Transcripts
Erik: Joining me now is Rosenberg Research founder, David Rosenberg. Rosie, great to have you back on the show. It's been quite a while. Let's dive right into the obvious. You know, everybody's talking about this market. You and I have had our reservations for the last couple of years, but it keeps charging higher and higher. It seems like nothing wants to stop it. What do you think?
David: I think that what we always have to do, is try and assess what the market is telling us in terms of its view of the economy and earnings and interest rates, so on and so forth, and what your own view is, and that's how you can map out whether or not you want to be long or short or anything in between. So, what is the market telling us? The market is telling us that once we get to this July 9 deadline on the reciprocal tariffs, we're going to be met with yet another reprieve from President Trump and, or that we will see a flurry of deals coming to the fore, which haven't happened yet, but the market's telling you that it expects that the tariff file is going to be in the rear view mirror if it's not already in the rear view mirror. When it comes to the geopolitics, the market is clearly telling you that the fear that there would be either a blockade of the Strait of Hormuz, or that the IDF was somehow going to take out some of Iran's oil export terminals, that didn't happen even when the US went after the nuclear facilities energy, which, of course, is their economic lifeblood, was left untouched. So, you removed that worry. And everybody believes that this war between Israel and Iran, just like the tariff file, is in the rearview mirror. And of course, how this relates, most importantly, on this point of the geopolitics, is ultimately what it means for oil prices. So, oil prices coming back down is viewed as basically a tax cut for the US economy and for the global economy. So that part we can easily explain. There's this prevailing view that with Donald Trump's popularity on the rise, now that he can claim a win from that dramatic strike in Iran last Saturday, that now that he has the political tailwinds, that he's going to have a much easier time getting his “big, beautiful budget bill” through Congress. So, all these uncertainties in the market's mind have been put to bed, that no tariff, war between Israel and Iran is now contained, and the road towards, call it fiscal stimulus, if you want, is intact. Fiscal deficits themselves be damned, but that the budget bill is viewed very positively by the marketplace. So that's what we have on our hands. And all the while, the market believes that we're not going to have a recession, and the market believes that even without the recession, inflation is going to fall sufficiently to pave the way for the Fed to cut interest rates. So, this is not a cup-half-full narrative from the stock market. This is a case of the cup-being-entirely-full, and that's where we are today. I have a different view than the markets, and we'll see how it plays out, but that is the signal from the market pricing as we sit here today.
Erik: Joining me now is Carlyle's Chief Strategist for Energy Pathways investment, Jeff Currie. Jeff, it's great to get you back on the show. It's been way too long. You just penned a great article that is all about capital rotation and why you think we're in one now, and Europe is going to be the big benefactor. Tell us more.
Jeff: It's a pleasure to be back. And the piece was focused on European defense, in the sense that it's going to create a need for a large-scale investment in old economy, asset heavy type industries, and the real catalyst to this was the lifting of the debt break in Germany. Now, this piece that we put out is a follow up to The New Joule Order that we put out a few months ago. And in The New Joule Order, we made the argument that the Bretton Woods system is breaking down, the US is retreating, and this is going to have a significant impact on the dollar, energy and military investment. And this piece we put out yesterday was really about the military investment component, but I want to talk about this breaking down of the Bretton Woods system and the retrenching the US. And the way I like to think about it is, if the dollar was the heart of the system and the oil was the blood going through the veins of the system, the US Navy was the muscle of the system. In other words, for the last 75 years, the US has used its military might to protect global sea lanes for global trade. The dollar was used as the medium of the exchange. And when you think about if you had protected sea lanes, you will start importing oil as your primary energy source. It is the most portable, the most storable. And as a result, we had supply chains that stretched all around the world with previous adversaries, and the biggest commodity being shipped was energy. That's your strategically most important commodity. And as the US retreats, it brings all of these into play, and I like to call it bonds, barrels and bombs. The bonds of the dollar, the barrels are the oil, and the bombs are the US military, all three of these are under pressure.
And talking about this now in the context of the capital rotation is, as the US retreats, Russia is getting more aggressive, and as a result, the situation in Europe, it is now existential that they need to make these kinds of investments, and when we look at the potential return in old economy, they're undervalued tremendously. Europe specifically is undervalued by about 40%, and all the complaints about Europe being the superpower of regulation, what did it get out of it? The lowest debt to GDP ratio. It has the highest level of income and wealth equality of the major regions in the world. And instead of having crippling market concentration, like most parts of the world, it has consumer surplus. So, it has all of the requirements, and plus, a steep value discount to track that capital. And I’d argue, what we saw going into the events in Iran and in Israel on Friday is the dollar was weakening tremendously. Part of that is, we saw the outperformance of Europe. I like to point out, since ChatGPT was first announced in November of 2022, Europe has outperformed the US by 20%, meaning what's going on in Europe right now is likely bigger than AI. In fact, AI’s CapEx since that announcement, has been 500 billion. German defense alone is going to be more than 1.5 trillion, already announced. So, this is big. And one last point I want to make here is that when we think about Silicon Valley and AI, they are simply an extension of the US military industrial complex. It started out with DARPA, creating the internet that created AI. Think about Silicon Valley. Where does the name come from? It comes from, they needed to come up with a material that would not melt in a B-70 bomber in a Minuteman missile. And they had, they came up, Fairfield semiconductors came up with the silicon chip, and that's where it came from. So thinking about it, why does Europe not have a Silicon Valley? It never had military industrial complex. So, this is huge, and we think it's going to create a productivity a boost there. And again, going back to the steep valuation discounts, and I think, the point being is, I think this rotation is all underway. And if you put it in context of previous rotations, we saw one in 2000 to 2003, when capital left the dot-com boom and went to bricks again. You know, you had overvalued tech and undervalued commodities in heavy asset, heavy sectors. And then the next one was 2014, 2015, when money left bricks and went back to Silicon Valley for the MagSeven. And again, it was overvalued commodity, heavy asset plays in China, and undervalued tech in the US. Now, we're kind of in the same, in a point here where you have undervalued heavy asset commodity sectors against relatively steeply valued tech sector. So, this is probably a process that's going to go on for a while, and it's pretty consistent with things we've said in the past. But I think the catalyst here is, really, European defense, and the potential there with the lifting of the debt break, they have the spare fiscal capacity. They have industrial capacity. All the ingredients are there.
Erik: Joining me now is Commodity Context founder, Rory Johnston. Rory, it's great to get you back on the show. It's been way too long. Let's start with the crude oil market. Almost feels to me like we're seeing the beginnings of maybe an upside breakout. What do you think?
Rory: We’re definitely at the highest level. I mean, with Brent kind of sitting around $67-$68 a barrel, highest level since the latest sell-off in April, still a decent ways off of kind of where we started, prior to President Trump's Liberation Day tariff announcements and the kind of double tap follow on of OPEC+ announcing this kind of accelerated production increase schedule. But it definitely looks like things are firming up. I think a lot of the kind of teasing, kind of temptation of us dipping into full curve contango, seems to have been at least averted for now. But what's left us with is the fact that the curve is in this very, very weird shape, and in some cases, at least on the Brent curve, kind of an unprecedented shape that you have extreme backwardation now, or at least material backwardation across the first 4, 5, 6 months of the curve, and then you have broad contango everywhere else through. You've seen it, historically, where you have like lighter backwardation at the front. But this kind of juxtaposition of very steep backwardation at the front and broad contango is pretty unprecedented. And I think that is a kind of a flattening of the entire debate in the oil market right now, between these expectations of looseness to come and the reality of kind of still reasonably tight markets by any other way we measure them.
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.
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.
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 Patrick Ceresna shall NOT be liable for losses resulting from investment decisions based on information or viewpoints presented on MACRO VOICES.
