Transcripts
Erik: Joining me now is Tian Yang CEO and Head of Research for Variant Perception. Tian prepared a slide deck to accompany today's interview, registered users will find the download link in your Research Roundup email. If you don't have a Research Roundup email, it means you haven't registered yet at macrovoices.com. Just go to our homepage macrovoices.com, click the red button above to Tian's picture that says, looking for the downloads.
Tian, I have to tell you, I was a little bit taken aback by the title of your presentation, Reduced Left and Right Tail Risks. Hang on a second. I mean, you guys have had some fabulous calls. And I take everything you say seriously. But I've kind of been feeling like this was a time in history that was increased risk, not decreased risk. Are we talking about a different perception, variant perception of risks in the world right now? Are we just talking about a difference between market risks and global political risks?
Tian: Yeah, well, that's a fantastic question. And many thanks for using the Variant Perception. I’ll phrase that as well. So, if we look back over the past, kind of18 months, take it back to the beginning of 2023, the question today clearly is, we've had terrible leading indicators, ultimately, has the recession been delayed? Or has already happened? And where do we go from here? So I think the main thing we've been grappling with is headline level, it's been very hard to see much evidence of a genuine recession, right? We all know labor market data has been okay, consumer data has been fine. And certainly, especially in the past kind of six months, a lot of very credible people in the BCA, a lot of strategists I admire, have been talking about recession risks. So, you know, I'm not blind to that. But the one thing that's probably given me a bit more confidence, I think, after digging around in the data, we found a lot of evidence that the areas where there should have been a recession, where we should have seen the stress, there has actually been the stress, and that's a lot of what we cover in the stack.
So for example, micro businesses, if we look at kind of non-financial, non-corporate operating margins, they went to all time lows, right? It looks like what you would expect in a recession, looking at things like consumer credit card debt, very high delinquency rates 10% plus on the Feds data. So again, that's where the recession has been. The issue this time has been that normally manufacturing, recession, so forth. But historically, what you would normally expect to happen is when you get the stress kick in, they create more negative feedback loops, that feed into a more broad based slowdown that gives you like a proper kind of widespread recession. And I think that's been the difference this time around, where, because of the ongoing fiscal deficits, and quite a few kind of quirks of the cycle, we've just not had the negative feedback loops we would expect. And now you pretty much have lead indicators starting to recover across the board on things we look at. So, we think manufacturing is going to get better within the consumers okay. So it feels to us like the window in which those negative feedback loops should have kicked in, they've been somewhat alleviated by the very large and persistent fiscal deficits we've seen in the government's driven job creation. It's helped to prop up corporate profits. And obviously, there's well known things like, you know, a lot of people locked in mortgages at lower rates. So even today, a new first-time buyer might be paying 7% for mortgages, but the effective mortgage rates still only 3.8% on the stock of existing mortgages. So, household debt service ratios are still fine. So I think before, I would have been pretty concerned that leading indicators, is this the first time ever in history that just wrong? But I think the areas where a recession should have happened, where the impacts should have been like credit cards, like micro businesses, like manufacturing, we have actually already seen the recession. And so that gives me a bit more comfort that the recovery in lead indicators we're seeing is probably real.
Erik: Joining me now is Tressis chief economist and fund manager Daniel Lacalle. Daniel, I've been dying to talk to you about some longer term, big picture issues. You know, back when we had zero interest rates, all of the doomsday bloggers were saying, mark my words, someday we're going to get back to 5% Treasury yields normal interest rates. And when that happens, you're going to see the United States rack up an extra trillion dollars of national debt in a single quarter. And when that happens, it's all over baby, the sky is falling, the world comes to an end. That's it. Well, Daniel, the crazy thing is almost all of that happened. We got back to 5% Treasury yields, we got the trillion dollars of additional US national debt in a single calendar quarter. And nobody noticed it, didn't even make the news. I guess that probably is reinforcing moral hazard that a lot of people who say deficits don't matter feel like they've been proven right? We can just keep on printing money out of thin air, it seems like doesn't cause any problems. What's going on here? How is it possible that this has happened without causing any major problems? And what does it portend for the future?
Daniel: I think that the big risk here is to believe that nothing is happening when a lot of things are happening all at the same time. And that is because the average author, analyst or the average consumer, the average citizen, thinks that a sovereign debt bubble or a crisis created by government spending bursts in the same way that a real estate bubble or a tech bubble, they think that it's going to be an abrupt, very quick, very “evident in the eye” type of crisis. However, a debt driven bubble, like the one that we are living right now, bursts slowly. And it's like when you are boiling, I don't know, shellfish? Basically it's very gradual. And then it leads us basically to stagnation. So a lot of people say, well, nothing actually has happened. But a lot has happened. To start with, a massive decline in real disposable income, massive reduction of real wage growth, negative real wage growth in what was supposed to be a strong economy. And at the same time, a significant reduction of the ability of the middle class to climb the social ladder. So ultimately, what we're seeing is, is a slow process of impoverishment that people confuse with nothing is happening, when it is happening. There is a massive bailout of those that have access to credit and those that have access to those newly created units of currency, which are fundamentally the zombie companies. And we see that government and zombie companies get out of these recessions or crisis very quickly, and without allegedly much of a problem. But small and medium enterprises, the average citizen, the middle class, in general, does feel the pinch. And people don't understand that what is happening to them is the destruction of the purchasing power of the currency, which is the way in which government debt bubbles burst in a Japan-ization kind of way. So basically leads to stagnation when there should not be stagnation. In the case of the United States, it's a very, very agile, dynamic and intrapreneur driven economy that should be growing much faster. Not growing because of debt, not growing because of government spending and increases in deficits. But productivity driven growth with real wage growth, citizens listening and watching every day in the media that employment is at an all-time highs that everything is great, that this is a boom economy and real wage growth is negative. And that's on average. If you go sector by sector real wage growth is actually even worse. So it's basically inflation and stagnation together are the outcome of the burst of the bubble that was created by negative real rates and massive liquidity injections.
Erik: Joining me now is Bill Blain, editor of Blain's Morning Porridge. Bill, it's great to get you back on the show. Let's start with the usual suspects, boy, S&P 500, so many smart people on this program have made so many great arguments for why it shouldn't be just melting straight up. But boy, that's what it keeps doing.
Bill: Well, there is no stock market anymore, is there. All there is Nvidia and all the other stuff and Nvidia goes up 3% a day after falling 17% in the days before, it's moments like this, when I'm always reminded that global markets are not clever, they are not intelligent. They are just voting machines, reflecting all the participants think, and if the participants don't have anything else to think about, and they make big mistakes, and they've got all the wrong things in their minds, then you get strange behaviors. Of course, the markets are never completely wrong. So you've got to wonder what's behind it. And I rather suspect that it's a triumph of hope over reality. But you know, I believe in bonds, I've spent my whole career being a bond trader watching bonds and bond markets, there is truth, I always consider that stock markets just kind of go off in the back of them. If interest rates are too low, then stock markets get too enthusiastic. And I think stock markets have missed the fact that global interest rates are now normalized at much higher levels, and are not going to go back to the kind of nonsense 0% and 2% rates that we saw during the QE era. And I'm not sure stock markets realize that.
Erik: Joining me now is Rosenberg Research founder David Rosenberg. Rosie, it's great to get you back on the show. Let's dive in starting with the economy. How do you see the picture? What's going on? What's the update since the last time we talked to you?
David: Well, I think the update is that the US economy is slowing down precipitously. As we all saw first quarter, real GDP weakened to 1.3% at an annual rate, of course, that was revised lower from 1.6%, and was a surprise to the downside. And that is what we would have ordinarily labelled as stall speed, back when I started the business in the mid 1980s. And looking into the second quarter, right now, the data at hand looks as though we're going to come in somewhat even weaker than that. Our own model is saying roughly 1%. I know the Atlanta Fed is at 3.1%. But I am sensing that data point is a little stale after the disappointing retail sales report that came out for May. The St. Louis Fed Nowcast is actually 0.9%, and we're close to there as well. So let's just say that the view promulgated by Jay Powell at the podium, at the press conference after the last FOMC meeting, when he talked about how the US economy is strong and solid, I really think he was saying that with the lens of looking at the economy last year, when fiscal stimulus and the last leg of the excess savings file propelling the consumer, and of course, double digit growth in credit cards that produced 100% of the growth last year, those three items, collectively, and they are in the rearview mirror. So, I think that we are now seeing the economy decelerate. And the question for the macro bulls would be, what is the catalyst that is going to precipitate a re-acceleration in pace of economic activity? I actually think that, right now, we're setting the table for the recession that got delayed, but did not get derailed. And I think that a lot of those folks that threw in the towel last year on the recession call will be spending the summer picking up those towels.
Erik: Joining me now is Jeff Currie. Many of you know him from his former role at Goldman Sachs. Jeff has recently moved to Carlyle where he's the Chief Strategist of Energy Pathways. Jeff, it's great to get you on the show. It's been way too long since we talked. I want to start with what the heck happened last Friday, through Thursday night, gold market was looking terrific. It had seemingly rejected the 50-day moving average, was rallying very nicely above that. Everything looked great. All of the sudden, as Europe opened on Friday morning, the selling began and just wouldn't quit with gold down 100 bucks in a single day. As far as I could see, there was some US economic data that didn't come out until 8:30, the selling started four hours before that. So I don't think it was economic data. Any idea what happened here? Was there some major change that happened at Friday's open in Europe?
Jeff: Well, it was economic data from the Chinese central bank showing that they had quit buying gold for the previous month. And it also showed some tapering of their gold purchases, as prices started to rise at the beginning of this year. Obviously, I take the view that one month doesn't establish a trend and commodities more broadly, whether it's copper or oil, that is the pattern of the Chinese, when prices come down, they buy a lot more and as prices go up, they taper their demand back. So I guess if you cover all commodities, oil and copper, the behavior you're seeing from the central bank with gold shouldn't be that as concerning, doesn't establish a trend. But for those of you do not understand the importance of demand coming from the Chinese central bank, maybe it's worth taking a step back and talking about why gold, and I’ll throw Bitcoin into that, are the two best performing assets across the financial world this year in 2024.
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