Transcripts
Erik: Joining me now is Simon White. Many of you remember Simon when he was a co-founder of Variant Perception. That's the leading indicator guys that we like to get on the show every three months or so. Simon has moved on now and is Bloomberg Markets live macro strategist. Simon, it's great to get you back on the show. Listeners, Simon has prepared a slide deck, you'll 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 macrovoices.com, click the red button above Simon's picture that says looking for the downloads. Simon, I want to start with what's on everybody's mind the long awaited recession, is it really going to be forgotten in favor of a soft landing or is the recession still on the horizon?
Simon: Thanks Erik for having me and that's a great question to begin with. So, I would say I think the consensus has certainly seems to have shifted much more towards soft landing, no landing scenarios. I mean, stepping back, there's an issue here with none of these things are very clearly defined. So I think everybody's in a position where they can be right or at least not proven wrong. Although I think a hard landing is fairly clear, like if we get recession. But even then, a recession is not something that's clearly defined either. I tend to go by the MBR, like they're kind of the arbiter of whether there's a recession or not, and they give some guidelines about what they call a recession or not. But even there, that there's a lot of kind of fuzziness around the definition. So I tend to look at recessions, you know, economies kind of switch into recession, so they are a regime shift. And I think that's what really kind of catches people off guard is recessions, they're pronounced, they're protracted, and pervasive, the three P's. I'd say there's a fourth P as well. And they are precipitate, and they tend to happen very abruptly. So that's what I've tried to show in the chart on slide two, the right hand chart. And they tend to happen when you get interactions between hard and soft data. So soft data is your market data and survey data, things like ISM, and consumer confidence. And hard data, things like, you know, industrial production, retail sales, etc. And when these two tend to operate off each other, and they generate a feedback loop, and past a certain threshold, that they hit a cascading point. And that tends to be when you get recessions. And what's kind of interesting about the chart, is you'll see that there's a number of times when you have a stress in the soft data. But you don't get a stress in the hard data, and you don't get a recession. And they are really the times, you know, the Fed is kind of this, what the Fed is all about, right? The fable Fed put is essentially, if they can stop soft data stress, bleeding into the real economy, and then creating one of these feedback loops, then they've done a reasonably good job, you know, they prevented a recession.
And where we are today, again, if you look at the chart, as you can see that both hard data and soft data are stressed, and they're past a threshold that has normally been associated with recession. So I think we're at a very kind of like, hot point, the soft landing narrative, I think is, as I say, I think is basically misguided. I think that often, just before a recession happens, people tend to be off their guard, and rapidly, you get a decline in the data. And that's exacerbated by the fact that most economic data, some of it considerably so is revised. And here's the kicker, it's often revised at most at turning points like recession, so going into recession, you're kind of most blind and the data is most wrong. So you know, we've got a number of things that are standing out to me right now, that I think are consistent with prior recessions. So the claims data, now you can look at that in two ways. You can look at the national data, which is what most people focus on. But you'll get a lot more information content. If you look at claims data by US state mentioned, you know, recessions, one of the attributes they have as their pervasive. So you tend to see things worsening across sector and geography at the same time. And the claims data by state picks that up. And what we've seen over the last few months is that you're seeing deterioration in claims data across quite a high number of states to a percentage of states that's been consistent with a recession in prior years with a very high kind of hit ratio. And that's the unemployment claims and continuing claims as well.
So I think the recession is much more likely than the consensus believes and I think when it does happen, it will happen much more abruptly, the data will suddenly take a massive turn for the worse. And also subsequently, the data will be revised a lot more. And we won't know, we never do, we never know we're in a recession. Ex-ante is only ex-post. And that's really where it gets interesting because obviously telling someone that a recession has already happened, it’s useless as an investor and what obviously, as an investor, you want some sort of leading idea that you're going into recession. Because equities are kind of like not super quick in terms of like they don't sell off a long, long time before a recession is deemed to have started. But they do sell off a little bit before and they sell off obviously, through the recession, you get a good drawdown then, and that they start rallying before the recession ends. So if you look at where the reactors are behaving right now, in the median sort of around recessions, or the median after bear market, so the bear market that we've not quite left, depending on how you define it, but we've certainly not made a new high back in there, January 2022. You know, right now, markets are behaving in a way that's consistent that this is a bear market that is not going to be followed by a recession. So it's clearly not yet priced and complicating the issue as well. Something maybe we'll get into later on is I don't think this will be a normal recession, certainly not the garden variety recession that most investors will be used to, because I think this recession is going to be accompanied by elevated inflation. And that really kind of complicates matters and changes what people are perhaps expecting going into a recession.
Erik: Joining me now is Gavekal co-founder Louis-Vincent Gave. Louis, it's great to get you back on the show. You, having been a Frenchman who's lived in Hong Kong for much of your life, are very well known in finance as a China expert. So, I want to start there. And I think my real question is, okay, what actually is going on in China? Is this about, we're waiting for the Chinese economy to recover, like everybody was talking about? Because that's going to bring back final demand into the global economy? Is that what we're waiting for? Or is it more that we're waiting to find out if we're starting a major global war with China that's going to completely change the nature of trade? I'm not sure which it is anymore.
Louis: Well, first of all, thanks for having me again, Erik. It's a pleasure to be here. Pleasure to catch up with you guys as always. So thanks again for having me. Look, I think the narrative around China this summer has been fascinating. You know, you've had I think back-to-back covers of The Economist, you've had that meltdown cover on Business Week. Let's just say that the media narrative around China has been extremely dire. And to me, the first observation I have is that when it comes to China, I think people in the Western world always fall into one of two categories. It's either China's going to take over the world, or China's about to implode in a blaze of glory. And we seem to be swinging always from one extreme to the next. And today, obviously, we're in the "Oh, China's imploding" category. And I think this is for two reasons. First, of course, China's reopening has been disappointing. And here, I'll put my hands up, I messed up on this. I think I messed up a little by laziness. When China reopened, I thought, "Oh, I've seen this movie before, you know, I saw it in Europe, and I saw it in the US, and I saw it in Canada. And when economies reopen, you got all this pent-up demand, and you get all this growth, and this is going to be awesome." And I think the reason this script didn't play out in China is the very difference in the labor markets. I think what happened in the Western world was people were told, "You go home, you stay at home, and we'll pay you to stay at home." And then when we told people in the Western world, "Okay, you guys get back to work," you had a small minority of people that said, "Well, actually, I like working from home, or maybe I don't feel like going back to work." And this was especially true at the lower jobs, your McDonald's workers or your hotel cleaners or whatever else. And so all of a sudden, we found we had a shortage of labor at the low end. And that pushed wages up, that further fueled the consumption boom in the Western world.
In China, meanwhile, the situation was completely different. In China, people were told, "Okay, go home." And going home in China meant actually going back to the countryside. So you had literally tens of millions of people that left the cities, went back to the countryside. So when the government said, "Okay, you guys can come back to work," now you had tens of millions of people that swarmed back into the cities and actually depressed wages. And that's where we've been the past six months, you know, a fairly weak wage growth in China. And with that, obviously, bad consumption data, etc. Now, combine that with the fact that you've had five years of real estate crackdown, that real estate prices have rolled over by 10-20%. And pretty much any city that you care to think of, big property developers are going bust and/or have gone bust. And that at the same time, you're having all sorts of problems in the shadow banking system. And now I think you're seeing the other extreme, where people in the Western world are saying, "Aha, I've seen this movie before. This is 2008 all over again, falling real estate, property developers in trouble, financial intermediaries in trouble." But the reality, of course, is that China's financial system is completely different than that of the Western world. And the whole "Oh, China's going through its Lehman moment" is completely misplaced. And you see this, frankly, in the data. Chinese bank shares aren't collapsing, they're not going up, but they're not collapsing. You know, iron ore prices are up 50% since China reopening in late October, LVMH sales are still cranking away. So China today is… There is trouble on the real estate front there. There is trouble on the local authority front.
But if you take a step back away from the hyperbole, what do you see? Well, you see an economy that has gone from a trade surplus of 30 billion a month to 80 billion a month. You know, if you took all of China's annual trade surplus, it would be basically the 20th biggest economy in the world. China's trade surplus is almost a trillion dollars a year now. It's roughly the size of the GDP of Switzerland or Argentina or any G20 country. And behind that is a simple reality. Behind the surge in China's trade surplus is the fact that China's massively moved up the value chain in a number of industries. Where this is the most visible is autos. You know, five years ago, China didn't export any cars. In five years, China's become all of a sudden the world's biggest car exporter. And you can replicate that to earthmoving equipment, to solar panels, to trains, to nuclear power plants, you name the industry, and China in the past five years has done accomplished really pretty impressive things and become a genuine global player in pretty much any industry you care to name. So, to think that with all these strides, with an economy that's, you know, having a trade surplus of 80 billion a month, you're about to see an economic Armageddon and implosion, to me, is a massive stretch.
Erik: Joining me now is Harley Bassman, managing partner at Simplify Asset Management. Harley has prepared a slide deck to accompany this 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're not registered yet. Just go to macrovoices.com, click the red button above Harley's picture that says "Looking for the downloads."
Harley, I've been really looking forward to this interview with you this week because so many people are talking about the inverted yield curve. And I don't know the narratives and lore that go along with that. I'd like to push a little harder and drill down in this interview into what an inverted yield curve means specifically, what history tells us about it, and its impact on asset prices. Under what set of conditions does that make sense? Can we get into that in this week's interview?
Harley: Glad to be back. Wonderful to speak with you! Best podcast out there. We're going to talk about that and a number of other ideas of how to go and make money off the curve inversion.
Erik: Joining me now is The Felder Report founder and publisher Jesse Felder. Jesse, it's great to get you back on the show. Listeners, Jesse prepared a slide deck for this week's interview; you'll 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, click the red button above Jesse's picture that says, "Looking for the downloads." Jessie, as we dive into the slide deck on page one here, you've got equity valuations and interest rates. Before we even get into that, I want to just start with a real high-level picture that I think is on everybody's mind, which is all the smartest guys said, "Hey, it's a bear market rally, you know, don't trust it, it's gonna roll back over, the bear market's not over, the bottom is not in yet." Boy, if that's right, and this bear market rally sure is pretty long in the tooth. What's going on here? Is something changed? Or why are we having this experience where everybody's waiting for the recession and the resumption of the bear market? But it's not happening?
Jesse: Well, I mean, that's the question that is on everyone's minds, right? Is this a bear market rally? Are we going to have a soft landing? I've been thinking about this idea of a soft landing. And to me, it's pretty astounding. It reminds me of the old joke about the optimist who falls off the top of a skyscraper and on the way down, as he passes every level, he says to himself, "So far, so good," because he hasn't hit the bottom yet. That maybe things are going to work out, okay? And I think that's kind of where we are in the cycle, where people are looking to say, "Well, we don't see a recession materializing right now in front of our eyes. And so maybe things are going to work out." But I think they are underestimating the impact. It's astounding to me that it's obvious to everybody, everybody knows that these things work with long and variable lags, monetary policy and the rise in interest rates and all of these things. But we're not willing to wait until those lags actually kick in, which is, you know, right about now. I have a couple of charts in there that show a 24-month lead on a composite of the dollar, interest rates, and oil prices, and all these kinds of leading indicators suggest that if a recession is going to happen, it should start to materialize before the end of the year, over the next several months. So I still think we're kind of halfway down, you know, after we've fallen off the top of the skyscraper, and we haven't hit the ground yet, but we're headed in that direction. And so I think the idea that we're headed for a soft landing is overly optimistic.
Erik: Joining me now is Santiago Capital founder Brent Johnson. Brent, it's been a long time. Great to get you back on the show.
Brent: Yeah, happy to be here Erik. I'm always happy to talk to you and your listeners!
Erik: Folks, Brent has prepared a slide deck to accompany this week's interview. And you're really going to enjoy this one. Because Brent's done something for us that very few guests are willing to do, which is he took his slide deck from when he was on MacroVoices a year ago, reproduced it updated it and is prepared to talk about what he got right and what he got wrong. But before we even get into that, Brent, I want to frame this discussion in the sense that we have a very, very different geopolitical situation than we had. A year ago, the last time we spoke, the situation between Ukraine and Russia, lots of people have lots of opinions. My opinion is very much that this is likely to escalate beyond just Russia and Ukraine, I think that the tension through the Ukraine crisis between the United States and Russia is likely to escalate to the United States, Russia, and China all being in a new challenge of who really is the global hegemonic superpower, both militarily and economically over the world.
First question Brent is do you agree whether or not we're actually at risk? I'm not necessarily making an opinion on but do you agree that the United States position in the world is at least going to be challenged by Russia and China? And if so, I think we ought to focus this conversation on okay, what does that mean for your prognosis for the dollar?
Brent: Sure and I would totally agree with you on that, I've kind of categorized what's going on as the big game or the great game, or even a Game of Thrones, because I really think that this is what's happening now. And it doesn't mean it's all going to necessarily happen tomorrow or next week. But that is where the ball is headed. And I unfortunately, as much as I would love to see this turn around and go back the other way. I just don't think that that's likely. So I think we need to prepare for more volatility, and more hostility than we've seen so far.
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.
