Transcripts

Please 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 macrovoices.com 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.

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Please 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%.

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Please 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 Axel Merk from Merk Funds and Axel, boy talk about a news day for us to be speaking on Thursday morning. There’s so much to talk about, but let’s start with the ECB. A lot of expectations were growing into this morning’s ECB press conference that this might be that policy reversal moment akin to Ben Bernanke’s famous announcement of the tapering of stimulus that might reverse the whole direction of ECB policy. Tell us what actually happened, and let’s probably broaden it from there into what you see in terms of implications for the Eurozone generally.

Axel:              Yes, well it’s great to be with you, and I think you set it up right. There was a lot of expectation heading into this meeting, and as a result of that the Euro had had quite a run-up into that meeting and not too surprisingly, at least in the immediate aftermath, there is some profit taking, some selling of the Euro. Now, if you look at the media, they, the media are no smarter or dumber than we are, but they’ve got to their job, and so they look at the immediate reaction. The Euro dips down and so, alright, Draghi was dovish, and that doesn’t even begin to scratch the surface. The most relevant thing, and it was anticipated, the most relevant thing is that Draghi pointed out that they’re not going to lower rates any further, and they used to have that in the statement and that’s dropped, and so you would think that, yes, that means tapering is next, and if you recall when Bernanke thought it was tapering, well the tapering doesn’t stop for years, so it was always this anticipation, and of course in the meantime, the Dollar was rallying, rallying, rallying because the FED is going to be so hawkish, and we’re going to talk about the FED later, I presume.

                        Now, Draghi succeeded in the impossible in convincing the market that this is actually dovish, and the reason this is dovish is because they’re not yet tapering, they didn’t even, quote on quote discuss normalization. He did point out two on his board talked about it, but then he kind of said, nope, that was not a discussion, just them talking about it, because I presume, he didn’t engage, and he didn’t want to have it, he called it discussion. He did say that the growth in Eurozone is robust. He said he feels deflation is over, the risk is only internationally globally, yet, he’s going to continue to print the same amount of money as he has because he doesn’t have proof yet that we’ll reach 2% inflation, and that statement, that in some form or shape he has brought up in the past has kept folks at bay from further defying the Euro in the short-term anyway. Now that said, the program currently for those that don’t watch ECB every five minutes, the purchase program lasts until December, and everybody expects it to be extended, but at some point, probably in September, they will have to give us indication of what’s going to be next, how long is this going to continue, are they going to reduce the number of purchases…so he’ll have to face reality sooner rather than later, and the current lower rates are just unsustainable for Europe, and so my own view is that the Euro is going to get substantially stronger, especially in the context of a couple of things I presume we’ll be talking about in a few seconds or moment. Back to you.

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Please 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 petroleum geologist Art Berman. Art, you have a blog post that just came out. We have a link to that in our research roundup email for registered users. It’s basically explaining how it is that OPEC came with its much awaited announcement, now a nine month extension of their 1.8 million barrel per day production cut, which was designed to bump prices up and of course prices has sold off rather dramatically, in fact, took out the 200 day moving average on that news to the downside. We did see a bounce back up to retest it, and as you and I were speaking on Wednesday morning, we’ve given up the 200 day again, and we’re actually just barely trading on a 47 handle as we speak now, high 47’s, just taking out 48 on the last few minutes of Wednesday morning. Art, how’s this possible for people who didn’t read the full blog post? How come it’s doing the opposite of what they predicted it would do?

Art:                 Erik, I think the issue has to do with fundamental misunderstanding between what the market wants and what OPEC wants. In my view, OPEC is more focused at least for now and has been really since some time, well, early last year on maintaining a floor on prices, and what the market wants is for prices to go up, and so I think the issue is that perhaps you could phrase it as simply, or simplistically, as OPEC is taking the long view, and the market is taking the short view. The other issue that’s important is that markets don’t always pay attention to fundamentals, but fundamentals tell me, and have been telling me for quite some time that the right price for oil based on supply demand of inventory is $45, and basically we’ve been dealing with the, what I call the OPEC expectation premium now for over a year. That sentiment or expectation of what OPEC’s cuts or freezes or extensions or whatever are going to do to prices have been inflating them beyond what fundamentals suggest, so to me what’s happened is the market expected deeper cuts because it wanted higher prices. OPEC was unwilling to give that gift to its competition, was more concerned about a floor, and after all, I mean prices were $26 a barrel a little bit over a year ago, and now they’re, you know, in the upper $40’s, and so from that perspective, if you’re looking at revenues, that kind of looks like success to some people in OPEC looking at revenue, and so I think it’s just a mismatch of expectation, plus the market has been trying to adjust down to $45 several times here in, just since the beginning of 2017, so we’re just going to see more cycles, greater frequency, greater amplitude is my sense.

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Please 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 is one of our most popular MacroVoices guests ever- Alhambra Partners Jeffrey Snider. Jeff prepared a fantastic book of more than 50 graphs and charts for this interview, so I strongly recommend that listeners download it before continuing. Registered users already receive the download link in your research roundup email, and we explained for everyone else how you can register and get the download earlier in the program.

Now Jeff, in your past interviews which have all focused on your work on the Eurodollar market, you've given us some of the best and most advanced content that we've ever aired on MacroVoices as evidenced by your popularity with our listeners. So, I really want to thank you for that excellent content, but quite frankly Jeff, even some of the finance professionals in our audience have felt it a little bit overwhelming because you take such a deep dive straight into what swap spreads are, telling us about the Eurodollar shortage, and so forth. So, what I'd like to do, if you don't mind, is to start today's interview by reviewing the key points that I've taken away from our prior interviews and asking you to correct me if I’ve gotten it wrong as we introduce the basics.

Let's start with the “US dollar Serves as the World Reserve Currency,” and what that means is two things- first, the global trade. For example, France buys crude oil from Saudi Arabia- they're going to pay for it in US dollars. Second, central bank reserve assets, what you could think of as the piggy bank or savings account for an entire country are denominated in US dollars, specifically US treasury bonds and notes are the preferred reserve asset of most central banks around the globe. So, the consequence of all this is that there's an enormous artificial demand globally for US dollars. We don't need Swiss francs of the United States because they're not used in the United States, but the Swiss do need US dollars in Switzerland because they're needed both as a reserve asset and to settle international trade. So, in order for the global financial system to function, there has to be some kind of balance, there has to be enough US dollars to support the global financial system or else everything breaks. By the same token, I suppose you could argue that there can't be too many US dollars.

Now if I understand it correctly Jeff, almost all of the work that you do centers on analyzing the health of the global financial system based on whether or not there's a shortage or excess of US dollars available to meet the requirements of the global financial system. The Eurodollar market, which we’ll talk about in just a minute, is the primary analytical tool that you use to gauge the health and well-being of the overall global financial system with respect to whether or not the need for US dollars can be satisfied by the available supply. But before we move on to Eurodollars, how am I doing with the basic concepts so far?

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