Can the tech sector sustain its dominance in a volatile market? Join us as we sit down with Julian Brigden, co-founder of MI2 Partners, to uncover the secrets behind his innovative firm that mimics the strategic morning meetings of top macro hedge funds. Julian delves into the unexpected market shifts between small and large caps, and the intricate dance of CPI on macro trading strategies. He also sheds light on the pivotal role tech plays in fueling market rallies, questioning whether this momentum is truly sustainable amidst a backdrop of uneven productivity gains.
In this episode, Julian unpacks the potential for a dramatic rotation from growth to value stocks, drawing comparisons to the dot-com bubble burst of the early 2000s. We explore the dynamics influencing gold and silver prices amid market turbulence and the critical factors that could transform a harsh market environment into a more favorable one. Julian also highlights the looming threat of rebounding inflation metrics in Q4, the Fed's possible delayed responses, and the historical parallels that could indicate severe equity market declines. All this, while considering the looming influence of upcoming elections on inflation trends.
Dive deep into the global macro hedge fund thesis with an exploration of Soros’ concept of reflexivity and its profound impact on financial markets. Julian provides a detailed analysis of how US monetary policy divergence and global negative interest rates have fueled a hyper-financialized economy, leading to significant capital inflows into US assets. We wrap up by examining the structural shifts in the bond market, the impact of changing demographics on bond demand, and how Macro Intelligence Partners equips institutional clients with essential macroeconomic insights and actionable trade recommendations amidst market chaos. Don't miss this episode packed with expert analysis and nuanced market perspectives!
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
My name is Michael Guyatt, publisher of the Lead
Lagrime Report.
Joining me for the 40-minutetime period, here is Mr Julian
Brigden, who every time I seeyou, julian, my mind goes to
James Bond, and part of that'salso because your company is MI2
Partners, which sounds likeit's some kind of secret service
, I don't know, some kind oflike intelligence agency, which
it is.
Speaker 2 (00:27):
I want to play on that actually, michael.
Look, I'm a Brit, I'm a hugeJames Bond fan, obviously, and
if you look at the logo it's gotthe sort of overtones of
Universal Export, which isBond's company.
That was kind of deliberate.
I was just sort of riffing andplaying around with that.
But that was kind of deliberate, I was just sort of riffing and
(00:48):
playing around with that.
And then MI2 was actually asubdivision of British service
up until the end of the FirstWorld War, like MI5 and MI6.
It was actually in charge ofgeographical intelligence.
So I kind of thought, hey, thisis kind of a clever idea.
There were two of us settingthe damn thing up, so it seemed
like a fun idea.
Speaker 1 (01:05):
I love it, man, I love it.
So let's just do a quickoverview of your background,
what you've done throughout yourcareer and what MI2 Partners
does, aside from globalintelligence.
Speaker 2 (01:15):
Yeah, so basically I've been in the market now
since I was 19.
I mean, I started before I wentto university, started trading
uh precious metals uh a long,long, long time ago.
Um then switched over to fx.
Um did some uh fixed incomewhen I was at brothers, ran uh
(01:37):
fx sales for lehman in londonand new york.
Um moved uh to ubs for a bitand then basically moved on to
the sort of policy consultancyside with this group called
Medley Global Advisors and thatgave me sort of an insight onto
that, because they were thesmartest people on the street
(01:57):
and then basically gosh 11, no,13 years ago we set up MI2.
And the objective was toessentially replicate the
morning meeting of a macro hedgefund, so to go and kind of look
through the world from a sortof 40,000 foot view, then look
(02:21):
at positioning in the market andthen kind of come up with
objective traits.
I'm not really interested injust pontificating about the
economics or the outlook unlessyou can make money out of it.
To me that's just a completewaste of time.
Speaker 1 (02:39):
Let's start with that morning meeting of macro hedge
funds.
How do you think the morningmeetings for macro hedge funds
went about a week and a half agowhen suddenly small caps were
having this immense what lookslike short covering squeeze and
large caps the crowded, longtrade suddenly reversed?
Speaker 2 (03:01):
I mean I think, look, I think the trigger there was
the CPI.
That's really what the macroguys will be looking at.
Generally there are exceptionsMacro hedge funds don't take
single stock bets.
I think the macro guys havefound the equity market quite
(03:24):
frustrating.
They've been trading sort offixed income off the back of it,
dollar, yen off the back of it,carry trades off the back of it
, but they don't generally tradethe equity market so
aggressively.
So I think the question was, wasthat CPI at a kind of an
epiphany moment?
I have my doubt, but I thinkthe macro community has been in
(03:49):
general looking at what goes onin the equity market and, while
it's run longer than they think,looking at it from a quite
contrary perspective.
I mean, that's generally wheremacro comes into its own.
It comes into its own turningpoints and inflection points and
I think, michael, this sort ofsupposition in the market that
(04:14):
Goldilocks has given, I thinkit's something that many macro
guys in their heart of heartthey're not going to be trading
this way because it doesn'tprove profitable.
Question, and I certainlyquestion.
Speaker 1 (04:28):
All right.
So you used the word Goldilocks.
I want to hit on that a littlebit more, but first I want to
share a post that you put on X,and the comment was I can't
remember the last time I saw themarket so singularly dependent
on one sector infotech.
This is from July 10.
Even a month ago, we had foursubgroups in the top relative
(04:48):
strength quadrants.
I've talked about and writtenabout this before, but it seems
to me that whether you're a solobottom-up individual trader or
you're a macro hedge fund, theonly question that matters is
can the stock market rallywithout tech leading it higher?
Right, and I say that becausethe implication of that is value
(05:09):
then outperforms growthinternational, then outperforms
domestic small caps, thenoutperform large caps.
How does tech sector leadershipfit into that viewpoint of a
Goldilocks economy?
Can you actually have rotationin a Goldilocks economy where
tech is not the only game intown?
Speaker 2 (05:27):
I mean you should have a rotation right I mean
Goldilocks while I believe it'shighly unlikely, essentially,
you know and if the equity boysare to be believed and I think
they're full of you know it isin a true Goldilocks scenario.
(05:48):
You'd be looking at somethinglike the late 1990s, right?
So in that period what you getis you get a productivity
induced period of very rapid,sustained growth where you get
get a productivity is kind of aget out of jail free card right,
(06:11):
and productivity because whatit enables you to do is run very
, very high levels of nominalGDP, which is great for the
equity market because we earnnominal earnings.
It enables you to lowerinflation, which is great for
the bond market, and it enablesyou to run strong employment and
(06:31):
rising wages.
So it really, really is Nirvana.
And if the equity boys is tobelieve, that's kind of where
they think we are.
I think there's a couple ofproblems with that.
There are zero signs ofproductivity gain If you look at
it on a quarter-on-quarterbasis, unlike the late 90s where
(06:52):
it was steadily risingproductivity.
We've been falling in astraight line for three years.
The second issue is set up inthe equity market is set up in
the equity market.
So last week, for clients, Isent out a piece where, uh, and
it was off the initial bounce soI didn't catch the load, but
basically I said there's there'sfour times in history where we
(07:15):
had, on a relative basis, beenwhere we are in terms of the sp
and the SPW.
So the sort of more tech-heavygrowth, if you want, equity
market versus the SPW, which isthe broad, equally weighted SPW.
And those three occasions,michael, were the height of the
(07:38):
dot-com bubble, the low of theGFC and the low post-COVID.
And what we said is you aremeant to be short tech, long
value SPW okay, but there is avery, very significant
difference between two of thoserotations and the other
(08:03):
remainder.
So, in off the lows of theglobal financial crisis, off the
lows of COVID, we had what Irefer to as a nice rotation.
So a nice rotation occurs wherethe economic expansion falls
out, where value starts tooutperform growth languages or
(08:25):
doesn't perform as well.
Exactly what you say you go andbuy kind of international, you
go and buy commodities.
This is a broadening out of theeconomic situation.
Lots of people are sort ofpointing to that and I think
it's absolute BS and I'll tellyou why it's absolute BS, and
(08:49):
I'll tell you why.
Off both of those bounces.
Obviously we've had a massivedownturn in equity, so equity is
cheap.
The second thing we had is wehad a vast amount of
underutilized resources becausewe've just gone through swinging
recessions, so we had 10%unemployment.
So, the other words, theeconomy could expand without
(09:09):
running into any constraints,most notably rising wages that
would push straight through intocore inflation, and so I think
the setup looks radicallydifferent.
I think this one looks morelike 2000, dot-com bubble, where
you had a nasty rotation.
(09:31):
And in a nasty rotation whathappens is growth does
underperform, value outperforms,but in an environment where
both drop, and I think thatlooks like the current setup.
I think that's the risk.
I think we're going to have anasty rotation where tech sells
(09:55):
off and drags the whole marketdown.
Value doesn't underperform, itoutperforms, but only on a
relative basis.
Speaker 1 (10:12):
How much of that explains that scenario where
it's relative outperformanceversus the average downtrend?
How much does that explain someof this bid in gold?
I mean, I've argued myself thatI think this run in gold.
As've said, gold is sending awarning a few times.
It's big money that is lookingfor non-correlation for a reason
Right.
Speaker 2 (10:37):
Look, I think there are lots of stories that go
behind the gold game.
I think one of them is the lackof fiscal rectitude on many
continents that we see now, butparticularly most acutely here
(10:58):
in the US, where there justdoesn't seem to be the
willingness to get to grips withfiscal deficit.
I think that is pointinglong-term to a scenario of what
is referred to as fiscaldominance, where the central
bank ultimately has to pivotfrom targeting inflation and
employment to targeting to thesolvency of their boss, where
(11:22):
you'd expect to see somethinglike QE or fixed yields in the
bond market.
That's a number of years out,but that would be highly, highly
, highly negative for the dollarand obviously tremendously
positive for gold.
(11:43):
The other thing is that I havea chart where I look at the
relative returns betweentreasuries and gold.
I look at total returns fortreasuries, so including your
coupon and gold has just blownthrough like 35 years of support
.
So I mean, this is an amazingadmittance, but you would have
(12:05):
been better off being in goldearning nothing, than having
your money in treasuries.
Treasuries and bonds in generalin the G7, I think, look
increasingly like instruments ofconfiscation for increasingly
insolvent and governments whoare incapable of addressing
quite significant needs.
And I'm not capable ofaddressing quite significant
needs and I'm not saying thatthose needs aren't required Like
(12:33):
fiscal dominance actuallyoccurs throughout history and
has occurred throughout historyat periods where it's societally
necessary.
Michael, right, you know, secondWorld War, it was absolutely
societally necessary to go.
Sorry, bond market.
Here's your rates now buggeroff for the next decade, right,
I think we are in one of thoseenvironments, but it just
doesn't mean you want to own it,right, I mean.
(12:56):
So I think there's afundamental story behind the
gold thing.
What I would say is, if we aremoving into a nasty rotation
between growth and value, if yougo back and you look at 2000,
the sort of cycle high of thedot-com bubble, we did move
(13:18):
eventually into a nice rotationbetween growth and value, but
that really occurred between2002 and 2008,.
But that really occurredbetween 2002 and 2008, in that,
(13:39):
between sort of 2000, late 2000,into 2002, by and large the
rotation was quite nasty.
And in other words, you know,once again, on a relative basis,
you know gold might outperform,silver might outperform, but
they may not go up, they can godown, and the reason for that is
nasty rotations are verystressful and they cause pain
across portfolios, so even theassets that you ultimately want
(14:00):
to own, like.
I know where this goes.
The Fed has to print all thismoney again.
The dollar gets trashed.
I want to be long gold, I wantto be long silver.
But just understand, in thatprocess to get there, you could
get sideswiped by a bunch ofprofessional fund managers who
have gold and silver in theirportfolios and have to de-risk
(14:23):
their overall portfolios,something that we refer to as
sort of a bar shock, a valuerisk shock.
So, in other words, thevolatility of their portfolios
increase.
They have to reduce the size oftheir overall holdings.
So this is quite a tricky time,to be honest, michael, if I'm
right and we're going into anasty rotation.
Speaker 1 (14:43):
You mentioned the bar shock, and actually that's
where I wanted to go.
If, if it is going to be thisnasty rotation which, by the way
, I don't disagree with that atall um, what's sort of the
optimistic scenario in terms ofhow long it takes to play out,
and what's the pessimisticscenario in terms of it being
more like an event?
Right, is it a process or is itan event?
Speaker 2 (15:02):
so look I I think what typically creates the
transference from nasty to nice,it would be rate cuts by the
central bank and the beginningof dollar weakness.
Dollar weakness is really key,particularly for those precious
metals.
I have a view on whether theFed can actually deliver those
(15:28):
rate cuts that are currentlypriced in.
I think when they deliver them,they'll be too late and we'll
be moving into recession.
So there's a lot involved.
Typically, the equity marketsells off until the middle of
recession.
Recessions are not justtransitory things.
What's going to determine howquickly the Fed will respond is
what's the driver of the riskdownturn?
(15:49):
Are we looking, and I'm worriedabout a rebound in some of
these inflation metrics as wemove into Q4, beginning of Q4.
So if it's something like that,I think the Fed will have to be
slow to respond, which willmake the downturn worse.
Look, I mean to put it in asecond what would be a nasty one
(16:13):
?
I think a nasty one would seesome of these equity bubble
stocks.
And Nvidia, to my mind, walkslike a duck.
It cracks like a duck as WebFee.
It is a bubble.
Mind walks like a duck.
It cracks like a duck, has webfeet.
It is a bubble If you go backand look at history, some of
these things drop 80%.
(16:35):
That would be a nasty downturn.
And given that they're not, youknow, if you look at the
dot-com situation, they're notminnows like they were back then
.
These things are behemoths,right.
So you know, could you look ata?
They're not minnows like theywere back then.
These things are behemoths,right.
So you know, could you look ata 40%, 50% decline in the broad
(16:57):
market?
Speaker 1 (16:58):
Yeah, I think that's possible, and there's plenty of
precedent for that.
I mean, that's the funny thing.
It's not like that's someoutrageous argument.
Speaker 2 (17:06):
No, I mean the average decline, michael.
I looked at this, the averagedecline and it depends what you
know.
You can pick any of theaverages, right, you know the
average decline of the S&P andthere's never been a situation
where it's rallied right in arecession.
Right, you know?
Even in COVID and I think thisis what some of the bulls get
(17:27):
wrong they're like, oh, look atCOVID, this is what happened.
They forget the Fed.
At the same time as we weregoing into the recession, the
Fed was blowing out the balancesheet.
They're not going to be able todo the same this time.
There's lots of internaldisagreements about, or
contention around, qe and whatit's done societally with the
(17:52):
wealth disparities that it'screated, the difficulties that
they'd have had to draw this out.
Folks, just take it at facevalue, please.
It's going to take a shitloadof pain to get them to do that.
Okay, to get them to do thatload of pain to get them to do
that.
Okay, to get them to do that.
So the average decline of theS&P in a recession is 30%.
(18:18):
Right, it's not 10.
It's not 20.
It's 30.
And even if you exclude some ofthe big ones, right, gfc, you
know 19.
You know, 19, 20 times, andthis is going back 90 years.
I've taken these stats right.
Then you're still looking at 20, 20 to 25, right?
It's just not a flesh word,right?
Speaker 1 (18:37):
this is a serious event you mentioned, um, you're
expecting a pickup in theinflation metrics.
I'm curious if that hasanything to do with the election
or if there's other dynamicsthat, independent of whoever's
president, that that pickup willhappen.
I think, look, I think.
Speaker 2 (18:59):
Here's what we need to know.
Addressing the first startingpoint is addressing inflation is
extraordinarily difficult to dobecause and you can see this in
the utterances of central banksthat I think are being more
intellectually honest than theFed I started the year off
(19:19):
saying that I think this isquite a political Fed, not so
much in that they're pro-Trumpor pro-Biden, but I think they
are scared of Trump and what hepotentially means
institutionally for the Fed,although I think this idea that
he's going to ride roughshodover the Fed is farcical.
It's not really how it works,but this is a Fed that wants to
(19:45):
avoid a recession.
But if you look at othercentral banks, they're much more
honest.
The RBNZ, the Kiwis, have beenthe most honest and they've come
out and forthrightly said ifpeople don't stop raising prices
and they call them pricesetters, so companies and
individuals asking for payincreases we're going to have to
(20:05):
drive unemployment to the pointthat it breaks the back of
demand.
And that's just.
And there's sort of linkagebetween this sort of labor
market and service inflation.
You can see from the back ofEngland, which is B, and that's
how it works.
Michael, most of inflation is afunction of service inflation
(20:26):
Two-thirds, we'll call it, andservice inflation has been
bloody sticky.
I mean service inflation.
In the US, core serviceinflation is still sitting about
five and for all this, oh well,owner equivalent rent is going
to continue to fall.
Sure, owner equivalent rent hasfallen.
It's down 200 basis points ofits size and yet service
inflation is down 100.
(20:46):
So the feed-through is not onefor one, but what has driven
inflation lower has been goodsinflation.
Goods inflation, basically, upuntil COVID has gone nowhere.
I mean literally the classicexample of productivity
(21:08):
globalisation.
We hadn't seen goods inflationreally for 20 years.
It sort of meandered aroundzero.
Oh no, oh no.
Covid comes along.
We give individuals aninordinate degree of money and
the US corporate sector, beingas effective as it is and highly
(21:31):
uncompetitive in many sectors,reached down people's throat,
right into their back pocket andtook every red cent out of it.
So the first time in 20 yearswe had goods price inflation.
So that's dropping out, but atthe moment it is running at the
second lowest rate, the lowestrate being post the dot-com
(21:52):
bubble.
First In 65 years it's runningat minus 1.7%.
We believe our indicatorssuggest that's not going to
continue and that over the nextsix months that could start to
completely reverse, not that wego to a massively positive
budget.
We could go back to zero by theend of Q1 of next year.
(22:12):
And so you're putting a lot ofpressure on that service
inflation to deliver, and Ithink, if it does deliver, that
would be a sign of weakness inthe labor market today.
I think that would really be asign of weakness in the labor
market today and that'srecessionary sign.
(22:32):
So I think it's extraordinarilyhard to deliver this sort of
halcyon inflation.
Just a back rate, it all goesaway without really crushing
demand and pushing the economyinto recession and, as I said,
the Fed just hasn't beenintellectually honest enough to
admit that.
(22:53):
Whether it's a function ofpolitics or their dual mandate,
I don't know.
Speaker 1 (23:00):
And the unemployment rate has been rising and it does
seem like that trend.
Speaker 2 (23:05):
I would say the labor market is softening, but the
unemployment rate, I think, isgiving us a bit of a dummy
signal.
Because of the immigrationissue and you can don't get me
wrong I think employment growthis softening, so I wouldn't be
supposed to see a sort ofweakish, not-well payroll.
But typically what drives youinto recession is rising is
(23:28):
layoffs, and we have no signs ofthose.
Speaker 1 (23:36):
You had mentioned to me before that you thought we
were in this enormous carrytrade, that you thought we were
in this enormous carry trade andI have talked about this
reverse carry trade dynamic withJapan as the catalyst, as the
risk, for a lot of reasons,largely because of oil price and
yen.
I've been wrong on that thesis,at least so far.
Speaker 2 (23:58):
But I want you to explain that idea that we're in
this enormous carry trade, soit's much bigger than just Japan
.
This is truly a reflexive cycleI think we're in.
We've been in them before, mostnotably the dot-com bubble and
the GFC, although the fundinginstruments certainly the GFC
(24:20):
were different Soros talks about, you know, economists, sort
economists have a basicassumption that markets tend
towards equilibrium, that theyfind their equilibrium.
Soros came up with this thesisof reflexivity and said he
utterly disagreed becauseotherwise you couldn't get
bubbles.
What he talked about was aconcept whereby you can get this
(24:43):
sort of positive feedback,positive or negative feedback
loop, but in the kind of boomperiod which we're currently in,
you get a situation where thepurchase of the asset drives the
fundamentals that underpin theasset.
So as you buy it, you kind ofimprove its fundamentals and
underpin its ongoing performanceand you end up with this kind
(25:03):
of virtuous circle.
And I think that's where we'vebeen, michael.
You know, starting in sort of2011, but accelerating
materially in 2014,.
Us monetary policy divergedreally heavily from the rest of
the world.
The H-PAM was toying withnegative interest rates, the ECB
(25:23):
was toying the same thingbecause solving crisis in Europe
, and I remember at the timehaving conversations with big
real money accounts and Iremember one particular Swedish
guy and he just said to me look,I mean there's no yields here,
there's nothing right and wehave an obligation to our
shareholders.
We just got to pile money intothe US.
It's the only place with theliquidity that we can get those
(25:47):
sort of yields.
So I think what happened ismoney piles in, goes into the
bond market, a lot into thecorporate bond market.
Corporate start to buy backtheir own stock.
Us equity market outperformsmore money piles in the interest
rate differential at the sametime is driving the dollar up.
So you have this sort ofvirtuous cycle in the financial
(26:07):
market.
But it goes beyond that.
In the US we have this thesis wecall hyper-financialization.
In other words, it's sort ofvery screwed up feedback loop
whereby you would think that thereal economy should lead
financial assets, but not in theUS.
It's actually financial assets,particularly the equity market,
that leads behavior in the USbecause of two things Firstly,
(26:27):
it feeds discretionary spendingfor the wealthy, which is at
unprecedentedly high levelsbecause their portfolios have
done extraordinarily well.
And secondly, it feeds hiringand capex because CEOs already
pay to be guardians of theirequity price, and when the
equity price is rising, theyhire, and when the equity price
(26:51):
is falling, they fire.
So we've been.
You create this kind of virtuouscircle.
So assets go up, ceos hire,people spend more money, the Fed
raises rates, the dollar getseven stronger, but then there's
a third leg to this, and that isthat as the economy booms and
the Fed raises rates and moremoney comes in, americans tend
(27:14):
to suck in vast quantities ofimports, and that current
account deficit has to be fundedby foreigners.
We can't print euros, yen andrenminbi, and so they have to
fund it, and they fund it in oneof two ways.
They either lend it to us, andthe overseas liabilities of US
(27:35):
banks have switched, but whatthey really be doing is buying
assets, treasuries, but theymost recently 2020, bought a
shitload of stock, and so youreally get this mechanical
relationship, michael, wherebyasset prices rise and the
(27:58):
funding that that leads to therequirement of funding to fund
that current account sucks inmore.
So you get this very reflexivecycle, but it's inherently
unstable, and this is what Sorostalks about.
Reflexivity he talks about, hecreates this impression of
equilibrium, but it's actuallythe antithesis of equilibrium,
(28:20):
because if any of those factorsthat drove the uproot start to
become unhinged.
You can go from the boom to thebust, and so this will be a much
bigger than just the yen.
Don't get me wrong.
I think the yen you know we'vebeen short dollar yen since
about 160 in our tradingportfolio but this is much
(28:43):
bigger.
I mean the yen is emblematic ofthis, of a massive carry trade.
We haven't had long yet wehaven't had short yen positions.
Long dollars, euros, whatever,mexican pesos, whatever.
All of this magnitude is aheadof the GFC.
But that is really just oneelement of this.
This is much bigger, mate.
This is truly the largest carrytrade in global markets, which
(29:08):
is akin to what we saw headinginto the dot-com bubble.
It is akin to what we sawheading into the GFC.
Apart from that, was fundedwith debt, particularly
housing-related debt, thatblowout of the current account
deficit.
So this is big.
This is big.
Speaker 1 (29:28):
But does that imply that you need something very big
to start the deleveragingprocess, or is it more one of
those?
Because we're in a chaoticsystem?
Any number of small thingscould just start this kind of
global margin call reversal ofthat carry trade.
Speaker 2 (29:43):
So I think generally you do need something quite big,
but it can start small if thatmakes sense.
So you can have a series ofcracks, like the Dutch boy with
his fingers in the dike.
At some point you run out offingers to stick in the crack.
So you could have a situationwhere US rates start to come off
(30:03):
right.
That undermines the dollar,that starts to cause outflows,
because a lot of this strengthis a function of dollar strength
, because it's very enticing toforeigners to plow money into
the US when the dollar is strong, because they get two for one,
they're long dollars and they'relong-term outperforming US
(30:24):
assets.
So you could have dollarweakness.
You could have equity marketunderperformance, which could be
a function of the tech bubblestarting to start to
underperform, and that rotationinto the more value-orientated
stuff and you could just have arecession, and in a recession we
won't need to from that currentaccount deficit because you've
(30:45):
tricked and then the money goeshome.
So it can start small but trulyto unwind it truly to create
the conditions for the realoutperformance of, say, precious
metals typically takes a bigsell-off in stocks, so something
(31:07):
big ultimately is the deathnail.
But the cracks are starting toemerge and that's why I think
that CPI was kind of interestinglast week, because I think
people want to think that it'scausing nice rotation.
I'm not convinced People wantto think that it's causing nice
rotation.
I'm not convinced.
I think that rotation we'reseeing looks nice because a
(31:29):
bunch of people with very shortvalue and long growth and so
what they're doing is covering,so they're buying the value in
the long short equity space.
Speaker 1 (31:43):
But I think once that buying is done, I'm not sure
it's going to look quite as sexyas people think.
I'm going to share another postyou put out on May 17.
Oh, yes, you bought bonds right, but we believe bonds are in a
structural bear market thatabsent intervention will see
yields rise for the next 20 plusyears.
And you need a new hedge.
Note that, on a total returnbasis plus interest, treasuries
(32:03):
have broke a 35-year supportversus gold.
This is a topic which is nearand dear to me, purely because,
from my perspective, I thinkpeople misunderstand what
treasuries are.
A hedge to the risk that's offin the term.
Risk off is ultimately defaultrisk For a moment in time.
It's what creates the flight tosafety.
(32:25):
Right Credit spreads widenmoney for a moment in time goes
to US treasuries because they'vegot a printer.
Even after inflation, you'restill going to get your money
back right to some extent, butthat's for a moment in time.
Speaker 2 (32:54):
You can still have that happen within a broader
secular market for bonds.
So if bonds are going tocontinue to be challenged for
lack of a better way of sayingit and we're talking treasuries
here but broadly, when it comesto the bond market, is it a
duration issue or are we goingto see credit stress be of a
combination of that?
I think if I look at credit,it's a bit like the US equity
market it's mispriced, it's justmispriced.
I mean triple Cs have finallystarted to get to a level,
michael, where they look likethey're fairly priced, but
(33:17):
anything above that is mispriced.
I mean, typically, creditunderperforms in a slowing
economy and the base case isthat out of a tightening cycle
you end up with a recession.
That's set at this assumptionof hyper Goldilocks assumption
that the market's getting isstatistically unlikely.
The structural situation inbonds is look, I referred to
(33:40):
this at the beginning.
I've said that's the chart Iwas referring to when you broke
the 35-year trend line.
I think you know there are manyassumptions that we make.
We've spent quite a lot of timetalking about this assumption
that supply is the driver ofhigh yields.
Right, we're just issuing toomuch debt.
(34:00):
You know, from a verysimplistic perspective, which is
often how I like to sort ofthink of the world.
I mean, if supply wasincreasing but demand was there,
then supply wouldn't be anissue.
The issue is the demand isn'tthere.
The demand and the pool ofavailable savings that can drive
(34:21):
that demand is actuallyshrinking.
Demographics are dictating that, because if people are retiring
and they're disgorging not justhere in the US but globally and
they're disgorging the assetsthat they built up for their
retirement over the last 30 oddyears and even worse, a lot of
(34:42):
the purchases of our debt are nolonger our friends.
It used to be the countriesthat ran large current account
services that were our friendsKorea, germany, japan those guys
.
Now it's China, and so I thinkthe structural bear market is
something that I deeply worryabout.
Don't get me wrong.
I mean, I think in a recession,obviously treasury yields fall
(35:04):
to about 3%, but it ain't goingback to the same, and then I
think you go up and to the rightfor the next 20, 25 years.
I think it's going to be ahugely problematic setup and
that's why I think you want tokind of hold gold.
And I think the other thing tobear in mind is that we've lived
in quite an extraordinarilyabnormal period.
(35:26):
If you go back and look athistory in the Bank of England
to work on this I don't know howthey got stats for this, but
they looked at the risk-freeasset through history.
So treasuries essentially nowoccur, which is the current
risk-free asset against theequity performance, and we've
never had a negative correlationbetween bond prices not yields
(35:47):
prices the opposite and stocksfor 230 years.
Never, ever, ever.
It got down to like zero.
But basically, when bonds wentdown, stocks tended to go down,
and that's because you were inan inflationary world.
And then Greenspan came alongin 1998, and he flipped the
correlation on its head, andbecause we got concerned about
(36:08):
deflation.
And when you're concerned aboutdeflation, you solve for the
equity market because you wantto keep that demand going.
So you're trying to constantlykeep the equity market going and
we saw that obviously inextremes during COVID and
post-GFC.
But now and that's when thatcorrelation flipped negative and
that's when disparity worked.
(36:30):
That's when bonds were abrilliant hedge to assets.
If we are going which I believe, we're going back to a more
structurally inflation and we'vebeen talking about this for six
years now to a morestructurally inflation, and
we've been talking about thisfor six years now.
Structurally more inflationaryworld, then bonds are just not
as sexy a hedge.
(36:51):
I mean, they work at some pointto your point in the cycle, but
overall they are not a goodhedge.
Speaker 1 (37:02):
So wouldn't that imply that small cash will keep
on underperforming becausethey're more lever than cash?
Rich tech?
I mean going back to thatdiscussion around can the market
rally with?
Speaker 2 (37:13):
that.
Yeah, maybe until unless thebubble bursts in us tech.
Right, this is a bubble.
There is absolutely no questionthis is a bubble.
I mean, look, I think peoplereally need to understand this.
You've seen and you can see it.
(37:34):
You get movements.
I mean, look at Tesla's bouncerecently.
Right, and I got a bit of a bugin my bonnet about Tesla, but
nonetheless we see this bouncein Tesla.
After they just released youknow better than expected very
poor sales numbers, musk comesout and in his usual sort of BS
(38:00):
thing, says oh well you, the taxis coming, the cheap car is
coming.
Don't forget what we're goingto do in AI, don't forget what
we're going to do with the robotand the stock rallies.
But the stock really ralliesbecause a bunch of people were
bloody sure right.
So we end up of this narrativechasing the chastest price
(38:28):
action.
And if we go back, if I'm rightabout this big carry trade, then
really what is driving AI techboom is simply flow that has to
come into the US because we arerunning a large current account
(38:51):
and a capital account deficitand a budget deficit that
foreigners have to fund.
And then you pile on top ofthat domestic flows, which
obviously, and the mentor trade,and this just becomes an
inordinate virtuous circle which, all of a sudden, analysts have
to go.
(39:11):
Oh shit, why is Tesla up somuch?
Well, it must be because we'reextrapolating these assumptions
about fundamentals.
Maybe it's just as simple asit's just price action driven by
mechanics, nothing more.
And Mike Green's talked aboutthis from a micro perspective in
terms of indexation, and myview is this is going on at a
(39:37):
macro level at a much, much,much bigger level.
Speaker 1 (39:42):
As we wrap up, everybody that's watching and
listening.
Please make sure you trackJulian on X and various social
media networks.
Let's talk briefly about macrointelligence partners.
Talk about what type of serviceit is, and your tagline on the
homepage is markets are noisy.
We make calm out of the chaos.
Part of the calming is probablyyour accent and fairness, but
(40:07):
let's talk about what's involvedin the service.
Speaker 2 (40:10):
So you know we have this as an institutional service
.
It covers a gamut of parts fromthe set.
You know there's a lot ofmacros that are hedge funds to
real money, to family offices,to very aggressive large
individuals, family offices tovery aggressive large
individuals, um, and the purposeis, as I said to, to help
people frame the world from amacro perspective but then very
(40:30):
much sort of capitalize up thatin terms of of traits and we do
come out and and recommendtraits.
I'm not really interested inpontificating for the sake of
that.
Then we also have this productthat we run with Raoul on Real
Vision, macro Insiders, and youknow that's a different and it's
(40:52):
already taking two more retailtype investors.
You know, because some of thetrades that we do in the MI2
crowd are quite difficult toreplicate, you know, in the MI2
crowd are quite difficult toreplicate, you know, in the
resale space.
So we try and sort of set themup in more that kind of way.
And you know, I think you'vegot both Raoul and my view and
(41:16):
Raoul's had some extremely goodlong-term views but I tend to
sort of oscillate around kind ofhis view Because I'm, you know,
just more.
I've never said that trends aregoing to extrapolate.
So if I see things turning Ialways want to be a little bit
more cautious.
So that kind of what we, whatwe offer.
Speaker 1 (41:36):
Appreciate those that watch this live and those who
are listening to the editedversion here.
Everybody again, please makesure you follow, julian, and I
will see you next time on LeadLag Live.
Thank you, julian, I appreciateit.
Speaker 2 (41:50):
Pleasure.
Thanks, Michael.
Speaker 1 (41:51):
Cheers everybody, Thank you.
My name is Michael Guyatt, publisher of the Lead
Lagrime Report.
Joining me for the 40-minutetime period, here is Mr Julian
Brigden, who every time I seeyou, julian, my mind goes to
James Bond, and part of that'salso because your company is MI2
Partners, which sounds likeit's some kind of secret service
, I don't know, some kind oflike intelligence agency, which
it is.
Speaker 2 (00:27):
I want to play on that actually, michael.
Look, I'm a Brit, I'm a hugeJames Bond fan, obviously, and
if you look at the logo it's gotthe sort of overtones of
Universal Export, which isBond's company.
That was kind of deliberate.
I was just sort of riffing andplaying around with that.
But that was kind of deliberate, I was just sort of riffing and
(00:48):
playing around with that.
And then MI2 was actually asubdivision of British service
up until the end of the FirstWorld War, like MI5 and MI6.
It was actually in charge ofgeographical intelligence.
So I kind of thought, hey, thisis kind of a clever idea.
There were two of us settingthe damn thing up, so it seemed
like a fun idea.
Speaker 1 (01:05):
I love it, man, I love it.
So let's just do a quickoverview of your background,
what you've done throughout yourcareer and what MI2 Partners
does, aside from globalintelligence.
Speaker 2 (01:15):
Yeah, so basically I've been in the market now
since I was 19.
I mean, I started before I wentto university, started trading
uh precious metals uh a long,long, long time ago.
Um then switched over to fx.
Um did some uh fixed incomewhen I was at brothers, ran uh
(01:37):
fx sales for lehman in londonand new york.
Um moved uh to ubs for a bitand then basically moved on to
the sort of policy consultancyside with this group called
Medley Global Advisors and thatgave me sort of an insight onto
that, because they were thesmartest people on the street
(01:57):
and then basically gosh 11, no,13 years ago we set up MI2.
And the objective was toessentially replicate the
morning meeting of a macro hedgefund, so to go and kind of look
through the world from a sortof 40,000 foot view, then look
(02:21):
at positioning in the market andthen kind of come up with
objective traits.
I'm not really interested injust pontificating about the
economics or the outlook unlessyou can make money out of it.
To me that's just a completewaste of time.
Speaker 1 (02:39):
Let's start with that morning meeting of macro hedge
funds.
How do you think the morningmeetings for macro hedge funds
went about a week and a half agowhen suddenly small caps were
having this immense what lookslike short covering squeeze and
large caps the crowded, longtrade suddenly reversed?
Speaker 2 (03:01):
I mean I think, look, I think the trigger there was
the CPI.
That's really what the macroguys will be looking at.
Generally there are exceptionsMacro hedge funds don't take
single stock bets.
I think the macro guys havefound the equity market quite
(03:24):
frustrating.
They've been trading sort offixed income off the back of it,
dollar, yen off the back of it,carry trades off the back of it
, but they don't generally tradethe equity market so
aggressively.
So I think the question was, wasthat CPI at a kind of an
epiphany moment?
I have my doubt, but I thinkthe macro community has been in
(03:49):
general looking at what goes onin the equity market and, while
it's run longer than they think,looking at it from a quite
contrary perspective.
I mean, that's generally wheremacro comes into its own.
It comes into its own turningpoints and inflection points and
I think, michael, this sort ofsupposition in the market that
(04:14):
Goldilocks has given, I thinkit's something that many macro
guys in their heart of heartthey're not going to be trading
this way because it doesn'tprove profitable.
Question, and I certainlyquestion.
Speaker 1 (04:28):
All right.
So you used the word Goldilocks.
I want to hit on that a littlebit more, but first I want to
share a post that you put on X,and the comment was I can't
remember the last time I saw themarket so singularly dependent
on one sector infotech.
This is from July 10.
Even a month ago, we had foursubgroups in the top relative
(04:48):
strength quadrants.
I've talked about and writtenabout this before, but it seems
to me that whether you're a solobottom-up individual trader or
you're a macro hedge fund, theonly question that matters is
can the stock market rallywithout tech leading it higher?
Right, and I say that becausethe implication of that is value
(05:09):
then outperforms growthinternational, then outperforms
domestic small caps, thenoutperform large caps.
How does tech sector leadershipfit into that viewpoint of a
Goldilocks economy?
Can you actually have rotationin a Goldilocks economy where
tech is not the only game intown?
Speaker 2 (05:27):
I mean you should have a rotation right I mean
Goldilocks while I believe it'shighly unlikely, essentially,
you know and if the equity boysare to be believed and I think
they're full of you know it isin a true Goldilocks scenario.
(05:48):
You'd be looking at somethinglike the late 1990s, right?
So in that period what you getis you get a productivity
induced period of very rapid,sustained growth where you get
get a productivity is kind of aget out of jail free card right,
(06:11):
and productivity because whatit enables you to do is run very
, very high levels of nominalGDP, which is great for the
equity market because we earnnominal earnings.
It enables you to lowerinflation, which is great for
the bond market, and it enablesyou to run strong employment and
(06:31):
rising wages.
So it really, really is Nirvana.
And if the equity boys is tobelieve, that's kind of where
they think we are.
I think there's a couple ofproblems with that.
There are zero signs ofproductivity gain If you look at
it on a quarter-on-quarterbasis, unlike the late 90s where
(06:52):
it was steadily risingproductivity.
We've been falling in astraight line for three years.
The second issue is set up inthe equity market is set up in
the equity market.
So last week, for clients, Isent out a piece where, uh, and
it was off the initial bounce soI didn't catch the load, but
basically I said there's there'sfour times in history where we
(07:15):
had, on a relative basis, beenwhere we are in terms of the sp
and the SPW.
So the sort of more tech-heavygrowth, if you want, equity
market versus the SPW, which isthe broad, equally weighted SPW.
And those three occasions,michael, were the height of the
(07:38):
dot-com bubble, the low of theGFC and the low post-COVID.
And what we said is you aremeant to be short tech, long
value SPW okay, but there is avery, very significant
difference between two of thoserotations and the other
(08:03):
remainder.
So, in off the lows of theglobal financial crisis, off the
lows of COVID, we had what Irefer to as a nice rotation.
So a nice rotation occurs wherethe economic expansion falls
out, where value starts tooutperform growth languages or
(08:25):
doesn't perform as well.
Exactly what you say you go andbuy kind of international, you
go and buy commodities.
This is a broadening out of theeconomic situation.
Lots of people are sort ofpointing to that and I think
it's absolute BS and I'll tellyou why it's absolute BS, and
(08:49):
I'll tell you why.
Off both of those bounces.
Obviously we've had a massivedownturn in equity, so equity is
cheap.
The second thing we had is wehad a vast amount of
underutilized resources becausewe've just gone through swinging
recessions, so we had 10%unemployment.
So, the other words, theeconomy could expand without
(09:09):
running into any constraints,most notably rising wages that
would push straight through intocore inflation, and so I think
the setup looks radicallydifferent.
I think this one looks morelike 2000, dot-com bubble, where
you had a nasty rotation.
(09:31):
And in a nasty rotation whathappens is growth does
underperform, value outperforms,but in an environment where
both drop, and I think thatlooks like the current setup.
I think that's the risk.
I think we're going to have anasty rotation where tech sells
(09:55):
off and drags the whole marketdown.
Value doesn't underperform, itoutperforms, but only on a
relative basis.
Speaker 1 (10:12):
How much of that explains that scenario where
it's relative outperformanceversus the average downtrend?
How much does that explain someof this bid in gold?
I mean, I've argued myself thatI think this run in gold.
As've said, gold is sending awarning a few times.
It's big money that is lookingfor non-correlation for a reason
Right.
Speaker 2 (10:37):
Look, I think there are lots of stories that go
behind the gold game.
I think one of them is the lackof fiscal rectitude on many
continents that we see now, butparticularly most acutely here
(10:58):
in the US, where there justdoesn't seem to be the
willingness to get to grips withfiscal deficit.
I think that is pointinglong-term to a scenario of what
is referred to as fiscaldominance, where the central
bank ultimately has to pivotfrom targeting inflation and
employment to targeting to thesolvency of their boss, where
(11:22):
you'd expect to see somethinglike QE or fixed yields in the
bond market.
That's a number of years out,but that would be highly, highly
, highly negative for the dollarand obviously tremendously
positive for gold.
(11:43):
The other thing is that I havea chart where I look at the
relative returns betweentreasuries and gold.
I look at total returns fortreasuries, so including your
coupon and gold has just blownthrough like 35 years of support
.
So I mean, this is an amazingadmittance, but you would have
(12:05):
been better off being in goldearning nothing, than having
your money in treasuries.
Treasuries and bonds in generalin the G7, I think, look
increasingly like instruments ofconfiscation for increasingly
insolvent and governments whoare incapable of addressing
quite significant needs.
And I'm not capable ofaddressing quite significant
needs and I'm not saying thatthose needs aren't required Like
(12:33):
fiscal dominance actuallyoccurs throughout history and
has occurred throughout historyat periods where it's societally
necessary.
Michael, right, you know, secondWorld War, it was absolutely
societally necessary to go.
Sorry, bond market.
Here's your rates now buggeroff for the next decade, right,
I think we are in one of thoseenvironments, but it just
doesn't mean you want to own it,right, I mean.
(12:56):
So I think there's afundamental story behind the
gold thing.
What I would say is, if we aremoving into a nasty rotation
between growth and value, if yougo back and you look at 2000,
the sort of cycle high of thedot-com bubble, we did move
(13:18):
eventually into a nice rotationbetween growth and value, but
that really occurred between2002 and 2008,.
But that really occurredbetween 2002 and 2008, in that,
(13:39):
between sort of 2000, late 2000,into 2002, by and large the
rotation was quite nasty.
And in other words, you know,once again, on a relative basis,
you know gold might outperform,silver might outperform, but
they may not go up, they can godown, and the reason for that is
nasty rotations are verystressful and they cause pain
across portfolios, so even theassets that you ultimately want
(14:00):
to own, like.
I know where this goes.
The Fed has to print all thismoney again.
The dollar gets trashed.
I want to be long gold, I wantto be long silver.
But just understand, in thatprocess to get there, you could
get sideswiped by a bunch ofprofessional fund managers who
have gold and silver in theirportfolios and have to de-risk
(14:23):
their overall portfolios,something that we refer to as
sort of a bar shock, a valuerisk shock.
So, in other words, thevolatility of their portfolios
increase.
They have to reduce the size oftheir overall holdings.
So this is quite a tricky time,to be honest, michael, if I'm
right and we're going into anasty rotation.
Speaker 1 (14:43):
You mentioned the bar shock, and actually that's
where I wanted to go.
If, if it is going to be thisnasty rotation which, by the way
, I don't disagree with that atall um, what's sort of the
optimistic scenario in terms ofhow long it takes to play out,
and what's the pessimisticscenario in terms of it being
more like an event?
Right, is it a process or is itan event?
Speaker 2 (15:02):
so look I I think what typically creates the
transference from nasty to nice,it would be rate cuts by the
central bank and the beginningof dollar weakness.
Dollar weakness is really key,particularly for those precious
metals.
I have a view on whether theFed can actually deliver those
(15:28):
rate cuts that are currentlypriced in.
I think when they deliver them,they'll be too late and we'll
be moving into recession.
So there's a lot involved.
Typically, the equity marketsells off until the middle of
recession.
Recessions are not justtransitory things.
What's going to determine howquickly the Fed will respond is
what's the driver of the riskdownturn?
(15:49):
Are we looking, and I'm worriedabout a rebound in some of
these inflation metrics as wemove into Q4, beginning of Q4.
So if it's something like that,I think the Fed will have to be
slow to respond, which willmake the downturn worse.
Look, I mean to put it in asecond what would be a nasty one
(16:13):
?
I think a nasty one would seesome of these equity bubble
stocks.
And Nvidia, to my mind, walkslike a duck.
It cracks like a duck as WebFee.
It is a bubble.
Mind walks like a duck.
It cracks like a duck, has webfeet.
It is a bubble If you go backand look at history, some of
these things drop 80%.
(16:35):
That would be a nasty downturn.
And given that they're not, youknow, if you look at the
dot-com situation, they're notminnows like they were back then
.
These things are behemoths,right.
So you know, could you look ata?
They're not minnows like theywere back then.
These things are behemoths,right.
So you know, could you look ata 40%, 50% decline in the broad
(16:57):
market?
Speaker 1 (16:58):
Yeah, I think that's possible, and there's plenty of
precedent for that.
I mean, that's the funny thing.
It's not like that's someoutrageous argument.
Speaker 2 (17:06):
No, I mean the average decline, michael.
I looked at this, the averagedecline and it depends what you
know.
You can pick any of theaverages, right, you know the
average decline of the S&P andthere's never been a situation
where it's rallied right in arecession.
Right, you know?
Even in COVID and I think thisis what some of the bulls get
(17:27):
wrong they're like, oh, look atCOVID, this is what happened.
They forget the Fed.
At the same time as we weregoing into the recession, the
Fed was blowing out the balancesheet.
They're not going to be able todo the same this time.
There's lots of internaldisagreements about, or
contention around, qe and whatit's done societally with the
(17:52):
wealth disparities that it'screated, the difficulties that
they'd have had to draw this out.
Folks, just take it at facevalue, please.
It's going to take a shitloadof pain to get them to do that.
Okay, to get them to do thatload of pain to get them to do
that.
Okay, to get them to do that.
So the average decline of theS&P in a recession is 30%.
(18:18):
Right, it's not 10.
It's not 20.
It's 30.
And even if you exclude some ofthe big ones, right, gfc, you
know 19.
You know, 19, 20 times, andthis is going back 90 years.
I've taken these stats right.
Then you're still looking at 20, 20 to 25, right?
It's just not a flesh word,right?
Speaker 1 (18:37):
this is a serious event you mentioned, um, you're
expecting a pickup in theinflation metrics.
I'm curious if that hasanything to do with the election
or if there's other dynamicsthat, independent of whoever's
president, that that pickup willhappen.
I think, look, I think.
Speaker 2 (18:59):
Here's what we need to know.
Addressing the first startingpoint is addressing inflation is
extraordinarily difficult to dobecause and you can see this in
the utterances of central banksthat I think are being more
intellectually honest than theFed I started the year off
(19:19):
saying that I think this isquite a political Fed, not so
much in that they're pro-Trumpor pro-Biden, but I think they
are scared of Trump and what hepotentially means
institutionally for the Fed,although I think this idea that
he's going to ride roughshodover the Fed is farcical.
It's not really how it works,but this is a Fed that wants to
(19:45):
avoid a recession.
But if you look at othercentral banks, they're much more
honest.
The RBNZ, the Kiwis, have beenthe most honest and they've come
out and forthrightly said ifpeople don't stop raising prices
and they call them pricesetters, so companies and
individuals asking for payincreases we're going to have to
(20:05):
drive unemployment to the pointthat it breaks the back of
demand.
And that's just.
And there's sort of linkagebetween this sort of labor
market and service inflation.
You can see from the back ofEngland, which is B, and that's
how it works.
Michael, most of inflation is afunction of service inflation
(20:26):
Two-thirds, we'll call it, andservice inflation has been
bloody sticky.
I mean service inflation.
In the US, core serviceinflation is still sitting about
five and for all this, oh well,owner equivalent rent is going
to continue to fall.
Sure, owner equivalent rent hasfallen.
It's down 200 basis points ofits size and yet service
inflation is down 100.
(20:46):
So the feed-through is not onefor one, but what has driven
inflation lower has been goodsinflation.
Goods inflation, basically, upuntil COVID has gone nowhere.
I mean literally the classicexample of productivity
(21:08):
globalisation.
We hadn't seen goods inflationreally for 20 years.
It sort of meandered aroundzero.
Oh no, oh no.
Covid comes along.
We give individuals aninordinate degree of money and
the US corporate sector, beingas effective as it is and highly
(21:31):
uncompetitive in many sectors,reached down people's throat,
right into their back pocket andtook every red cent out of it.
So the first time in 20 yearswe had goods price inflation.
So that's dropping out, but atthe moment it is running at the
second lowest rate, the lowestrate being post the dot-com
(21:52):
bubble.
First In 65 years it's runningat minus 1.7%.
We believe our indicatorssuggest that's not going to
continue and that over the nextsix months that could start to
completely reverse, not that wego to a massively positive
budget.
We could go back to zero by theend of Q1 of next year.
(22:12):
And so you're putting a lot ofpressure on that service
inflation to deliver, and Ithink, if it does deliver, that
would be a sign of weakness inthe labor market today.
I think that would really be asign of weakness in the labor
market today and that'srecessionary sign.
(22:32):
So I think it's extraordinarilyhard to deliver this sort of
halcyon inflation.
Just a back rate, it all goesaway without really crushing
demand and pushing the economyinto recession and, as I said,
the Fed just hasn't beenintellectually honest enough to
admit that.
(22:53):
Whether it's a function ofpolitics or their dual mandate,
I don't know.
Speaker 1 (23:00):
And the unemployment rate has been rising and it does
seem like that trend.
Speaker 2 (23:05):
I would say the labor market is softening, but the
unemployment rate, I think, isgiving us a bit of a dummy
signal.
Because of the immigrationissue and you can don't get me
wrong I think employment growthis softening, so I wouldn't be
supposed to see a sort ofweakish, not-well payroll.
But typically what drives youinto recession is rising is
(23:28):
layoffs, and we have no signs ofthose.
Speaker 1 (23:36):
You had mentioned to me before that you thought we
were in this enormous carrytrade, that you thought we were
in this enormous carry trade andI have talked about this
reverse carry trade dynamic withJapan as the catalyst, as the
risk, for a lot of reasons,largely because of oil price and
yen.
I've been wrong on that thesis,at least so far.
Speaker 2 (23:58):
But I want you to explain that idea that we're in
this enormous carry trade, soit's much bigger than just Japan
.
This is truly a reflexive cycleI think we're in.
We've been in them before, mostnotably the dot-com bubble and
the GFC, although the fundinginstruments certainly the GFC
(24:20):
were different Soros talks about, you know, economists, sort
economists have a basicassumption that markets tend
towards equilibrium, that theyfind their equilibrium.
Soros came up with this thesisof reflexivity and said he
utterly disagreed becauseotherwise you couldn't get
bubbles.
What he talked about was aconcept whereby you can get this
(24:43):
sort of positive feedback,positive or negative feedback
loop, but in the kind of boomperiod which we're currently in,
you get a situation where thepurchase of the asset drives the
fundamentals that underpin theasset.
So as you buy it, you kind ofimprove its fundamentals and
underpin its ongoing performanceand you end up with this kind
(25:03):
of virtuous circle.
And I think that's where we'vebeen, michael.
You know, starting in sort of2011, but accelerating
materially in 2014,.
Us monetary policy divergedreally heavily from the rest of
the world.
The H-PAM was toying withnegative interest rates, the ECB
(25:23):
was toying the same thingbecause solving crisis in Europe
, and I remember at the timehaving conversations with big
real money accounts and Iremember one particular Swedish
guy and he just said to me look,I mean there's no yields here,
there's nothing right and wehave an obligation to our
shareholders.
We just got to pile money intothe US.
It's the only place with theliquidity that we can get those
(25:47):
sort of yields.
So I think what happened ismoney piles in, goes into the
bond market, a lot into thecorporate bond market.
Corporate start to buy backtheir own stock.
Us equity market outperformsmore money piles in the interest
rate differential at the sametime is driving the dollar up.
So you have this sort ofvirtuous cycle in the financial
(26:07):
market.
But it goes beyond that.
In the US we have this thesis wecall hyper-financialization.
In other words, it's sort ofvery screwed up feedback loop
whereby you would think that thereal economy should lead
financial assets, but not in theUS.
It's actually financial assets,particularly the equity market,
that leads behavior in the USbecause of two things Firstly,
(26:27):
it feeds discretionary spendingfor the wealthy, which is at
unprecedentedly high levelsbecause their portfolios have
done extraordinarily well.
And secondly, it feeds hiringand capex because CEOs already
pay to be guardians of theirequity price, and when the
equity price is rising, theyhire, and when the equity price
(26:51):
is falling, they fire.
So we've been.
You create this kind of virtuouscircle.
So assets go up, ceos hire,people spend more money, the Fed
raises rates, the dollar getseven stronger, but then there's
a third leg to this, and that isthat as the economy booms and
the Fed raises rates and moremoney comes in, americans tend
(27:14):
to suck in vast quantities ofimports, and that current
account deficit has to be fundedby foreigners.
We can't print euros, yen andrenminbi, and so they have to
fund it, and they fund it in oneof two ways.
They either lend it to us, andthe overseas liabilities of US
(27:35):
banks have switched, but whatthey really be doing is buying
assets, treasuries, but theymost recently 2020, bought a
shitload of stock, and so youreally get this mechanical
relationship, michael, wherebyasset prices rise and the
(27:58):
funding that that leads to therequirement of funding to fund
that current account sucks inmore.
So you get this very reflexivecycle, but it's inherently
unstable, and this is what Sorostalks about.
Reflexivity he talks about, hecreates this impression of
equilibrium, but it's actuallythe antithesis of equilibrium,
(28:20):
because if any of those factorsthat drove the uproot start to
become unhinged.
You can go from the boom to thebust, and so this will be a much
bigger than just the yen.
Don't get me wrong.
I think the yen you know we'vebeen short dollar yen since
about 160 in our tradingportfolio but this is much
(28:43):
bigger.
I mean the yen is emblematic ofthis, of a massive carry trade.
We haven't had long yet wehaven't had short yen positions.
Long dollars, euros, whatever,mexican pesos, whatever.
All of this magnitude is aheadof the GFC.
But that is really just oneelement of this.
This is much bigger, mate.
This is truly the largest carrytrade in global markets, which
(29:08):
is akin to what we saw headinginto the dot-com bubble.
It is akin to what we sawheading into the GFC.
Apart from that, was fundedwith debt, particularly
housing-related debt, thatblowout of the current account
deficit.
So this is big.
This is big.
Speaker 1 (29:28):
But does that imply that you need something very big
to start the deleveragingprocess, or is it more one of
those?
Because we're in a chaoticsystem?
Any number of small thingscould just start this kind of
global margin call reversal ofthat carry trade.
Speaker 2 (29:43):
So I think generally you do need something quite big,
but it can start small if thatmakes sense.
So you can have a series ofcracks, like the Dutch boy with
his fingers in the dike.
At some point you run out offingers to stick in the crack.
So you could have a situationwhere US rates start to come off
(30:03):
right.
That undermines the dollar,that starts to cause outflows,
because a lot of this strengthis a function of dollar strength
, because it's very enticing toforeigners to plow money into
the US when the dollar is strong, because they get two for one,
they're long dollars and they'relong-term outperforming US
(30:24):
assets.
So you could have dollarweakness.
You could have equity marketunderperformance, which could be
a function of the tech bubblestarting to start to
underperform, and that rotationinto the more value-orientated
stuff and you could just have arecession, and in a recession we
won't need to from that currentaccount deficit because you've
(30:45):
tricked and then the money goeshome.
So it can start small but trulyto unwind it truly to create
the conditions for the realoutperformance of, say, precious
metals typically takes a bigsell-off in stocks, so something
(31:07):
big ultimately is the deathnail.
But the cracks are starting toemerge and that's why I think
that CPI was kind of interestinglast week, because I think
people want to think that it'scausing nice rotation.
I'm not convinced People wantto think that it's causing nice
rotation.
I'm not convinced.
I think that rotation we'reseeing looks nice because a
(31:29):
bunch of people with very shortvalue and long growth and so
what they're doing is covering,so they're buying the value in
the long short equity space.
Speaker 1 (31:43):
But I think once that buying is done, I'm not sure
it's going to look quite as sexyas people think.
I'm going to share another postyou put out on May 17.
Oh, yes, you bought bonds right, but we believe bonds are in a
structural bear market thatabsent intervention will see
yields rise for the next 20 plusyears.
And you need a new hedge.
Note that, on a total returnbasis plus interest, treasuries
(32:03):
have broke a 35-year supportversus gold.
This is a topic which is nearand dear to me, purely because,
from my perspective, I thinkpeople misunderstand what
treasuries are.
A hedge to the risk that's offin the term.
Risk off is ultimately defaultrisk For a moment in time.
It's what creates the flight tosafety.
(32:25):
Right Credit spreads widenmoney for a moment in time goes
to US treasuries because they'vegot a printer.
Even after inflation, you'restill going to get your money
back right to some extent, butthat's for a moment in time.
Speaker 2 (32:54):
You can still have that happen within a broader
secular market for bonds.
So if bonds are going tocontinue to be challenged for
lack of a better way of sayingit and we're talking treasuries
here but broadly, when it comesto the bond market, is it a
duration issue or are we goingto see credit stress be of a
combination of that?
I think if I look at credit,it's a bit like the US equity
market it's mispriced, it's justmispriced.
I mean triple Cs have finallystarted to get to a level,
michael, where they look likethey're fairly priced, but
(33:17):
anything above that is mispriced.
I mean, typically, creditunderperforms in a slowing
economy and the base case isthat out of a tightening cycle
you end up with a recession.
That's set at this assumptionof hyper Goldilocks assumption
that the market's getting isstatistically unlikely.
The structural situation inbonds is look, I referred to
(33:40):
this at the beginning.
I've said that's the chart Iwas referring to when you broke
the 35-year trend line.
I think you know there are manyassumptions that we make.
We've spent quite a lot of timetalking about this assumption
that supply is the driver ofhigh yields.
Right, we're just issuing toomuch debt.
(34:00):
You know, from a verysimplistic perspective, which is
often how I like to sort ofthink of the world.
I mean, if supply wasincreasing but demand was there,
then supply wouldn't be anissue.
The issue is the demand isn'tthere.
The demand and the pool ofavailable savings that can drive
(34:21):
that demand is actuallyshrinking.
Demographics are dictating that, because if people are retiring
and they're disgorging not justhere in the US but globally and
they're disgorging the assetsthat they built up for their
retirement over the last 30 oddyears and even worse, a lot of
(34:42):
the purchases of our debt are nolonger our friends.
It used to be the countriesthat ran large current account
services that were our friendsKorea, germany, japan those guys
.
Now it's China, and so I thinkthe structural bear market is
something that I deeply worryabout.
Don't get me wrong.
I mean, I think in a recession,obviously treasury yields fall
(35:04):
to about 3%, but it ain't goingback to the same, and then I
think you go up and to the rightfor the next 20, 25 years.
I think it's going to be ahugely problematic setup and
that's why I think you want tokind of hold gold.
And I think the other thing tobear in mind is that we've lived
in quite an extraordinarilyabnormal period.
(35:26):
If you go back and look athistory in the Bank of England
to work on this I don't know howthey got stats for this, but
they looked at the risk-freeasset through history.
So treasuries essentially nowoccur, which is the current
risk-free asset against theequity performance, and we've
never had a negative correlationbetween bond prices not yields
(35:47):
prices the opposite and stocksfor 230 years.
Never, ever, ever.
It got down to like zero.
But basically, when bonds wentdown, stocks tended to go down,
and that's because you were inan inflationary world.
And then Greenspan came alongin 1998, and he flipped the
correlation on its head, andbecause we got concerned about
(36:08):
deflation.
And when you're concerned aboutdeflation, you solve for the
equity market because you wantto keep that demand going.
So you're trying to constantlykeep the equity market going and
we saw that obviously inextremes during COVID and
post-GFC.
But now and that's when thatcorrelation flipped negative and
that's when disparity worked.
(36:30):
That's when bonds were abrilliant hedge to assets.
If we are going which I believe, we're going back to a more
structurally inflation and we'vebeen talking about this for six
years now to a morestructurally inflation, and
we've been talking about thisfor six years now.
Structurally more inflationaryworld, then bonds are just not
as sexy a hedge.
(36:51):
I mean, they work at some pointto your point in the cycle, but
overall they are not a goodhedge.
Speaker 1 (37:02):
So wouldn't that imply that small cash will keep
on underperforming becausethey're more lever than cash?
Rich tech?
I mean going back to thatdiscussion around can the market
rally with?
Speaker 2 (37:13):
that.
Yeah, maybe until unless thebubble bursts in us tech.
Right, this is a bubble.
There is absolutely no questionthis is a bubble.
I mean, look, I think peoplereally need to understand this.
You've seen and you can see it.
(37:34):
You get movements.
I mean, look at Tesla's bouncerecently.
Right, and I got a bit of a bugin my bonnet about Tesla, but
nonetheless we see this bouncein Tesla.
After they just released youknow better than expected very
poor sales numbers, musk comesout and in his usual sort of BS
(38:00):
thing, says oh well you, the taxis coming, the cheap car is
coming.
Don't forget what we're goingto do in AI, don't forget what
we're going to do with the robotand the stock rallies.
But the stock really ralliesbecause a bunch of people were
bloody sure right.
So we end up of this narrativechasing the chastest price
(38:28):
action.
And if we go back, if I'm rightabout this big carry trade, then
really what is driving AI techboom is simply flow that has to
come into the US because we arerunning a large current account
(38:51):
and a capital account deficitand a budget deficit that
foreigners have to fund.
And then you pile on top ofthat domestic flows, which
obviously, and the mentor trade,and this just becomes an
inordinate virtuous circle which, all of a sudden, analysts have
to go.
(39:11):
Oh shit, why is Tesla up somuch?
Well, it must be because we'reextrapolating these assumptions
about fundamentals.
Maybe it's just as simple asit's just price action driven by
mechanics, nothing more.
And Mike Green's talked aboutthis from a micro perspective in
terms of indexation, and myview is this is going on at a
(39:37):
macro level at a much, much,much bigger level.
Speaker 1 (39:42):
As we wrap up, everybody that's watching and
listening.
Please make sure you trackJulian on X and various social
media networks.
Let's talk briefly about macrointelligence partners.
Talk about what type of serviceit is, and your tagline on the
homepage is markets are noisy.
We make calm out of the chaos.
Part of the calming is probablyyour accent and fairness, but
(40:07):
let's talk about what's involvedin the service.
Speaker 2 (40:10):
So you know we have this as an institutional service
.
It covers a gamut of parts fromthe set.
You know there's a lot ofmacros that are hedge funds to
real money, to family offices,to very aggressive large
individuals, family offices tovery aggressive large
individuals, um, and the purposeis, as I said to, to help
people frame the world from amacro perspective but then very
(40:30):
much sort of capitalize up thatin terms of of traits and we do
come out and and recommendtraits.
I'm not really interested inpontificating for the sake of
that.
Then we also have this productthat we run with Raoul on Real
Vision, macro Insiders, and youknow that's a different and it's
(40:52):
already taking two more retailtype investors.
You know, because some of thetrades that we do in the MI2
crowd are quite difficult toreplicate, you know, in the MI2
crowd are quite difficult toreplicate, you know, in the
resale space.
So we try and sort of set themup in more that kind of way.
And you know, I think you'vegot both Raoul and my view and
(41:16):
Raoul's had some extremely goodlong-term views but I tend to
sort of oscillate around kind ofhis view Because I'm, you know,
just more.
I've never said that trends aregoing to extrapolate.
So if I see things turning Ialways want to be a little bit
more cautious.
So that kind of what we, whatwe offer.
Speaker 1 (41:36):
Appreciate those that watch this live and those who
are listening to the editedversion here.
Everybody again, please makesure you follow, julian, and I
will see you next time on LeadLag Live.
Thank you, julian, I appreciateit.
Speaker 2 (41:50):
Pleasure.
Thanks, Michael.
Speaker 1 (41:51):
Cheers everybody, Thank you.
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