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but for now, let's get into today's interview.

0:14

Very happy to welcome back to

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Forward Guidance Alfonso Pecetiello of the

0:18

Macro Compass. Alf, how's it going?

0:20

What's going on? Hey, Jack. All good.

0:22

Very nice to be back. What are you

0:24

paying attention to these days in markets, Alf?

0:26

That service ratio is probably the key metric

0:28

I'm looking at to grasp

0:30

whether the past through of Fed

0:32

hikes or central bank hikes around

0:34

the world is actually impacting the

0:36

private sector negatively. And

0:39

I think there is a new theory that goes

0:41

around that Fed hikes are stimulative, which

0:43

is an interesting one. It has certain merits to

0:45

the point that if you hike interest rates, your

0:48

standard past through mechanism to the economy to

0:50

weaken it would be that the private sector

0:52

has to face higher interest rate costs. So

0:55

households have higher mortgage rates, higher refinancing rates,

0:57

so on and so forth. And

0:59

as they refinance and

1:01

that servicing costs are higher, the

1:04

share of earnings, the share of salary, the

1:06

share of disposable income they can

1:08

spend on consumption goes down because a certain

1:11

larger share of that pie has to be

1:13

allocated to that servicing costs. But

1:15

if you don't need to refinance anything, which has been

1:17

pretty much the case in the US for the last

1:19

18 months, or very little of that,

1:22

then of course that impact on the liability side

1:24

of your balance sheet is pretty contained. But the

1:26

impact on your asset side can be great. I

1:28

mean, you can buy TBS at 5%. I mean,

1:31

there is the treasury of Google or Apple

1:33

or Microsoft. For example, they're sitting on

1:35

hundreds of billions of cash. They

1:38

get paid on that. So you have in

1:40

the meantime, a positive effect on the asset

1:42

side and on the liability side, not so

1:44

much a negative one. Now

1:46

this is a temporary effect, obviously, because

1:48

at some point the refinancing cycle kicks

1:50

in. It does, or to be more

1:53

precise, it impacts a

1:55

larger proportion of the private sector

1:57

over time so that impact becomes

1:59

visible. the negative impact becomes

2:01

more visible. And the debt service

2:03

ratio is a metric that calculates pretty much

2:05

that. It looks at how much of the

2:07

disposable income in the private sector gets used

2:10

to pay debt servicing

2:12

costs for houses and corporates. And

2:14

if you look at that ratio, I think it

2:17

does pretty well to give you an idea of

2:19

the life past true of central banks hiking cycle.

2:22

And the US is not really

2:24

the place where this has been picking up

2:26

the most lately, but there are many other

2:29

jurisdictions around the world where that is a

2:31

visible negative impact, namely Sweden, where today the

2:33

Ricks Bank, for example, has got interest rates,

2:35

and I don't think that's a coincidence. I

2:38

think people have gone way too far saying

2:41

that high interest rates are stimulus. It's like, okay,

2:43

yes, everyone was wrong

2:45

that there would be a recession and

2:47

that 5.5% interest rates would, you know,

2:50

would take the economy. Yes. People,

2:53

people have a fixed rates loan, a

2:55

30 year mortgage. Apple, all

2:58

these big corporations took a huge

3:00

amount of fixed rate, very low

3:02

coupon, low rate debt in 2020, 2021.

3:07

You know, this was a known

3:09

factor and fiscal stimulus,

3:11

you know, the government was running a

3:13

very large deficit. So

3:15

we have not had a recession, but to

3:18

say that interest rates themselves are stimulative to

3:20

me is going too far. Yes. Bill Gates,

3:22

all wealthy people who have lots of cash

3:24

and money market funds are

3:27

making more money and Apple,

3:30

Google, Berkshire Hathaway,

3:32

Warren Buffett just said, we're have a lot of

3:34

money in cash. We're making the money in cash.

3:37

That is stimulative. But on the other side of the fact,

3:39

you have people who are borrowers who

3:42

by definition have less money and they

3:44

spend a much higher percentage of their income. So I just

3:46

don't buy it. What do you think, Alf? No,

3:48

I think it's a very far fetched theory.

3:51

I was just trying to explain a new

3:53

kid in town, which is that high interest

3:55

rates are stimulative, which obviously is not the

3:57

case. But Of course, if you want to be very.

4:00

Can you want to talk about the precise six

4:02

to twelve months apart in the cycle where you

4:04

don't have to borrow, you don't have to refinance

4:06

you just dolphins. but then on the assets I

4:09

do that fade a little bit more than before

4:11

you can make the case. The very far fetched

4:13

case that on a limited amount of time higher

4:15

interest rates can be simulated is that the thing

4:18

you what odds of push through or best the

4:20

new I bought this is that will last forever.

4:22

Of course it's bullshit gonna say bushy come forward

4:24

area that helps us It's so what I'm saying

4:27

is we are now with the part of the

4:29

cycle where I. Think people have become

4:31

so frustrated for so long with this

4:33

slow down. the never happens. Basically that

4:35

a bit lacking two thousand and seven

4:38

you start having. That. Funny

4:40

theories going around the case. Back then

4:42

it was that the Us Housing market

4:44

could continue on forever. I. Mean

4:46

that are many movies out there were day.

4:49

I think they do a very good job

4:51

at showcasing the idea that if you went

4:53

there and try to propose the mere idea

4:56

of shorten the Us housing market were ridiculed,

4:58

right? And there are many, many movies that

5:00

plot that very nicely. And I think right

5:02

now we're the situation where if I have

5:05

to hear somebody saying that there is something

5:07

different and and higher interest rates are forever

5:09

similar. The for the Us economy, it's a

5:12

pretty fun theory to extrapolate over time. It's

5:14

just it's not through now. I seen that.

5:16

This that that service ratios will disprove.

5:18

the steering. Namely if you.

5:21

Raise interest rates across the world and

5:23

you keep them high for a long

5:25

enough period of time. At some point

5:27

the refinancing cycle, we hit a large

5:29

part of the private sector, or large

5:31

enough to impact that service ratio as

5:33

an aggregate basis. And that is Anthony

5:35

as we speak in places like Australia

5:37

or Canada, or News Eden or Sweden

5:39

And guess what? Gdp growth in Displaces

5:41

has been pretty abysmal already, and that

5:43

is a sign saying that the private

5:45

sector is under pressure and also central

5:47

banks are taking notice. I mean that

5:49

expand already cut interest rates today. They

5:52

are not waiting for the said, simply

5:54

because I think they can not wait

5:56

for the sad and the past two

5:58

or higher interest rates in the. Economies

6:00

to the private sector is much more aggressive.

6:02

Will. You what would have been in Europe

6:05

for? I've noticed that the advertising for

6:07

mortgage that the posters they are very

6:09

well a lot of variable and say

6:11

so the six or eight years you've

6:13

listened this were American, be fixed rate.

6:15

Thirty Years phenomenon is not really a

6:17

market phenomenon. it is not natural the

6:19

up it is enabled by Fannie Mae,

6:21

Freddie Mac and the Gts. He. That.

6:24

Basically allow that to happen. So

6:26

in most parts of the world,

6:29

mortgages are not thirty year fixed.

6:31

Rates. They are variable and as

6:33

such interest rate hikes from the Easy

6:36

Be or the the. Sweetest

6:38

Central bank Have any impact else

6:40

fails. Immediately. Or

6:42

or somewhat soon. as it says

6:44

in thirty years. that is correct

6:46

Jack and there are three reasons:

6:48

Three ways that the private sector

6:51

of them be structured in a

6:53

way that to feel the interest

6:55

rate hikes sooner wanted to on

6:57

you're mentioning. so you're getting floating

6:59

rate mortgages are floating rate corporate

7:01

borrowing. Okay, so in Europe with

7:03

quite a lot of floating rate

7:05

corporate borrowing, Why? Because the capital

7:07

markets in the Us account for

7:09

a lot of Us corporate borrowing.

7:11

so it's. Mostly Bones own capital market

7:13

issuance while in Europe a lot of

7:15

that the steel banking loan related and

7:17

is banking loans tend to be very

7:20

often you ride or plus spread so

7:22

namely that on a floating basis you

7:24

get lend at the benchmark. great driver

7:26

Plus the credit spreads to account for

7:28

your credit risk. Now what is the

7:30

issue As a as a more aware

7:32

if your eyeball rates go up so

7:35

namely if the central bank rate goes

7:37

up which naturally also brings your eyeball

7:39

rates up you get you have to

7:41

pay more. To continue servicing that that nine

7:43

clone that you have received in the Us.

7:45

That's not the case as you made the

7:47

example for Apple, the locked in twenty arrays

7:49

at like two percent or whatever they did

7:52

back then. So you have this floating rate

7:54

corporate borrowing that's one thing right of can.

7:56

Accelerate the pastoral hikes. Then.

7:59

You add, Looking rate mortgages,

8:02

And. In places like Sweden that standard

8:04

floating rate mortgages are the market standard

8:06

not six. They're mostly floating. In places

8:08

like Finland which has the Euro, it's

8:11

a European country. same story. Most of

8:13

the of the of their mortgages are

8:15

a floating basis. Then you have the

8:17

thirty impact and the thirty Mbeki his

8:20

mortgage is resets. So. In certain

8:22

countries you have a sixth grade market.

8:24

It accounts for most of the mortgage

8:26

market, but these mortgages are very short

8:28

de de de de de headless and

8:30

reflex of interest rates every five years.

8:32

For example the Uk the market where

8:34

the six read these dominant in the

8:36

mortgage market. but you refinance are you

8:38

Receipts are your interest rate every five

8:41

years. So. That move your. The.

8:43

Time by which need to fix your

8:45

interest rate again back from the two

8:47

percent may be locked when interest rates

8:49

were zero, two six percent and to

8:51

trust lock Now that the Bank of

8:54

England is raised, rates aggressively is coming

8:56

pretty soon. So then you need to

8:58

budget for that that is coming. And

9:00

then the fourth one is the actual

9:02

refinancing of the notional of the loan

9:04

or of the mortgage. So that means

9:06

are we having a market that has

9:08

corporate borrowing on a five year or

9:10

seven year basis or our corporate generally

9:13

borrowing. For ten year plus are people setting

9:15

their entire mortgage to last for ten years

9:17

Or five years for for thirty years? So

9:19

in the Us as you say, thirty years

9:21

is pretty much the markets com that I

9:24

think. But that's not the case. Everywhere.

9:26

In the world, in some places people

9:28

prefer to add the mortgage that as

9:30

a tenure expire at twenty or expiry

9:33

or he can be even shorter on

9:35

the carpet Sites This for factors the

9:37

all accounts for the past true of

9:39

hikes through the private sector. Of course

9:41

the first one is our leverage. these

9:43

of private sector that's awesome bottle how

9:45

like that? Yeah I mean how much

9:48

debt is impact by higher interest rates

9:50

are refinancing or resets or whatever and

9:52

their that is an interesting statistics because.

9:54

I. think people are looking a lot of at

9:57

the wrong debt when they want to look

9:59

for macro fragility is they're looking at government debt.

10:02

But I mean, the US issues the

10:04

global reserve currency of the world, and we

10:06

know that, issues in its own currency. And

10:08

we know that, and the

10:10

macro risks that are coming from

10:12

that are, I would say, they can

10:15

still be there in

10:18

the form of people demanding a higher

10:20

term premium because they think that inflation

10:22

and growth volatility are gonna be massive

10:24

because fiscal deficits are not under control,

10:27

but that type of macro risk is more

10:29

rare. It's not something that happens once every

10:31

few years, it's something that happens when something

10:33

is going really wrong. For example, the UK

10:35

budget crisis of 2022 is

10:38

a good example of that. But that's the UK, not

10:40

the US. There is a difference there. The

10:42

macro risk coming from debt often comes

10:44

from private debt. And if you

10:47

look at all the macro events coming from

10:49

high leverage in the past, they're all related

10:51

to private debt, mostly related to private debt,

10:53

or to government debt not denominated in your

10:55

own currency. That can also be the case,

10:57

right? But private debt is the culprit

10:59

of most of the macro risks out there. You

11:02

know, the Asian tigers, Japan in the 1990s,

11:05

the Spanish housing crisis in 2012, 2013, China

11:11

right now, even if you wanna put them in a

11:13

box, most of them come from

11:15

high levels of private sector debt. And

11:17

the US is a private sector debt to GDP of about

11:19

150%. And

11:21

it has not gone up since the great

11:24

financial crisis. So it's actually running

11:26

at lower levels in 2012, 2007 today. Yes,

11:29

the huge levering up in America since

11:32

the great financial crisis has been on the,

11:34

the government has been borrowing a lot of

11:36

money. The private sector is as levered or

11:39

maybe even slightly less levered, as you said.

11:41

And then, yeah, most financial crises are the

11:44

private sector being over levered and

11:46

encountering crisis. Because the private sector can't

11:48

print its own money, the government can, With

11:51

the exception of that you said, governments that

11:53

can't print their own money, such as all

11:55

European countries or all countries that are in

11:58

the Euro, such as Greece. Right

12:00

that made can for the Euro date the

12:02

European Central Bank for the Euro and the

12:04

European Central Bank of The reports to Athens

12:06

in the same way that. The said

12:08

forced to washington. And on top

12:10

of it, if you want to use fiscal

12:13

deficits in Europe in a flexible way, you

12:15

can't You can't because there is a bunch

12:17

of bureaucrats the tell you that you can't

12:19

run a deficit as a percentage of Gdp

12:21

above a certain threshold, and if you do,

12:23

they wanted to make. Or. Do

12:25

they call that structural adjustment? So namely,

12:27

they want to cut your primary spending?

12:30

The new rules or even more restrictive

12:32

than the ones that have basically kills

12:34

growth in Europe between twenty twelve and

12:36

twenty nine pm. To the old roast

12:38

old Maastricht rules used to be based

12:41

on a deficit spending and deficit spending

12:43

also counted for and for interest rates

12:45

of payments. On that, and right now

12:47

they're going for primary spending. So if

12:50

you are running a deficit of above

12:52

three percent, for example, they want you

12:54

to cut your primary. Deficit spending So

12:56

the literally want you to get more

12:58

resources from the private sector. they wanted

13:01

to acts more people guys and what

13:03

happens is is it is very. Funny.

13:05

Dad because I once did these

13:08

experiments. If you overlay. Deficit.

13:10

Spending in the Us and deficit spending in

13:12

Europe. Over the last twenty years,

13:14

you can plot freaky much older growth

13:16

differential that the Us has been able

13:19

to generate on top of Europe. Almost

13:21

all of it can be plotted as

13:23

the result of more at the more

13:25

aggressive deficit spending the United States than

13:28

it's allowed in Europe. And that's an

13:30

interesting proposition because what I'm saying is

13:32

the U S E's more productive than

13:34

Europe. The Us has better demographics and

13:36

Europe, so that helps on the margin

13:39

adding more structural growth to Us than

13:41

Europe. But. Most of the differential in

13:43

gdp growth of this be generated over the last

13:45

ten to twenty years. Also. has

13:47

to do with the fact that

13:49

the u s ken and ease

13:51

producing a much larger deficit spending

13:54

than europe is so basically european

13:56

bureaucrats are up being the wings

13:58

of growth in europe not Europe

14:00

could grow a lot anyway, but

14:02

they're making sure it can't by

14:04

effectively denying any proper constructive deficit

14:06

spending in Europe. Al, inherent in

14:08

what you just said, I think

14:10

is a central idea that

14:12

I have to agree with, which is

14:14

that when the fiscal authority, the

14:17

government runs a deficit, i.e.,

14:19

it spends more money than it takes

14:21

in in taxes, that that government

14:25

deficit is the surplus of the private

14:27

sector because there's more money for the

14:29

private sector to have. So basically, government

14:32

deficits are stimulative, and

14:35

government surpluses are contractionary. Now, sometimes, obviously,

14:37

if you have an inflationary boom, it

14:40

would be appropriate to run a government surplus.

14:43

But in Greece, in

14:45

2012, according to Barry Eichingrein, so I mean,

14:47

I'm going to say it's true, that the Greek

14:49

economy, basically from 2009 onwards,

14:53

was actually worse than during the Great Depression, the

14:55

Greek economy during the Great Depression of the 1930s. That

14:59

only running a 3% government

15:01

deficit is highly inappropriate. You should be running

15:03

a much larger government deficit. If you're having

15:05

a worse Great Depression, obviously, you should be

15:07

spending way more money. So

15:09

you and I agree on that. However, I think

15:11

a lot of people in the macro world, particularly

15:13

some older investors, so I would say, we agree

15:16

on, Al would be called

15:18

a Keynesian idea. The older

15:21

school of the neoclassical school and

15:23

legendary macro investor on CNBC the

15:26

other day, Stan Druckenmiller,

15:28

said that he was worried about if

15:30

the US is running so large of

15:32

a government deficit that it begins to

15:35

crowd out private

15:37

investors. And my

15:39

new fear now is that

15:41

spending and the resulting interest rates

15:44

on the debt that's been created are

15:46

going to crowd out some

15:49

of the innovation that otherwise would have

15:52

taken place. And basically, if

15:54

governments borrow so much, all

15:57

of the money is going towards the government, there's

15:59

not enough money for Apple. There's not enough money

16:01

for private sector. In theory, it makes sense. What

16:04

do you think? Do you agree with Stan or no? I'm

16:08

going to quote my mentor who

16:10

used to say, do you

16:12

want to be right? Or do you want to make

16:14

money? And Stan

16:17

Ruckmiller doesn't need to

16:19

be right on how monetary accounting

16:22

works. He doesn't need to be right.

16:24

That's not how he makes money. He's

16:26

a great investor. Amazing. I love

16:29

him. And he hasn't done accounting

16:31

for a long time, I think,

16:33

because it is a fact. It's

16:35

not deniable that private sector, sorry,

16:37

that fiscal deficits equal

16:39

private sector surplus. It's

16:41

just an accounting identity. It's an accounting

16:43

truth. It's not deniable. The

16:45

story by which if the government spends more

16:48

than Apple has less resources just

16:50

doesn't make any sense from the accounting perspective.

16:53

Now does that mean, because now we're

16:55

going to MMT type of thing, does

16:57

that mean that the government can spend

17:00

whatever they want whenever they

17:02

want forever? No, that's not

17:04

what I'm saying. I'm just saying that if the

17:06

government spends more than you will have more money.

17:08

That's an accounting identity full stop. Now

17:11

what are the limitations of that? Well, there are a few actually.

17:13

So the government can do whatever they want,

17:15

even if they issue in their own currency.

17:18

So what is the limitation? Well,

17:21

pretty simple. The limitation would be that if

17:23

you do too much and too concentrated, so

17:25

Stan Ruckmiller, I think is right on the

17:27

potential risks of debt. If

17:29

you do too much fiscal deficit clustered

17:32

in a macro period where nominal growth

17:34

is already strong, Jack, so you don't

17:36

need the pro cyclical fiscal spending

17:38

on top. If you do too much,

17:41

then you can run an overheated

17:43

economy. You can run an overheated economy when

17:45

bond investors are going to ask themselves the

17:47

question, do I need a premium to buy

17:50

third year bonds, which is exactly what they

17:52

asked in the UK. The UK

17:54

was running a services inflation of 8% annualized

17:56

at the end of 2022. Well,

18:00

I'm coming in with a new expansion

18:02

expansionary budget. I'm gonna do more tax

18:04

cuts I'm gonna do more fiscal. That's

18:06

it. So what did the investor do?

18:08

Well, they sold the pound and they

18:10

added the big fat term premium on

18:12

the third year UK bonds by

18:15

selling them By selling them.

18:17

Yes. So in order to buy UK

18:19

assets, they wanted a premium They wanted

18:21

a weaker currency so a premium on

18:23

the FX front or they

18:25

wanted a premiering a premium in bond markets

18:28

Now imagine if you do this if you

18:30

do this pro cyclical fiscal spending on an

18:32

already overheated economy and then you generate this

18:34

market reaction Well, what happens? Okay,

18:37

the next time you show up at issuance

18:39

you have to pay a premium And so

18:41

you're adding even more on your deficit levels

18:43

because your interest rate spending goes up and

18:45

then it can become a vicious circle So

18:48

I think soundtrack Miller is right on the

18:50

potential risks that that can happen But

18:54

I don't know if the US is

18:56

in the position of being vulnerable to

18:58

a big term premium bond Digilentes type

19:01

of action We for sure have never

19:03

seen anything like that because I would

19:05

invite people to understand That

19:07

if the long end of bond market is

19:10

selling off if bond and long bond yields

19:12

are going up alone That is not a

19:14

reason to say that Investors are

19:16

adding to an premium or investors are

19:18

behaving like bond digital on this you

19:20

also need to have a weak dollar

19:23

You also need to have a reaction where

19:25

people are selling dollar assets They're selling the

19:27

dollar and they're also adding the premium 30

19:29

year bonds that that combination Is

19:32

exactly the type of bond vigilantes protest from

19:34

the bond market and the FX community from

19:36

investors in general And they're looking at the

19:38

situation that they're not happy with and in

19:40

the US you haven't seen that in October

19:42

last year You've seen long bond years go

19:44

up a lot, right? But you have also

19:46

seen a big dollar rally coming with it

19:49

So so far we haven't seen that yet Great

19:52

point and also term premium has

19:54

widened from being negative 90 basis

19:57

points to now being 12 days basis

20:00

points, but in the 90s, it was 250 basis points. So

20:04

you got a long way to go. I mean,

20:06

Jack, let's define for a second term premium. It's

20:08

a big word and nobody ever says what it

20:10

is. It's unobservable. First of all, it's a bit

20:12

like our friend, our star, which

20:14

is great, but it's unobservable. And

20:17

it's a concept that generally, um,

20:21

mean that bond investors are demanding

20:23

a higher term premium if they

20:26

believe that the uncertainty and the

20:28

volatility around the future growth and

20:30

inflation will be higher. The

20:33

higher that uncertainty about the growth and inflation

20:35

cycle, the more I want to be paid,

20:37

the more term premium I want, the higher

20:39

yields I want. Why? Well, try

20:41

buy a third year bond, which

20:43

normally has a duration of, I think today's

20:46

like 15 or 16 years, given the high

20:48

coupons, try to buy a 16 year duration

20:50

bond or a third year maturity bond and

20:52

try to hold that position through cycles where

20:54

fiscal authorities are behaving in an irresponsible way.

20:56

What will happen is that you will have

20:59

more booms and more busts, right? So you

21:01

will have a lot of volatility in the

21:03

price because it's a long duration bond. And

21:05

because of that ball, you want to be

21:07

rewarded ex-ante with the higher term premium. Right.

21:09

And as you said, in the nineties, in

21:12

the eighties, this was 200 basis

21:14

points. So people were demanding a serious

21:16

term premium. And today what we have

21:18

done is gone from extremely negative levels

21:21

to zero. Extremely negative levels

21:23

means you're willing to pay

21:25

term premium, negative term premium for

21:27

the luxury to own long bonds. So

21:30

that's where we came from. Okay. And

21:32

now we're back to zero. There is

21:34

no sign that a term

21:36

premium trade is going on. And

21:38

if you're interested in one, also have a

21:40

look at the dollar, the coincidence of dollar

21:42

weakness and term premium going up. That's very

21:44

scary, but we haven't seen that happening at

21:46

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22:45

And now back to the interviews. So

22:48

I just want to go back to a point you made really

22:50

important that making money and being right

22:52

are not the same thing and that

22:54

often people who are right don't

22:56

know how to make money in the markets and people who

22:58

can be wrong but still make money in the markets, that's

23:01

a sign that they're a really good trader. I

23:03

would say Michael Platz, who he's

23:06

only 55 years old, but he's already

23:08

closed his hedge fund to private investors.

23:11

Incredible track record over the past two

23:13

decades. If you look up clips

23:15

on YouTube of him talking about 2012, 2013, the Euro

23:17

crisis, he actually, like

23:21

a lot of pundits on TV, was dead wrong. He

23:23

thought that basically the Euro area

23:25

crisis would be a great

23:27

depression and that it was basically a

23:29

huge risk off episode. Not that European

23:32

stocks did not do well, but they

23:34

drastically underperformed US stocks, as you know,

23:36

but he was wrong about that and

23:38

yet he still made money. He was

23:40

on cash on CNBC in 2012 talking

23:42

about how he only longed cash and yet he managed

23:45

to make 50% that year. So

23:47

that's very impressive. It's very impressive and I think

23:49

it's the trait of the best macro investors out

23:51

there because people have this Funny

23:53

thing that they want to take somebody on

23:56

Twitter tweeting something. They want to derive his

23:58

positions and then three months. they are. They

24:00

want to go and check how he has

24:02

done. You. Have no idea

24:04

I feel sized appropriately for was running a

24:06

hedge what he has done in the meantime

24:08

if it was running the separate position in

24:10

the book that had a separate Mack Rothys

24:12

is that worked out. I mean

24:14

one thing is a commentary and year.

24:16

I think you're doing great job inviting

24:18

a host of people to share their

24:20

frameworks. It's all about frameworks. what is

24:22

that you're looking at? I made my

24:25

example on that serves ratio before. that

24:27

is part of my framework. Is. It

24:29

right, Is it wrong is invaluable. Up

24:31

to the listener to figure out by. The

24:33

most important thing is Mike Reiss to develop

24:35

your own framework. Horny? didn't. Work. It

24:38

out and then once you have that framework. While.

24:40

I think you're doing better than the average

24:42

investor who doesn't like from there to say

24:45

and you have the right framework and you

24:47

will make money. Oh. There. Is there

24:49

is a big a big way to

24:51

go? I mean making money is a

24:53

lot about position sizing, portfolio construction, risk

24:56

management, Being. Humble A been able

24:58

to rotate your views on a dime.

25:00

It's a lot about that Any Also

25:02

we the wrong framework you can make

25:04

money for example Sandra Camilla things that

25:06

deficit spending crowds out. the private sector

25:08

which is accounting lies not correct yet

25:10

is one of the best Mclean this

25:12

is out there. Are there To

25:14

date only fair was was actually sat

25:17

on the every was big the crowding

25:19

out thesis that running large fiscal deficit

25:21

would. Crowd. Out the private sector

25:23

crowded investments to the private sector wouldn't be able

25:25

to given enough money. That's eat

25:27

so I think he might. He might

25:29

agree or maybe not does it. but

25:31

he didn't make a comment on whether

25:33

a government deficit was a private sector

25:35

surplus. That and an accounting sense is

25:37

true, but I would say that supports

25:39

for the notion. That our

25:41

money if we sector investment

25:43

is not crowded out by

25:46

public sector barring is not.

25:48

Theoretical. based on t accounting such

25:50

as are coming it is incurable or oh

25:52

i see look at he does theoretically make

25:54

sense that there's privates you know there's a

25:56

huge bucket of money that has a see

25:58

on it see for capital, and that

26:00

money either goes to borrowers

26:03

or to people who need money,

26:05

the government or the private sector. G

26:08

or P, if G is taking up

26:10

so much money, where is the money

26:12

for the P, the private sector? Empirically,

26:15

I would say, you know, during my

26:18

adult lifetime, that theory has just not

26:20

worked out. But theoretically, it

26:22

does make some sense, right? At

26:24

least when I put it in such childish,

26:26

easy to understand terms. Yeah, yeah. I don't

26:28

understand where it comes from. It didn't deny

26:30

the accounting truism, let's say, went

26:32

at another empirical angle. But it's just

26:34

an example that there have

26:37

been other investors that maybe didn't

26:39

have the perfect understanding of monitoring

26:41

mechanics. Nothing I do. I'm

26:43

just presenting my own framework here again.

26:45

But as you said correctly, making

26:47

money and having the right framework

26:49

are completely different things. Earlier

26:52

in our conversation, you referenced four factors.

26:55

We're talking about interest rate sensitivity. Can you

26:58

just review what those four are quickly? Oh,

27:00

yeah, sure. So I would say the first is the

27:02

level of debt. Make it

27:04

simple, right? If your economy is highly leveraged

27:07

on the private side, please, I'm talking about

27:09

private sector debt, specifically the BIS data set,

27:11

which is public. So everybody can go there

27:13

and download it and play with it. The

27:16

BIS series, which is non-financial

27:18

corporations and households. So

27:21

we're looking at corporates in the private sector, basically,

27:23

and households. Okay. So the

27:25

private debt levels. So levels of private

27:27

debt important. Second,

27:31

the share of floating

27:34

rate corporate borrowing, which

27:37

is generally linked to how

27:39

much banking loan, bank loans versus

27:41

capital market borrowing is skewed in

27:43

that economy. Okay. So

27:45

in Europe, it's a lot of bank loans. That

27:47

means more floating rate corporate borrowing, generally speaking, in

27:50

the US, it's all capital market. It's

27:52

a lot of fixed rate borrowing for corporates. Third,

27:56

would be floating versus fixed on

27:58

the mortgage side. Okay, so that's

28:00

a very common and famous one. Fourth

28:03

will be the

28:06

reset nature of your

28:08

mortgage market. So

28:10

like in the UK, they're reset every five years on

28:12

average. And fifth,

28:14

the maturity of your borrowing. So

28:17

is your mortgage a 10 year or 30 years? Your

28:19

corporate loan a five year or 10

28:21

year or seven years? If you take

28:23

this five into account, I have done

28:26

it with a, what I call a

28:28

country vulnerability framework, where I score countries

28:30

looking at this five series. Then you

28:32

can basically score countries, rank

28:34

them by how vulnerable they high

28:37

they are to an interest rate

28:39

hiking cycle. So the ones

28:42

that have the highest debt, the shortest resets,

28:44

the more floating rate borrowing and so on

28:46

and so forth, they will be the most

28:48

vulnerable. Obviously in the countries with the lowest

28:51

amount of private sector debt and fixed rate

28:53

mortgages, fixed rate loans and so on and

28:55

so forth, they will be the least vulnerable

28:58

on, I think I ranked about 20 countries

29:00

in my model. The US

29:02

ranked, I think third

29:04

or fourth least

29:06

vulnerable. And we discussed why,

29:09

right? I mean, private sector debt, that hasn't gone

29:11

up as a level to private sector debt level

29:13

seven gone up, a lot of fixed corporate borrowing,

29:15

a lot of fixed mortgages,

29:18

a lot of long dated corporate

29:20

borrowing and mortgages as well. Right.

29:23

And not in a market without a reset.

29:26

So that's all positives basically

29:28

out there. Right. And so

29:30

in the UK, interest rates reset every

29:32

five years. So theoretically 20%

29:35

of every home borrower would have to

29:38

pay the new rate every single year.

29:40

Whereas in the US, if

29:42

everyone has a 30 year mortgage, that would

29:44

only be 3% of people would be forced

29:46

to pay. Obviously

29:48

a lot of people refinance for a variety of

29:50

other reasons. So yeah, the US is

29:52

much less interest rate sensitive. So what is your outlook

29:55

on the US economy now where we've had, you know,

29:57

interest rates have been at over 5% for. A

30:00

long time now. so I'm going to

30:02

say something, which is that what's most

30:04

important is not. My.

30:06

Absolute outlook my my outlook vs consensus which

30:09

is also the other way you make money

30:11

macros not by being right or wrong but

30:13

by being. Sufficiently. Away

30:15

from consensus and then having consensus movie

30:17

or way. Basically, at some point you

30:20

don't need to be right, necessarily terminally

30:22

right. So then I would say a

30:24

look at consensus first and consensus says

30:26

that the Us nominal Gdp growth these

30:28

years gonna be five percent core inflation

30:31

is forecasted about two and a half

30:33

and real Gdp at about two point

30:35

four. So make it five jack. Okay

30:37

sized person nominal growth by the end

30:39

of the easier would mean if realized.

30:42

That. The u nominal gdp would

30:44

be above five percent. For

30:47

over two years in a house which

30:49

is the longest period of five percent

30:51

last nominal growth. Since. Two Thousand

30:54

and Six. Two Thousand and Seven. And then

30:56

the second one. You have to go back to.

30:58

Ninety Ninety Six Ninety Ninety Eight. So very

31:00

Hot. Macro. Periods and for growth

31:02

in the U S. and both of them

31:04

actually terminated in a recession the two thousand

31:06

and One and the Two Thousand and Eight

31:08

once. So this is where we stand. But

31:10

I think. That. The five percent

31:12

on me or growth forecast by the end

31:15

of this year is perhaps a bit too

31:17

optimistic at this point. At namely, the that

31:19

service ration the Us has gone up to

31:21

fifteen percent one five. Let's long term average:

31:23

we've seen an increase over the last few

31:26

quarters. It makes sense, because slowly but surely

31:28

even if the U S one of the

31:30

most shielded economies out there, slowly but surely

31:32

higher interest rates in back, the larger proportion

31:34

of the of the private sector just takes

31:37

a little bit longer. But he does have

31:39

pets, so you have these negatively impacted slowly.

31:41

but. Surely feeds in versus one

31:43

of the most optimistic analysts consensus

31:45

for nominal gdp growth out there.

31:48

And. So that dichotomy I think

31:50

Jack makes for a good risk

31:52

reward in say, during. The

31:55

stronger and that is consensus for nominal gdp

31:57

growth. So I think you're gonna have a

31:59

disappointment there. The comes as a mix

32:01

mix of inflation. Going back down may

32:03

be due to present a bit more

32:05

rapidly but most importantly comes from a

32:07

bit of a disappointment from real gdp

32:10

growth. Now finally let's say that I

32:12

am right. And. Nominal gdp growth in the

32:14

Us end up being at four percent by the end of

32:16

the. So. I don't know like to

32:18

Gdp is gonna be one point eight at the

32:20

end of the year and inflation is gonna be

32:22

to. Just. Naming some numbers at

32:24

real gdp one point eight and placing

32:26

to and then we add inflation to

32:29

real Gp. You get normal Gdp correct

32:31

and a that knowledge be at like

32:33

three point eight four so you disappoint.

32:35

Market consensus, Economists Consensus. What? Happens to

32:37

Asa classes of that's the most important thing,

32:39

right? So. That's a

32:41

fun one because. People. Would

32:43

say nominal gdp growth disappoint. Sell stocks

32:45

and I would say knowledge is big.

32:47

Rothys appoints. Power. Less come

32:49

up with basically a new fad put and

32:51

I can elaborate on that. if you want

32:54

buy stocks. There. Will be the first

32:56

reaction. And it's funny because

32:58

if you look at beating which numbing

33:00

addressing the Us is disappointed consensus. But.

33:03

It has done so without being

33:05

recessionary. So. That means you

33:07

have you had an acceptable level of gdp

33:09

growth and acceptable level of inflation. And

33:11

the Federal Reserve at a novice reaction

33:13

function. Actually see this was

33:16

the these were the best speed it's

33:18

for stocks not the worst. Despite gross

33:20

disappointing, that's because. The. Sad dovish

33:22

reaction function trump's anything else when it

33:24

comes to the soft and performance of

33:27

stocks because the changing valuations to changing

33:29

for what be that comes from having

33:31

all the uncertainty removed by the sad

33:33

having the said put adding power coming

33:36

in and say oh well a lot

33:38

the labor market is only up being

33:40

the hundred and fifty thousand jobs a

33:42

month. oh I see crocs emerging any

33:45

to come in and probably cut interest

33:47

rates Dad the sex is much more

33:49

positive in the first instance for stocks.

33:51

That a d to slow down a nominal growth.

33:54

So. And on the stock side the first

33:56

innings a bit what we're seeing today I

33:58

would say of Powers Remove. The hiking

34:00

uncertainty, cutting that deal away from

34:03

the distribution, and focusing on when

34:05

are we gonna cut rates really

34:07

helps Stock markets do okay, even

34:10

if normal growth disappoint. slightly. Expectations.

34:13

And on bombs. Well. That would

34:15

be a definitely Stephen or a boost

34:17

the power of the Curve that we

34:19

have been basically not seen for a

34:21

couple of years. People have been waiting

34:23

for it, calling for it. Talking about

34:25

the best investors in the world. Your

34:27

bad Bill Grouse be guys going on

34:29

Tv calling for this big steepening coming.

34:32

Doesn't com it's were just embarrassed at

34:34

all the time into stands a never

34:36

leaving birds I think if you finally

34:38

see a deterioration of nominal gross little

34:40

bit of a deterioration and you have

34:42

the said happy to come in and

34:45

caught more than forwards uprising and finally

34:47

you can have the steeping of the

34:49

curve because they're not cutting on. Anything

34:51

that is terrible for growth. So as

34:53

they cut interest rates in the short

34:55

term, the long and of the bond

34:57

market will interpret this as a support

34:59

for long term inflation and gross and

35:01

so the cops come in and the

35:03

lower your from the Neil's a long

35:05

and deals can be a bit supported

35:08

by this proactive Dhabi stance and so

35:10

the curve ball steepens. So. Long

35:12

stocks. East. That comes through.

35:14

Been long risk assets and bull

35:16

steep ner. I think a bit

35:18

like twenty nineteen to give your

35:21

reference would be pretty much the

35:23

that the macro asset class scenario

35:25

play. So long term bonds rally

35:27

is just that. short term bonds.

35:30

rally by a lot more yeah in that

35:32

case that's the case correct and that because

35:34

nominal gdp falls are just not to recession

35:37

level and that's bull a stop to that

35:39

you that your base case i would say

35:41

that my base case for the next three

35:43

to six months is pretty much that once

35:46

so what i've been doing your for example

35:48

lease and nothing extremely send see on april

35:50

twenty second i bought some call spreads on

35:52

the us and be five on read so

35:55

that's a structure that allows you to be

35:57

long the us and be five on that

35:59

but identifying a certain payoff. So you buy

36:01

a call and you sell a nearby call,

36:04

you get paid if the S&P 500 gets

36:07

to that level of strikes, but you're selling your

36:09

upside. If the S&P goes to new highs, it

36:11

goes up 20%, you don't get

36:13

the full benefit of it. And the strikes

36:15

are 518, 520 in SPY, where

36:18

we basically are today. So what I did

36:20

is during the drawdown, I looked at my

36:22

macro model and said, well, there is not

36:25

much has changed there. I think the Fed

36:27

put is still live. Nominal growth should slightly

36:29

disappoint consensus. And therefore you want to

36:31

fade any drawdown in that environment because

36:34

the Federal Reserve is there

36:36

to close the distribution for you, to

36:38

cut away these hikes on distribution, to

36:40

cut the uncertainty. There's a Fed put

36:42

out, basically. That's what it is, in

36:44

my opinion. And therefore you want

36:46

to try and fade that and get along the

36:48

stock market without being excessively bullish. I think there

36:50

are ranges and valuations coming in

36:52

at some point where you need to be

36:54

a bit more attentive. And these call spreads

36:57

expire next week. They're

36:59

close to basically being nicely in

37:01

the money. After that, for

37:03

a further rally in the stock market, it

37:05

requires you to hit new highs every week

37:07

and every month after that. Right? That is

37:09

a scenario that could still unravel. But

37:13

the conviction levels in chasing new highs in the

37:15

S&P 500 is there. I

37:19

will take it month after month. But the

37:21

highest conviction at that point will be doing

37:23

carry strategies. So those are

37:25

strategies that effectively make money if

37:28

macrobolicity is low. If you don't

37:30

have a lot of surprises coming

37:32

up, then you get paid effectively

37:35

to pocketing premium. And

37:37

those strategies are a few out there.

37:39

A few are very popular and known,

37:41

others not really. For

37:43

example, FX carry. Okay,

37:45

that's very known. So you buy a

37:47

currency that is high yielding, you sell

37:49

one that is low yielding. VIX roll

37:51

down. Okay, that's an interesting one. The

37:53

VIX curve is always a particular shape

37:55

where if you're able to sell long-dated

37:57

VIX contracts that are normally offering the

37:59

premium. or a volatility premium, you

38:01

roll down the VIX curve. So over

38:04

time, if there is no volatility spike,

38:06

you basically get paid to roll

38:08

down this VIX curve. Okay, that's

38:11

one other strategy. You can sell straddles in the

38:13

S&P 500, same story. There

38:15

is a certain level of volatility out there priced in, you

38:18

sell that away, and as long as nothing

38:20

blows up, you get paid. All of these

38:22

are versions of selling volatility,

38:25

basically getting paid to pocket in volatility.

38:27

And they work until they don't, there

38:30

are macro scenarios in which, as long as the

38:32

central bank is cutting away uncertainty,

38:34

as long as macro volatility is low, even

38:36

if you get a disappointment in nominal growth,

38:38

as long as the volatility in that macro

38:40

surprise is low, you actually get paid for

38:43

that. Not a fascinating period, but

38:45

something that is unraveling under our

38:47

very eyes, the S&P 500 realized

38:49

vol has been 10%, or

38:51

around 10% for a bit. Yeah, borrowing

38:54

in Japanese yen to buy

38:56

US higher yielding currencies, it's a great

38:59

trade, number one, just because the yen

39:01

has been depreciating. You talk about that. When

39:03

you talk about selling equity volatility, again,

39:06

it's relative to market expectations. So you say

39:08

volatility has been realizing 10, but

39:10

I'm looking at the VIX now, implied

39:12

volatility, kind of.

39:14

And it's 13, that's pretty low.

39:16

So like, obviously you'd wanna sell

39:18

it in late March 2020

39:21

when the VIX was at 60 after you just

39:23

had the biggest financial crisis ever, the

39:25

biggest in the stock market, because everyone

39:28

was still pricing for a dramatic crisis.

39:30

And what occurred was a

39:32

huge rally where volatility compressed. Likewise, if you were

39:34

to talk to me in late April, 2022, okay,

39:37

the Fed just did its first hike, volatility

39:39

is at 33, the VIX is at 33. If

39:42

it realizes 25, you're still making money.

39:45

But at 13, if it realizes 15,

39:48

the VIX is probably gonna go to 19 and you're

39:50

gonna probably lose money. So isn't VIX

39:52

too low to be selling volatility? Absolutely,

39:55

so I'm not implementing these ideas through

39:57

selling equity vol, that's pretty low. Or

39:59

let me correct. premium you get

40:01

against spotable or a credible

40:04

range for realizability is not very high. So

40:06

that doesn't make a lot of sense. But

40:09

for example, if you buy

40:11

the dollar and you sell a currency like

40:14

the Swiss franc, just making an example, okay,

40:16

you also get paid quite a lot of

40:18

carry to sit on that trade. You have

40:20

the Swiss national bank that is very

40:23

much on the dovish side, they want

40:26

a weaker Swiss franc, not the strongest with frank,

40:28

they have inflation at 1% in Switzerland, as

40:31

we speak 1%. So they're

40:33

going back to this idea that they need to weaken the Swiss

40:35

franc, which is by the way, what they tried to do for

40:37

like for the last 10 years, barring the

40:39

small episode of 2022, they did the same

40:41

for the last 10 years. So you have

40:43

interest rate differentials your way, you

40:46

have central banks, especially the Swiss national bank

40:48

that is pushing for your trade, right, they

40:50

want the weaker Swiss franc, and

40:52

you have positive carry at the same time.

40:55

So that can be a trade that pays you if

40:57

nothing is going on. And it's

40:59

a bit akin to say, well, I

41:01

think US macro volatility is not going to

41:04

be very high for another three months or

41:06

six months. So I can safely be long

41:08

the US dollar versus some low yielding currencies,

41:10

you can do the same thinking on Mexico

41:12

or Brazil, a real if you think that

41:14

they can still provide you with that buffer

41:16

of carry, or let's

41:18

say, carry adjusted for volatility. Alternatively,

41:21

again, if you are into the 2019 camp,

41:23

2019, namely nominal growth

41:26

in the US slows down, but not to

41:28

scary levels, and there is a light fed

41:30

put, which was basically the case in 2019.

41:33

If you look at asset market returns, what

41:35

happened back there is pretty simple stocks

41:37

made money, and bonds made money

41:40

and in particular, the curve bull steepened. Gold

41:43

also made money, but it's it has

41:45

also done a great run here today.

41:47

So you're looking at a market that

41:49

basically has a risk parity soft of

41:51

rally where all assets do well, basically,

41:53

and also there the dollar doesn't depreciate

41:56

because other central banks are more dovish

41:58

than the said is. So

42:00

that becomes hard for the dollar to

42:02

sustainably depreciate, especially against low yielding currencies

42:04

like the Swiss franc. And

42:07

that's I think my base case, but when it comes to, this

42:09

is the macro base case, this is the talking

42:12

head base case where I can go and see

42:14

MVC or on bloomers tomorrow and tell them that

42:17

this is my overview. How do

42:19

you implement this? It's different because your point on

42:21

the VIX is very true. I wouldn't want to

42:23

sell equity vol at 13. That

42:25

doesn't make much sense from risk management perspective.

42:28

So right now the live trade I have

42:31

on is this call spread that expires next

42:33

week. And from there, I'm looking at steepeners

42:35

in the yield curve that might make sense.

42:37

But again, talking head is easy because a

42:39

steepener is a negative carry trade. That

42:42

means if Drucker Miller or

42:44

Bill Gross go and say, I like

42:46

steepeners, I also like

42:48

steepeners. But if you want to run

42:50

steepeners in your trading book, you are

42:52

paying negative carry and roll every day,

42:54

every month. And I can explain why.

42:57

Wouldn't you be selling a 10 year to

42:59

belong a two year and isn't a two

43:01

year carry more? So you will be buying

43:03

a two year. So let's say you do

43:05

two stands. If you want to do two

43:07

stands steepener, what you need to do

43:09

is you need to do them duration adjusted. So

43:12

that means you will be buying, please

43:15

don't quote me on this. I don't have a Bloomberg

43:17

in front of me. You will be buying roughly two

43:19

and a half X, roughly maybe three.

43:21

I don't know about top of my head, but about let's

43:24

say three. Let's assume three. Three

43:27

times the two year future and you will

43:29

be selling one time that any future. So

43:31

let's forget about the future. Let's talk about

43:33

bonds for a second. Okay. So now what

43:36

you're doing there is you are basically you're

43:38

receiving three times more

43:41

in terms of the size basically to

43:44

your contract you're receiving or you're buying

43:46

this bonds. Okay. If you're buying futures,

43:48

that means your alternatives to that will

43:50

be to simply depositing money at repo

43:52

or at Fed funds. Okay. That's

43:55

your starting point. So that means that you are building into future

43:57

prices. So Think of this as this

43:59

is my opportunity. Because these exists now

44:01

to erase uprising in. How. Many

44:03

countries that ad and one hundred basis points

44:05

to on the basis points guy something like

44:07

that to that negative carry because he would

44:09

be just as you're you're borrowing money at

44:11

the spot raid which is five point three

44:13

percent to but to sit at to buy

44:15

something as two years at four point eight

44:17

percent. And. As aggregate to make it

44:20

duration a giant mean that three times as

44:22

much as you're doing that in the ten

44:24

years rights, so that makes the trade basically

44:26

every day. If nothing happens in, the curve

44:28

isn't steepening. That. Makes the

44:30

trade slowly lose money. So.

44:33

Again, it's easy to see I like steep

44:35

Nurse or it's easy to say. I.

44:37

Think a recession is coming, but playing

44:39

that I'm a risk management perspective requires

44:41

you to size trade appropriately. You.

44:43

Stop Loss is either risk framework, etc etc.

44:46

Do you think a recession is going. Talking

44:50

at Answer Risk Manager and Sir Talking

44:52

at Answer is are the odds are

44:54

higher than there were twelve months ago

44:56

as sure because the refinancing side well

44:58

as I explained gets more lively. Ah,

45:01

we're far away from the starting boy.

45:03

I mean, the starting point of a

45:05

recession is the Us are deemed less

45:08

jobs than the labor supply brings in.

45:10

Every. Month Guy: that's a labor market

45:13

recession. Basically, you're rubbing more supply of

45:15

labor than demands of labor. And.

45:17

If that gets bad the jack then

45:19

you add the recession am right now

45:22

the suppose sorry before the big integration

45:24

flow into us. The. Labor

45:27

Supply. Consistent.

45:29

With. Unemployment rate being stable

45:31

demanded that the Us to added about

45:33

a hundred thousand jobs a month. If

45:35

the U S other the hundred two

45:37

jobs and month, it could absorb the

45:40

new labour supply coming in the Us

45:42

every months, and so roughly unemployment rate

45:44

would be stable today. That number is

45:46

a bit higher. But. You

45:48

can say maybe one thirty One Twenty

45:50

One Thirty case. So the Us and

45:52

it's to odd about one third One

45:54

Twenty One thirty thousand jobs a month

45:56

to keep unemployment rate roughly stable. Looking

45:59

at labor supply. Now. We

46:01

are running over two hundred thousand right now and

46:03

have been running over two hundred thousand and on

46:05

a on a rolling basis for a while. So

46:07

the starting point is. Reasonably far,

46:09

not very very far, but the

46:11

reasonably far the direction of travel

46:13

as I think south. Phenomenal growth.

46:16

Do. We ever crossed the recession rubicon.

46:18

Maybe. Not sure what does it

46:20

prevent it and if inflation comes down

46:23

south back again like it. it resumes

46:25

that you to to treat you for

46:27

disinflation piece of last year than the

46:29

Federal Reserve is a very nice window

46:31

to start cutting interest rates early which

46:33

means the refinancing cycle becomes. Way.

46:35

Less punitive right for people because the fed is

46:37

bringing in this forward rate is cutting rates so

46:39

when you actually go to refinance is much less

46:42

painful and that wind I think is still there.

46:44

That. The soft landing window is still relatively

46:46

open by. The odds of the recession right

46:48

now should be put a bit higher than

46:51

they were. Twelve. Months ago. Again,

46:53

does it matter what I think about

46:55

it? No. in the matters, what I

46:57

think about what the market is pricing.

47:00

That's the most important thing because what

47:02

the money you will be make to

47:04

making any macro come from deviation from

47:06

consensus or from pricing. And if I

47:08

look at their marketing glide distribution for

47:11

said sounds over the next twelve months

47:13

which you can drive from options underlying

47:15

social contracts a. Number of

47:17

cox over the next twelve months. In

47:19

line with the Us Recession which is sort

47:21

of related been two hundred and fifty basis

47:24

points ruff sleep in the first twelve months.

47:26

Let's say it's so the said cutting Two

47:28

hundred to two hundred and fifty basis points

47:30

in twelve months from now, that's probabilities below

47:33

ten percent. According. To option

47:35

pricing. What do we make? Stem percent? Well,

47:37

the U S used to have recession once

47:39

every. Seven. Eight nine,

47:42

Ten years. So ten percent is.

47:44

Market. Pretty much pricing that

47:47

historical. One. Of probability of of

47:49

the Us going in a recession next year. They're

47:52

roughly once every ten years. What

47:54

are the preconditions for next year?

47:56

While. the set aside to five twenty five

47:58

percent it's keeping retire for long We have

48:00

refinancing cycle that is coming in. So I

48:02

would argue without knowing anything else

48:04

that you would need to price the US

48:06

recession next year a bit higher if I

48:08

were The market on a market neutral basis.

48:10

I would price it maybe 15 16 17

48:14

percent. It's priced at below 10 So

48:16

some of these convex recessionary hedging

48:19

strategies are relatively cheap

48:21

right now So you're bullish

48:23

the two-year. I think that there

48:25

are better career adjusted ways to express that but

48:27

roughly This is the same way of saying I

48:29

like bull steepening. It's the same thing You

48:32

would expect right? Jack that if the labor

48:34

market deteriorates a bit faster Then the curve

48:37

steepens because a lot of cuts are getting

48:39

priced in the front and being long two

48:41

years is a bit punity From the carry

48:43

perspective you can express it in other ways

48:45

But yes, my inclination is to expect a

48:48

stronger nominal growth slowdown which

48:50

surprises both economists and

48:52

market consensus right now So you

48:54

can get paid by doing trades

48:56

similar to being long two-year rates

48:58

Yes, so on an absolute basis

49:00

not taking into account What

49:03

the market assigned probabilities which will you know

49:06

that is how you trade? But

49:08

just your own probability do you think what is

49:10

more likely a soft landing a no landing or

49:12

a recession? Can you rank those three in terms

49:14

of which you think is most likely to least

49:16

likely and then we'll talk about what the market's

49:18

Pricing and how you trade on this net next

49:20

12 months. I would assume that

49:23

the highest Probability

49:25

scenario is a soft landing with the

49:27

current set of information. I would probably

49:29

price that somewhere around 60

49:32

to 65 percent so strong base case no

49:35

landing. I don't know exactly what it means. Let's assume

49:37

long-term I never understood it, but let's assume that

49:39

you know what it means else. You know what it

49:41

means It means high nominal growth

49:43

high inflation bonds

49:46

continue or high inflation as well. Okay,

49:48

so it means it means Something

49:51

is different permanently in the US. So

49:53

you're running these high levels of inflation

49:55

and nominal growth permanently I would say

49:57

the probability isn't very high but maybe

50:00

let's put that at 10 to 15%, like

50:02

a relevant tail, something along these lines. So

50:04

then we are at 75 to 80%, yeah,

50:08

and the remaining 20-ish roughly would

50:10

be the odds of a recession. So

50:12

20% from a historical perspective is actually not

50:14

so low. As I said, the US in

50:16

any given year has the odds of a

50:18

recession at about 10%, once every 10

50:21

years, roughly over the last 50 years. And

50:23

I'm putting my own subjective probability at about 20. And

50:26

the market is at about eight, as we

50:28

discussed before. So that would be

50:31

bullish fixed income assets, which

50:33

rally as the Federal Reserve cuts rates. Yes,

50:35

particularly the front end. If

50:38

that discrepancy comes into reality and you can

50:40

monetize it somehow, then you're right, particularly the

50:42

front end will be rallying a bit more

50:44

aggressively and the curve will be both deepening

50:46

as a result. The first innings, funnily enough,

50:49

will be a nominal growth slowdown because we are

50:51

over five now. So the nominal growth slows down

50:53

from five and a half to five and then

50:55

four and a half. As long as

50:57

there is a Fed put out there, the stocks will

51:00

actually like that. That's the funny part, as we

51:02

are seeing today. So you

51:04

have a risk-quality rally, basically in

51:06

the first innings, that involves everything,

51:08

gold, bonds, stocks, everything. And then

51:10

later on, it can morph into

51:13

something a bit more risk-off.

51:16

So a bit more of a mixed market

51:18

reaction. So you're broadly bullish

51:20

all assets now. I

51:23

would say that, yes, if you look at the next three

51:25

to six months, it's hard

51:27

to be particularly negative. You have to

51:29

expect one of the two tails to

51:31

realize right now, macro tails, because the

51:33

Federal Reserve, from a monetary policy perspective,

51:36

has cut all possible tails. So

51:38

the most negative tail for bonds

51:41

and stocks is hikes

51:43

from the Federal Reserve. That's the most negative

51:45

tail. And Powell did everything he

51:47

could at the press conference to avoid any questions

51:49

about hikes. He doesn't wanna talk about it, forget

51:52

about it. So, okay, if you need to cut

51:54

that tail away from a monetary policy perspective, it's

51:56

very hard to get a negative

51:58

push for stocks. or bonds, but it

52:01

can come from macro. Macro data

52:03

can actually deliver that deal, right Jack?

52:05

So if you want the

52:07

negative stock and bond reaction, then you

52:09

need to have strong inflation. Because

52:12

Powell was also clear, if you've got strong growth,

52:14

he doesn't care, he's not gonna hike because

52:17

there is strong growth, he's gonna be very

52:19

happy about strong real growth. If

52:21

inflation keeps surprising on the upside,

52:24

yeah, that will be the negative tail. Now

52:26

my view is that given

52:28

market consensus and the economy's surprising, at

52:30

2.5% inflation by the end of

52:32

the year, and core PC's at three as we

52:34

speak, I think the hurdle

52:37

for a hot inflation surprise over the

52:39

next three to six months is

52:42

pretty high. And given that I

52:44

don't think the macro tail, the negative

52:46

tail will realize, and Powell has cut

52:48

the monetary surprise tail, it

52:50

becomes very hard to be negative on

52:52

risk assets in general. Sorry, you said

52:54

that the odds of a negative inflation

52:56

surprise or a positive inflation surprise is

52:58

high. The odds of a

53:01

hawkish inflation surprise is very low, I think,

53:03

over the next three to six months. We

53:05

already had one, by the way, in the

53:07

first quarter of this year, any

53:09

inflation number, big core PC, core CPI,

53:12

super core, wage growth, you wanna name

53:14

it? All of them, we

53:16

had all the surprises we could have hawkish

53:18

surprises on the inflation front. Inflation being higher

53:20

than expected, you mean? Yeah, yeah, higher than

53:22

expected, wage growth higher than expected, all of

53:25

these. And if you go check the market

53:27

reaction, by the way, you'll be pretty surprised.

53:29

Of course, bonds have sold off a

53:31

bit from early this year to

53:34

now, and that makes sense, right? You've had

53:36

a sell off in five years, 10 years,

53:38

30 year bonds, which is consistent with

53:40

some hawkish inflationary surprises. But if you look

53:42

at risk assets, even that has not been

53:45

really able to derail the

53:47

bullish risk asset trend out

53:49

there, mostly because Powell has

53:52

not reacted to these hawkish surprises.

53:54

Jack, he doesn't wanna talk about

53:56

hiking interest rates, he's cutting away

53:58

any uncertainty from... the distribution

54:00

of outcomes. Right, but I

54:02

feel like the seven cuts were priced in

54:04

at the beginning of the year, and

54:07

to go from seven cuts be priced

54:09

in to heigsting, you have to get the

54:11

cuts priced out. Yeah, that's

54:13

true. So we had that. We had

54:16

the distribution, which to be precise, had

54:18

as a modal outcome in generally three

54:20

cuts, only three, but it had a

54:22

very fat left tail. So the recession

54:25

scare was still priced in pretty aggressively.

54:27

Now we've priced that all out completely.

54:29

So the distribution now doesn't have a

54:32

recession tail. It has a

54:34

light heigstail, slightly bigger

54:36

than the recession tail, but not really.

54:38

And now the modal case is one

54:41

to two cuts in one year. That's

54:43

it. And now the distribution is well centered

54:45

around this outcome. One to two cuts, tails,

54:48

both the recession and the higher for longer,

54:50

very thin. That's where we are today. Now,

54:53

with this set of information, if you want to

54:55

be negative on stocks, for

54:57

example, coming from a hawkish monetary

55:00

policy surprise, monetary policy

55:02

surprise, what you need is

55:04

to get that hawkish tail fatter, correct?

55:06

You need to have that hiking tail become

55:08

fatter. That will be the next surprise that

55:10

actually brings down stocks. And

55:13

Powell has been pretty clear, if you ask me,

55:15

that he doesn't even want to talk about that

55:17

side of the distribution. And who am I to

55:19

challenge Powell? Or as my friend, Jim Lightner would

55:22

say, who am I to challenge the game master?

55:24

Alf, what else you got taken at

55:26

the macro compass? At the macro compass,

55:29

the good old usual doing research for

55:31

clients. What is new actually is that

55:33

I am launching my own macro hedge

55:35

fund. So this is something

55:37

I'm proud of and

55:40

humbled about because I

55:42

run money until 2021

55:45

for ING Germany. And

55:47

then I stopped doing that to go my own, basically

55:50

to have the advisory shop I have today with hedge

55:52

funds and family offices and so on and so forth.

55:54

But it's time again to be back into the game,

55:56

Jack, because I think the set of macro opportunities out

55:58

there is massive. And we... will be there for

56:00

the next five to 10 years. So I

56:03

left the bank on a very boring macro environment,

56:05

which was prevailing between 2014 and 2021, pretty

56:08

much all the time. And now

56:11

I come back opening my own

56:13

macro edge fund with so much

56:15

macro volume opportunities out there, which

56:17

honestly is very exciting. What

56:19

is the source of the macro volatility that was absent

56:21

from 2014 to 2021? Well,

56:25

I think it's first of all, that fiscal

56:27

is not a taboo anymore. I

56:30

mean, in Europe, it was a complete taboo. And

56:33

now it still is, but there

56:35

are some maybe even discussions there

56:37

going on. In the US, it

56:39

was never a taboo, but it was used

56:42

anti-cyclically. So if the economy was weakening,

56:44

politicians were going for fiscal deficits and

56:46

vice versa. And right now it seems

56:49

to be like a permanent setup,

56:51

right? It's a permanent feature that the US

56:53

has large fiscal deficits. And I think that

56:55

accelerates macro volatility. And then you're having idiosyncratic

56:57

situations going on. You're having China doing a

56:59

certain thing with their own macro story. You'll

57:01

have a bunch of economies out there that

57:04

are not to keep the same way the

57:06

US is to handle higher interest rates. And

57:08

that's another set of macro opportunities. I mean,

57:10

I think there's a lot going on. And

57:12

are you gonna do be specializing in currencies,

57:15

carry trades and fixed income stocks? Are you

57:17

gonna just do everything? Like, oh, if I

57:19

wanna be long uranium, I'll be long that.

57:21

Or is there any restriction on, or just,

57:23

no, just the out show? No,

57:25

we don't do single stocks. That's the only thing. We

57:28

do macro, global macro, which means we

57:30

trade mostly in futures. That's the

57:33

best and most flexible and liquid expression

57:35

of most of the global macro ideas

57:37

out there. So those are futures

57:39

in interest rates, inequities and commodities. We'll do

57:41

a lot of effects products as well. Also

57:44

ETFs, when the expression is best done through

57:46

ETFs, for example, equity sectors often don't have

57:48

a liquid futures underlying, it's best to do

57:51

them through ETFs. But mostly I would say

57:53

it's a global set of opportunities that we

57:55

are pursuing. So it's not geographically limited. And

57:57

our asset class perspective, it trades the... foremost

58:00

liquid acid classes in the world. So rates,

58:02

equities, commodities, and effects. And

58:04

just to give people a sense of what,

58:07

now your biases, your views now, so you

58:09

talked about US stocks, European stocks, Japanese stocks,

58:11

Chinese stocks, you know, in a minute or

58:13

less. All possible, all possible.

58:16

And it's a fund that runs

58:19

a 10% example. So

58:22

that's the target of the fund tries to run

58:24

at around 10% volatility. And

58:27

it's a fund that tries

58:29

to achieve returns that are uncorrelated to

58:31

standard betas, equities, bond beta.

58:34

So the returns are coming not from

58:36

standard beta exposures, but rather from market

58:38

neutral macro opportunities. So you can think

58:40

of relative value ideas between two countries

58:43

or two currencies that are not directional

58:45

to the dollar. All these ideas that

58:47

come from idiosyncratic, set of opportunities that

58:49

are going on around the world, plus

58:52

obviously trying to catch the

58:54

occasional macro trend that develops

58:56

ahead of times, right? That can be maybe a

58:58

bullish trend in equities or a bullish trend or

59:00

a bearish trend in bonds and so on and

59:02

so forth. Alif, are you feeling like

59:04

you got to launch a hedge fund just because you

59:06

conquered Twitter? You know, there's no one, you're

59:09

Alexander the Great of Twitter, there's no one else,

59:11

you know, you've become number one. So

59:13

you've got to- No, no, no, that's not

59:15

it. I mean, I don't even know what

59:17

number one in Twitter will be in this

59:19

case, because Twitter is an interesting place where

59:22

I think the 2020, 2022 Twitter experience we

59:24

had was

59:29

very interesting. Everybody was at home, everybody was

59:31

trying to do research to figure out what

59:33

the hell is going on in this big

59:35

monetary experiment we are running. There

59:38

was a lot of sharing and information.

59:41

I remember, for example, fondly,

59:43

when Efficient Market Hype, which

59:46

is, I think, a hedge fund PM in Singapore,

59:48

I think, just going out top of my head,

59:51

he wrote a book, which I would

59:54

recommend anyone to go and look at.

59:56

It's fantastic. It's called something like

59:58

the Guide to Bond This Time. I don't know,

1:00:00

it has an amazing name. It is

1:00:02

beautiful. It's the best source

1:00:04

of information on bond markets that you

1:00:07

can ever find, ever. It's

1:00:09

incredible. There are Bloomberg screenshots and even

1:00:11

if you're not a Bloomberg user, there

1:00:13

is a lot of information on how

1:00:15

to do a structured trade, on futures,

1:00:17

a curved trade, all of that was

1:00:19

going on on Twitter. And honestly, if I

1:00:21

look at what's going on today, we are perhaps

1:00:23

a bit less exciting. But that's not

1:00:25

the reason why I'm opening the hedge fund. I'm opening

1:00:27

the hedge fund because I think there are a lot

1:00:29

of opportunities out there, I'm doing that because clients

1:00:32

on the research side and the previous network have

1:00:34

asked me to do that. I'm humbled and really,

1:00:36

really happy to be back into the game. Yeah,

1:00:39

I think with Twitter, there used to be so

1:00:41

much free information that maybe shouldn't have been free,

1:00:43

which is a great value. I think a lot

1:00:45

of that has moved to Substack where I believe

1:00:47

you, you're still on Substack, right? Yes, I have

1:00:49

a free newsletter that goes out on Substack every

1:00:51

10 days or so. Got it. But none

1:00:53

of your paid stuff is on Substack. It's all on. No,

1:00:55

it's on my website. Yeah. But a lot

1:00:57

of people have moved to Substack, to paid

1:00:59

Substack, and it's like, yeah, if you're posting

1:01:01

about preferred shares on banks,

1:01:04

maybe people should

1:01:06

pay for that. That's the way it goes. Al, people

1:01:08

could find you on MacroAlp. Where else can they get

1:01:10

in touch with you? Yeah, I think the

1:01:13

usual media channels, that's the easiest one, Twitter

1:01:15

and LinkedIn and whatever. And if anyone is

1:01:17

ever interested in having a chat about the

1:01:19

fund, they want to know what it is,

1:01:21

how it works, whatever, they can just send

1:01:23

me an email. The

1:01:25

email address is fundatthemacrocompass.com.

1:01:29

Pretty simple. Just send me an email, whatever inquiry

1:01:31

question, or when I have a coffee chat, just

1:01:33

send me an email. I'll reply personally. Is

1:01:35

the name of that fund going to be the macro compass? No,

1:01:38

but I can't reveal yet what the name will be. You can't reveal

1:01:40

the name. I look forward on seeing your

1:01:42

progress with the fund and great to catch up

1:01:44

as always Al. Thanks Jack. Talk soon. Thanks

1:01:50

for watching. Remember to check

1:01:52

out vanek.com/HodelFG to learn more

1:01:54

about the Vanek Bitcoin Trust

1:01:57

ticker HODL. you