Deutsche Bank's Ozan Tarman and Aditya Singhal on Understanding the Macro Risks

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2:06Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Weisenthal. Joe, our live show in London recorded May 7th at Wilton's Music Hall. A lot has happened since then in markets. It's hard to have a markets conversation that, you know, isn't out of date within like a minute or two. Yeah. But I think this one carries on. I think this one is still relevant. Well, you know, I have to say, I always feel a little anxious about recording markets episodes because of this very phenomenon. But this is true for our live and our recorded shows that by the time it comes out, who knows how much will have changed.

2:41This is why you should go to the live show. That's exactly where I was going to go. It's actually good to record markets episodes of the live show because it's like, all right, you create an inducement to get people to buy a ticket. But again, you know, with a lot of these things like how traders are digesting this particular moment in time, sure, the headlines and the prices on the screen change. But there are certain like principles and frameworks for understanding what's going on that will be sort of useful regardless of what's happening in the meantime. You mentioned frameworks and that is the perfect framing for this discussion.

3:10So we indeed had the perfect guess. We spoke to someone who's been on quite a few times before, one of our favorites for letting us know what the big money is actually thinking about and trading. We spoke with Ozan Tarman. He is, of course, vice chair of Global Macro over at Deutsche Bank. We also spoke to his colleague, someone who hasn't been on the show before, but who has quite a reputation. One of Deutsche Bank's star bond traders. Aditya Singel, he is the head of EM trading across rates, FX and credit at Deutsche Bank. So take a listen. OK, let's start with the obvious question. lines on the chart keep going up despite what would seem to be some challenges to the global economy, to put it mildly.

3:52Why? First of all, even when I walked in, I was checking for you guys. It wasn't like that 15 minutes ago when... We're now recording this at 7.33. 20 seconds. When one agency claimed that Operation Freedom was back on, that President Trump could try to open the hormones by force. S &P and oil, S &P didn't like that at all. Oil was surging higher. Then Algecira denied. So we're all calmer again. But bottom line is why we keep going higher despite everything that Javier and Lorcan said is because buses are empty. When I say buses are empty, I don't only talk to my portfolio managers, but men on the street, to my college classmates.

4:35One of them was like, what do you mean buses are empty? That means investors don't have it. the analogy is a bit like closer to April 2nd, April 9th of last year, when we had the big tariff shock, billboard up, we thought that it would be the end of the year, end of the markets. Then President Trump stepped back, and the markets never looked back. A bit similar, coincidence or not, March 31st is the first time he claimed through Wall Street Journal that he would separate State of Hormuz and the operation, that the two could go separately. None of that happened, but that was the first big, brave market took.

5:10And on April 9, exactly on the same day, the big first postponement came. He said, we're not going to do anything for two weeks. And since then, markets never looked back. A historic led by tech, Nasdaq and S &P rally. And you know, I talked to a lot of people, a lot of, you know, key ladies, guys, honestly, maybe three, four, five people really believed in this rally since April 1st, April 9th. That's one big part of it, but it can't be all positioning. Also fundamentals, right? Earnings. Yeah. Again, head of sales, one of my legendary researchers, Jim Reed, just today, he was on Bloomberg as well, talking about earnings.

5:53In Q4 of last year, just 13 % growth. Q1 record is biggest in five years, led by take 24%. And that engine keeps us going. Yeah, the earnings are what they are. So here's something I'm curious. So Ozan came in and he gave us the latest headlines. Thank you, because I hadn't been looking at my job. Yeah, exactly. He didn't look at his phone for 15 minutes, which might be a record. It's a record. How do traders deal with the market in which there are just the sheer number of headlines, how would you, and how do they know what to take seriously? And like, yeah, what's real, what's not real? Like, how are they ingesting news?

6:32So from a trading perspective, right, mostly, almost everybody, there are fundamentally five asset classes, right? So you have a thematic view and your race affects credit, equities, and commodities. And a lot of people are fixated or are mandated for asset class, per se, right? So they have no choice but to stick within that kind of regime. And then, of course, if you're a real money investor or a hedge fund, or if you are a sell-side trader, just depending on how you are positioned, right? It's not really, it's difficult to get in and out, right? So thematically, you have to take a structural long-term view, see what every asset class is pricing on that particular view, and define an upside-downside kind of scenario.

7:12And based on the liability profile you have, and how you define that is the function of the money you have or what kind of drawdowns are acceptable. You take a particular position and you let it play out. So in this kind of environment, it's difficult. So what is the upcoming kind of positive news that you can rely on to the market, right, today? If you were to sit here today, you say, okay, so the fact that not much action has happened in the last three to four weeks within the straight means that at some point or the other, the resolution will come. Pakistan is mediating, as we can see. There's been enough talks happening.

7:46So you assume that a resolution should come. That's what the market is pricing, theoretically. You also have a situation with Russia, which is developing, right? Russia-Ukraine war, which could be positive. And then you have the visit, the US visit to China, which also is their term positive. Now, of course, there's a lot of it is at the price per se, but fundamentally speaking as a trader you position yourself and and then you just choose you know at some point to uh close it to the time but get out but just like just i and i that all makes sense to me but like are traders sitting there with a truth social window open like the literal like ingestion of news how do you do it and how just getting the messages from me yeah right just kidding well someone needs to make like a motivational poster that says lord give me the confidence of an equity investor trading on an Axios headline.

8:38Yeah. Like, I feel like that would sell out, right? So, yes, we have one open. Yeah. But seriously, yeah. Genuinely, we have no choice. But fundamentally, it's like this, right? So, you make a, you see what, so we had, if you were to look at the rates market, for example, just as an example, right? There was a Six Sigma event that happened within it. at some point the pricing gets to a level where it doesn't make any rational sense. So you start to look at that on a more structural basis, and you start to ignore the noise in the middle. And whether we like it or not, we have to operate with that kind of philosophy.

9:14So you take one side or the other. It's very difficult to trade the headline because it's impossible. Because as of now, you had two conflicting headlines, and you can get caught out. So most people have come to that understanding. So you've taken a perspective or a view that either this is going to get resolved or you can believe it's not going to get resolved. There's a way of expressing it within the five asset classes where you might get the most convexity. Similarly, if it gets resolved, there are certain things that actually might work which haven't yet worked. So you take those sides and you just sit and wait.

9:47You know, you mentioned irrationality just then, which means we should talk about AI, right? Because all of the stock market rally at this point essentially seems to be a bet on AI. What are you hearing from your clients, Ozan, on how comfortable they feel with this? Well, just two days before the Iran war began, we were in West Palm Beach and Miami with Adichie as well, visiting clients. And then the whole talk of at least that town, but the U.S. in general, was that famous Citrini piece, the other 50 million stamp piece, something big is about to happen. How in 12 to 18 months, 50 percent of white-collar jobs could be wiped out.

10:29what that could mean for rates. That in itself is very, very telling, right? And because of that, and one slow-slow claims number, if you remember US 10 years, that Friday before the bombs came in, closed at 393. And one of my more famous friends' clients sends me a message on that Friday night, bond is the new gold, 393, top tick close. Then Iran war happens, not that surprising, But of course, how it played out is very, very surprising. Warflation, hikes getting priced in. So people completely pushed aside the slow down job growth labor part of it. And then started completely focusing on the equity, the growth, the AI engine.

11:15Again, if you just go back to January, February, we were quote unquote happy because the thing was broadening out. It was a rally, but it was a rally led by Russell as well. Would it be Magnificent Four, Magnificent Three? Oh, yeah. It seems like a long time ago. Magnificent Seven was forgotten. And now, Lord behold, some of us, thank God, have three-month memories. Now we're complaining about, oh, it's all about seven stocks. The brief is to... We're just fighting ways to try to fight and wrestle away the rally. But so back to your question, at the moment, yeah, the Kool-Aid is to believe that this AI run may have another one to two years to go.

11:51So Paul Tudor Jones, public, one of definitely my more famous friends' clients, today claimed that that's the case and made the 1999 analogy. So either you swim with that or try to fade it. You know, this is the other thing. All right. So we talk about these very worrisome scenarios, the price surge in oil, but very worrisome scenarios about deep shortages in various commodities. So that's one reason to be worried. But then there's this other thing that basically, you know, the disinflation is stalled out if arguably it's going in the other direction. Rates around the world in, you know, we're I think, you know, there was some sort of what was UK 30 year?

12:33The highest since 1998. Yeah. So, again, just intuitively, you would think these things compound each other and should really take the wind out of the sails of risk appetite. And yet, so how is it that like, even like, you know, what we see going on in selling of, how does the selling in sovereign bonds mix into this market in very few? So let me take this to actually give you a thematic kind of how to think about things, right? Okay. Just to give a perspective, right? So ultimately, there is only one thematic view that matters for the next few years, right? And that is, if you were to assume you have China and China-aligned countries and you have the West, right?

13:10Right. If you were to take China and China-aligned countries, right, and they were in space, what does the West need, theoretically, in both manufacturing and services? And if you were to reverse the roles, and if the West was in space, what does China and China-aligned countries need, both in manufacturing and services? And the reason I'm bringing you to this point is because I want to give a perspective. So what happened, right, in the last many years? So this microphone, for example, right, most of the material in here comes from China. or China-aligned countries, almost 90%, right? Manufacturing capacity of the world is 55 % China or China-linked, but some places almost 90 % to 95%.

13:47Take an example of cobalt, cobalt refining, all in China. Now, in the past, what happened was they would give you this microphone and you would give them dollars or pounds or euros or whatever it is. So they hold that. So China holds that. What is the most rational thing for them to do? The most rational thing for them to do was to buy your land with that money. But you said no. Then they said, I'll buy your equities. You said no to that too. Then they said, you know what? I'm going to buy the commodities that you might need in the future. You said, fine, do it, which is what China did for years.

14:22Then here's the interesting thing. You said, in return, let me sell you my services. So let me sell you fine wine. Let me send you the Gucci, you know, more phenomenal bags. Top tier educational services. Top tier education, education, and a lot of other things. And then also services. Services, whether it's Microsoft, Excel, or whatever it is, right? But now what's happening is you have that side of the world, which is also building their own services stack. So tourism is now onshore. They started building their own cars up the chain, value chain. So you're getting to a stage where if you expand this thematic view, you in the West have to literally build all of it from ground up.

14:59So if you assume China was in space, they can still disrupt the services sector, but they can't disrupt the manufacturing sector, theoretically anymore. because you can, you will have to build it all up. So if you want cobalt and if they say no, you have to refine it, mine it, refine it. You need to have companies that refine it. You need to have the engineers that do that work. And fundamentally, that's what the fundamental paradigm of the world is. So when you talk about sovereign debt or any holding of, or any equity holding, ultimately the creditor is China and China-allied countries. They are the creditors of the West and we are the debtor.

15:34and this is only increasing. So if you believe the wizard, what is the ultimate objective agenda of the visit of the US to China is to balance the current account to some extent. That's one agenda. And there's, of course, there are certain other aspects to it, but fundamentally, that's what defines the kind of makeshift of the next kind of year, two, three years. And whether we like it or not, we have to build this.

16:14Data centers need electricity. AI needs copper. Reshoring needs steel. And gold's run may tell you something about how the world is repricing money and debt. All of those point back to real assets. The RACS ETF is an actively managed one-stop real asset shop from gold to commodities to natural resource equities, adjusting as conditions change. Visit vanek.com slash raaxpod to learn more. An investor should consider the investment objective risks, charges, and expenses of the fund before investing. To obtain a prospectus and summary prospectus, which contains this and other information, visit vanek.com.

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17:54Output is for informational purposes only and is not an investment recommendation or advice. Complete disclosures available at public.com slash disclosures. Amazon Health AI presents Painful Thoughts. I, um, I can't stop scratching my downtown. Yeah, but I'm not itching to go downtown and tell a receptionist I'm here to talk about my downtown. Some things you'd rather type than say out loud. There's no question too embarrassing for Amazon Health AI. Chat your symptoms and get virtual care 24-7. Healthcare just got less painful. I want to come back to China versus the U.S. on AI in just a second, but I definitely want to also ask this question because we are in London.

18:40How big a deal are the U.K. elections from your respective purchase, the local elections that are happening tonight? It is important because basically U.K. and abroad, There is, for the past two years at least, a big fight between fiscal dominance, I believe, 10 years, 30 years, more importantly, 30 years around the world. Will they get more out of control since we are in London? Will we have the Dear List Trust 2 moment? Or will financial repression mean, meaning emerging market style, treasury and central banks working more closely together, especially on issuance, issuing less on the long end, more on the short end, taking a risk, but making sure that 10 and 30 years are under the leash.

19:29In fact, a very key investor last summer asked in a smaller roundtable, what happens if all four of them, this was probably August-ish before back to school September races began, US, France, Japan, and UK, if all of them had their trust moments. And then September came in. I remember us talking about this. Yes, it happened, but only four hours in the gilt market. And that was it. I remember that little mini moment. So now there is an excitement again, because UK has a different risk premium, net international investment portfolio, i.e. has a budget deficit and the current account deficit has to be nice to the foreigners because they will buy our debt.

20:09There are question marks on on what this local election may mean for the government. Will there be a change there or in the chancellor? Will somebody more to the left come in? All these are under question mark. Famous last words, my feel is for the moment, still this financial repression will win. We won't have the trust moment too, but obviously we, they will need a little bit of luck for the Iran situation to continue to calm down because unlike the trust moment, trust moment one, now all of this is happening for reasons much beyond the UK. Joe, I am impressed that we always manage to schedule these macro conversations for maximum event risk between when we record and when it actually publishes.

20:55So we have the UK elections, everything happening with Iran, and we have non-farm payrolls tomorrow. There's so much going on and we just apologize in advance. This is why people should buy tickets to the event. That's right. Because if you have to hear this conversation on the podcast feed, who knows, it could be out of date. But those who are here don't have that issue. Is EMification of Western policymaking, is that an apt characterization of it? Setting aside specific, you know, elections here or there, you hear that term EMification. And is that apt? It depends, right? So it's country to country.

21:31In this, again, paradigm, you have... So let's take UK as an example. Let's elaborate further. The rail rates are reasonably high. The country's gone through a difficult situation and can see what happened with oil, the pass-through effect, but it's happening pretty much everywhere else in the world. You have a current account which matters mostly in most EM countries, including UK. You have an input factor of energy and you have an output factor of services, effectively, that you said. So depending on where you are in the world, which country, depending on who you are, if you have a situation where you're an energy importer and your exports are highly dependent on effective services, which are getting disrupted courtesy AI, you're in trouble.

22:18Alongside, if you are an importer of manufacturing also or goods, again, you're in trouble. So this adjustment will happen. So you have to have allies. You have to have people who you do a quick procure with. And that adjustment is what we are seeing effectively. And markets are finding a true balance of risk premium alongside. Well, OK, so on this point, two things you've said, which sound very rational on stage, having a series of allies. I don't know if those are stable. And then also, you know, this aspiration to balance the current account between the U.S. and China. It sounds nice. But like, do you think like, are there actually any real prospects of moving the dial on that kind of thing?

23:04So again, I don't want to comment here. This is in terms of our house view, but I'll give you a general perspective. On the same example, if you were to get West in space and ask China, what does it need from the West? Yeah. It's not much. Yeah, I've heard. Apart from Boeing and Airbus spare parts, if you were to just look at it from that perspective. So there is a desire and maybe there is, they will oblige. I do think there is certain things like, for example, agricultural products that could benefit. There are certain aspects. But fundamentally, unless we choose within the West to build the whole manufacturing stack, it's going to be very difficult to keep this current account balanced.

23:44Yeah. And on top of it, the biggest worry, and again, I'm maybe jumping on this point, is when people talk about the AI stack that the West is investing in, in the CapEx stack that the West is investing in. The key is not what the West is doing. The key is to understand what China is doing in it. Understand what they are doing with the DeepSeek version 4 models, the GLM-5, the Huawei clusters. I can go on with an optical compute. There are quantum computing. There are many more things that they're actually investing a lot in, which effectively becomes a true competition and a cost factor reduction.

24:19If there is a risk, that is the risk to watch out for, right? It's not to study what we are doing here because we will find ways to keep evolving. But you have an ecosystem there, which is actually quite well versed and also has a lot of capital behind it. And there was somebody who was quoted as most of the engineers today actually are in that part of the world. Another thing that the market miscalculated, right? After Trump got elected the second time, December 24, January 25, by far the big consensus rate, besides the U.S. 10 years going to 550, you know, everybody being dollar long, was to buy these dollar CNH options, strikes at 775, 8.

24:58Everyone I knew was buying dollar CNH options. There you go. Keep going. Yeah, yeah. And what happened? It's the stark currency is dollar over and on, CNH. So that shows you, even though some people are really into saying markets are never wrong, you're wrong, that can be very, very wrong itself. So we are all human beings and certainly that can make markets very wrong itself. One more Asian country that we need to talk about to bring it right to the markets, Japan, right? So to your question, higher oil, higher rates, why doesn't this thing bring down equities? Why are these, you know, why is this guy Ozan sending messages, bus is empty, nobody's buying it.

25:34It can be quite frustrating, right? Last Thursday, Friday, it almost happened because, you know, it just feels itchy. Dollar yen looked like it would break 160. It looked like U.S. rates would continue to sell off. Hormuz, again, question mark. There wasn't that tant. And then just like the rate checkoff at the beginning of the year, one of my closest friends, not on our trading floor, but on the sector, I had heard this big Irish voice, you know, this is New York calling on behalf of Bank of Japan. I'm like, what's going on with this guy? And because he was shouting around because they want to make sure that, public information.