An Inside Look at the Macro Investing Tool ft. Julien Brigden

0:00Hi, it's Raoul. Guess what? I can't believe we're turning 10 at Real Vision this September. I can't believe it's a whole decade of democratizing the very best financial intelligence and building this super super of finance, including the super platform of finance. And to celebrate, we're throwing a virtual party on September 27th at 12pm, and you are on the guest list. It's free to join, so don't miss out. If you're not a member, you can sign up at realvision.com forward slash free. We've also got a trade ideas competition where you can flex your market smarts, plus some exclusive limited birthday merch and much more planned for September.

0:41It's going to be a lot of fun. So sign up, realvision.com forward slash free, and we'll see you at the party September 27th at 12 p.m. That's realvision.com forward slash free.

1:01Hi, I'm Ralph Powell, and welcome to my show, The Journeyman. The Journeyman, as you know by now, is my journey to that nexus of macro crypto in the exponential age of technology. Now, for a very long time, in fact, since I've been in this business, I've used a business cycle framework to truly understand where assets are going and where economies are going. See, global macro investing is all about understanding the cycle of the economy and how it affects asset classes. Once you learn this one thing, it will massively help you in your investing journey. You see, if not, you're flying blind. You're just listening to opinions on X.

1:46You're just reading random research with people's opinions. But once you have analysis of the business cycle, you'll really understand how it all comes together and how you can allocate your assets with more confidence. And that's the key thing of the investor. We never get probabilities dead right. There's no certainties in this world, but it's about getting the probabilities in your favor of owning the right assets at the right time. And that's what business cycle framework investing is all about. Now, several years ago, Julian Bittle was working at a large asset management firm when he came across my work, and it kind of retooled how he thought about asset allocation.

2:24He was on the asset allocation committee at Pictet, and he used the business cycle framework and developed it beyond where I'd taken it. Now, luckily enough, Julian reached out to me, or I reached out to Julian, I can't even remember anymore, a couple of years ago, and said, listen, why don't you come and work with me at Global Macro Investor, and let's really change the world in how people understand the business cycle and how it applies to macro investing and crypto investing and how it fits in with secular cycles too. So Julian joined Global Macro Investor and has been an incredible asset. And I think many of you have seen the quality of his work and how it fits in with my work and helps me drive my decision making too.

3:08So Julian actually writes a service called Macro Investing Tool that's part of Real Vision. And it's part of the Real Vision Plus tier, which is the kind of knowledge tier. So we have the Real Vision, which is the information tier. The knowledge tier is Real Vision Plus. And then we've got the wisdom tier, which is Real Vision Pro Macro and Pro Crypto. But MIT, we made it available to everybody in the knowledge tier. Or you can buy it as a standalone product if you're just a free person on the Real Vision platform, but you want that to navigate the business cycle and have the tools and have Julian as your mentor.

3:46Well, that's there on platform. So what I wanted to do while I'm away in Zambia in the bush trying to avoid getting eaten by leopards, I wanted to bring Julian on. And what this is, is his update for MIT that he does every month. So he writes every week, updating all of the charts, where we are, inflation, business cycle, unemployment, asset allocation. And then we have the whole tool, which is the asset allocation cycle, the macro seasons, to understand exactly what assets should be doing better or worse over those periods. It's really the most comprehensive tool. And it's the one that people on Real Vision love the most.

4:24If you are a Real Vision subscriber and you're in the free tier, well then either upgrade to the plus tier where you get tons more benefits, all the benefits of the community trade ideas and also the incredible Q &As with our rockstar guests and the Real Vision Academy, or you can just pay for the add-on service of MIT. But trust me, people are passionate about this product because it actually changes lives. So anyway, over to Julian. Join me, Raoul Pal, as I go on a journey of discovery through the macro, crypto and exponential age landscapes. In The Journeyman, I talk to the smartest people in the world so we can all become smarter together.

5:13Hi, everyone, and welcome back to this month's MIT video update. A couple of housekeeping issues before we dive in, because I'm not sure that all of you will have seen it, but and although I'm pretty sure most of you will have noticed that you didn't actually get an MIT monthly write up this month. And that's because one of the data inputs into the growth composite didn't release for July. And I've never, ever seen this before. But it does kind of remind me of what I discussed early last month in relation to the Atlanta Fed postponing their wage data to make sure that the data was accurate. And so I reached out to the data supplier provider, and they said that they'll be back next month.

6:10So it's not an issue. If it happens again, what I'm going to do is I'm going to replace that input with something else. But for the time being, it seems okay. I still don't know why we didn't get something for July. Maybe summer vacation. I'm not sure. But it seems like next month we'll be back to normal. But nevertheless, I didn't want to leave you guys sort of hanging. And so I wanted to put together just a chart deck, a relatively big one. We're at 76 slides, I think, this month. So not quite 90 or 100, but 76. So we're going to get through that and just kind of high level growth, talk about liquidity.

6:54We'll talk about inflation markets, and then we'll kind of sum things up or wrap things up with a recap of the boring zone. I'll also keep this MIT update relatively short because I'm conscious of the fact that many of you are likely to be kind of soaking up the last days of your summer holidays. And then I'm also racing off just after this at the airport as I'm going to Verona for a wedding. And then I actually decided to stay a couple of extra days and see Venice. And I've never been to Venice, but I've heard really great things. So I'm quite excited about that. So let's get into it. So I'm going to start kind of as always with growth momentum and just talk you through some of the things, some of my current thoughts right here, right now.

7:47So as you know, the ISM came in lower for the month of July at 46.8 versus 48.8 expected. I put this chart out in one of the updates during the month. And what I'd said is, are we concerned about this? And the answer is no, because a trough in the business cycle takes time and B, the ISM almost always dips lower before it starts to climb again. If you look at, you know, kind of that 2002 time we saw, you know, it start to rally and then come down around five and a half points. Same thing in 2012. You know, we see it time and time again. And then ex-COVID, around 2.4 points. Now, at the same time, while the US economy is still weak now with the ISM where it is, and I wouldn't totally rule out another dip lower here just because of what I'm seeing in some of the regional Fed surveys for August.

8:57Not all of them are out, but we have quite a few of them now. The key factor as to why the business cycle has remained subdued for so long is because of the Fed's restrictive policy stance, which has kept rates too high. But this is already starting to shift in a big way. And so as you'll remember back into early April, when Raoul and I had started to anticipate that rate cuts would be priced into the forward curve with just 1.3 cuts priced in. We've since priced in an additional four through January of next year for a total of 5.3 cuts. And as we anticipated, this really started to push down both bond yields and the dollar.

9:40And these declines, especially in relation to interest rates, means that financial conditions are easing very quickly now, which bodes well, I think, for the future outlook of the economy. And as a result, I think that over the next three to six months, the ISM will be higher and that this will provide support for things like crypto, cyclical equities, particularly with the added tailwind of a weaker dollar, which we'll talk about a little bit later. The surge in rate cut expectations is also giving a serious boost to our GMI financial conditions index. I also, in relation to the dip lower in the ISM that we've seen, I also believe that this is down to the tightening of financial conditions that we saw over the summer months of last year, just because remember that this index is so leading.

10:36And it's clearly visible on the chart. If you look at just that period where the ISM dipped lower, we did see financial conditions tightening. But now they're really starting to, as a goose higher on dollar weakness and rates coming in lower. If we then look at some other indicators, so this is the NFIB Small Business Optimism Index. In July, it rose sharply to 93.7, and this significantly beat the consensus expectations for 91.5. And there's a lot to cover within the survey itself, I mean, I'm not going to go over all of it, but I think one of the most notable elements for July was a significant rise in confidence regarding the outlook for general business conditions.

11:20And so month on month, although I'm not showing that here, it was a 2.5 standard deviation move, which was the strongest monthly move since April of 2020, just as the economic data started to recover post basically the entire world being shut down during COVID. in. Earlier in the month, we also received the Q3 data for the Fed Senior Loan Officer Survey, which showed another sharp increase in banks' willingness to make commercial and industrial loans. And this is important, right? This is a major business cycle positive because more credit availability is what? Well, it's more cowbell. And not only are banks easing up credit standards for C &I loans, but we're actually also seeing a sharp uptick in demand.

12:08And credit is really the lifeblood of economic growth because when businesses start borrowing more, it's usually a clear sign that they're gearing up for expansion, whether we're talking about new projects, hiring more staff, ramping up production. So this is bullish in my opinion. And banks are also becoming increasingly willing to make consumer loans, which again, very positive. And for those of you that are worried about the rising delinquency rates, I see a lot of people still posting these charts on X, you know, don't be because this data simply lags behind banks' willingness to lend by around 12 months, as you can see here.

12:48So the real focus should always be on whether banks are loosening or tightening credit standards, because this is just another form of injecting liquidity into the real economy. And so everything else, delinquency rates included, just follow with a lag.

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14:05And when I aggregate all of the surveys or, you know, across all major categories, we, you know, we did ease further this quarter. And this typically leads bank lending activity by around 12 months. So this is not something that you typically see in a late cycle economy. It's really quite the opposite. OK, so I think that this is all taken together very positive. And then some of you will have seen on Monday the release of durable goods orders, new orders. This is month on month up nearly 10%. So this is very positive. And then we'll just look at things like imports. U.S. imports year on year are up around 7%.

14:49And it's not just the U.S. either. South Korean imports are up 10.5 % year on year. And then if we look at South Korean exports, I showed you guys this chart earlier in the month when I went through financial conditions easing and mapped them against a bunch of other indicators like earnings revisions, the S &P comp, year-on-year comp, the Goldman Sachs financial conditions index. As financial conditions ease, you know, there's really, they're so leading that if anything, soon these year-on-year comps are going to start to rise further after a period of, let's say, consolidation. And then when we come back to imports again, here's Brazil, just over 15.5%.

15:32Japan, 16.6%. And so I really feel that we're in this stage of the business cycle, whereas more central banks begin to start cutting rates, the Fed included, that's going to be what drives leading indicators higher, coupled with what we're seeing from the senior loan officer survey. So, you know, on the credit side of things. So what you guys have all been waiting for, liquidity. So as you know, we've been expecting Global M2 to break higher following the breakout in our GMI financial conditions index since financial conditions are leading. Well, you know, it just did and is rising pretty sharply here.

16:22And we've also been keeping an eye on our GMI Weekly Global Liquidity Index, which hones in specifically on public liquidity. So central bank balance sheets and net liquidity terms adjusting for all sources and uses of cash to give us the best read on the dollar supply available in the system. And so this is also breaking out just, right, just peeking its head above that line. And this is so far being driven in large part by what's going on with the PBOC. So we were, if you remember back, we were saying that we expected the PBOC to start to inject increased liquidity additions during the second half.

17:09They're now doing that. And as we also pointed out last month during the video that I did when I was in Cyprus, this has historically been enough to push Bitcoin's price higher alone. And so this is, in my opinion, a major positive, and I expect them to continue. Now, the breakout in both public and private liquidity composites means that our GMI total liquidity index, which puts them both together, has broken out as well. And if we're right about the everything code, this thing is headed so much higher over the next, let's say, 12 to 18 months. And as we've hammered home kind of time and time again, liquidity is king for Bitcoin.

17:56So the breakout in our GMI total liquidity index is the kind of signal personally I don't want to ignore. And I don't think that you should either. And take a look at this chart now. So here's a really nice visual of the last three times our GMI total liquidity index broke out and the immediate impact on Bitcoin prices. So every time, I mean, every time, it's not a huge sample, but again, we don't have a whole lot of history for Bitcoin. Following the breakout, Bitcoin prices moved higher almost immediately. And I'd also argue that if it weren't for the black swan event that was COVID back in 2020, which I've highlighted there for you, Bitcoin would have just kept climbing.

18:40So the pattern to me is very clear. When liquidity breaks out, Bitcoin responds almost immediately. And then lastly, excess liquidity is still also moving higher, which, as I've discussed before, is the liquidity metric most correlated with equity multiples on a forward looking, i.e. leading basis. So I think all of this taken together is mega positive. Now, I'm going to talk about inflation. I'm also at the same time, I'm not going to dwell too much on the inflation story this month because, you know, you've heard us talk endlessly about inflation heading lower. Raoul and I have made our point and the data is starting, of course, to back that up.

19:25So I'm going to try and keep it short and sweet this time around and not show you, you know, 30 charts on inflation. So headline and core CPI came in lower for the month of July with the drop in core goods being especially striking. As we've been saying all along, though, elevator up equals elevator down. So this isn't really much of a surprise. What goes up fast has to come down just as quickly. I mean, this is the power of base effects. Most crucial to our Fed outlook, core CPI has now dropped to 3.2%. And we still expect core CPI to continue to trend lower for really the remainder of this year and into 2025, largely driven by those big, extremely lagging components like shelter.

20:15So as we've discussed before, shelter just lags home prices by here around 17 months. So the decline will continue for a while longer. And this is 36 % of total CPI and approximately 60 % of core. So it's a big, big wait. Then if we look at the Atlanta Fed core sticky CPI, three-month annualized rate, we're down to 2.6 % from 3.1 % last month. So another new cycle low. And then when we come back to the July NFIV report, we also saw another large decline in the percentage of firms planning to raise prices over the next six months, aligning, very much aligning with our expectations from several months ago, when we strongly kind of opposed the consensus narrative that small businesses were poised to increase prices and that this would feed through to higher CPI numbers.

21:09Actual compensation plans, again, NFIB also have collapsed to a new cycle low consistent with a lot of the lead indicators that we've been sharing in this report so far this year. So remember that rising wages are really a late cycle phenomenon, not for right now, in my opinion. Trueflation numbers are also continuing to fall, so currently just around 1.5%. And so the bottom line is that as we pointed out last month, this sort of inflation Mount Fuji chart remains our true north for the time being. So we still think lower is the direction of travel. Unemployment, again, I'm not going to spend too much time on this.

21:55I'm just going to look at a couple of charts with you guys. So small business hiring plans remain weak in July, or sorry, remains weak, like many of our other lead indicators and suggest that a move towards around 5 % in unemployment is likely. And again, I could show you another 10 charts as to why it's 5%, but I've spared you. At the same time, small business sentiment around hiring has improved slightly since March. And as I've kind of previously discussed in maybe two of the latest video updates, we're not expecting a significant rise in unemployment at this stage, but just enough to catch the Fed's attention and provide them with the justification that, of course, they need to start lowering rates.

22:48So 5 % on unemployment seems reasonable here. And remember, though, that rising unemployment, as we've been saying all along at this stage in the cycle, can only mean one thing, and that's more cowbell. Even the large BLS payroll revision of 818K, in our view, was a bullish signal as this would only accelerate the timeline for rate cuts. And as if on cue, Powell announced at Jackson Hole last week, quote unquote, the time has come for policy to adjust. So confirming the September rate cut. Now, no word on whether or not it's 25 or 50. My hunch is 25. But let's see. I'll also talk a little bit more about this later.

23:38Markets. OK, so let's kick things off with the Nasdaq. Last month, I said that a pullback to around 18 ,500 on NDX, taking it below the minus two standard deviation oversold threshold would be a screaming buy by our playbook. Remember that corrections of around 8 % to 12 % are not only normal, but they're also a healthy feature of bull markets. What ended up happening is that we dipped just below 18 ,000 to retest the 200-day moving average. And this was the line in the sand for the bulls, and it helped firm. At the same time as this happened, the NASDAQ, as I had highlighted last month, was deeply oversold with around 30 % of stocks trading with an RSI below 30.

24:30Now, a couple of factors, you know, bolstered our conviction, you know, during my last update. And one of them was that financial conditions were easing and are easing rapidly again, driven by dollar weakness and bond yields. And remember that tech stocks are essentially a pure play on easing financial conditions due to the fact that financial conditions lead the liquidity relationship. Right. So that this was a major support for us. The second is that if you look at the NASDAQ advance decline line, it's already hitting new all time record highs and barely budged during the recent correction. To me, this suggests that what we saw was more about sector rotation than any real panic.

25:20However, what I will say is that the NASDAQ can't just go up in a straight line. From the moment, basically, I had done my update, as I said, we dipped a little bit lower, but from that low, the NASDAQ just went up in a straight line 14%. And if you look at the recent local high, although I don't have them on the chart, there's a daily DMARC9 sell set up in play. And currently we're on day four of nine lower. So I think on this basis, there's still scope for some sideways chop or more of a correction ahead, but I don't think anything severe lies ahead, if that makes sense, within the context of the framework that I'm outlining for you here.

26:07And I think the fact that speculators are back to being net short SPX again here sets a floor as to how far the market can fall because everyone's just back to being bearish. And that feels completely unwarranted given kind of the macro and liquidity fundamentals that I've outlined for you so far. And another thing that you'll notice here is they're back to being net short. But every single time the market corrects, what we're seeing is basically people covering their short, speculators covering their short position and getting long. And we've seen that through the course of the last, well, basically since Q4 of 2022.

26:48And then when we look at positioning, sorry, this is the best image I could find. And even then it's still quite fuzzy. But anyway, you can see from the Bank of America Fund Manager survey released for this month, that positioning is hugely defensive. Bonds, utilities, healthcare, US, UK, telecom, and staples, right? And then, I mean, it's massively tilted towards defensive bond proxy sectors and then fixed income. I mean, even from a regional asset allocation perspective, UK, I mean, yes, it's energy and some industrials, but it's also a lot of staples in healthcare. So from a beta perspective, the UK is actually versus if we talk about global equities is a offensive market play.

27:37So this is, as you can see, a very defensive posture. Meanwhile, the weekly chart of materials, I think, still looks great. Ditto looking at industrials, which just closed at a new all-time record high. I still really like this chart of BKX. I think above 118, this is really going to move. it feels like as I've shown you maybe last month, and I don't know, time flies, but I showed you this chart before, that we might see a slightly larger right shoulder form to complete perhaps a big inverse head and shoulders pattern. Let's see. Either way, I think that this is definitely a chart to keep on the watch list.

28:29The Russell 2000 still has, I'd say, a bit of work to do, but we have re-secured, I'd say, key support. And I still believe that we'll end the year a lot higher for the Russell 2000. And like many other risk assets, seasonality for small caps really takes off starting in October. Now, a big part of what I believe is going to propel cyclicals higher here, particularly things like, let's say, emerging market equities or high yield bonds is the fact that the dollar is breaking lower. And a weaker dollar means that global liquidity improves as dollar denominated debt becomes easier to service. So you'll see all the headlines.

29:19Oh, DXY is breaking down, the dollar is tanking, whatever it is. But the real story with the dollar breaking lower is the ripple effect this has on global growth and how it feeds back into the US economy. So this is a major tailwind, I believe, for risk assets going forward. The last time I showed you this chart during last month's update, the dollar was still at 104. So we're down around 4%. So this was a good call. The only thing I'm going to say here and now is that we do have some cluster DMARC buy signal stacking up. So we've got a 13 aggressive sequential. We have a DMARC 13 sequential and a combo in play.

30:08And there's also a nine there. So this to me feels like we could actually back up a little bit more. If you look at the weekly chart, there's also a daily nine buy setup. So this has worked pretty well in the past. And so my thought here is that, and of course, as well, if you just scan X or Twitter, you can see everyone's like, oh, dollar's heading lower. So it feels kind of like a consensus view right now. So this would take a lot of people by surprise. And if I just skip back up to this chart, let's say we retest 102, 102 and a half. That would be that kind of white line. So previous support now, I think resistance.