Crash or a Boom? A Special Two-Week Series

0:00Are we in the most hated bull market in history? The S &P is up 17 % so far this year, and the NASDAQ 100 is up 43%. The highest number of people since 2008 are invested in the stock market, yet institutions haven't participated. And sentiment is not happy. What's going on? Well, at Real Vision, we'll be talking to the world's best investors and thinkers to answer that question in crash or boom, how to profit from what's coming. This is a really important topic, and this two-week special series starts on September the 11th with what I think is coming. I'll lay it all out for you, and then we'll hear from the others.

0:43Go to realvision.com forward slash big question to get all the details. That's realvision.com forward slash big question, all lowercase, to get all the details. Don't miss out.

1:03Hey, everyone. Look, it's a fascinating time in global macro right now because there's so much confusion as to where we are. I think the world is split. If I look at Twitter, it's fighting all day between everything is going to crash. Can't you see there's a recession coming? Can't you see there's a credit contraction? Can't you see inflation? And then there's others of which I lie on the other side of the camp, which is, tell me something we don't know. what we probably need to start looking at is the other side of this cycle. So I'm going to dig into my views. But as ever, look, the study of markets and the study of economies, you don't ever know who's right until it plays out.

1:45But what I want to give you is an understanding of how I'm thinking through this. And then over the course of this week or so, we'll be speaking to some of the most amazing people to get their views, see how they differ from mine, because what's important for all of us is to hear the other views. And then we can put it all together and decide, okay, what do we think the best course of action? But the spoiler alert for me is I'm really bloody bullish and I've been bullish all year. And I was starting to get bullish at the back end of last year. And so far that's played out well. My main bets have been crypto and tech, and they've both had phenomenally good years.

2:21In fact, the Nasdaq's had one of its best ever starts through its year. Now, does that mean I'm going to be right going forwards? Who knows? I think I've done the homework. I think I know where we are, but obviously things can change. I also think that there is always volatility involved in markets as well. And the market's job is to try and throw you off. Right now, generally speaking, most people have missed the massive rally in equities. and so they're hoping that the market comes lower. So we've seen that from the institutional surveys. People just haven't been involved. So a lot of it's been retail and passive money, index funds, stuff like that, without people actually making money from it.

3:05And that's always interesting to me because we come into year end and it tends to mean that somebody's going to have to make a decision how they want to report to their investors at the end of the year and the pension funds and others don't want to show that they were massively underweight equities all year. But let's see. Let's see how that plays out. I've got some strong views about the rest of this year as well. So without further ado, let's go through some of this. So firstly, let's think about growth, the growth element. Where the hell are we? Now, many of you have seen this chart of the GMI business cycles dominoes.

3:40And this is really important to understand because as Stan Druckenmiller says, you never trade today's news. You need to understand which part of the cycle is driving the asset prices and which part of the cycle is driving the Federal Reserve. So on this, myself and Julian Bittle, who works with the Global Macro Investor, well, our job is to live as far out as possible. So we're in that eight to 10 months area ahead where we're looking what's happening to the cycle. We actually go further out, But the bulk of our business cycle work, as opposed to our secular work, is this eight to 10 months out.

4:17Now, the markets have been roughly trading two to four months ahead of the business cycle. In some cases, stuff like technology and crypto, they've actually been even further ahead than normal. And then we've got the central bank. Well, they're lagging with the ISM. If we take the ISM as where the economy is today, because it's basically a real-time GDP indicator, well, the central banks, well, they're looking for CPI to come down on unemployment. And those things are really lagged. In some cases, six to eight months. And when we get down to the big inflation stuff like shelter inflation and wages, I mean, they can be over a year, sometimes two years lagged as that keeps changing.

5:01So, okay, that's now you understand where we are. So let's look at, right now, the ISM. The ISM gives you the snapshot of where we are. And it's been around this kind of 46, 47 level for a while now. Now, that's a really important level because historically, that has pretty much had 100 % chance of recession. And I think most of us realize we've had a recession. I think most businesses have seen a slowdown. I think many people have laid off jobs. And we're seeing, and I'll come on to jobs later, a change in the job structure. But that recession has not been called yet. We've seen the economic data, the GDP data, still somewhat buoyant.

5:44But I think it's there. And I think when all is said and done, the recession will have been called during this year. But here's the rub. I think it's actually about to start becoming over. Now, again, I'm using the ISM. The ISM leads GDP because that's lag by three months. So therefore, by the time the ISM gets positive, which I think is coming, and I'll show you that in a sec, that's all going to play out kind of Q1, Q4 to Q1. But the point being is we are at the trough of the actual cycle right now. So if we look at what we use as our main indicator, the GMI Financial Conditions Index, it has a nine-month lead.

6:25Now, this financial conditions index is a blend of the dollar, commodity prices, and rates. Now, it led the whole cycle, suggested the ISM is going to recover by a significant portion of time. It also gave us the trough nine months prior. So we've known roughly when the ISM was going to trough from using our indicator a long time ago, and what that was going to do to financial markets. You can see, interestingly now, it's rolling over somewhat. That's based on the fact that the dollar's gone up recently and rates went up recently. So it tells us something that we may see growth slow down or have a soft patch later in 2025.

7:08And anyway, let's not get ahead of ourselves. We're focusing on now, boom, bust. It's that crash or are we in a next bull market idea that I want to go through. So as opposed to our GMI financial conditions, let's use something more traditional. Let's use the ISM new orders minus inventories. It basically has a three-month lead, and it's saying that ISM is about to start recovering fast. In fact, in the last quarter, ISM may well trade above 50 and show the economy's in expansion again, which is not what people are expecting. Now, I think people are all chewed up on, is this a recession, not a recession?

7:47It doesn't really matter to me. You see, the key thing is, is the markets priced it in last year. And I know that people struggle to understand this, but the NASDAQ priced the ISM at something like 37 last year. It was a terrible year for equities, and it priced in a full recession in advance because it's leading the ISM. In fact, the NASDAQ has been a really good lead, and it's a bit further out than usual. In fact, if we look at it versus our financial conditions index, it lags that by about six months. But you can see it's been following it pretty closely. So as financial conditions eased, that's the blue line going up, the NASDAQ went up with it.

8:37And it forecasts further out that we've got further rises in the NASDAQ to come. But you can see financial conditions get a bit choppy going forwards because of what we've seen with interest rates and what we've seen with the dollar. But I think that will resolve itself in lower yields and lower rates. I'll come into why the lower yields later. up. So this is why I remain bullish and we'll go further out in due course. Okay, the next part that people talk about all the time is inflation. Well, inflation is sticky. Again, everyone's looking at today and you hear the central bankers say, well, inflation is too high.

9:16Well, the forward-looking stuff is vastly different and they know that too. I think they're doing it to engineer an undershoot because they need to finance the debts, It's something I'll come on to later. It's something I've talked on Real Vision about. So the inflation side of the story, look, this is a very ordinary inflation cycle. Yes, it went higher because of the supply issues. But if we look at this US CPI year on year versus the five major kind of inflationary episodes since the 1940s to the 1980s, it's pretty much identical. In fact, it's probably falling faster than most. And I don't think that it's out of the normal.

9:54Yet everybody wants to believe that something structurally has changed, but there is no evidence of that. I don't see sticky inflation anywhere. In fact, when we look at the most similar episode, which was post-World War II, when we had the same supply issues and demand as everyone's come back into the labor force and went back home from the war, we had this huge burst of inflation. Then inflation collapsed. It went negative. Then it had the rebound, and then it continued at a low inflationary level going forward. And I think that's pretty reasonable. Of course, we will have a rebound because of the year-on-year comparisons.

10:31But is that real inflation? Not so much. We did have real inflation from the supply issues. They were real structural, well, not structural, cyclical things that were one-offs. And that's now unwinding. So one of the things that's really driving inflation or the core inflation, the stickiness of core inflation, if you remember, when we look at those dominoes, the furthest domino back is shelter, because shelter is incredibly lagging, even how it's calculated. So when we use the Case-Shiller Home Price Index, it's already unwound all of the inflation. It's at 0%. And that would suggest CPI Shelter is also going to head down by 2025 to maybe 2%, maybe less.

11:24Hey everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back. Your favourite neighbourhood spot grows with Square. Indeed, my favourite neighbourhood spot has quickly become Todd Snyder in Williamsburg. Todd Snyder is one of my favorite menswear shops and has supplied me with all the clothes I have needed this quite hot summer. Every business has different goals, but Square is the business platform that supports them all. From opening a new location, selling something new, or just expanding their reach. Indeed, I've seen it with Todd Snyder. In Square also you can get real-time insights, so don't wait for end-of-day reports.

12:04Go to square.com forward slash go forward slash real vision to learn more about how your business can grow with Square. That's S-Q-U-A-R-E dot com slash G-O slash R-E-A-L-V-I-S-I-O-N.

12:29So this is yesterday's story, and this is going to continue to play out. And I think when the Fed get to cutting rates, they'll be cutting rates longer, as they always do after a recession, because the core lags the headline inflation. And they will focus on the core to get it down as low as possible. And before you know it, they overshoot. So they are going to be cutting rates as they see it coming down. Now, the other thing is wages. So wages have started deflating massively. Here's our wage growth tracker index at GMI. It's an 11-month lead. and the Atlanta Fed version, and it's just coming lower.

13:06So wages are coming down, rents are coming down, inflation, core inflation, because these are the stickiest parts, are going to keep coming down. So I don't know where this interest rate shock is going to come from. I understand there is a supply issue in rates right now, and that's probably keeping rates higher. I understand about the deficit. I understand about financing of rates, but we'll come on to that in a minute and how that's going to play out. So when do they take out shelter from CPI? It already shows CPI at 1%. So the inflation story is over, over, over. Yes, commodities will rally somewhat at this point in the cycle, but to generate significant inflation, considering commodities are like 17 % of CPI, you need a hell of a big move in commodities for it to even appear in this.

14:01And there's always a cyclical uptick in headline inflation before core inflation stops falling. Our view at GMI is we probably hit somewhere close to zero in headline inflation this year, and we probably hit zero or less in core next year. So therefore, we think that the central bank is going to be much more active than people anticipate. the other thing people talk about a lot is there's going to be a credit crunch and the market's going to crash we've all seen the banking situation i get it i get it there is a credit problem and you see if we look at bank lending year on year it's starting to go lower of course it is with that point of the cycle but if we look at the lending standards which leads it it's already been pricing this in for a while now.

14:55And equities, I think, have already priced this in. Doesn't mean that bank lending is not going to slow down, but it means that the market's going to look through this. Because what you find is bank lending standards is basically ISM. And if we think ISM is rising or starting to rise, well, then lending standards themselves will, and eventually bank lending itself will bottom out in a long time. So if bank lending is still contracting, but the economy is growing, the Fed will be more prone to action, continued action, when they start looking at these lagging things. Leads, lags, so important, really, really important to understand.

15:38Okay. The bank lending standards, well, the S &P has already priced in a recovery. Why? Because the financial conditions index that we showed you has started rising in liquidity, has started coming back. So the S &P priced in this bank lending standards last year. That's the point. All of this got priced in last year. The market was forward-looking. It saw it. It's almost impossible to find a situation now where you're going to get all of this rolling over again, where we get the crash. Based on what? I don't see it. I don't see how that can be if we already priced it in last year. Last year was one of the worst years on record for all assets, the 60-40 portfolio, for example.

16:27And I think people are still a bit scarred from that. But also, a lot of people want their comeuppance. They want to their 50 % crash. But I'll come into why that can't happen. So we had technology was down 70%, but the S &P and the NASDAQ, they were down 30%, 40%. Decent-sized recessions, much like 1990 recession, nothing out of the ordinary, and they're showing the recovery. And yes, we understand that inflation is going to keep coming down lower. We understand that the ISM is showing negative GDP. We think there is negative GDP on the cards, but all the forward-looking stuff is saying we've got a recovery coming, and that's what the markets have been pricing.

17:10Okay, the other one is CEOs and CEO confidence. They kind of know what the gig is, and they're very good at predicting the economy, and they too have started saying things are getting better. So even though bank lending standards are terrible, CEOs are going, well, you know, things are picking up. They're not yet positive, but they're getting there. They're starting to say, we can see the light at the end of the tunnel and it's not an oncoming train. Well, I know many people still think there's an oncoming train to come. I just don't see it. Okay. The other thing is this recession idea. It's like, we're going to go into recession and therefore we're going to see a collapse.

17:48And really what we're looking at is stuff that was already priced in again. So if we look at imports and exports, we're seeing world trade falling. So here's the Eurozone imports from non-Eurozone countries, right? Collapsed. We've seen that everywhere. We know this information. This information was essentially that fall in the ISM. There's nothing new to know here. Yes, economic growth is incredibly slow right now. Yes, many countries are in a recession. Yes, some will avoid a recession. I do think the US is in a recession now, and it's a mild one. But that's what we see from this stuff. Also, if there's a recession, you see jobs falling.

18:32So here's job openings. Now, job openings are coming off sharply, and they will continue to come off until they get back to some sort of trend. That shows you we're in the recessionary environment. We know this. It's been priced in. also non-farm payrolls everyone frets over this bloody stuff every month and really the forward looking indicators have been calling it all along it's going lower it just takes time these things are lagged if you remember wages lag ism and they will eventually keep falling and then we'll start getting negative prints and people will suddenly wake up and smell the coffee much like we've seen with the unemployment rate, it's like, oh, it's ticking up now.

19:15So it does come, but it takes time. And by the time non-farm payrolls are negative and inflation is below 2%, well, the markets well look through this and it's looking for the recovery. But it also means that the cowbell, the monetary stimulus, the printing, and even the ability in an election year to add fiscal stimulus grows. And I think they want that. I think they want the excuse to stimulate. And I'll come on to why, but the election side of the cycle, of course they do. They always do. Politicians just want to hit the print button, give you money, vote for me. That's the way the world works, sadly.

19:58So the unemployment rate. So this is an inverted unemployment rate. So as this goes down, unemployment rate rises, our GMI unemployment index leads by three months. It's suggesting unemployment is going to rise about a percent from the low. So we're starting to see that happening. So unemployment should start ticking up. Now, if unemployment's rising and inflation is falling, ding, ding, ding, more cowbell. More cowbell, interest rates start falling. Remember the financial conditions indexed. The dollar starts weakening. And what we get at that point is the financial conditions index showing further loosening, and that drives the next leg of a bull market.

20:40So I think the market continues into the end of this year. Then it might have a soft patch as the financial conditions index, which is forward-looking, slows stuff down. And then from the cowbell, we'll see it going forwards. I'm not focused on the volatility part. I'm in this cycle for the full cycle, which I think goes into 2025, maybe even to 2026. So it's kind of for me as you strap in and ride the trend. And I'll talk about what assets in a bit. Okay. The other thing to know about unemployment rate is every time it rises by half a percent from the low, the Fed cuts every single time since about 1950.

21:23Now you might say, but unemployment is crazy low right now. And that's true, but it doesn't necessarily lead to wage rises or ongoing wage rises. Japan has had very low unemployment. In fact, for the last 10 years, it's got a 10-year older population. It's had unemployment at 3.5 % or lower, basically, barring a couple of recessions for the extended periods of time. And that's because as their older population leaves the workforce, the younger population has jobs, but they have to compete against friendshoring, offshoring, and technology. So wages over time still never really rise. So yes, we get some wage rises pushed through because of what happened last year, but generally speaking, we don't see any evidence of sticky wages or wage rises or some wage price spiral or any of that sort.

22:18It's just not evident in any of the data. Okay. So now we've established that we think that the economy is currently in recession. We think it was priced last year by asset markets, and therefore they are looking forwards. Our financial conditions index, which is nine months in the future, has been going up for a significant period of time. That calls exact timing of the low in the ISM. The markets exactly followed suit. The liquidity cycle is driving. Here we are with a slow economy. Here we are about to see unemployment rising, non-farm payrolls falling, and inflation falling, and an ongoing deflation in core CPI.

23:07That is exactly the set of circumstances why I think the Fed was so late with the rate cycle this time around. Because they want these things to undershoot, because what they need to do is debase the currency to pay the debts. And this is something I've talked about in the everything code. So let's not get ahead of ourselves. First, liquidity. Liquidity matters. And our GMI Weekly Global Liquidity Index actually lags our financial conditions index by five months. So that's very useful. It tells us liquidity is going to keep rising. It's going to keep rising. well into 2024 where we might get this little air pocket.

23:50But don't concern yourselves with the wiggles. They don't mean a lot. Overall, directionally, we should be headed much higher in the global liquidity cycle. So that's what I'm expecting. So therefore, I cannot be a bear. Because if there's excess liquidity, you're debasing the currency. So optically, asset prices rise. And the assets I'm long are the secular trending assets. So those are the ones that naturally go up, like the NASDAQ and cryptocurrencies. Those ones are in a natural secular cycle, so they will continue to go up. Now, some of you might go, well, NVIDIA, that's so expensive, it's overvalued, blah, blah, blah.

24:31I don't care. It's liquidity that drives everything. We only need to worry about that stuff at the end of the next cycle, when inflation is coming back and rates are going back up. We're the opposite of that right now. We've got a lovely 18-month period of rate cuts, stimulus, and all of the good stuff. That's what you should be focused on. You shouldn't be focused on these other red herrings. They only matter when the cycle rolls over, and that's not for a period of time. So here's another longer lead. This is our GMI Weekly Global Liquidity Index versus ISM. So ISM has a 15-month lead because of the cyclicality of the global economy that we've talked about before due to the rate refi cycle.

25:18Well, that suggests that all of 2024 liquidity is going to be rising. So we've got a great year to come in 2024, all things being equal. And I think that probably plays out. And we've got much more within the everything code that we developed at GMI. And we've shown in great detail in Real Vision Pro Macro. If you're not a Pro Macro subscriber, you're missing out on all of this work, where we're going through step by step how this is playing out, where we could be right, where we could be going wrong. But generally speaking, what we see is ongoing liquidity. Ongoing liquidity automatically debases the currency, changes the denominator, asset prices rise.

25:59Hey, everyone. We're going to take another quick break and hear a word from our partners, and then we'll be right back.

26:09Okay, the other thing that we can look at is in the US, something a bit easier, which is the Fed net liquidity, which is the Fed balance sheet plus the, or taking away the Treasury general account plus the reverse repo. That equation gives you this. I know some people hate this. I actually use technical analysis and economic data and stuff like this. And this looks like it's a consolidation pattern of Fed net liquidity. What could drive this further? Well, what could drive it further is if the Treasury stopped building the TGA because they understand there's probably too much issuance around right now and that the market doesn't like it.

26:49And therefore, the reverse repo drains faster than the Fed QT. If that's the case, it breaks higher. If the banks run into trouble again, this breaks higher. If they start cutting rates because of the issues that I've talked about, this goes higher. So I'm very interested in this. Could it trade sideways for a bit longer? Yes. But if you remember, our idea is that the Q4 of this year, we start to see the liquidity picture changing because of inflation and other stuff. Sorry, that's my wife pinging me. I apologize. Okay. Let's go into the crash scenario. I don't think it can happen. This quote from Yellen is something very interesting.