Crash or Boom? Week 2 Wrap-Up

0:02Hey, everyone. If you like this podcast, go behind the paywall to get privilege access to the smartest minds in finance. Visit realvision.com slash rvpod and use the promo code podcast10 to get 10 % off our essential membership for the first year. Join the Real Vision community and learn how to become a better investor. And now to today's episode of Rao Powell Real Vision. Hi, everyone. Welcome to the Real Vision Daily Briefing live from New York City. I'm Maggie Lake. Here with me today is Raul Powell, co-founder of Real Vision and CEO. Hey, Raul. Great to see you, Maggie. So we have somebody else with us.

0:39You can't see, but we have a room full of our first cohort of VIPs. I know you're not supposed to make noise. How about a round of applause so everybody knows? There you go.

0:52Super excited to have them all with us. We're holding an event here in New York, and there's one happening. We think it's happened or happening, probably still happening in London right now, which we're super excited about. You can find out more about that. We'll tell you a little bit more in a bit. But it's great to be here with you, Ralph. Yeah, I'm excited. So we're wrapping up the end of our two-week content campaign, Crash or Boom, How to Profit on What's Coming Next. And we've had some really interesting conversations. You and I talked last week about the first week and really sort of digging into what's behind this divide.

1:26So people kind of generally feeling like all of the fiscal spending kind of offset this aggressive monetary tightening we've seen, threw the timing off for a lot of people, made it a really tricky environment. So there's a lot of agreement around that, consensus around that. But then what to do about that? What happens next? Wildly divergent views. This week, we had, I think, good representation from the hard asset crew, let's call it. A lot of talk about things being different, maybe being in a new regime. Let's listen to some highlights from that, and then we'll talk on the other side. The challenge is that most investors have some version of 60-40, whether they like to admit it or not.

2:10That's essentially what their exposures are. And what is 60-40 particularly good at? When does it outperform? It outperforms in an environment where there's disinflationary strong growth. And instead, what we're sort of seeing here is an environment of inflationary weak growth. I'm just long, hard assets. I mean, I'm along all sorts of things that are below the cost of producing them that are producing a lot of cash flow, or I think they're going to produce a lot of cash flow in the next year or two. But we're just long, hard assets, preferably ones that don't have a massive GDP component to them.

2:50To be honest, the Fed's 2 % stated goal is probably not going to happen. And at some point, they're going to have to accept 3 % or 4%. I'm long a lot of energy. I'm very, very long various parts of the energy complex. My take is pretty simple. You've had everything for energy to go down in the past, really, six months. First, you had the Iran-Saudi deal, peace breaking out in the Middle East. That should have been energy bearish, and it wasn't. You've had a whole lot of bad news on China that should have been energy bearish, and energy continues to grind higher. Fossil fuels are an extremely efficient form of fuel for motor transportation.

3:34They deliver a lot of energy relative to the volume of the material. They're just extraordinarily efficient. And I would suspect that people will continue to favor efficient forms of energy. So for us, it's AI. And that sounds very buzzword today. But I do want to just reiterate, this has been a thesis of ours for many years on record archives. But within that, this is, in my humble opinion here, the number one investment opportunity of our lifetimes, the generation before us, their lifetime, the generation after us. This is an enormous opportunity and there's nowhere else to invest right now, in my opinion.

4:14You shouldn't be fearful as an investor when you hear the word regime change. You should look at it, lick your lips and think of it as an opportunity to make money or at the bare minimum, save money in financial markets. And this is why we do research. This is why we constantly wake up and refresh the same models, refresh the same tools, analyze the same time series to ultimately give ourselves the best chance of actually getting this stuff right. So that's just a little snippet of the amazing conversations we had for all of the full interviews. You can head over to our platform and check them out.

4:45If you are not already a member, scan the QR code, and that'll tell you what you need to do to take advantage of some spectacular deals we have right now. So you can hop on the platform and join our community. So, Ra, I love how Darius finished that, though, because he's like, listen, yes, it's difficult. It maybe is going to be more volatile, but there's opportunity, right? Anytime this is happening, there's opportunity. I think that's why Louis had Make Volatility Great Again on his hat. He and Cuppy are sort of like licking their lips saying, this is going to be awesome. But you have to figure out your way through first.

5:15And a lot of the people in the content campaign, all of them, not only said what their view was, what their macro view was, but they also said where they see the opportunity coming. And it was really varied. It was all over the place. So let's talk a little bit about this view on hard assets. Very different from the one you have. Yeah, but although you say that, but this point in the cycle, so I think of this as, for me, we're in macro spring. Macro spring is volatile. It's confusing because you have inflation, the slow component slowing down, but they've just started. The forward-looking stuff, the commodity stuff starts picking up and you're bottoming in the business cycle.

5:57We saw the ISM coming out today and it looks like it's at the bottom. And that's the work that Julian and I have done at Global Macro Investor. So we actually think the economic cycle picks up, but the stuff like inflation, the wages, the rents and stuff slows down. So this point is classically a good point for commodities because they get bombed out in the bad side of the cycle and then you start to get the relief rally. So it's classically good for that, but it's also classically good for technology, which is why technology has been the best performing sector the whole year. So that's why people are so confused because they kind of want it to be one or the other and it's not.

6:32So are commodities anticipating the ultimate? Are they sort of looking past this? Are they just because they're coming off a bottom? Or are they anticipating an ultimate payoff? My point was last year this was all priced in. So what a lot of people find funny is like I say, well, the equity market priced in the economic slowdown last year. And a lot of people say that's ridiculous. But those same people are actually the commodity bulls where the commodities priced it in last year as well. that's when most of the commodities fell and did most of their damage on the downside. So we had all of that last year.

7:07So this is the confusing, it's always a confusing point in markets. Do you think we're still going to have a recession? Or do you think that that also happened? I think we're actually in one. I don't know a single business who's not seen a slowdown. I don't know a single person who's not had to let go of staff. I've not seen any sign that we've got robust strength. So yes, you might get the government sector growing somewhat from the fiscal stimulus. But what you're seeing is the private sector struggling. And we've seen that pretty much everywhere. So if that's the case, then usually if ISM's bottomed, therefore it bottomed over the last few months, that leads GDP by a quarter.

7:49So we probably end up seeing weaker GDP numbers. We might get downward revision soon. and then we'll get weaker GDP, I think, into Q4 and Q1 because it takes a while before it comes back up from the bottom again. And my hypothesis always was this was going to be a mild recession. It's like 1990. It's a mild recession. The markets fall kind of between 25 % and 40%. Sure, some stuff like technology, the growthy end of technology went down to 75%. Some of the commodities got hit equally as hard. But overall, it's a relatively mild event, which is hard to believe with rates having gone up as much as they have.

8:25Well, and this is where the expectations get tough because people thought it was going to be another financial crisis. Now, some people would say that's recency bias, that everything's not going to look like the great financial crisis. But that was some of the expectation with the amount of fed hikes that we had. Yeah, and I've always said you can't have a financial crisis again. Yeah. And the reason being is because you've got the magic money printer. And what that does is debase the currency. So why 2008 was so bad is the value of collateral. So in a debt-driven world, you have to pay your interest rates, and your collateral must maintain.

9:02If the collateral collapses, then you've got this huge gap and everything blows up. So the magic money printer essentially optically makes the value of the collateral rise, so you don't default. So that's what happens here. So we're seeing it with what the Fed have been doing by taking off some of the, giving the emergency lending to some of the smaller banks. That's essentially the same thing. They're supporting the collateral by taking essentially the bonds, which they're underwater on, and making them whole on it. Which is why we didn't see that sort of contagion that people thought for a minute we might see on the…

9:36I don't think it's over yet. I mean, I just, everybody should just watch that chart of KRE, just ticks down every day in the BKX. You know, the banking system doesn't like an inverted yield curve. It certainly doesn't like it when they're offering half a percent on deposit rates and money market funds are offering five and a half or whatever they're offering. So that whole process is still underway. The Fed is still essentially emergency lending more and more each week. So it's just a quiet, slow death going on. And just watch that price, because if it breaks back down below the price of whatever March or April or whatever this year, then everyone starts to panic again.

10:14And I think we're in that phase. You know, October, September, October, great month for a good panic. Traditionally terrible. And usually that is normally the bottom of the bear market. The bottom of the bear market, the actual bear market was October. And I remember talking about it in Daily Briefing and also on Twitter and writing about GMI. It's the bear killer month. So normally this kind of volatility happens very normal this time of year. We should expect more volatility into October. But usually that's when it stops. Hey everyone, we're going to take a quick pause and hear a word from our partners.

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11:31That's s-q-u-a-r-e dot com slash g-o slash r-e-a-l-b-i-s-i-o-n.

11:48When you were talking about the economy in Lizanne Saunders and David Rosenberg sat down as part of the content campaign and Lizanne called it a rolling recession. And so weakness in parts, but not ever, which makes some sense based on what we've seen, but not that big push down, which is why it's been hard to call it. So if you think about it, tech had its horror story beginning of the year, you know, commercial real estate, the banks. And it's just, yeah, you're right. It's kind of rolled through bit by bit. So we'll wait and see. But all I do know is like American employment is really based around small and medium sized enterprises.

12:28That's the American economy. And these people can't, you know, these kind of rates take time to work through, but it just makes it harder for them to run businesses, harder for them to pay their rents, harder for them for a number of things. And slowly over time, you'll see that that has an effect on the economy. So it's not a big whoosh. Yeah, it's going to take time to push through. So I wanted to, when you talked about the commodity, so you're not, you don't see your call being completely opposite to some of the people who are bullish commodities, you'd expect them to behave this way. But I think the interview with Cuppie and Louis Vincent Gave, which really, I think they did a great job of giving voice to the people who believe in the commodity story and the hard asset story.

13:14But they don't think it's just that they're turning and bottoming. They see a very different regime now. And Cuppie talked about three things. First of all, they see structural part of the commodity story is a structural bull market and emerging markets. They also talk about Western currencies being debased and then underinvestment in energy. And so they think this is kind of like the rest of it's going to shit and that's going to be what. You can't have a bull market and emerging markets with a strong dollar. They're basically one for one correlated.

13:53So emerging markets, usually at this point in the cycle, should also start to perform again. So if we think of the GMI macro allocation model, I think we presented in this room a few. Yeah, we were just talking about that, the business that, yeah. Yeah, that model will spit out. It should be a weaker dollar environment. It's not currently, which is a bit of a surprise. It should be an EM pickup story. It should be a commodity story. It should be a technology story. That's normally what happens at this point. Bonds are usually a bit iffy because you've still got the remnants of inflation. until you go into sort of the macro summer phase where you're then getting into the disinflationary trend plus growth, which is the phase I think we hit in 2024.

14:36So the hard asset story, we don't know if it's a secular story or not. We know the supply constraints. We just have to see how that plays out. And it's not absolute price that matters. So oil at$100 is not necessarily wildly inflationary. Because don't forget, it was at$100 a year and a half ago. So you need to think about rate of change terms, which confuses everybody as well. So always early cycle, you'll always see this pick up. And it's that weird dichotomy where the heavy inflation slowing down and the forward looking stuff's going up that often creates this little uptick in inflation for a few months.

15:19So we produced a chart in GMI, which shows all of the inflationary episodes since 1940, and just put this against it. And this is absolutely spot on normal. It's normal. And every time we get this little pickup, because it's that little point where the commodity markets breathe the sour relief, they start rallying. But then the really heavy kind of disinflation stuff happens, and inflation rolls over. So I still think inflation rolls over. I'm still not a big bar of inflation. Commodity inflation is about 18 % of CPI. 68%, 70 % is like rents. So all the big stuff is still to come. It's interesting because I think there are people who think we're in a higher inflationary environment now.

16:00They think something's changed and that the Fed, all the central banks. So by the way, we're talking, we should mention, Fed, all of the central banks, BOJ, we've had everyone weighing in. But they think that now, I think Bob Elliott was giving voice to this, the central bankers are going to go on pause, probably because they can't afford to raise rates anymore. But they'll have done it before they really got a handle on inflation. So we're going to be living in this era where inflation is trending higher. Not crazy high, but higher. I don't see where that argument is in how the inflation cycle always takes two or three years to deflate because of how it's constructed.

16:46So my actual view is that they want inflation to overshoot. The inflation, disinflation recycle now was baked in the cake six months ago, nine months ago. So we kind of knew where it's going. All the forward-looking indicators still show that. So my view is they actually want inflation to fall further than expected. And some of our models suggest it's well below 2 % by the end of the year. So it's possible that if they're undershoot, their banks are a little bit rickety, they have the cover that they need to get rates lower. Because don't forget, the real issue at hand here is they've got about$13 trillion to roll of debt.

17:26And they're going to go from 0 % interest rates, because that was the pandemic issuance, to 5%, 5.5%. And to do that, they have to issue more bonds. And then it just keeps going in this spiral. So the deficit keeps going, so they have to issue more bonds. The only ways around this equation, for me, are they either have to try and let inflation under chute so they can get the cover to cut, or they have to impose yield curve control at some point, which is what the Japanese did. Both of the ways, to me, are actually monetary stimulus because both of them end up printing money. So I know that sounds weird to some people, but that's how I see it play out.

18:05Because if not, you end up in a death spiral of debt. And that's the last thing they can do, because what is the collateral of the entire system? US government bond. So a few of the folks in the campaign this week thought that the market is way too, I would say throughout the campaign, because I'm even thinking of Juliette de Klerk, I think there's too many rate cuts priced in right now, currently. Does it seem like the market is still expecting to? Again, there's a small crowd of us, myself, Alex Gurevich and others, who will say there's nothing different here and we will more likely. This was an outsized reaction to the outsized reaction to the downside from the pandemic.

18:48And we kind of continue to do that, make volatility great again within the rate cycle and the business cycle. And that maybe things haven't structurally changed. Now, we have to wait and see. We have to wait and see whether something structurally there has changed or not, that rates stay the same for an extended period of time. But that would be very rare. It's normally four months that rates stay on hold. And often, it's within two months they're cutting from peak rates. So they don't ever really last very long. There was a period in the 90s that they only partially raised rates. then it plateaued, then it fell, then it raised, that kind of thing.

19:30But normally, you get to the top of the mountaintop. Now, is it Table Mountain or is it K2? That's what we need to find out, right? I can tell that you wish you were in front of your terminal right now, because you can pull up your charts. That's right. Because this is what having a framework is, when you say, because we're always tempted to think something's changed. And on the margin, things are changing. It's not exactly the same. But if you look at it and chart it, which is why on the new platform we have charting, and we have all of these new tools, including AI, to sort of like, what happened?

20:03Is there a time? That's a good thing to do is if you go into the data center area, go to the economic data, and there's a whole bunch of them like inflation charts, and just look at them and say, did we have a massive move down followed by a massive move up? Does that look like an equal and opposite reaction. And if you head check it, you go, yeah, it does. So then where does it resettle down? That's just all we need to know at this point. And we need to figure out, has something fundamentally provably changed as opposed to, well, the inflation of the 1970s is coming back. Look, look, look at this chart where it went down and then went back up again.

20:40But then when you look at the 1940s, it went down, came up a bit, and then went down again. or other rate cycles, you will always get rising inflation at the end of the next cycle. That is 100 % guaranteed. So inflation always does this, as GDP always does this. But to extrapolate it that suddenly there's a new trend seems misplaced. Yeah. Rosie made a very impassioned argument that the business cycle is not dead, that it's a living, breathing, organized business that changes. To be fair on him, he came into my office at GLG in 2000 and was beating this drum. And I remember him also in 2007 beating this drum and he was getting laughed at.

21:24And people were saying the yield curve inversion doesn't matter. We're going to have a soft landing. I remember it. That's when I first met Rosie. So a long time ago. And he was right. And David's not a bear either because I remember being really - That's what he pushes back on that. I was really angry with him in like 2010, 9, 10, when he was bullish. I'm like, how can he be bullish? It's like this, you get stuck because you're so anchored to what's just happened, right? And you kind of think it's - The recency bias. Yeah, it's the recency bias. And you kind of think it's, you're so, you've got PTSD.

21:56And I remember him turning bullish thinking, what? What the fuck are you talking about? How can you be bullish? And he was dead right. Yeah. Because he's following the models, I tell him. He's not always right. But these kind of calls, he's pretty much always been right when I've seen it. Yeah. Well, and he did say, as many have, the timing and the bond call has been tough. And he was wrong. He was early on bonds. Yeah, early and wrong. But you both have a long-term perspective. And so when I asked him about that in the content campaign, and that's with Lizanne, if you want to check it out, he said, listen, in the end, getting it right is what matters.

22:31So, yes, my timing was off. By the way, he's not a trader. He's an economist. My timing was slightly off. But if it's the right call, it doesn't matter. That's what counts in the end. And so if you're short term, that's tough. But if you have a longer time, he'd rather be right in early than wrong. Yeah, I mean, I was. You bailed out of your. I bailed out in the end because, you know, yes, I have a long term view. But it's like this wasn't the hill I wanted to die on. Yeah. I think there were better trades to be done. So I'm like, OK, look, let's just. Yeah, because you tie up your capital losing trade.

23:01Yeah. We have some questions. We still have this funny thing happening with the migration with the new platform where they're coming in as a sequence of numbers. So my apologies for not mentioning your name. But, Raoul, are hedge funds dumping non-profitable tech stocks? It looks brutal out there. Yeah, I think they will flip and change, right? So if they see the truth, you know, a lot of the hedge funds are relatively short term. So they've made some money by, you know, running some of those stocks. They'll try and flip out. You know, if commodities are moving, they'll try and get some exposure there.

23:34I mean, that's their job to do. And don't forget, technology went up a long way. It exceeded the Fed net liquidity. It had really had a good run. So for it to correct, I think, is normal. This time of year is also a very normal time for it to correct. It had a monster run. It was the biggest ever run of the NASDAQ in history, I think. And there were lots of people that were on the sidelines for it. We've had people in the content campaign saying, I missed that. I was not in that. Nobody was in. The only people who were in were 401ks. It was just people in 401ks. And there was a bit of, you know, if you look at the activity in Robinhood, where traditionally people tend to be technology investors, call options, yet some of the retail guys nailed it.

24:20Almost the entire hedge fund business and the entire institutional business had PTSD and they didn't want to touch it. Hey, everyone. We're going to take another quick break and hear a word from our partners, and then we'll be right back.