Equities Are Back, Baby...! ft. Andreas Steno

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1:53Hey, everyone. As you know, on this podcast, I bring the best guests in the world at that nexus of understanding of macro crypto and the exponential age of technology. If you're enjoying the show, a quick five star rating goes a long way. It helps us grow and keep these conversations coming with the best guests in the world. Thanks a lot.

2:30Hi, I'm Ralph Powell, and welcome to my show, The Journeyman. The Journeyman, as you know by now, and I repeat the same words every single show, is my journey to that nexus of understanding between macro crypto and the exponential age of technology. Now, at Real Vision, we have a phenomenal stable of incredible talent, and particularly in the pro tier where there's myself and Julian Battelle alongside Andreas and Mikkel from Steno Research who are incredible and Jamie Cootes and periodically I like to bring them on to my show so we can exchange ideas because we don't always get a chance to exchange our ideas even though we're all within this Real Vision pro tier.

3:14Andreas is you know one of my favorite business cycle people and Mikkel with his geopolitical analysis, it's really valuable. Sometimes it's different to my views. Often it complements because we use business cycle analysis. And so it's great to sit down with Andreas. Andreas gets, unlike many macro people, he gets technology, he gets crypto, he gets the move to single stocks, but he also understands what drives dollar yen, all of this stuff. And so it's always a rewarding conversation. So you get to peek behind the curtain of Real Vision Pro by listening to myself and Andreas Steno chatting, shooting the shit about macro.

3:52Enjoy. 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.

4:11Andreas, good to see you, my friend. likewise so you've been crushing it this year in real vision pro what the fuck are you up to what's going on what's working why is it working um you know i think the combination of a business cycle framework a liquidity framework and a policy department looking into all of these political cases gaining traction at the moment i think that's what's been working for us you know So this interlink between an economy that is to a larger extent driven by policy decisions and a framework that allowed us to turn upbeat in the aftermath of the Liberation Day panic is basically what made us ace this cycle so far.

4:57I think we're up 70 % without any major drawdowns this year. Not that I necessarily try to avoid these drawdowns, but we've managed somehow. So I'm pretty satisfied. Right. And so talk to me about business cycle first. Because you and I were just talking off camera about this weird perception that we're going into a recession and that we're late cycle. Talk me through how are you seeing it all right now? Well, I guess if you look at labor market indicators, such as the ADP report this month, various other labor market indicators, they obviously look bad. The ISM index looks lukewarm at best. We're kind of sideways around 50-ish, right?

5:48And nothing is really happening. But if you look at the Standard & Poor's version of the PMI, we're actually at plus minus 55. So pretty decent uptick in the cycle. So that's the first conclusion I'd like to reiterate. Basically, we've told our pro members this over and over, that the standard and poor PMI is much better at predicting the actual cycle and the actual activity one or two quarters later. Why is that? Because it's a newer index, so it's harder to have that long-term track record. But why is it better? I've looked at the differences in, first of all, the questionnaire, but also the sample of the two surveys.

6:26And if you look at the questionnaire from the Standard & Poor's PMI versus the ISM PMI, it is much more focused on domestic trends and not as focused on cross-border trends. So when you look at the questionnaire from the Institute of Supply Management, they're very focused on, okay, how's the cross-border order book looking? How are operations running in all of your countries, et cetera, while the standard and poor PMIs is very narrowed down to the domestic picture. I think that's a big difference given everything we've seen on tariffs, et cetera, this year. When you look at the sample size, it's much bigger in the standard and poor PMI as well.

7:06So they capture more of the, say, the SME segment and less of the blue chip old industrial base. So I think those are two key reasons. When you look at it empirically, over the past handful of years, the standard of PUS PMI is roughly two times better predicting actual services and manufacturing production one quarter later. It's much better. No one cares about it, which is interesting, right? You've covered hedge funds both on the sell side. You've also been in hedge funds on the buy side, right, Raul? I know this from my journey on the sell side as well. all major PMs, especially in equity space, they look at ISM.

7:47That's all they look at. They don't really care a lot about macro. So that's kind of their bellwether. They think it's forward looking. It's not really anymore. So I think you have a huge advantage versus your institutional peers just by creating some simple forward looking indicators for this metric and they all look fairly good right now so speaking of the cycle um i i think first of all it's it's it's been tempting quite a few times over the past 24 months to to turn negative um because you've seen a couple of employment scares you've seen the tariff sentiment scare and all of that and by the end of the day when you look at it nothing has really materialized.

8:39And I think, for starters, it's relevant to look at the credit creation slash money creation in the economy to explain why. Because it's actually true that the industrial base has been, you know, sort of wadley for a couple of years running. It is true to a large extent. Just a couple of observations is that there is a CapEx cycle going on that's raising GDP and government spending. but domestic ordinary businesses in the u.s are struggling because rates have been high and so you've got this bifurcation the domestic versus the internationals kind of thing as you said um and that's caught a lot of people off sides is just misunderstanding that whole process when in fact liquidity explains what nine between 97 between 90 and 97 percent of pretty much everything you have one macro factor i've i've always said that it's the greatest and easiest macro risk-taking environment of all time because you have one macro variable that matters nothing else really counts yeah but i think um to add a bit of spice to that mix what happened roughly two years ago as well was that the credit creation moved from the central bank balance sheet to the broader economy yeah uh and and a lot of people completely missed that because if you look at the fed balance sheet it's it's basically flatlining right um we know the reason why we have quantitative tightening running in the background then you have a couple of countering factors but the balance sheet is flat and um basically net liquidity measures yeah yes exactly uh and And therefore, the money created since 2023, all of that credit creation has happened in the private sector and in the treasury deficit, basically.

10:30So, of course, if you run a huge deficit and private banks create money by lending out to households, corporates, you're going to see an explosion in liquidity just from another source. So essentially three agents in an economy can create a dollar. The Federal Reserve can create a dollar. That's what we've been used to being the key driver. The US Treasury can create a dollar by running a deficit. And a commercial bank can create a dollar by lending out and increasing their leverage. And it's only two out of three agents that have added liquidity for the past couple of years. And the Fed is not one of those two.

11:10And I think that has caught a lot of people offside. We looked at this and wrote a lot about it in GMI. and Real Vision Pro is it seems that they're trying to move the game when people understand what the game is. So at first, it was the balance sheet from 2008 until 2012, 13, 14. Then it became FedNet liquidity, which is all of those measures. And now they've gone to total liquidity, which is really right now being entirely driven by the private sector. But it's still liquidity. And I love the way you put it. There's three ways you can create a dollar. You need to keep your eye on all three ways.

11:44And there's also a certain amount of liquidity that comes from issuing short-end bills as opposed to long-end. It seems like that's a liquidity provider. Yeah, indeed. And at first, the current administration tried to at least rhetorically lament the bill issuance of the Janet Yellen treasury, but they ended up doing the exact same thing, right? So they've utilized that as a liquidity instrument without any doubt. And we've, by the way, also seen that in global yield curves. And I actually think this is an overlooked mechanism. If you look at Japan and Europe right now, we're also seeing a large credit creation in those economies without the central banks really.

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13:17That's s-q-u-a-r-e dot com slash g-o slash r-e-a-l-b-i-s-i-o-n. Yeah, helping that trend, actually. And interestingly, if you look at the Japanese case, we've seen this massive steepening of the Japanese yield curve where long-term bond yields have been allowed to rise for the first time in a long, long while. And while it seems counterintuitive on the surface that when Bank of Japan has basically pulled back from intervening against long-term bond yields going up, it has ultimately released the animal spirits of the Japanese commercial banking system again, because they were stuck in one or two decades of no carry.

14:04So they basically have a business one where they borrow short and lend out longer out the curve. And when the curve is flat as a pancake, they can't really make any money doing that. So they don't lend out. And as soon as this shift happened very aggressively, they started lending out in a way that we haven't seen a very long while. It's always been my impression that the global central banks completely understand what they're doing. Japan is always the leader in this because its population is older, I guess. And there's signal in what they're doing, which is saying they've all seemed to have gone away from using traditional methods to just going straight to the private sector and using the banking system.

14:51And Japan is doing the same thing by readjusting its yield curve. Yeah, it is. And at the same time, we're obviously seeing this global trend towards removing red tape, removing capital restrictions, et cetera, for private banks, again, incentivizing them to do the heavy lifting on this liquidity creation. And I think that's essentially what a lot of people have missed over the past couple of years, that we've seen a move from central banks doing the heavy lifting themselves to instead incentivizing the private system to do it instead. Why did they do it? At least my initial thesis was that, you know, they were scared in the aftermath of that inflation spike in 2022 into asking someone else to do the dirty job.

15:39They can't be hung for it. So it's like, well, we're not doing it. therefore they've incentivized the private system to do it instead and i think that makes as for as long as we're running inflation above their target range that's probably how they're going to to maneuver this oh so their messaging looks consistent it's like we're not adding liquidity because we understand inflation meanwhile they're like hey you guys over there buy as many of these bonds as possible and create more credit on the back of it yes exactly uh so ultimately i think it's a result of what happened in late 21 early 22 with that inflation spike um and they're not willing to once again take the blame for inflation running a little bit above target as we are right now so they're they're asking uh the private system to do it and that just tells you they know what they're doing yeah everybody calls the fed idiots but i'm i've always figured that if you actually take the framework of they know what they're doing, look at it through their eyes, it's much clearer.

16:46Yeah. You know, I don't get the chance to sit down with Fed members that often, but I've had the chance to sit down with a lot of members of central banks in Europe, and they know what they're doing. But of course, when you address the public, you have to do it in official ease, right? So they'll never admit to it, straightforward as we're chatting about it here but they know what's going on of course and of course they do also track these you know private liquidity mechanisms very closely and their staff is on top of what's going on in the private banking system and the commercial banking system no doubt about it i never forget my best ever central bank meeting was with the swiss national bank and it was when i was still at glg back in the day and we were talking about deflation and the issues we're facing and they're like the best thing about being the Swiss is like, we know what's going on.

17:37We're behind every closed door in every meeting. We're too small to matter. So we can do anything we want. And then if you take that bit of information, and it took me a long time to understand this, a long time, is everyone's like, what the fuck are the Swiss National Bank buying equities for? Particularly tech equities. When everybody else is doing different stuff with their reserves, but they're buying tech equity when they were printing money. And what they were doing was counteracting the debatement of currency, doing the trade that we're all doing now well before we even understood it. They understood it straight off and bought equity, and nobody understood what they were doing, but they've done brilliantly, and it's kept the Swiss franc quite strong because of it.

18:20But, Raoul, I actually had an interesting observation this week. You know the guy, Mohammed El-Erian, very non-economist, right? So he tweeted on X that, I think it was J.B. Morgan and another big investment bank in the U.S., now label the gold and Bitcoin trade, the debasement trade. I saw that. It took them, I don't know, two or three years to get there. But it's actually quite interesting because that probably leads us to the part of the cycle where, you know, the broad participation will gain speed. We'll see advisors, you know, slowly but surely sending money in that direction, etc. So I think it's a really, really interesting juncture when these banks start to admit to the trade.

19:06I wrote about this on X recently. I'm like, it's amazing because I went and searched via Grok or whatever to go and find any use of the word debasement by any media. There was none. And what's also incredible about the whole debasement trade, it was a bunch of fucking crypto people who figured it out well before everybody else. The gold people have kind of got confused with inflation because they were very stuck in the 70s idea. And it's the crypto people who figured this all out before everybody else. And finally, people are starting to realize that this is the thing. And so I think, as you say, it's still early because I still have to explain it to everybody.

19:47And by the time we even get to next cycle, I think it becomes the all in. Everybody knows what the game is. Yeah, I think you're right. And, you know, we started out by discussing the business cycle and where we are in the business cycle. If you look at the best forward-looking evidence for labor, for example, temporary hiring. Of course, you do not hire people permanently when you think the outlook is slightly muddy still, which is, you know, for sure still the base case at sea level. but we're starting to see you know a mild acceleration in the temporary hiring while we don't see the hiring elsewhere and that's the first clue of every acceleration of the hiring cycle so i think in a couple of quarters from now we'll probably start talking about scarcity in various sectors again and from an employment perspective also given what's going on with the labor force right so my biggest bet actually right now is that the capex cycle that we see in data centers, AI, et cetera, will spill over to a massive CapEx cycle in automation.

20:55And those two themes are obviously interlinked. The kind of robotics idea that everybody gets efficient in manufacturing. Exactly. So look at it this way. If you see a decline in the foreign-born labor forces we do right now, and you send a lot of low-skilled workers home. If you're a farmer, if you're a warehouser, if you're in logistics, et cetera, you simply need to spend now to be on top of this. And, you know, ultimately, you're more into this than me. I don't think it's out of this world to think about, you know, a humanoid robot controlled via AR in India. So you can still hire, but not in the US.

21:37And I guess that's kind of what the administration is trying to incentivize early here. So I think it was really, really interesting when I did a study. And typically I hate looking, you know, five, 10 decades back for comparisons because nothing is kind of like that anymore. But I had a look at the last time we had tariffs implemented in size. And what happened in the aftermath of that was actually a huge CapEx cycle because by implementing - This was the 50s. 50s and then you had um an implementation of terrorists just um around the 1890s as well so you know you have a couple of empirical studies and both led to capex because you simply force the local manufacturers to do capex even though they don't want to uh especially if you shrink the labor force at the same time and um you know we can discuss the morals of everything that's going on i don't really care about that when we talk about investments right um and i i think it's crystal clear that you're forcing the domestic manufacturers in the US into a capex cycle now.

22:42And that is certainly not a theme that a lot of people subscribe to. And also, while everybody fears AI and robots taking our jobs, the actual problem is there's not enough workers because of the aging populations. So if you look five years ahead, you've got a big fucking problem on your hands because the labor participation rate collapses over time because you can tell it by births deaths leads it and so you're gonna have to fill in that gap and it's gonna take time i think but you have to fill in that gap with robots and ai there's no way of doing it or the economy grinds to a halt yeah um it's as simple as that and you basically you know you bring that date forward when you shrink the labor force via migration policies on top of it.

23:27That's right. You force it to happen. Yes. And I think the administration is fully aware of this, and I think it's part of the plan. Yeah, I agree. And you hear the administration. It's really interesting to hear this administration because, A, they've talked about, even Trump was out yesterday, he's like, we need to grow our way out of the debt. Elon, when he was around the administration, was like, yes, it's the robots and the AI. It's the only answer. Meanwhile, Scott Besson is basically talking about keeping the dollar weak, getting rates as low as possible. And he's openly talking about refinancing the debt, which is the whole debasement trade.

24:04And they're openly talking about what they're doing now. It's in plain sight. Yeah. And, you know, even the presidential family is involved in the trade, right? So, I mean, it seems like it's a good idea to listen here. Let me put it like that. Yeah. And that's why, you know, I write frequently in GMI. It's is the greatest macro risk-taking opportunity of all time because we now know the game it's clear and they're telling us it's the game and that drives your asset allocation decisions so clearly it makes it super interesting now i just want to run through with you uh a bit more about the japan thing because there's a lot of you know fear-mongering again japanese rates the whole world's going to blow up so does it matter the japanese rates are going up apart from the fact this creating credit in japan um you know by the end of the day uh the japanese yield curve is a global bellwether uh due to the fact that japanese life and pension funds are big investors in in in global bond markets but i don't necessarily think it's a biggie uh given that uh the japanese life japanese life and pension funds are first of all big enough to buy more than local bonds secondly they have to buy global stuff due to investment policies it's not like they can buy just local stuff uh it wouldn't be allowed in any um european pension fund either you obviously have to diversify due to a lot of political reasons um but sure i mean it it will spill over uh to to the shape of the u-curve not least elsewhere uh and that's the important word here So a global steepening continues.

25:50Yeah, it does. But you ultimately need to remember that not a lot of issuance is going on in the 30 to 50 year space. I mean, it's more of a, you know, it's what you have on the screens more than something that matters in practice, right? And we've seen this global trend of moving inwards as a consequence of this, right? The US Treasury has done it very openly, by the way. and we've seen it elsewhere. So I think the only place where it matters a little bit is in the mortgage space, obviously due to the link to the 30-year treasury yield. And we've seen some issues around what I typically label the golden handcuffs syndrome in the US due to long-end yields moving as much as they've done, incentivizing people to stay where they are.

26:42So the lack of movement is something that could potentially be an issue in the US. Because people can't sell the house and refinance because the new mortgage comes at higher interest rates and they're locked in at low rates. Yeah, and I honestly think it's one of the reasons why we've seen the remote trend being much more pronounced in the US than elsewhere. It's this golden handcuff syndrome leading people to just seek remote work instead of moving. Super interesting. Now, before we get onto the US rates, give us the view on Europe. Because Europe, what's going on with the French spreads? What's happening?

27:22There seems to be some dislocations starting to play out in Europe. How do you see that? France feels a bit like the Italian case to me just a handful of years back, right? They have an election every year. They end up in sort of a lame duck situation every time they hold an election because the center of the political space keeps blocking both the right and left wing from coming into power, meaning that nothing happens in France. And I know you like stating that nothing happens, but that's really the case in France. Nothing happens outside of a, you know, they basically roll forward the budget every year and they cannot really agree on anything reform-minded.

28:05So that's why investors are getting tired of France. You can also see France disappointing in equity space versus all of their peers in Europe, whether it's Spain, Italy, Germany they're running behind in any measurable way so of course that's kind of annoying me being here trying to at least pitch the European case from time to time but I don't think there's a lot of good to say about it you have a couple of niches that are interesting in Europe first of all defense I still think that's an interesting trait you nailed that really early before it was on anybody's screen you were like well if you listen to what's going on geopolitically they're going to have to ramp up defense spending yes and especially um a lot of people missed the train when trump told europe to do it they thought he was he was bluffing again and he wasn't i mean uh look at the results uh coming out of the nato summit was it in june or july you know every single member country i think outside of spain uh signed this uh new treaty to to bring us to four percent uh of ggp per year in in military spending plus uh a couple of add-ons that's a lot and it's a big step forward for nato compared to uh yeah just a handful of years ago where you know biden struggled to convince everybody to to meet the 2 % target.

29:28So I think this is a sector that will see a lot of demand over the next three to four years. And lately, it's been pretty interesting to follow developments, the developments both in Denmark and in Germany and Poland, in all of the countries surrounding where I live. We've seen probably Russian drones flying over the airport here in Copenhagen. We saw it over Munich yesterday. Really? Yes. I didn't see this story. And, you know, Munich's airport was closed for a couple of hours yesterday because of, you know, hostile drones in the airspace just above. And the interesting thing was that the Danish administration went on air, you know, live television.

30:18The world was watching as a consequence of this drone flying over the Copenhagen airport, stating that, well, To be honest, we don't have any way to detect this outside of watching it with binoculars, and we don't know how to shoot it down. So I think especially on, you know, the war from home story is incredibly undersubscribed from an investment perspective because you simply need to be able to defend yourself against, you know, smaller units and things that are remote controlled from wherever in Russia. I think that's a big, big trend. And we've nailed a couple of single names there. And, you know, returns are absolutely through the roof.

30:59I just lament that I didn't buy more, but that's always how it is when you have a good trade. You're never satisfied. At least I'm never satisfied. No, no. I could have done better, right? So a quick break in your regular programming. If you're serious about your future, grab my free report called Prepare for 2030. I think you've got five years to make as much money as possible. And this guide will help you navigate what's coming. The link is in the description. Download it now. And what about European rates and European liquidity? The two things that really matter in the global equation. Where's that trend going?

31:35Yeah, so if you look at the narrow liquidity picture in Europe, it's incredibly tight. It's even tighter than it is in the dollar market. You've seen that in various spreads that you refer to both French government bonds versus the swap curve. So, you know, a measure of the interbank liquidity, essentially. And that liquidity is still incredibly tight. So it's mostly an issue for sovereign markets, sovereign bonds, right? While the broader liquidity landscape is actually fine, since private banks, commercial banks have also increased their balance sheets amidst this. We're seeing the first signs during my adulthood of the European Commission looking into rolling back red tape for European banks.