#1021 - Should You Steer Clear of Autos? | With Kevin Muir

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1:12should you steer clear of autos hi everyone welcome to the real vision daily briefing i'm maggie lake with me today is kevin muir author of the macro tourist newsletter hey there kevin great to have you here today well thanks for having me on i've been looking forward to this that that's just the best name for any newsletter i absolutely love it um and before we jump into the specifics. Talk about what you're seeing on the macro, the broad macro spectrum. What, what are you in a camp? You know, what, what is the sort of framework that you're operating from? Well, I guess if you had to put me in the camp, I've been in the economy is going to be stronger than everyone expects camp.

1:49And ultimately it comes down to my belief that from 1982, all the way to COVID, we in essence, tried to influence the economy solely through monetary means. And then when COVID came, we all of a sudden introduced fiscal stimulus and fiscal stimulus ends up being way stronger than people expect. I think that's part of the reason that everyone's continually being surprised that the economy hasn't rolled over is because they underestimate the power of fiscal. And I continue to believe that as long as we have fiscal stimulus, as long as we have things like the IRA, as long as we have two presidents that are talking about how much they're going to spend instead of trying to balance the budget, I think we're going to have an economy that ends up being stronger.

2:28So count me in the kind of inflation and the economy is going to be stronger, Cam. Yeah, it's so interesting because that was really so many people got that wrong, I think, and have been surprised at the strength. And even if they were wrong initially, I thought, OK, well, the timing's just off, but we keep pushing it out and pushing it out. I want to at the very top run a clip from Josh Young, who just came on and talked to Damian Horner, one of our co-founders, for a show we do called Three Ideas. And it talks about his three favorite trades at the moment. But he also was talking about he's coming from a very similar place as you are, I think, in terms of looking at the strength of this economy.

3:10Let's listen to a clip of that. I think we're in very complicated and challenging times. I think we'd be in a deep recession if there wasn't such extreme fiscal stimulus and deficit spending going on in the US, as well as in various other countries around the world. I think there's a lot of complexity and concern around what's happening in China. And I think we might actually be seeing a little bit of a slowdown right now in India, despite some of the rosy economic figures that people are looking at and rosy projections. And so I think we're in sort of challenging times. That being said, I think it's really important to remember that in the long run, stocks do very well.

3:53So it makes sense, I think, to try to not, you know, to try to be like Peter Lynch and not get out of the market, out of a concern of a recession. And you can see his three ideas, Josh's three ideas on the platform that shows dropped. Just head over if you are on YouTube and you are not a member, subscribe so that you can get it. And that's the show we track what they say and see who is performing the best. Some really good ideas in there too. So, you know, I think what's so interesting about that, Kevin, is that he's talking about these extraordinary forces, but also saying it's not that easy, right?

4:34It's been a little bit complex. It's not like, yes, there's fiscal spending, we're off to the races. And everyone jumps on that narrative. Some of you have been contrarian on that for a while because we've seen weakness here or there. And today's ISM numbers are a perfect example, right? They came in a little bit weaker. So then people were thinking, oh, okay, maybe the Fed's back on the table. You saw that in stocks. Interestingly, treasury yields did dip, but then it kind of came back up again. So maybe not buying that right away. But it has been there. You can find a piece of data to support whatever your view is.

5:10And it's made it tough for people. Oh, for sure. And one of the things that you can also see is that the divergence between soft and hard data, soft beating things that like our surveys, people's expectations, that's continually being, you know, much weaker than everyone expected. And yet the hard data has continued to like be firm and actually surprise to the upside. Same with inflation. And one of the things I remember Mike Wilson, that legendary strategist saying that the soft, the hard data always follows the soft. And that's part of the reason that he was so bearish and expecting the market to come in.

5:45And yet this time it hasn't. And I think that one of the mistakes that a lot of people are making is they keep assuming that this cycle is like the last cycles of the past 40, 50 years. And I really contend that given the fact that fiscal is now the dominant force, it is affecting the economy. And I might even argue that the Federal Reserve is not able to control the economy as much as they think they can with interest rates and that rises don't have the kind of typical effect that they do, that really they're not able to steer the ship as much as they think they are. And really, we should be watching for fiscal instead of monetary.

6:25Yeah. And this is a big change, right? It was all about monetary before, but now you have Congress that's spending and spending. And there's a spending bill in front of Congress right now that they've extended their session. And it looks like, you know, the big headlines have been aid. But I heard someone talking about it, telling you, when you dig in there, a lot of it's defense spending that's going to be domestic. Right. You know, it will result in aid and arms going abroad, but it is domestic. So we will stimulate the U.S. economy. That was their pitch to try to get senators to pass it. But put on the conversation we're having, it's yet more stimulus after we've already seen a lot of stimulus.

7:05And the other problem, Maggie, is that we have things like the IRA, Inflation Reduction Act, which is just an oxymoron. It's anything but inflation reducing. But it's difficult to judge how much has actually gone out into the economy. You see those things where they talk about, oh, the fiscal stimulus, it's getting whittled down. This is the month that it's finally going to kick in and that we're going to have the fiscal stimulus will be gone. The trouble is when you look at the IRA, it's actually money that's been allocated to states. And you know how difficult it is to actually for the government to spend money, all the bureaucracy, see the red tape.

7:41So when you think about it, we actually could have tons of money sitting at the state level that still has not gone out. And this is the problem with fiscal stimulus. It is very hard to track and to get a feel for how much is actually still waiting to be spent. Yeah. Which, you know, we often talk about this because we talk about inflation as being so bad. And John is asking what's the outlook for U.S. inflation in the next 12 months. That sort of stimulus that takes a long time to go through the pipe that's uneven could potentially just provide a floor for growth. But the problem is we've had so much of it.

8:21So we don't know how to calibrate that. And then we've been getting these nasty surprises. By the way, I'm assuming neither does the Fed, right? Because you can't game out when your local neighbor, I mean, I'm getting all new sidewalks. That was probably from five years ago. Who knows? You're absolutely right. And it's needed. Improving infrastructure is needed. Anybody who saw the Baltimore Bridge disaster knows that. But in terms of economic modeling, it's tricky. A hundred percent. And the reality is that you can just look at it and say, I expect the surprises to be to the upside. I don't know the specific times.

8:57I can't tell you if this is the one, if we're going to come in. But over time, when you look at this, you can say, given the fiscal spending, given the continued fiscal spending, we're going to see more and more surprises to the upside in terms of inflation. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Today's Real Vision Daily Briefing is brought to you by Chintai, your partner in asset tokenization. Licensed and regulated by Singapore's Monetary Authority and powered by the innovative Chex token, Chintai offers a compliant, one-stop solution for bringing real-world assets on-chain.

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11:28Yeah, so that's a good answer, John, because it's more nuanced. It's not like, oh, inflation is going to, you know, be at XX percent. It's not going to be a straight line maybe, but it's just the trend is higher. Also means the trend's higher than the Fed's potentially comfortable with, right, Kevin? I think even more important than the trend is the direction of the surprises. If you can figure out the direction of the surprises, you've gone a long way in terms of figuring out how to position your portfolio. So Nick is asking, can you comment? I'm going to go with questions right away. You guys are on it.

11:58They're good. Can you comment on the VIX and TLT? We just saw a massive drop in the VIX today. And yet when the VIX spiked last week, TLT didn't really respond the way flight to safety trade normally does. Okay. That's a great point. Over the last 40, 50 years, we had this negative correlation between stocks and bonds. It ended up being the rise, gave rise to one of the richest hedge fund managers in the world, Ray Dalio Risk Parity. And it was a great way to construct a portfolio in terms of You would go, you'd buy the risky asset, you would lever up the risk-free asset. And then when things went wrong with the risky asset, often the risk-free asset would go up in price.

12:40So therefore, the volatility of your portfolio would be lower. It's been terrific. I've been arguing for a while to be careful about bonds. And this is even, you know, basically pre-COVID I've been saying this, that bonds might eventually, instead of being the ballast to your portfolio, could eventually be the anchor that drags it down. And that's exactly what we saw in 2021 and 2022 in that bonds, because of this inflation, because of this bad return, actually dragged it down. And so the negative correlation between stocks and bonds actually flipped and became a positive correlation. They went together.

13:13So one of the things I think is actually one of the largest challenges to regular investors out there, not just regular investors, actually pension funds endowments, is this disappearance of the negative correlation between stocks and bonds. No longer can you do that. And if you think about it through, you go through the logic, one of the kind of consequences of that is means you actually have to use less leverage because now you can no longer count on that risk-free asset providing a buffer. And in fact, it might drag your portfolio down. So when the readers or listeners asking the question about VIX and TLT, I've long given up on VIX, sorry, of TLT as being a buffer for my portfolio and expect that to save it if we get into a situation where it's risk off.

14:00I, in fact, the thing I'm most worried about is bonds continuing to sell off and it dragging the stock market down. Like when I think about the risk going forward, if the economy rolls over and inflation comes in, actually, to me, that's not a bad outcome. What's going to happen is the Fed's going to lower rates. Everything's going to get a bid. It's actually going to be OK. What's more worrisome, what's more scary, what's more difficult to actually construct a portfolio for is what if inflation continues to surprise to the upside? What if the stock or the economy keeps being stronger than everyone expects?

14:34And then that ends up being a much more difficult situation. Yeah, absolutely. And we've seen that, right? We've seen that everyone, somebody commented, everyone's got to be a rate, got to have their eye on rates, right? I mean, there is a time when people just looked at equity, especially if you're looking at home, you're worried about your 401. You have to know what's happening with rates now because it has been the rug that's been pulled out a few times now and caused a big down trend for stocks. I want to put a pin in that. Somebody remind me if I don't come back to it, because I want to ask you what you do like in terms of portfolio construction to help.

15:07But I want to ask you one more thing about this idea of bonds and the impact on the economy. When people have been thinking about what's happening, is it weak? Is it strong? I think the other thing that's thrown people is that we see pullbacks in certain areas. And I would say amongst certain people, we know inflation has hit people hard at the lower end. We just don't know if anyone noticed in the US, depending on where you are, but gas just spiked, gasoline prices. We know that acts as an immediate tax, especially for folks on the lower to mid range of the economy. And yet you have the people who own assets have done really well.

15:46How are you thinking about that and the way that the bond market plays into it? Because if you borrow money, you've been hurt by bonds. But if you don't, then it doesn't seem like it has had the impact that the Fed maybe would have hoped by slowing things down. You're absolutely right. And it is a very difficult thing for the Fed to actually stick handle through. And it ultimately comes down to the idea that, you know, there's two ways to create money. One is a bank lends it into existence. That's where you and I go to the bank. We borrow to buy a car, to buy a house. We lend that into existence.

16:20The other way that you can create money and actually is through the government spending it into existence, meaning you do deficit spending. And what's happened recently is that as the Federal Reserve has raised rates, it has affected the economy. The private sector has lent less. So there's no doubt about it, but it's not affecting the economy as much as everyone hoped, or at least as much as the Federal Reserve hoped. And the reason it's not doing that is because a lot of people went in and got mortgages and locked it in. You guys in America have 30-year mortgages. One of the most wonderful things around because now all of a sudden everyone locked in their mortgages.

16:57And so when the Fed raised rates, the economy wasn't as sensitive to it. But on the other side, Maggie, what's occurred is that as the Fed's raised rates, it's increased the cost of the existing debt of the Treasury, meaning the government. And when they increase that, what you need to remember is that the government's deficit is the private sector's credit. Everyone always thinks the government spends, the money's gone. It's not really gone. It's actually somebody's credit. And that's part of the reason the US economy has done so well, because they've run, you guys ran 24 % debt deficits to GDP post-COVID.

17:36The next closest economy was Australia at 18. We ran 16. So that's part of the reason your economy has done so well. And so what's happened is as rates have gone up, it has actually increased the deficit. So right now you're running five to 6 % deficit, even though you have unemployment at three and a half percent. And as that deficit has gone up, we just said that the government's deficit is the private sector's credit. So to your point that yes, the rich people are becoming richer because they're the ones that own those bonds and they're that the private sector is earning it. So it is a quandary.

18:12And one of the, one of the conclusions you might say is that the federal reserve can't affect economy as much as they think they can affect it. And ultimately, with trying to deal with this problem of inflation, either we should be taxing less, more, or spending less. And that is the true way that you can actually slow down the economy. Which will be so popular to talk about in Washington during an election year. Right. And that's ultimately why I'm a big inflation bull, because I don't think it's going to happen. Even absent an election year, I don't think it's occurring. I think that we as a society, and it's not just you guys, it's everyone, the world over.

18:47It used to be people would go and run and be worried about when they were running for office, they would be worried and talking about how they're going to balance budgets. You don't hear anything about that anymore. No, and this is a huge shift. And many, many of you folks who are really smart and watching this and really thinking about the future are talking about this and the perils of this. We have a question from Doug about gold because anytime we go down this road, we're going to talk about gold. But first, I do want to ask you about autos. We came in on that, and Tesla is out with earnings after the bell.

19:21I'm just going to read you guys some of the headlines in case you're driving or something and you're not behind. $0.45 versus$0.51 expectations. Revenue, 21 versus 22.15. Revenue dropped 9 % from a year earlier. I mean, I think a lot of us knew this. If you look at the stock, it's off 43%. So I think investors have been pricing this in. It's a little bit of a train wreck, Tesla. It's got a lot of stuff going on. But overall, you posted something recently. Now, GM was one of the winners today. It came out with earnings that beat expectations. You don't like autos. You posted, right? Are we correct in saying this?

20:00Sell your autos. Seriously, take them off your screen. Yeah, 100%. What is going on with you and autos? Why are you so bearish? It's already a difficult industry that suffers from overcapacity. And then what happened was that we went down this road of trying to move our existing fleet into electrical vehicles. And so governments the world over encouraged all sorts of more supply. And although you might say that most people either want an electric or they want a traditional one, an ICE car, the reality is a car is a car is a car. And we now all of a sudden have way more supply than we've ever had.

20:39you go back and you look at China, they have 91 separate electric vehicle makers. It's monstrous. Like the amount of extra supply that we've created has been absolutely huge. And so my point is, this industry was already a bad industry. It reminded me of the airline industry. Warren Buffett has this famous line. He says, if we really wanted to do something positive for capitalism, we'd go back and sabotage the Wright brothers. And when they took off, because the airlines have been such a complete waste of investors capital over the years, I suspect it's going to be the absolute same when it comes to autos.

21:17This is going to be a race to the bottom. Yes, you might have squiggles that, you know, for a month or two, it goes up. But at the end of the day, there's just way too much capacity. And it's one of the things you just don't overthink it. There's extra capacity. It reminds me a lot of the cannabis craze that we had here in Canada. when we all of a sudden legalized cannabis and all these stocks went to the moon and there was dispensaries everywhere. Absolutely, the supply response was huge and nobody made money. And I suspect that it'll be the same with autos. Over the long run, these companies are gonna struggle and it's gonna be something - They're almost utilities because cars are needed.

21:54Well, utilities make money. I think these things won't make money. It'll just be, there's just too much capacity and we need to go through a period where they go out of business. And the other thing is you can't get consolidation like you can in a traditional industry. Like BMW is not going to buy Toyota or Toyota is not going to buy BMW, whatever it is. You don't get that sort of thing. And then not only that, you have this China pushing in terms of the extra supply. They've gone from being like exporting zero cars and importing cars to being one of the largest car exporters in the world. And not only that, also, they've created their own new price segment.

22:32They're competing like BYD sells these$10 ,000 cars that my buddy Louie Gabb talks about. He says to the emerging markets, and now all of a sudden emerging market citizens can actually afford these cars. And going back to our inflation issue, if we do have a situation where you have a lot more cars being built or a lot less, that also means that the commodity prices are going to go up. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:05um that's it's it's really interesting something that we really need to think about because you know we all know that we're on a cycle we're going to continue to buy this but the idea that they're not even profitable and are getting you know we've got this whole new level of competition um and then some of these sort of legacy things that prevent innovation i guess and and a way for the industry to sort itself out i'd add on to you know these big companies that have these sort of national identities that are not likely to merge or get an international cross-border merger. We also, in the US, are kind of moving the other way.

23:39We just had a union vote succeed in Tennessee. We had that sort of segmented whole part of the Southeast that was not unionized carmakers. And now, will it ripple? We don't know, but that adds another dynamic to watch out for. Christopher's saying that although the numbers were bad for Tesla, they weren't as bad as maybe some were bracing for. So that whisper number, maybe, uh, for sure there's a little bit, it's the worst performing stock in the S and P 500. There was a lot of people. That's a, that's a really, that's a really big loss. Um, okay. So let's get to the idea. Uh, cause a couple of people have a question on this, uh, including, as I mentioned, Doug, uh, talk about golds because am I right in thinking if you do not find that bonds give you that uncorrelated protection or hedge, Is it commodities?

24:26Is that the answer that you found? Well, long term, I actually think that inflation break-evens are the most attractive asset to own. But that's a complicated discussion. And for the folks that are interested, inflation break-evens are you buy tips, and tips are a bond plus inflation protection, and you hedge out the bond portion because I suspect the bonds will do bad. So it's isolating only the inflation portion only. And that's my favorite long-term play, but let's talk about gold because gold is another way to do it. But I actually am bullish gold and have been bullish gold for a completely different reason.