#967 - What’s Really Going on With the U.S. Economy? | With Julien Bittel

25:40So that's good. Yeah. So, you know, this is, and this is the point. So the NASDAQ priced in an ISM of 37.7 in Q4 of last year. So that was like, I'm sorry, in Q4 of 2022. So that had firmly priced in a recession. The same time leads are picking up. At the same time, the quant framework is saying this is extreme, right? It would kind of all coming together. And that's what I said at the beginning as well, is we want to reduce as much uncertainty as we can before making an investment decision. And this process really helps with that. But then, so technology is priced in a sharp acceleration in ISM, but then look at things like small caps.

26:19And if I was to take a basket of financials or even look at banks, if you look at materials, energy stocks, the point here is that these things have priced in the current economy, but nothing forward-looking, if you see what I mean. And so this is the opportunity, I think, for this year. And then I occasionally run through the five pillars. This is something everyone has their own investment process, but everyone also has kind of the lens by which they view the investment world. And for me, I've always looked at that through macro, valuation, sentiment and positioning, earnings, and then liquidity.

26:58So then I'll go through something like that. So here we're looking at macro, still weak, but across below 10 % on the lower band here of this boundary tends to be a good buy, a strategic long opportunity for equity. So this is something we were looking at last year and still quite muted. And this is why I think growth can continue to pick up without causing inflation like people are scared of because growth is still weak. And growth drives inflation, not the other way around. And then valuations. So I'll talk about valuations. As I say, earnings. Just showing through a couple of charts and then I want to get to the tables.

27:40Position or sentiment positioning. So people are still net short. In fact, this is, as I say, this is my presentation from, you know, two weeks ago or so now. So positioning is actually even more short than it is here. Things like liquidity, right? So those are the kind of the pillars. And we'll revisit these every month to see where are we? What does it mean? And, you know, I'll do my best to, you know, as I say, keep us on the straight and narrow. That's so interesting. Julian, let me interrupt you for one second before you move on. So it's so interesting you're saying that, okay, this was two weeks ago, maybe I think you just said they're even more net short.

28:14So net short equities, US equities? Yeah, net short US equities. So people would maybe find that surprising because we have the S &P 500 at new records. It seems like everybody's bullish. Yeah. So what happened, interestingly, is, I mean, this net short position, as you can see, kind of in Q3 went, I mean, it was over the summer months, got really, really extreme on the downside. Then over the summer, like late summer, we had that kind of rollover in equities until Q4, and then it went totally bananas. And people started to cover their shorts as equities came lower. And then in Jan, they started going back to net short.

28:54Interesting. But to me, Maggie, this is just fuel for the fire, right? Equities can bull back. They're a little bit overbought. Sentiment, so this is AAII bulls versus bears, is a little bit extreme. And then the other thing, I don't have this chart here, but I did include it in the presentation. when you look at the percentage of stocks trading above the 50-day moving average, it went from like 10 % to 90 % in Q4. So everybody's talking about, you may have heard this speaking with somebody on the daily briefing, or as you say, on TikTok, Twitter, whatever the things we all follow. So people are like, there's no participation in the stock market.

29:33It's just being driven by MAG7 or whatever. And that was true up until Q4. And that was being driven by, of course, it's a macro spring profile. But in Q4, there are no more bad breath issues with the market. You know, once you get to like 90 % of stocks within the S &P 500 trading above the 50-day moving average, that tells you that participation is there. And that's my expectation for this year is that participation will broaden. So while last year was about tech and discretionary and home builders and crypto, those things can still do well. But like I showed you on that small cap chart, it's the same for banks, the same for many sectors of the economy.

30:13they're still not pricing in anything forward looking. So I think there's this opportunity for catch up, right? So broader participation. And then we get to these. So the MIT summary tables. And sorry, I skipped through one. So here you go. You know, here is spring, summer, fall, and winter. This is a 60 year, 50 to 60 year regression framework looking at asset class behavior, sector behavior, commodity. I'll go through, I've got all of them on this list here, during different periods of the economic cycle. So just at a very high level, what this will tell you is that during macro spring, you want to be long things like equities and credit, right?

30:54If we look at that kind of first tab, if we scroll down, then let's say, for example, the sectors, just look at the green arrows. What does it say to be long? Consumer discretionary, tech, semiconductors, and home builders. Those were all the assets that did well last year, right? And far up the supply chain, you start to see some inflationary pressures building. We think that inflation's not an issue for now, and we don't think that it will be soon. But we think that the market will start to front run the transition into summer this year. So then you look at it, and you're saying, OK, well, I need to scan these tables.

31:28What should do well? Well, equities, then commodities. And you can scan it. So the point here is that if the arrow is green, it means that that asset class, that sector, I'm going to go down here, we're at bonds, forex, that bond, that commodity tends to do well or that performance is statistically significant, right? If it's green, it means it's positively statistically significant. If it's red, it's negatively statistically significant, meaning that it underperforms. And yellow means it's not really, there isn't much of an outperformance or underperformance. It's just kind of sideways. So I'll just skip down one more time.

32:06So to crypto and styles. So again, it's just about looking at this. And this is updated every couple of months. As I say, it doesn't make sense to update it that often because I've done the 60 years of regression framework bar crypto, right? Crypto, we have less data, but basically within every single asset here, I've looked back as far as I can. data-wise. And so that's what this approach is about, is it's the tool, right? Updated on a monthly basis. Where are we? What are lead indicators saying? Is one season extreme or not? How long can we remain within this season? What are the things that should outperform?

32:49What is the market pricing? And then coupled with some charts, a theme that we might be looking at. And that's, like I said, it's really just a framework for understanding. And it really helped Raul and I last year. Yeah, so, so helpful. This is actually the first time I'm seeing it. And this is tremendous. This is the thing I always want to want to get my hands on is this sectors and how things fill when perform when they're in there. So let me ask you something now as we think about this and how this works in conjunction with everything else. So based on, and of course, you update them regularly so that there's a little lag in what we just showed.

33:28So maybe not absolutely on the forward leaning sort of what you're thinking, but you're kind of explaining how maybe industrials and small caps and the broadening out, all of those sectors haven't really priced in what's coming. They're not looking at the leading indicator. They're a little bit either in the now or backward looking and look like financials were in there. So one of the issues that came up last week is a lot of concern about the banking sector, regional banks in the U.S. We saw New York Community Bank, but that wasn't the only one. There was a Japanese name. We saw some commercial real estate issues at Deutsche AG, just having to adjust for losses they expect.

34:07And it just feels like people are nervous again about regional banks. So there was some noise on Twitter about that today as well. How do you use the framework and then a sort of more current event or worry that comes up? Like, how do you look at something like that and plug that into the framework here? Do you understand what I'm saying? Like, how does that - Totally, totally. So for me, it would be the way this worked, if I think back and I'll come to banks in a second in, what was it in Q1? Oh, right, we had FTX, right? The FTX blow up in Q1 of last year. And what I had written at the time in Global Macro Investor and using a very similar process to this is the market started to price in macro winter, right?

34:55And it was very clear that the market, but if we are convinced that we're transitioning into macro spring and that's the dominant season within the data, this is typically the environment and the opportunity to where you want to add to those positions, right? Now that requires, so for example, with banks right now, people have been worried about banks all of last year. And if you think about it - Yeah, sort of since SDB, right? So in Silicon Valley, although we'd be really worried about it, and then it would kind of go away. You're right. Then set up the facility, and then it kind of went away.

35:25But it's always in the backdrop. And now you have one name that responds and drops. And now every day someone's talking to me about it. Yeah. And if you look at that, I mean, I, again, had a lot of calls with clients last year around banks, banks, banks. And that was the major concern. But if you think about it, from the FTX low, banks were up 50 % on the year. it's not quite so again if you look at kre right so you take it from the low uh 50 they close the year up 50 now they're coming a bit lower right but that's very normal as i say in january the way that i use january is january is a difficult period to trade because the market can't quite it's got new data we're getting january data we came in with six rate cuts and priced and it's the market's a little bit confused so i always use january january kind of on the sidelines I mean, if you're not currently invested, what I would say is, you know, January's coming.

36:17I mean, January's over now, right? But February, so we're in this new month now. We've been through January. We have some visibility now on what's going on with the JAN data via the ISM report, right? Some of the employment data. We've heard the Fed speak, right? And basically what the Fed said was, look, inflate. I mean, data is already good enough to cut, right? But what we want to see is a little bit more on the inflation front. If you think about core PCE on a six-month annualized basis at 1.9%, that's a great print considering six months ago we were annualizing at 4.5%. We've made significant headway on the inflation front.

36:52And then the employment stuff, the payroll stuff is throwing people off. But again, we just kind of have to be patient there and see what kind of Fed brings us in terms of revision. And everything else that we're looking at, if you look at NFIB hiring plans, they came lower, still suggesting there's small upside risks to unemployment. So I think no matter how you look at it, whether it's financials, whether it's industrials, whether it's small caps like the Russell 2000 as an overall index, I think that these things are up. Because the way I view things is no matter what happens right now, all roads lead to more cowbell.

37:30and more cowbell meaning more liquidity because it's a presidential election year. It's the Bitcoin halving. There's a lot of positive catalysts here. And so what I would just circling back on your bank's comment, what I would typically do in this environment is, and banks aren't along in macro spring. They become along in macro summer, as you say, so more forward-looking. That's where I think we're transitioning. It's a little bit early, but the market will front run that. So you need to keep an eye on these charts now because currently banks, as you say, have come a bit lower, right? At any point they become oversold and we transition into this macro summer thing, which I think is going to happen soon.

38:08You know, it's the opportunity to add to these things. So yeah, that's, that's what I would say. Yeah. And important, you know, it's important to know that because if you look across the markets now, and we may be different, we're going to air this a little bit later because of the time difference we're recording it, but you know, you've got the Russell down 2%, right? So that But it's very much sort of looking at the moment and responding to the things that are coming out from the Fed. But markets always look ahead. So you want to be paying attention so that you're able to move. And you don't have to be the first one, right?

38:41You don't have to be here and be the first one. But you want to have an idea where we may be going and watch the charts, as you say, so you can maybe take the opportunity and get that nice move if that is something that you agree with. So that makes a lot of sense on the banks. So in terms of inflation, just roughly what you're looking at now, we hear a lot of people think that we're in the 1970s and that you will see inflation come back. And that means a 10-year could go back to 5%. We know people are split on this, but there are plenty of people who still have that as a narrative they're looking for.

39:22It sounds like you don't see that happening based on what you are looking at in your models. Yeah. I mean, it's not just the models, right? I mean, GMI, I mean, what comes into this? GMI, by the way, is the institutional research business that Raoul and Julian provide for their basically professional clients. Yeah. And so thanks, Maggie. And so we're bringing a portion of that to Real Vision with this MIT tool. And what I'll say is, you know, in relation to inflation, the work that we've done is, and you'll see that, you've seen that chart, right? The three waves of inflation during the 1970s that basically everyone's shown now.

40:01We have a different view. We think that this looks a lot, COVID, I mean, which was the, which was basically what generated this inflation, looks a lot. So the current bout of inflation looks a lot more similar to kind of the mid-1940s, where post-World War II, you had a big supply and demand shock. That sent inflation sharply higher. Then in 1947, it peaked. And kind of two years later, by like 1949, it went negative. And then it went higher again. So Raoul and I have the expectation that inflation will come back late in 2024, 2025. But again, this model will keep us honest. That's the point. We have these expectations.

40:42We have these biases built into our heads. But being data dependent is the most important thing. But in any sense on this 1945 thing, it's really interesting because demographics is a major driver of inflation. So during the 1940s, everybody came home from the war. And what did they want to do at that point? Well, they wanted to buy a house, all of that. But they also wanted to make love, not war. Hence the baby boomers. So you had a big surge of people coming into this world. And by the time the 1970s hit, all of these kids were coming into their prime consumption age. And that's what generated this 70s inflation style.

41:22We don't have that today. Demographics are in decline. And that's just, like I say, that's not the only driver. right i mean supply chain pressures are off i mean last inflation cycle was a result of supply chain pressures um and and and stimulus okay um but both of those supply chain pressures came sharply lower stimulus is starting to pick up that was the point is financial conditions have eased if you look at g5 liquidity impulse that's up a little bit but that works with such a lead it takes so long for that data to filter through to the real economy so in any case you know our our view is that this is not the 1970s for the structural demographic reasons but also within the charts that we look at we still think if you look at did you see true inflation data today no it's at 1.4 percent okay so our bait we were i mean i think we were the only people calling for inflation or headline cpi to to come to below two percent and the important the important point here again, Maggie, just with these GMI, these business cycle dominoes is that, you know, if you people, so you have energy, which is like 7 % of CPI and you have food, which is like 13%, but then 80 % of CPI is core.

42:33And within that, the biggest component is shelter and shelter. If you remember back to that GMI business cycle dominoes chart, shelter's all the way to the back. Yeah. Lag, lag, lag, lag, lag. So people are still talking about wages and wages will stay above 6 % and shelter is still too high. But the point is, is that that's going to now work through. And my expectation is, is that's going to keep core lower for basically all of this year. And that's going to keep the Fed in, you know, happy land because core will, because they're not focused on commodity prices. They're not focused on the ISM.

43:07People keep, you know, we'll post a tweet about the ISM new orders back above 50 and say, oh, JPO, wow, what's going on? What are you going to do? They're not focused on that stuff. They ain't focused on it. They're so far behind the ISM focused on lagging economic data. It's just not a problem. So anyway, that's what I would say. And we see, by the way, we do see every day, we know that wage inflation is the stickiest, the one they worry about. Every day we're seeing headlines on layoffs. Snap today, laying off 10 % of its global workforce. I mean, companies are so quick to just cut, especially if it means, you know, making their shareholders happy.

43:45We sort of, I think, instinctively know that. So one more question I want to ask you before we go is there, for the people who don't think it's 1970s inflation, the other thing is we're headed to a recession. Recession's coming. And talk about bias. We tend to think if there's a recession, it's going to be horrible because we all lived through the great financial crisis and there's just a sense that recessions are so painful. I think we fear that more than anything. Do you see a recession? Were we already in recession? Yeah. So my, I mean, the view that I have is, I mean, the indicators, as you say, were split last year.

44:26There was a lot of data yield curve being inverted. But if you look at the conference board leading economic index, that was at 100 % recession territory going back to the 1960s. You know, and across the sentiment spectrum, conference board, I mean, sorry, CEO, confidence, manufacturing sentiment. So if you look at Philly Fed, Chicago Fed, and you open up that chart and you go back to 1950, most indicators were at 100 % recession territory. Right. I mean, it was it was really incredible. But the market, the point here is that while some of these indicators still suggest that recession might be coming, the market, our view had always been that it just didn't matter anymore because the market had priced that in in Q4 of last year.

45:08And the other important point here, Maggie, is that with what the Fed said recently, and more importantly, with the state of the world economy in terms of demographics, debt, basically GDP being in constant decline, is that central banks around the world know that they can't let this economy repeat GFC again. it's a fed put because at the current state of let's say baby boomers savings um and like i say the bigger demographic picture if they were to let stocks fall 50 it would be it would not it would be generational pain because it would mean that not only do the baby boomers have nothing right uh but their children wouldn't inherit anything either um and and as you know i mean my generation, we have student debt, right?

46:01We've got a lot of bills, things have become expensive, real wages are negative. So that's where I think is key here is we're in a phase where central banks aren't stupid. And if you overlay the labor force participation rate versus the central bank balance sheet and or government debt, the GDP, it's the same thing. So the worst things, my point here is that the worst things get given the environment that we're in and given what Raoul and I released last year on Real Vision, we released one of our articles called The Everything Code. If you haven't read that, please go back and do read that because we're in a world now where central banks, I think it was like 2016 when Yellen said, we'll never see another recession in our lifetime.

46:46At the time I was managing my multi-asset fund and me and my whole team. We were laughing about that, like literally kicking and laughing. But then COVID came and the world came to a complete halt. The economic data collapsed. We went to a recession and the Fed that very moment said, okay, it's time to inject liquidity. And they did. And that turned the economy around on the dime. So the point here is that even if there is a recession, the Fed knows what they can do. And they're not the only one, right? They're all working together. And in fact, you know, so that's the point is that people are very scarred from 2008.

47:25But I just don't see that as a possibility this time around. Also, households have deleveraged. It's a very different world than it was back then. It is. And, you know, it's such a great point. And by the way, it is a super important report. And it's sort of like the, you know, like the matrix. You really see what's going on. So sometimes it's hard to keep that in mind because you're like, wait, it's a different. And it's dangerous to say things are different this time. But for those of us who went through that and lived through it, they created tools that didn't exist before or that they'd never used, but they know they're there now.

48:01And so in that respect, things are very different. Does it mean that there can't be an unintended mistake or something will go? But the plan is to not go through that again. And COVID was the biggest test they've had since then. And you're right, Julian. they pulled it out and they will again. I mean, there are other problems that you and Raoul talk about longer term that that will create. But for now, that's the situation, which again, makes it really hard to kind of go by the old models and just look at things through some of the lenses we did before because things are a little bit different.

48:33Julian, fantastic stuff. I'm so glad that we tracked you down. You're a hard man to get, but now I know why because you're busy doing all this stuff. So we really appreciate it. I think this is going to be so helpful. And certainly for me, it helped clarify, I think, why people are so confused. And it's okay, right? It's okay to wait at the beginning of the year. It's not our imagination. But then after that, we always say, like, we need to have a framework to look at things through, to try to sort through and make sense and figure out what's on the leading edge of what we need to pay attention to.

49:06And I think that's where you're right, a lot of the confusion comes from. So this is going to be so, so helpful. I'm pumped about it. And I think just on the last point on that, you know, if you guys haven't yet watched the video that I did on Real Vision Academy about this, so something that Raul and I did in New York last year, that really goes into a lot more detail. I'm pointing as if you guys can see my third screen here. In our mind, we can. Yeah. That goes into more detail around everything, you know, I've covered today. And so, you know, what our performs. This is understanding the business cycle, right?

49:40Exactly. Exactly. So that's very helpful if you haven't seen that yet. Yeah. Fantastic stuff. Julian, I'm going to rope you and make you promise to come back on again, the daily briefing, and give us an update as we sort of make our way through the next few months and let us know what some of your charts are telling you. 100%, Maggie. Anytime. Appreciate it so much. Thanks, Julian. Thanks, Maggie. Bye. Whether you're a crypto newbie, an established investor, or operating a business in Web3, Tax season can be an absolute headache, but it doesn't have to be a nightmare. That's where CryptoTaxCalculator comes in.

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