Central Bankers Spoke... Are Investors Listening? w/ Brent Donnelly

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2:08central bankers spoke our investors listening. Hi, everyone. Welcome to the extended Real Vision daily briefing with me today is Brent Donnelly, president of Spectra Markets. Hi, Brent. It's great to see you. Hey, Maggie. How's it going? It's going OK. You know, before we kick off, just a reminder to everybody, the second half of the show is for Real Vision members. So if you want to be part of that conversation, and we hope you do, scan the QR code or a link that Brian will drop in the chats and join the community. So great, great day to be with you, Brent. We had four of the most influential people in the world.

2:43I think you could argue on a stage together. Speaking earlier, the governor of the Bank of Japan, the governor of the Bank of England, the chairman of the Federal Reserve, and the European Central Bank president, all sort of fielding questions and talking about monetary policy. You don't see that all the time. What was your takeaway from what they had to say? So I think the takeaway is a little bit boring because generally, Cintra kind of has been the Jackson Hole for the ECB, the place where they kind of showcase what their bigger picture policy direction is. And I'm not the only one that's saying this, but they don't know what's happening or what's going to happen.

3:23Like, I think the credibility, it's not necessarily the central banks, but the credibility of economic forecasting and whether it's private or public forecasts has just gone down a lot since 2020 or 2021. So from 2010 to 2020, you had kind of a low volatility environment in markets, but also low volatility of economic data. And so that period kind of made it pretty easy to be a central banker, right? Because they could go so slow and they could just kind of, there was so much room for error, so much margin for error. And in this cycle, everything's going so quickly that they've made a lot of errors and most of them obviously in hindsight, although a lot of people thought they were making a big mistake with transitory.

4:11um so now when you get these gatherings like we had today it's just doesn't have the same punch because people don't believe what they're hearing so even like there was a divergence kind of between lagarde and bailey and powell in terms of whether we're deep enough in in restrictive territory to slow the economy and whether it's just about long and variable legs or whether they have to hike more, right? And that disagreement in economies that are operating in similar frameworks with a lot of inflation and inflation coming down in all those economies, the fact that those are like the biggest central bankers in the world, and they have probably 1 ,200 PhDs employed between them, and they disagree on what the lags are, means that they don't know and we don't know.

5:03And I mean, I think that's really been the sort of like the hallmark of this whole cycle, right, is just the inability of forecasters to predict what's going to happen. And that continues. Yeah. And part of it is because there was this humongous, unprecedented experiment, right? I mean, you're coming already out of an experimental phase with QE and all of that and the impact of negative rates. And then you had a pandemic where they threw everything at it. And so what does that look like coming out of it? You just you don't know. So you have this sort of, you know, they keep going from kind of uncharted to uncharted.

5:40So I guess it shouldn't be surprising. They don't really know. No, I don't. I don't really even put that forth as a massive criticism. It's more just the reality of forecasting is really hard, like especially about the future is the cliche. But and then the other issue, too, is that this cycle has brought up a lot of new kind of wonky details that weren't really relevant in the past. For example, year-over-year data is kind of like the standard benchmark of what people look at for data. But then if you went to infinity in 2021 and then kind of did not that much in 2022 and then went back to baseline in 2023, all your year-over-year comps are going to be all busted.

6:24So it's the same thing in China. If you're comparing consumption now to 2022 when they were in COVID zero, what does that mean? So then do you compare it to 2019? And then what happens with a lot of this stuff is, unfortunately, it comes down to the priors of the person looking at the data. So if they're like a deflationista or like someone who tends, like say Blanche Flower is always very dovish, tends to lean that way. And that's no disrespect to him. I think he's a totally fine central banker. But then he'll see dovish stuff everywhere, right? He'll look at year over year M2. It's like, ah, it's collapsing.

7:00It's negative 5%. But then if you look at the three-year change, it's basically on trend. So I'm just saying M2, but you can look at anything. And it's very difficult to know what the hell is actually happening because your standard way of looking at the data in a lot of cases, not all the cases, but in a lot of cases just doesn't apply. and then the issue becomes you can choose your framework and your framework is going to match your bias. So that's the issue. I think that's such a wise observation, Brent. And I think it explains why things seem so, not chaotic, but there seems to be so little clarity or so much disagreement.

7:42We hear everyone say it, that this is such a tough macro environment. Like translated just means no one knows what's going on, including the central bankers, or no one can kind of get a handle on that. I wonder if investors are having the same issue, right? Like if you can't look at year on year, are they faced with the same problem that there's just no forward clarity? I mean, I think absolutely, because you look at things like a lot of the standard metrics, like say the yield curve inverting or NHB sentiment collapsed. And if you look at history, So, excuse me. The other thing is that any kind of historical analogy or analog that you run probably doesn't work because none of this stuff has ever happened before.

8:29So if you look at like NHB housing index, usually that turns and then construction employment collapses like a year later, because that's just how it works. all the houses that are being built now, they finish those houses. So sentiment's going down, but they got to finish the houses that they already started. And once they finish, then those construction people get laid off and they don't get jobs. But this time, basically the demand went down, the sentiment went down, but then this fiscal stuff started like the building, reshoring and plants in Kentucky and Ohio and all that. And there was some unknown shortage already.

9:07So as those projects, those home projects ended, those workers either got absorbed by other projects that couldn't start because they were short of workers or other service jobs who were also short of workers or this infrastructure stuff picked up the slack. And now there's shortages in those jobs. Like in Ohio, they can't find enough people to build the chip plants. So all of this stuff is unprecedented. And you threw like, what,$5 trillion at the economy. and that money didn't just like, it wasn't like all spent in 2021, although most of it seemed to have gone into crypto in 2021, but it wasn't all spent.

9:45And then someone posted a good tweet that said, US, what was it? US consumers now have somewhere between 99 cents and$5 trillion of excess savings. Like that's how confused everyone is. And so forget about forecasting. that like, it's just hard to even measure the stuff, right? Like look at non-firm payrolls has beaten 14 months in a row on the unrevised, like the actual announcement has beaten 14 times in a row. And that again, like for it to beat five times in a row is pretty weird. Like six or seven is unusual and like 14 is insane. So it just shows like everything is impossible to understand.

10:28And I think like in that environment, the best way to be is agnostic, but then a lot of people. So going back to your initial question about like, how has this harmed investors is that people have been very bearish because a lot of the normal signs of apocalypse were present in like the inverted yield curve and housing and all that. And yet those, none of those things came to fruition because other bullish factors came in to save the day. And so I think like the biggest, I mean, really the biggest bias in finance through my whole career has been just people are way too bearish. Like stocks go up whatever 70 % of the time and 70, 73 % of years or something like that.

11:10And I would say like people are generally at least 50 % bearish most of the time. So there's always a mismatch. Why do you think that? Yeah. I mean, I know why it is. I mean, I've written a ton about this. It's just that that's a human bias, right? Is that the mainstream media has a negativity bias because that's what people want to read. Being negative makes you sound smarter. Being bullish makes you sound like you're waving the pom poms on CNBC. So, and it's like being bearish also sells subscriptions. Like a friend of mine runs a newsletter and he was bearish, like this is way, way back in the day.

11:49He was bearish from like 08 to 2013. And then he was like, okay, I've seen the light. I'm getting bullish. And he lost one third of his subscribers because people want confirmation of their bearish view. And like, there's so much literature on this. Like people always think everything's getting worse, but then on many metrics, you know, like global, global poverty and, you know, women's rights and many, many, many, many men metrics, things are getting like inexorably better, but the human bias is to be negative. And the mainstream media is like that. Twitter like that. So I think it's very hard to have a diet of information that's balanced.

12:29It's just easier to make the bear case all the time. And like, to be fair, the bear case made sense, like for ages in for a good part of 2022 and 2023. So 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 Today's top analysis on the Real Vision Daily Briefing.

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13:53Yeah. Well, there are times. I mean, you're going to be right sometimes if you're bearish. Yeah, of course. But the problem is that if you're always bearish, then you're missing a lot of the upside. I mean, listen, we experience all the time because Raoul tends to be bullish. Like he tends, he's very focused on exponential age. You know, it's interesting that you say that because so investors, that's the skew for investors. I think it's probably it's probably an argument that it's exactly the flip for entrepreneurs. Right. And and venture people, because I we've spoken to Peter Diamandis a few times, created the X Prize and started a university for space while he was still getting his doctorate.

14:35It's still in Harvard Medical School. I mean, a crazy serial entrepreneur. and he is relentlessly optimistic and bullish. Like he won't even consume negative news because it takes up too much bandwidth. Right, right. So he started a million company, you know, because he's always leaning into this. So it's so interesting that some of the unicorns everyone chases are, and sometimes it's the downfall of those entrepreneurs, by the way, because they're never prepared. But like someone said to me on that topic that go through the Forbes 100 list of the most, like of the richest people in the world and try to find a pessimist in there.

15:08You know, there's probably a couple, but, you know, there's not too many. I guess you could argue maybe Elon Musk is somewhat pessimistic about Earth's future. And that's why we have to go to Mars. But in general, I would say, you know, the optimists make money and pessimists sound smart is kind of like a cliche that I think is somewhat true. Yeah. But then, like, as you know, my time horizon is shorter. So I just feel like you can be tactically bearish and that's worthwhile, like, from a trading point of view. And you can be structurally bullish, but it's just so hard to be structurally bearish because you just have so many things going against you.

15:46And one of them is just that stocks are a nominal asset that pays the dividend. So, you know, prices just generally go up in the world and more money gets created. So if you're short indexes, that's, you know, that's a massive, massive headwind, or like it's a tailwind for stocks, a headwind that you're fighting as a short. So my advice, and I'm not the only person to ever say this, is that you can pick shorts and you can say this is a really shitty company and I'm going to ride it to$1. But shorting indexes is just way too hard. Oh, yeah. Everyone seems to be seeing the religion on that because I've spoken to a lot of people recently who've just said, I don't short anymore.

16:28It's just too hard. You could lose so much more money than you. then you recover from that. Maybe the astute observer is saying time to buy SPX puts then because they are cheap right now. But I don't know anyone that's ever made money doing that other than 08. Sorry, go ahead. Yeah. So I just want to kind of bring it back to what we saw. But I think that's all really sort of great framework, I think, to lay things out in. Because you're right. And even the central bankers said, listen, we're meeting to meeting now. They've even acknowledged that they don't really, like they have this plan and they want everyone to think they're going to really tackle inflation, but they don't really know how they're going to do it.

17:09And they don't really know like what's left in that job. And they're kind of data dependent and they're, you know, they're kind of spitballing it. So what does that mean? I want to get back to stocks in a minute. But first, what does that mean for treasury yields? Because one thing we've been hearing is that like the markets are looking at different things, right? The bond market and stock market look like they're looking at different worlds. and everybody seems kind of out of step with what central banks are saying. I mean, not long ago, we had easing priced in and now all of a sudden, you know, maybe we've got two consecutive rate hikes, Powell says today.

17:40So what are you thinking about? What are you thinking about Treasury yields, U.S. Treasury yields? Yeah. So I think that yields are going higher. I don't think crazy higher, but we've been in this consolidation for quite a while. And I think the market is kind of slow to realize that there's still a lot of support for the economy, specifically on housing, but then also the infrastructure and the fiscal. And there could be some fiscal drag maybe later if student loans have to start getting paid in that, and that could hurt sentiment. But I mean, that's a story for Q4. I think that's October is the earliest that people will have to start paying.

18:19But if you look around the world, housing has actually picked up quite a bit. And so that's one underpinning of the economy. If you look at housing, government, and infrastructure, like fiscal kind of stuff outside of government, which is like actual shovels in the ground, which is happening, there's still a lot of supports for the economy. And then I think people got excited about the tech layoffs, which is like 5 % of the workforce. And if you look at the May payrolls report, it shows all the industries and it's like increase, increase, increase, increase, then like decrease in information technology, increase, increase, increase, increase.

19:03Like the shortage that has existed since 2021 is still there. And like it again, in that going back to our earlier conversation, it's in that realm of like the unmeasurable, like, of course, one day that shortage will be taken up, but it doesn't seem like it's close. Like I was just in Florida and, and there's just help wanted signs everywhere. It might, I live in Connecticut. There's still a lot of help wanted signs. Um, so to me, it's, I mean, that's not a way to, to make an observation about treasury yields, but I'm just saying that as an anecdote on top of 14 straight jobs reports that were strong.

19:40Um, to me, it feels like the market's been trying to kind of play this disinflationary badness is coming. And it looks more like disinflationary muddle through. And then on the other side, you may actually see a pickup again in housing, like in places like Sydney and Toronto and a lot of the US, things have stabilized. Actually, I think there's a chart there if you guys can bring it up. Of housing? What's the chart? Yeah, the black, blue, and red line. I can see. Oh, yeah. I think Brian's got it in front of him. Yeah. So this is a chart of homebuilder sentiment is black. Homebuilder stocks is blue.

20:28And red is home prices. So generally, the sentiment moves first just because home prices are kind of a lagging indicator, just the way they're measured. So home prices got down to like now, I think that number is like minus 1.7 year on year or something, 1.7%. Keep in mind after they've gone to the moon. So like the price drop is barely visible if you look at the actual price of homes like in Toronto, Sydney, whatever. And so the home builder sentiment and all the kind of more forward-looking stuff looks relatively good again, which I know is like in the realm of the unthinkable, like how is that even possible?

21:10But again, there's shortages everywhere, right? Like there's just not enough homes for sale. There's a lot of Airbnbs available to rent and all that, but there's not a lot of homes available. So people are banking on OER and rents and home prices to be like the final disinflationary thing that gets us from like four and a half to two. And I just don't, I don't think that's going to be the case. So I don't want to get into the whole boring thing about the OER lags because a lot of people know about that, but it's kind of important. So essentially the rent portion or the owner's equivalent rent portion in CPI lags by 12 months.

21:47So it's about to go down a lot and provide some inflationary relief. But then on the other side of that, it could already, you could look forward and say that stuff is already based. Like rents in New York City just made all-time highs. Brooklyn, Queens all made all-time highs. So this disinflationary impulse, I think, is real, obviously, goods, prices, and shipping. There's many, many things on that side of the ledger that have helped a lot. But getting from wherever, like in Europe, getting from 10 to 6 is easy relative to getting from 6 to 2. I think it's going to be exponentially more difficult for the Fed to get from 4.5 to 2, or four and a half to three, maybe they get there and then getting lower is hard.

22:33And I mean, that's reflected in the projections that they've made. 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.

22:48And you made the great point that you're seeing it on the good side, but the services side, you know, this is two economies. The weakness we've seen is really concentrated in goods and manufacturing, the services is still going gangbusters in a lot of places. Yeah, that's the thing is like if you look at Supercore and like those things that strip out all that housing and goods and all that, that that part is just like it hasn't moved at all. And then like some good economists are arguing like goods lead and then eventually input prices go down and and then services prices go down. But then I think you had Sam Rines on recently.

23:23His point is that the corporations are enjoying this opportunity to raise prices and they may not be so quick to stop raising prices. That's what you need for disinflation. Obviously, you don't need price cuts, but you need no more price rises. And there's still a lot of price rises going on because like in my town, all the restaurants, basically the prices were the same forever, as long as I can remember. And then they were like, oh, we can put prices up a dollar. Oh, let's try that. Okay, how about another dollar, another dollar? And then you add on the Uber fees and all this, and they're like, well, let's just put it up two more dollars.

23:59And a lot of that has its own momentum. And like, okay, if you're that restaurant and your input prices went down, you're like, well, everyone's still coming here. We can barely keep up. Yeah, I mean, it's only going to stop when you have a recession and everyone had to work with no money, right? I mean, that's eventually will stop that. And that's not a good scenario for anybody. Yeah, and then so like, to me, the yield curve always is a good predictor of recession, but with unknowable timing, which kind of like good forecasts always have a time condition. And so if you have a forecast that doesn't have a time condition, if anything, I think like this was the case in 06 as well, that it actually costs people a lot more money believing in that indicator because yeah, it eventually happened.

24:43But the two years you were waiting, like so many people lost their jobs trading from the short side in that interim. And that's what's happened, right? Everyone keeps pushing that recession forecast out. Is it that they were asked about that to the central bankers and they were like, well, we don't, you know, they kind of couched and said, we don't necessarily see recession as the outcome of higher rates. Are we back to trying to figure out if they can actually, even if it's not by design, but by just pure luck, hit a soft landing? Or is it just that we're going to get that recession? We just don't know when.

25:17I mean, it's possible, right? Like the, the track record isn't very good on like aggressive tightening cycles, but they did do it in 95 somehow. Um, and the funny thing is like, everyone was complaining about negative rates and zero interest rate policy and how it's doing all these bad things. And like so many traditional, you know, like more, more like, um, more like non-Keynesian kind of people, like more Hayek kind of people were like, we need to get rates back up so we can have a normal economy and the world can be normal. Like shit, maybe that's just what's going on is rates are back to normal.

25:53And that's like the crazy, insane view of that would be like, that's a good thing. I mean, we did have a lot of people say that though. A lot of people were like, you got to get back to some more traditional sense of like, this is, you know, this can't go on kind of thing. Yeah. So like, I think it's, I know it's kind of boring when people don't make like decisive forecasts. But to me, this like this has been and I've kind of been like this for a while, but it's a good time to be somewhat agnostic. And then but then the thing is, you have to hope that, you know, when you see it. So like same thing with the UK, right?