The State of Macro? Let’s Hear from the Pros With Julian Brigden, Barry Knapp, Steven McClurg, Leo Mizuhara, and Matt Hougan

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0:55Hi, everyone. Welcome to the Real Vision Daily Briefing. Today, we are going to celebrate the U.S. Thanksgiving holiday and our huge Black Friday sale by unlocking some content for you. First up, Julian Brigden of MI2 and Barry Knapp, Managing Director of Ironside Macroeconomics, sat down for a special macro insiders conversation. They covered inflation, tech, bonds, as well as what to expect in 2024. Well, hello, everyone. So we have a slightly different format for insider talks this week. Raul's away, probably a massage. And Julian this week is joined by the excellent Barry Knapp of Ironsides Macro.

1:36Good to see you again, Barry. Raul couldn't join us, so we will be doing a special Ask Me Anything with him on Monday morning at 10 a.m. Eastern Time for the Real Vision Pro members. So where to start? Normally, I'd ask you guys for your views and how they've evolved over the month. But still, since Barry is guest starring with us here, maybe we should start with a rundown on what you're both thinking about the key markets. Barry, would you like to kick us off? What are you thinking? Sure. I'd be happy to. On balance, I would say that any rally in the Treasury market that is not led by two-year notes is suspect.

2:22And any rally in the equity market that doesn't have a bull steepening, a two-year note led rally in the Treasury market is not really sustainable, notwithstanding the favorable seasonality between now and the end of the year. So the inflation numbers this week clearly are a big positive, but they were to be expected. There's no question that inflation has been coming down. In fact, if you remove the lag-impaired rent-of-shelter portion of CPI, CPI has been below the Fed's target for six full months now. And so, sure, we had a couple of months uptick in non-housing services inflation. That reversed this month.

3:12We had a very curious six-tenths of a percent increase in rent of shelter in September. But we all know rents have come down really starkly. Rental indices like Zillow and ApartmentList were increasing at 16 percent annualized rates 18 months ago. They're down to negative in the case of apartment list by about a percent and 3 % in the case of Zillow. So we knew inflation was coming down. But the Fed, since the September FOMC meeting, has created this, I would consider it to be curious construct. I think it's probably Fed orthodoxy, though, that the necessary condition to stopping the rate hikes and then transitioning to reversing at least the last three rate hikes that I think were unnecessary and, in fact, harmful, the necessary condition is disinflation.

4:02But the sufficient condition is weaker growth. Right. And that is a little bit curious in as much as it's not weaker growth that caused inflation to reverse. from the peak in mid-2022. It's not really been demand-driven. But yet, again, Taylor rules, methodology, the Phillips curve, orthodoxy lives deep inside the Fed. And so if you think even about this week, we had the weak CPI or cool CPI report on Tuesday, a ferocious rally. And then on Wednesday, we got a reversal of about a third of the rally in the Treasury market in the belly of the curve, so the twos to seven-year part of the curve, when we got a modestly stronger than expected retail sales report.

4:52So again, cool PPI wasn't enough without cooling growth. And the question is, can we make that transition from disinflation to cooler growth and somehow just land the plane without any pain in the equity markets? As one of my colleagues said to me this morning, if the Fed eases because they can, it's sort of the immaculate disinflation scenario, that'd be great. The probability of that happening is fairly low. But easing because they have to, either because the tightening of financial conditions, the deep inversion of the yield curve, and mind you, the yield curve only got as inverted as it did in 2023, three other times in US history, 73, late 79, late 80.

5:40And it's an existential threat to small banks. So either we have a financial crisis or growth weakens decidedly. And in both of those scenarios, you'd still have to ask yourself, how do bank stocks perform in that outcome? How do small caps perform in that outcome? And so I'm not ready to declare victory on this and move on. I suspect that while the markets could probably hang in through the balance of the year, the first trade out of the gate as we have to absorb an exceptional amount of supply in the high yield market, in multifamily real estate, private equity, leveraged loan deals that get rolled, even investment grade credit, and of course, the granddaddy of them all, government debt.

6:23I would suspect that the first trade out of the gate in early 2024 will be a bit of a risk off type of market environment. Thanks, Brian. That's fantastic. Julian, you disagree? You agree? No, look, I mean, I don't really disagree that much. I mean, I've been in the camp that this concept of this immaculate disinflation is kind of irrelevant in an environment of very strong nominal GDP with low unemployment. You know, because yes, there is a get out of jail card, and that would be an explosion in productivity. And sure, you know, AI could deliver that, but it isn't likely to deliver it imminently or insufficient time to let the Fed back off.

7:14And very simply, as I've said before, I think a lot of the equity bulls, wet dream would be they'd wake up tomorrow morning and inflation would be zero and nominal GDP would still be at six. And they'd be, huzzah, this is it, off we go. And my point is, is that's absolutely bloody impossible when you've got 3.9 % unemployment. There just isn't the slack to enable the offsetting explosion in real growth that you'd have to get if nominal stays at six and inflation goes to zero, real has to go to six itself. So I think the Fed has to lower nominal GDP, which, to Barry's point, it seems to be their bias that you've got to see this slowing down of growth.

7:59I think their intention all along has been to use this opportunistic disinflationary policy framework where they trade off the absolute level of rates for the time at which rates stay somewhat restrictive. And so that means that what's priced into the market, this sort of assumption of rates go up and then they immediately start coming down, is almost certainly wrong, absent some major correction in equities or some other kind of event. And so we're in this sort of grinded out environment. And as Barry sort of alluded, I think this leads to this kind of choppiness where you get the rally that we hit our target.

8:47We'd had our models that suggest 5 % for 10-year treasury heels. We hit that. I'm amazed how quickly it's all reversed. I think some of that is treasury manipulation, right? They're clearly beginning to get a little shit scared, as they should be. about the movements that are happening at long end of the bond market, because we are running unsuitably large deficits. And someone's got to pay for them. And we've discussed this, and you're going to be getting a paper from us talking about the supply side of global savings, and that it just isn't sufficient to support this level of debt rollover that we've got coming through.

9:25So something's going to have to give. But we play this sort of situation where we've got this big rally in Treasury's yield fall, stocks go, woohoo, off they go to the races. But the ensuing easing of financial conditions in an environment, that's how you control growth, is not supportable. So the Fed has to come in, and they have to come and start slowly going, we're not easing, it's higher for longer, it's higher for longer. And I just don't believe that grinding out process, that period of it. Because in an ideal world, I think Barry would agree, what they'd like is a period of subtrend growth for however long it takes.

10:04It could be two years. It could be three years. Until that productivity burst comes through, they'd sit there. I just don't believe the US is set up for that. I don't believe if you're looking at an environment where stock prices haven't gone up for a year or so, that CEOs will sit there and not cut costs. And as soon as they cut costs, the odds are that we likely slide into a recession because unemployment goes too high and it becomes self-reinforcing on the other side. We're not there yet, but there are some signs. Or just markets on their own lose momentum. Equity markets in particular don't like trading sideways for an extended period.

10:42Not at such elevated pace. This tendency to lose momentum, as they lose momentum, CTAs come in, trend followers come in. I don't think people realize, if you're in a balanced portfolio, you're down 20 plus percent over the last three years, two, three years, and you haven't made money since that you made that loss in 2021. Our US investors have got hundreds of billions, if not trillions of dollars in these damn things. What are they going to do when they get the statement at the end of this year again? Are they going to sit there and say, oh, well, third year, you know, come on, Wellington, come on, Putnam, come on, all these guys, you're going to make me money this year.

11:23Or are they going to go fuck this for a game of soldiers and start to liquidate these things? I think it gets kind of interesting. 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.

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12:42So listening to both of you outline the situation we're in, the questions that came into my mind was, is the Fed really done? I mean, some part of it is, I look at how markets are trading, I struggle with why equities have remained robust. I struggle with why bonds were quite so terrible. is the Fed done? Go ahead. Sure. They certainly should be done. As I said, I didn't think that any of the last three right hikes were necessary. And in fact, I think they made the condition in the banking system, small businesses, real estate. We just got a terrible NIHB home builder index, which has now fallen from, I guess, 80 at its rebound peak down to 34.

13:37So well into deep contractionary levels or funding of the government. I think they've made this situation worse. So they certainly should be done. And I think that the equity market, probably Treasury market, will behave pretty well into the December FOMC when the Fed will eliminate that last rate hike dot and confirm that they're done. The question is, though, to Julian's point, what are they going to do about the 2024 dots? Remember that that change in the 2024 dots from 100 basis points of rate cuts to 50 basis points of rate cuts at the September FOMC is really what caused the second half of the sharp bear steepening that we had.

14:28So the first 50 basis points or so of 30-year real rates, and I like 30-year real rates because that's the piece that's least influenced by the Fed's balance sheet or rate policy. Market forces sort of dominate out that part of the curve. But that part of the curve moved 50 basis points higher after the Treasury announced in early August that they were going to borrow an extra$500 billion more in the second half of the year than anyone expected. But then the market stabilized after the August employment report, which looked really weak and I thought was a bit of a game changer for the Fed. the Fed sort of dismissed it, right?

15:11And then they changed the dot plot for 2024 from 100 basis points of cuts to 50. So the question is, what are they going to do with the dot plot in December? The market thinks it's 100. I think it's 100. But that doesn't leave a lot of room for upside. And if the Fed were to just eliminate that last dot and leave the terminal rate at the same place, that would be 75 of cuts next year, but still less than the market expects. And they'll probably say, we're not thinking about thinking about rate cuts yet. And so in that environment, with all that issuance due in 2024, I think the market will really struggle with that.

15:53So listen, I didn't think there was any justification for the other cuts. I don't think there's any the last three hikes. I don't think there's any justification for any more hikes. But then we're just going to get into this immediate debate about when do they start reversing the heights. And without that reversal, right now the market's at about 75%, 80 % that they start in May. But that's a long time. I mean, it's six months. And so a lot could happen in the equity market in six months. And the Treasury market, to me, you really can't get a significant sustainable rally going in the back end until two-year notes come down shortly.

16:33So that's why I'm with DROC. I like two. What's that? Or stocks crash. Yeah, right. Or the banking system has another round of crisis, right? So if you think about the three ways the curve can disinvert, and I believe it needs to disinvert to absorb all this supply, There's the immaculate disinflation bull steepener where the Fed cuts because of inflation coming down. But they've been dismissive of that. And I can't imagine they're suddenly going to change their tune. Because the last part of it, getting from three-ish down to two, is going to be hard. And I don't believe two is going to be long-term trend anyway.

17:12Then there's the growth weakened scenario. Well, that's kind of negative equities. And then there's the financial crisis scenario. Which is very negative equities. Exactly. Macro Insiders is the monthly conversation between Julian and Raoul that is available on our pro tier. Occasionally, we mix it up with guest appearances, as we did with Barry. And truthfully, it looked like Julian enjoyed the break from Raoul. Next up, an excerpt from Ash's conversation with Stephen McClurg, Leo Mizuhari and Matt Haugen, who tackled the question, is the Bitcoin spot ETF approval imminent? Guys, let's talk a little bit more about the macro backdrop.

17:51Obviously, everybody in the so-called TradFi space, as they call it in crypto, has been watching what's happening right now in U.S. treasuries. How do you guys think about what's happening from a broader macro backdrop context in the crypto space? What's its influence now and going forward? Matt, jump in. Sure. Yeah, I think it's moved from a headwind to a neutral to mild tailwind. That's my view of the macro setting. I mean, I think if you're thinking about price direction of crypto, you have to think of multiple factors. You have to think of the macro factor impacting crypto. You have to think of crypto industry factors like regulation impacting crypto and then asset specific developments.

18:30What's going on in Bitcoin? What's going on in ETH? What's going on in Solana? And I think people got all focused on the macro space during COVID because we had the most extreme monetary and fiscal policy of all time. And that arm overwhelmed everything that was going on in the crypto space. Crypto almost didn't matter. It was just macro. And now I think it's much more neutral. And that's why we're seeing correlations below 0.3 on Bitcoin to the S &P 500. you're seeing the crypto specific factors being the primary driver, the development of ETF, the rise of layer twos, interesting new innovations that are catalyzing excitement, you know, in the DeFi space and others.

19:15And I think that will be the case going forward. I think if anything, the macro factor is modestly positive. We're more likely to see rates come down at the end of next year than go up. we're more likely to see people looking for quality growth assets with secular trends that can overwhelm weak economic conditions than the opposite. And so I see it as sort of less important than it's been over the last two years. But if anything, positive to, yeah, probably modestly positive, maybe just positive as a catalyst behind us. I don't think it's the most important thing, but I think it's a modest tailwind at this point.

19:57Modestly positive. Modestly positive, yeah, which we'll take as opposed to massive hurricane force headwind, which is what we had for a while there. Yeah, which is interesting because the irony is that for many people, particularly in the Bitcoin space, we heard the idea that Bitcoin was going to be a massive inflation hedge. And what we saw, in fact, was just the opposite. We saw when you had interest rates near zero, you had whatever the number was, a 0.8 % correlation between the NASDAQ 100 and the price of digital assets, just a massive inflation of the everything trade, right? I mean, this is, go ahead, Steve.

20:34Well, you know, one of the things on inflation, though, is, you know, you also have to look at the history of gold and its correlation to inflation. And it's actually been pretty uncorrelated. people will buy gold speculating that inflation might come later. And then when we start getting inflation, people start selling out of their gold. And that trade has typically worked up until 2009. And even in 2009, there was speculation that, oh, people are going to start buying gold. And it didn't happen ahead of at that time. That was the last moment when the Fed decided it was just going to unlock helicopter money, that's when gold started losing its relevance.

21:21But oddly enough, that's when Bitcoin came into the market. And so I agree with Matt that at the moment, macro doesn't have a whole lot to do with Bitcoin, but I think it will in about six to nine months. But before that event is right now in Bitcoin, we're in that four-year economic cycle of Bitcoin where the halving is about to come and we're approaching the time when prices begin to steadily rise. But that has more to do with the network as opposed to anything macro related. But I think that the macro headwinds are going to come in about six to nine months when we're entering into a new election cycle.

22:03And even though the Fed isn't supposed to be political, It has become political over the last six to eight years. And when we have an economy where inflation is still pretty high on the things that matter, inflation is lower on things that don't matter, you know, and at the same time, you're starting to see job losses and lack of job growth and general signs of a recession, including an inverse curve. So all of those factors are going to force the Fed into and to begin to think about lowering rates again. It probably won't happen until May or June of this coming year. But I do expect to see the Fed begin to lower rates at about a 25 basis point clip all the way into the election cycle, which which which which really will be in October.

22:57So that macro factor should have a massive impact on Bitcoin because now you've opened up monetary policy again. And that's the period of time that I expect Bitcoin to really start moving. 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.

23:20Steven, just so I'm sure I understand the catalyst correctly, you're saying ultimately it's your expectation in 69 months, We're going to start to see rate cuts from the Fed, obviously more accommodative monetary policy stance, and therefore an increased tailwind to the price of digital assets as risk assets in general rally. That's exactly right. Yeah. Can I build on that one, Zach? And I also want to push back actually on the idea that it didn't hedge inflation. I think if you look back at what happened in COVID, Bitcoin bottomed right when we found out the government was going to come in with massive stimulus and cutting rates to zero.

23:54It went from$3 ,000 to$69 ,000. And it hit its top two or three days after the release of the Fed minutes, where the Fed finally admitted that inflation wasn't transitory. So literally at the moment that the Fed got serious about cutting back on inflation was the top of Bitcoin. I think it did beautifully well. I think people look at CPI, which is backward looking, and say it didn't hedge inflation. But for the period of time where inflation pressure was building up to the point that the Fed woke up and realized that that inflationary pressure was there, Bitcoin absolutely ripped. And I think towards what Steve is saying, when we get to the other, you know, down the cycle in six, nine months, when I do think the Fed will be more accommodative and will be forced into both lower rates and a more easing space, I think that's going to be a massive tailwind.

24:42I think we'll do quite well in the interim. That may be where Steve and I differ because I think the catalyst of the ETF is really significant. But I also think that will be a secondary tailwind when it reappears. Steve, did you want to jump back in? Yeah, the only thing that I'll add is, yeah, I think that is where we differ. We're probably going to see everybody's expecting a Bitcoin spot announcement over the next week. It's all over Twitter. If we don't get that, I think we just sort of crab along in price with some volatility, either flat or down until January. So I do expect prices to be pretty bland over the next six weeks.

25:28All right, let's pull Leo back in. Leo, the floor is yours. Macro context, what do you see happening right now? Yeah, I was just going to comment on the comment about inflation. I think it's important to separate out asset price inflation versus goods prices inflation. I think Bitcoin is a very good indicator of asset price inflation. And I would argue that monetary policy is largely a driver of asset price inflation. And it's not as obvious how strong the correlation is to goods price inflation. And that's in both directions, both with monetary policy and goods price inflation, as well as Bitcoin price and goods price inflation.

26:09I really liked how you broke apart the macro factors versus the more network-related factors. When I think of macro, though, I tend to break that down into three different categories as well. I think of regulatory as part of the macro environment. It's kind of a slow-moving piece. I think of the economics, the interest rate, and the fiscal and monetary policies as another piece, but then also demographics as another piece as well. I think when we think about the ETFs, that is a big regulatory tailwind, right? We're doing well in the regulatory space right now. We've won a lot of court cases, and it looks like we're about to get this ETF.

26:47I think on the interest rates and policy plays, I don't know if I agree with Matt and Stephen as much. I think the general consensus appears to be that we're going to get rate cuts come mid-next year. I mean, I think we have a real good potential for it being later than that. This latest kind of slowdown was very well orchestrated, right? The Fed being able to orchestrate the soft landing, unheard of ever in policy history. And I think it's quite possible that even as long as the Fed kind of stays on hold for a while, I think it's quite likely that the economy continues to hum along on other tailwinds.

27:28And that might not be great for the asset price inflation tailwind of backer economic policy for Bitcoin. And on an even longer horizon, I'd say that demographically, there's a lot of tailwinds. It seems like young people really like crypto as an asset class, which is a little bit surprising to me. But, you know, DGENs will be DGENs. Leo, is it too cynical or skeptical of me to say they haven't quite negotiated the soft landing yet? Oh, that's definitely true, right? Well, it's never going to look perfect. And we don't know how bad it's going to get. But I mean, we had that recent scare in inflation over the last few months that seems to have died down.