Tony Greer: How to Navigate an Era of Volatile Inflation ft. Kevin Muir CFA

28:46It was actually one of the crappiest recoveries we've ever had. And then all of a sudden we do all this fiscal. And yet instead of saying, OK, now we should be pulling back on the fiscal because the economy is flying, they're doing the opposite. They're once again trying to fix it with interest rates. and monetary policy doesn't work the way we think, especially in a situation where everyone's already locked it in. And there's kind of the Fed is in a really tough spot because the Fed's tools are not appropriate for the job. We're going to take another quick break to hear a word from our partners.

29:20We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

29:28There are some intense read throughs and I had some of you Eureka moments, I hope some of the listeners did during that explanation, Kev. I can't thank you enough for that. That takes me sort of along to some of the other stuff that I've been reading that you've been putting a lot of work. I've learned more about the 60 portfolio, 60-40 portfolio from you than from anybody in the world. And you can have to think about it, how to look at it, what to think about it. In one of your posts you recently wrote now, and this is how inflation can affect that portfolio, this change in stock bond correlation is being underappreciated.

30:04Many folks are swimming a return to the 2009 to 2020 period. We're not going back. Therefore, it's vital we spend time understanding how the 60-40 portfolio and the bond correlation behaved under different regimes in the past to better help us forecast how it might behave in the future. Unpack that statement for me a little bit. Tell me what you think about how the 60-40 portfolio is going to be affected going forward and what we should think about it. Okay, so I think that this is the biggest challenge facing investors in the coming years and decades. If you kind of go back and think about most portfolio construction, it's usually kind of augmented by the fact that we've had this negative correlation between bonds and stocks.

31:02So what does that mean? That means that when the stock market got into trouble in the past, the negative correlation meant that your bond portion did better. And so we had this kind of natural kind of offset dampening of volatility by putting these two assets together. And there's folks like Ray Dalio made himself the richest hedge fund manager in history by taking advantage of that and making what is called risk parity, realizing that he could lever up a bond portfolio, make it the same volatility as a stock portfolio, put the two together. and Bob's your uncle, you're off to have a great return.

31:49And I look at that and go, this was during a period when we had this kind of sustained disinflation that 1982 all the way to 2020 period. And one of the things that worries me is that if we do get a kind of sustained change in the bond stock correlation, a lot of the portfolio construction will be hampered by it. And people haven't thought through how to go about changing it. They're all assuming, again, like this goes back to my idea that everyone's long the bond market. They're long the bond market because it's worked in the past. And I just like, I think that they need to kind of stop and think about why it might change, how you can take advantage of it, and what you need to do for your portfolio.

32:48So first of all, I just want to say the 60-40 I used because it ends up being just the simplest, easiest way to understand it. You put this portfolio together. It's a classic one. It's with bonds and stocks, and the two even themselves out, and it's a great, nice little construction that's done very well over time. But if you look over kind of the last hundred odd years, you'll see that there was four periods of what they referred to as lost decades when the 60-40 portfolio actually went sideways. It was 1898 to 1920, 1935 to 1945, 1960 to 1981, That was almost two decades in 1997 to 2008. Okay.

33:36And what you need to remember is you need to look at these in real return fashions, meaning after inflation. And over those periods, the actual portfolios didn't make anything and they just, they just barely kept up with inflation. And so you did not earn anything. And I suspect that we have entered already entered into another one. Okay. We've entered into another period where the 60-40 was going to have a lost decade. And it's largely going to be a result of this stock bond correlation going from consistently negative to positive. And I think you already saw it because in 2022, we had the bond market going down and the stock market going down.

34:22It ended up being that the bond market dragged the stock market down. right and and i always kind of joked and said the fact is everyone thinks that the bond market is going to be this ballast to their portfolio and i and i've been arguing that's going to be the anchor that drags it down and i think that that's going to continue now let's just think i wrote i when i wrote that piece i went and found this fellow noah weisberger from pgim he just wrote like an absolutely fantastic series of papers about the stock bond correlation and he kind of went through what causes, you know, positive stock bond correlation periods.

35:00And he talks about one being unsustainable fiscal policy. Well, I think we're on that. The knock-on effects, which lead to less independence of central banks. Although so far, I would argue that the Federal Reserve has been remarkably independent. I don't know how long that's going to keep. And then the third one is supply shifts impacting the economy. And so I kind of think about these things and I think about inflation and why we're going to have sustained inflation. I look at the fact that we have deglobalization. We have the money that's needed for the green energy transition. and then I have this, what I believe is a change in attitude in terms of the people willing to spend money, the willingness to do fiscal policy.

35:55And this goes back again to my argument. Don't trade the market you want. Don't trade the economy you want. Trade the one you have. And one of the things, I'm a big fan of Marco Papage from Clocktower's work. And one of the things he has in his book, Geopolitical Alpha, he says, the median voter is the price maker. The politicians are the price takers. And one of the things that a lot of folks are missing is that the change in attitude about fiscal spending has changed. I mean, sorry, the attitude about fiscal spending has changed. No longer do we have Tea Party. Like, let's even just take this last budget debate.

36:35The reality is that what did the GOP get? Barely anything. And the reason they did that was because they realized the medium fiscal voter is completely happy with spending more. We've unlocked this kind of attitude about spending and it's changed the whole narrative. So I suspect we are going to have, you know, sustained higher inflation. Yes, it'll be volatile. It'll go up and down. I'm not going to dispute that for a bit. But over the long run, I suspect that we will have three to four percent average inflation over the coming decade or a couple of decades. And when that occurs, it threatens the stock bond correlation.

37:25And if you think about what that means for your portfolio, it's like I just talked about how Ray Dalio levered up his portfolio with bonds because they were negatively correlated. Well, if they go positively correlated, what does that mean? That means you actually need to use less volatility. Sorry, less leverage. You need to reduce your leverage because no longer are they offsetting and dampening volatility. They're actually positive volatility. So you need to find another asset that has kind of the traits, the negative correlation traits with kind of a steady uptick that we've seen over bonds, because let's face it, we've gone 40 years in one of the greatest bond bull markets of all time.

38:13So it was a great trade. You levered it up with stocks. And not only did you make money when the kind of shit hit the fan and the stock market went down, you also just made money from the kind of declining interest rate kind of environment. So one of the things that I believe is you need to find something else. And yes, you can go and you could argue gold, you could argue commodities, and there's all sorts of inflation trades out there. But one of the trades that I think a lot of folks are missing is what's called long, the break-evens. And break-evens is long tips, short, the government bond.

38:52And if you look at this, the returns of the five-year break-evens, long, the five-year break-evens, we've had seven years in a row that's up. It's one of the few inflation protection instruments that didn't collapse right back down when inflation went the other way. So I really think that this is the period, this is the time when long inflation break-evens will do well. And I just want to contrast this and think about it in terms of 1982, when Volcker came and he broke the back of inflation, nobody wanted to own bonds. And the reason they didn't want to own bonds was because they were convinced inflation was coming back.

39:37And because they were convinced inflation was coming back, they kept the real rate, meaning the rate of bonds over inflation, extremely high for a long, long time. So you could earn positive real rates by buying the bond market because everyone thought it was coming back. It took many, many years for that kind of persistent real rate to decline. I think we have just the opposite right now, Tony. I think that we people continually underestimate how persistent inflation will be. And I think that that's why we're seeing people rush into the bond market back to the sentiment talking that we spoke about.

40:19They keep rushing back in there and they keep remembering the old era, the old era when rates went to 1 % or 0 % and how much money they made that way. So we are going to have persistent kind of over-optimism about bonds. And if you want, you can't just be short bonds. It doesn't quite work that way. You really, what you want to be is long inflation. And that's why I think long inflation break-evens is a much better addition to your portfolio in a period of positive stock bond correlation than anything else. So, Kev, what's the adjustment that you make, right? I could see where you make a case that the bond portion of the 60-40 portfolio is going to face some headwinds with a higher inflation for longer.

41:09How do you adjust that portfolio? Do you go 60-20 and then 20 in break-evens or 20 in gold? Or do you adjust it down that way? or do you adjust the stock portion a little bit as well? How do you adjust it? Well, if you look at NOAA's work, first of all, the efficient frontier actually changes because of the positive correlation. So you need to reduce your volatility just in general, or sorry, your leverage just in general. So because the volatility has gone up of the portfolio. And so one of the things that I think that people need to realize is that portfolio returns will become more volatile.

41:42That's the first thing. So you need to do that. So yes, you can add gold. and different things like that to try to find other kind of dampening effects that'll help you. But at the end of the day, each individual needs to change it based upon what they see fit. I personally wouldn't own any bonds. Like, I think that bonds in the coming years and decades in real return kind of aspect will lose you money. I think that they're going to continue to bleed. And, yeah, I'm not talking about a trade, and I get it. We could have a situation where something bad happens in the stock market. And next thing you know, the 10-year has gone from 4, whatever, 4.10 to 3%.

42:34And everyone's like all excited about it. But let me ask you this. If we got into a real problem with the stock market or with the economy, what's going to happen? What is the Fed going to do? Fed's going to stimulate again. And we're going to be right back at it. And not only is the Fed going to stimulate again, I suspect that the government will spend again. And so when I think about what inflation is going to average over the coming years, it's not going to be, it's going to be ugly. Like, I think it has a real good chance of being four plus, like over, you know, a long period of time. So when you're buying bonds, like at 4%, a 10 year, I think kind of the best you do is break even on real terms.

43:22Like, it doesn't mean you should go out there and short them with both, you know, both fists, but it just means that I think people are overly confident that bonds are going to be a great investment. And they could be a great trade. And I just want to differentiate that, that there's a big difference between making a trade that you're going to go and buy for the next, you know, month or two versus making an investment. If you're constructing a portfolio, I think you need to think long and hard about your bond portion. And I think that that's just started, Tony. Like, I don't think, I think it's just as the, you know, everyone's still long.

44:03Everyone's still expecting it. This is going to be something that happens for years and years and years. Everyone's freaking out about 4 % 10 years. Go look at the charts. Like, it's like. Like. You see nothing yet, right? Like, that's how. Yeah. Like, we're stuck. You know, that recency bias is so prevalent because everyone's remembering 2008 to 2020. But that's the anomaly. That's the part that's kind of unusual. And like you and I both remember times when the, you know, tenure was 6%. Hell yeah. Yeah. And yeah, that's why, you know, your brain just gets adjusted to looking at the prices that are on the screen for so long that, you know, it's that mean reversion mentality.

44:44But we're getting some good questions regarding what we're discussing now, Kev, from some of our viewers. So before I go into some of the other topics, let me hit some of these questions. We got a question from Michael that I may have already asked and you may have already answered, which was adding gold and commodities to offset equities and bonds in that portfolio. And you already went over. Yeah, go ahead and tamper around and find your own replacement that can dampen that volatility and maybe improve on your correlation. And just to be clear, if you go look at like Ray Dalio, Bridgewater, the traditional all-weather fund, like the risk parity, they definitely have a commodity.

45:21And I shouldn't speak about them specifically. The risk parity, a lot of risk parity funds have an element of commodity slash gold that they put in there. Exactly, exactly. I want to ask you another question we just got from Assad. So how do you withdraw fiscal stimulus today and what fiscal stimulus still exists? If inflation is supply side driven, why would the interest rate or fiscal side even matter? Well, so that's where. OK, so this is I got mad at like the MMT folks, even though I'm sympathetic and I like their framework for understanding how the economy works. some of their analysis after the fact seems really kind of foolish to me and and they were busy saying inflation was wholly supply side and i was like that's bullshit like you know like it was you you stuck two thousand dollars in everyone's pocket or whatever the number was you it was you created it on the demand side and like think about what would have happened had they done none.

46:34You just sent everyone home. It would have been a depression. So we have to agree that there was at least an element of it was kind of demand side driven. There's no doubt, though, that the supply side made it worse because the reality is we couldn't buy anything. But at the end of the day, it was actually a victory for MMT folks because people thought that we couldn't save the economy. They thought that they couldn't actually affect these things, that it would end in a disaster. And it ended up being, let's face it, way less onerous than what all of the kind of doomsdayers said in 2020. Like, think back to March 2020.

47:14People thought the world was ending. Like, they thought there's no way this is going to occur. Like, we're done. Like, the economy is going to collapse. 1929, like dogs and cats living together, the whole nine yards. Like, it was just, and yet it was the opposite. it. But what pissed me off about the MFTers is instead of saying, yeah, it worked, but we did a little too much, they started arguing, no, no, it's all supply side. Like, no way. It was, there was definitely, you know, the demand side work. So it was, the trouble is that it was tough to differentiate the two. And that's what my main point is that I don't know how much of it was too much stimulus and how much of it was supply side.

47:54And I think we're still working that out. And I think that part of the, you know, I mentioned the reasons that I thought that interest rates might be less effective and maybe even stimulative. But another thing that we haven't discussed yet is the fact that when they went and did, the government did all the stimulus, part of it was they handed everyone checks. But another part of it is they handed states checks. Like they went and actually did all sorts of spending. And then not only that, it was followed up with this huge, you know, inflation reduction act, which is basically an infrastructure push, right?

48:26Again, that is spending. So they are actually doing fiscal again, again and again. And so if I was like, it ends up being difficult because a lot of that infrastructure is needed. So I'm not disputing that part of it. But if I was trying to slow the economy down tomorrow, I would raise taxes. it worked it worked you know that's that's that would be way more effective than um powell raising rates yeah oh nobody wants to do that yeah that's politically impalatable though right yeah well because your options are raise taxes or or pull back on the spending so you know does this does the spending need to be like i would argue that a lot of the infrastructure is actually long overdue like the US had one of the like kind of oldest infrastructures.

49:18When you looked at the average age of everything, it was needed. So I think it's needed. But at the same time, you can't go and argue that in 2019 or 2008 to 2020, we didn't have enough spending and that's why inflation was low. And now that inflation is high, it's not a result of too much spending. It is a result of too much spending. Great point, man. Great point. And I want to take one more question from a viewer before we switch topics at all. David asks, do you overweight value over growth in your inflationary model? And I'm assuming he's talking about on the equity side. And I think that's a good question.

49:55What do you think about that? I think it's a great question. And yes, I do. I do think that that's another way you can play this kind of change in terms of if we do go into a prolonged period of inflation. And the reason is, although it seems counterintuitive, in an era of little growth, what you had is lower and lower interest rates with less and less growth. And so the one is if you think about when you're kind of pricing out the kind of the value of a company, if a company is growing a lot and all the growth is out in the future, if you put a lower discount rate on that, it means that it's worth more.

50:39Yeah. Right. You think about it like in an era of declining interest rates, you wanted to own 30 year zeros instead of two year, you know, paying out like every month bonds. And so what's happened is that when the kind of over the last decade, we've had this massive move into growth and it's become so expensive versus everything else. and actually I thought that when 2022 came and interest rates went up and kind of we accepted it I thought that that was it I thought we had finally seen a period where value was going to take off again the growth was never going to get bid again and this is this is one of my kind of adding to my list of errors that I've made over the third past 30 years I got this this rally in the big cap growth completely wrong.

51:33I did. I thought I was lucky enough to get really bearish. I got somewhat less bearish at the bottom, but I kept saying, don't buy this because this is a bear market rally. And I was wrong. I was super bullish on the rest of the stock market, but I was sure wrong on that. And I still think, to be truthful, that this is the remnants of this kind of desire to own big cap growth. I think ironically, it's actually the recession bros didn't want to buy stocks because they were convinced the stock market was good or sorry, the economy was going to roll over. And so what they do is they go, oh, I'm underweight stocks.

52:13I need something that's like not correlated to the stock, to the kind of to the economy. I'm going to buy AI. It's the brand new thing. And they rushed into it and created another kind of what I think is a bubble. So anyways, I got it wrong, but I think that in the long run that value is going to win over growth and it's dirt cheap. Yeah, I tend to agree. We shouldn't we can't. I'm 100 percent in the same camp of that thinking that growth was going to be done. Right. With this rise in inflation, seeing rates take off. We also got thrown a massive curveball in March that I know that you remember when Jerome Powell on Thursday was Thursday.

52:53I think it was March 8th or Wednesday, March 8th. I think he said that the terminal rate was going to be higher in terms of Fed rate hikes than anybody really was expecting. And two year note printed five percent that day. And then we came in on Monday after the Silicon Valley bank blow up and the two year note was printing four percent. It's a little bit like the we're a long way from neutral. Yeah. In 2018. Yeah. So that was a major, as you would call it, squiggle that, you know, went vehemently against our view that rates are going higher. Inflation is going to be persistent. And then you had a position for the next three months after that was lower rates and tech straight up.

53:29Right. And that was just the kind of the right knee jerk reaction for the market to have, in my opinion, you know, given that severe turnabout in interest rates. And now we've kind of worn that, you know, that reversal off where now rates are back comfortable heading, you know, to the upside. So I think we're going to be back in business again. But we'll see. This has been a great, a great path through this discussion. And I think we covered pretty much everybody's questions, Kev. So I want to keep pressing on to cover a few more, a couple more topics, if that's cool. Sure. Let's do it. Yeah. One of the things that you write about that I'm kind of really interested with is equal weight versus market cap.

54:07You know, you've said you've said that the one ARB that still exists is that equal weight versus market cap investing. But the reason it still exists is that it's so hard to implement. Is this a good time for this trade? Or can you kind of tease that out for us a little bit right now? Yeah, so I do think that this is one of the few ARBs that still exists. And I think one of the reasons you need that it still exists is like, you need to understand why something exists. Like if someone tells me an ARB and I go, well, why does that exist? and they can't tell me why it exists, then I'm scared of it.

54:40Like someone will know something more than me, right? And this is one of the ARBs that actually I really think I understand why it exists. And it exists because of career risk. And the career risk is that everyone's benched to the S &P 500. And if they underperform that index, they're going to get fired. So they're forced to invest in a cap-weighted index. And any periods where they underperform that, it threatens their career. If you look, though, at the equal weight index over time, and the way if you want to have a look at this, there's an ETF, RRSP is the US one. And you look at that performance versus the S &P 500, SPY, over time, the RRSP does better.

55:30I think it's 100 basis points. Wow. And if you go through history, I think Research Affiliates has a great paper that I cited. And you look through all sorts of countries, you'll see that on average, equal weight outperforms market cap weight and it's slightly less volatile. So you ask, well, if it outperforms, why doesn't everyone do it? And the reason they don't do it is because they can't take the pain of having it outperformed for three, four, five years, even longer sometimes. And I think that what we're experiencing now with this magnificent seven is a perfect example of kind of the career pain that people feel when it goes against them.

56:22We had this magnificent seven. I think that those seven stocks have never been worth more in terms of the top seven and the S &P over the last, whatever it is, decades. I went and made this kind of chart and I used the S &P 100, the OEX. Remember the OEX? Everyone used to trade OEX options for the old. For us old folks, you'll remember those. I did the S &P. I did the rolling 20-week OEX return versus the S &P 500 equal weight index. So I pulled this up. I did this over time. In end of May, it reached 17%. It had outperformed that. So the top 100 market cap weighted had outperformed the RSP, the S &P 500 equal weight by 17%.

57:12If you look over time, the only time this had ever gotten more extreme was December 24th, 1999. The mad rush into kind of the biggest stocks has been just brutal. You know, it started with Stanley Druckenmiller. It was the greatest trader who's ever lived. He gave kind of the all clear in terms of buying Nvidia. And it was just this mad scramble and it got ugly. I know I would hear stories about like value managers that were, they never trade that kind of crap going, I got to buy some Nvidia. I just can't not be there. I saw a tweet the other day from a fellow that talks to a lot of these pods, like, you know, the like the millennium and all these different kinds of pods.

57:58And they'll say and he said the biggest holding across the kind of the universe is NVIDIA. They have they have positions even from within groups that don't trade semis. Right. It's just and so what there is is that when you're underperforming the index and this occurs, you just got to go. I got it. It's got to get in. And it just creates a self-fulfilling kind of madness. And so one of the things that I tell retail investors is that a lot of ways they have huge advantages over institutions. First of all, they trade smaller, so it makes it easier to get in and out. But regardless of that, their biggest advantage is that they're not going to get fired by underperforming.

58:41They're able to sit through the pain of watching the stock market go up more than they're going up. And so it ends up being that people underappreciate this risk. And long and short of it is that the RSP will outperform over the long run. I'm pretty confident of that. I don't know if it's going to outperform over the next three months, six months, year, it could get even worse. Who knows? Even as crazy as it is right now, I can tell you that in Canada, I was there when Bell and Nortel made up 40 % of the TSA 300. You know, it was one stock, basically Nortel made up the majority of the index. And it was so bad that they actually created, they were about to, they had just created an index that was going to be Nortel capped and it was going to replace the TSA 300.

59:36And just a little, you know, heads up about in terms of timing, by the time an index provider comes around and makes up an index that's going to fix a problem, you know it's over. Nortel went the other way. And so anyways, long and short of it is, if you could take the kind of career pain or if you can, if you're a retail and you don't care about career pain, you should be buying equal weight indexes. Over time, they outperform cap weighted in that system. You just converted me, I'll tell you that. Really, I mean, just, you know, just having that factor in your back pocket alone, Kevin, and knowing why, most importantly, right?

1:00:11The arm is because people can't underperform because they have job risk, right? And so if you can sit there and underperform for a little while, you get to make out in the end, you know? So I think that makes the most sense out of all of it. Really, really brilliant thinking there, Kevin. You've been critical of buy-write ETFs, right? Listeners that may not know, a buy right is holding one ETF and selling a one-month call against it, right? There's actually an ETF out there, TLTW, that is a buy right bond ETF. And yet they continue to expand in assets under management. What do you think investors are missing?

1:00:47Why is this getting so popular? Is this an immediate gratification type of trade that's coming about? Tell us a little bit about the buy right ETF. Well, you know, Tony, it started because one of my broker pals sent me some stuff. It was the end of the month, and they started talking about the effect that the rolling of this option was going to have. And specifically, it was on the NASDAQ. For whatever reason, the NASDAQ seems to be the one that's attracting real big size. Okay? And so, and there's an index there, and it's called, where are we here? What's it called? the CBOE NASDAQ 100 buy right V2 UCITS index.

1:01:30Who knows what that means? It's just, but this is the index. It's super popular. As you mentioned, it's basically just buying the queues, selling a one month call and doing this, right? And rolling it every month. And at first it seems great. You know, like you're going to earn a yield. You're going to like, if the stock market goes up, you get called away, you make the money and you just keep redoing this over and over and over again. It seems terrific. But when you stop and think about it, we know that buying the underline and selling a call is the same as selling a put, right? So in essence, what this strategy is doing is selling one month puts every month and just rolling selling one month puts.

1:02:14And if you thought that one month of volatility was kind of expensive, then I would almost argue I could understand why you might do this. Like there's lots of sophisticated pension funds and people with, you know, long, deep, deep pockets that enter into long, you know, like short volatility programs where they execute it smartly. But this just doesn't seem like one of those cases. Like you're actually selling a call or a part of the curve that is cheap. And the reason it's cheap is because most people buy out of the money puts and sell calls to fund those puts. So there's that what's known as the skew.

1:03:01So if you said to me, you know what, I'm going to do this trade in a disciplined matter and I'm going to sell what I think is expensive skew on an ongoing basis, then I could almost think that this is a good trade. But instead, they're selling what everyone else is selling and if everybody's selling, then it's going to be cheap, right? And so you're selling this what everyone else is selling. And if you think about it, you have limited upside of your right. And in a situation like 2020 or 2008, the thing goes no bid. Next thing you know, you're down 20%. And yes, you've sold the call for 2 % or whatever, but very quickly, it just looks like a straight long.

1:03:43Like the call is not helping you, right? So I did some math and I went and looked at this, like, you know, what does the return look like of this index? And I think it started in September of 2005. And so if I've done it right, it looks like the CBOE has returned 5.65 % on an annualized basis. And during that period, the NASDAQ total return was 14.72. Now, you know, that's, you might say, but it didn't lose. But here's the kind of interesting part. The CBOE kind of buy rate index, the volatility was 16%. The NASDAQ volatility was 22%. And when you go look at the sharp, the sharp of the CBOE index was 0.27.

1:04:25And the NASDAQ was 0.83. So you could have actually just gone and owned half the NASDAQ. So just own half the position of the NASDAQ and actually made more money over this period with less risk with a better sharp. so i just i i don't get why these things are so popular tony like it just it just because people can't think like you kev people people hand you a rubik's cube that's all mixed up in a bloomberg and you sit there and you twist it around and you hand us back a perfect rubik's cube not everybody can do that right well tony usually i the way i fix a rubik's cube is i just take off the stickers yeah exactly right so listen kev we have we've covered an enormous amount of ground and I still want to cover at least one or two more topics, but we have to go a little bit of a speed round type.

1:05:17OK, let's go. OK, yeah. There's basically two topics I want to touch on. You can go in any direction you want. I want to talk a little bit about what's going on in Japan because I think that it's wagging the markets a little bit. And before we hang up, I need to get your view on gold as a Canadian gold viewer at the very least. So take those in whatever direction you want. We can talk dollar yen at one one forty three, you know, 10 year JGBs yielding 60 basis points, rah, rah, rah, up from 40 basis points or go in any direction you want. What do you want to do? Yield curve. OK, let's go to Japan.

1:05:50Let's just talk about all of the assets, because I think they're all intertwined. Yeah. Japan is stimulating. No doubt about it. Everyone else raised rates. Japan didn't raise rates. They stuck with their zero policy. and not only that, they stuck with their YCC, which is yield curve control. They are slowly weaning themselves off of YCC, but it is slow. I listened to this great interview the other day with Luke Ellis, the CEO at Man Financial, and he talked about how he went to Japan and he spoke to the central bankers and he spoke to the finance folks and they said they are deathly afraid of inflation kind of rolling over and going back down.

1:06:30Last year, they saw for the first time, they saw increases in pay of their workers, but it was mainly with the large corporations because the government told them to do it. OK, so they are stimulating. And one of the things that people kind of forget is that YCC is kind of it's it's similar to QE, but it's even kind of more scary because instead of saying I'm going to do a certain quantity, which is quantitative easing, they say I'm going to go and buy whatever bonds I need to to keep this right here. So in essence, they are saying, I'll do as much bonds as you want at this price. I will expand the balance sheet as much as I can to keep it there.

1:07:09OK, so if I said to you that the government, the U.S. government was doing QE in this environment and, you know, forcing people to have raises and doing all this stimulative stuff, you'd be like, what should you do? I should sell the currency. I should buy the stock market and I should probably sell the long end of the bond market. so i think that that's occurred especially with the currency but the trouble is the currency now is so cheap because it became a funding currency it is actually just dirt dirt cheap i went to japan for a couple of weeks tony and i can't tell you i was i was like worried that i was doing the math wrong because i was like this can't be this cheap feed here it was just dirt cheap so long short of it is not only have they gone and done the stimulative but policies they've also changed their attitude about the stock market.

1:07:57So the stock market used to be no one cared. They just kind of weren't that interested in it. They've gone and they've said, anybody that's not trading above book value, you either have to tell us how you're going to get it above book value or fix it. Otherwise, you're going to get delisted. There's a huge change in attitude. So you're going to get more buybacks. You're going to get more positive kind of market-friendly policies from all these companies. It is dirt cheap. It is under-owned. They're doing all the right things. They're stimulating. Their economy is going to fly. They're going to have an inflationary boom.

1:08:32You got to be careful. You need to kind of be careful about shorting the currency. I still think that eventually we actually get it'll be a positive for the currency as money flows into there. But the long and short of it is long stocks, short JGBs, and I think long currency timing on the last one's a little bit tougher to tell. Oh, I like that strategy right there. Very good. Very good. Kev, let's keep plowing away because we got the clock ticking here. Tell me what you think of gold at last sale, 19 and a quarter. It can't seem to break through that double top at 2080. It seems to fall back when interest rates rise.

1:09:06Tell me what you think. Okay, so a lot of the gold bulls are so disappointed and they're just, they feel like, oh God, we had all this inflation. It didn't work. It's just awful. And I hear this time and time and time again. And I push back. I push back hard because gold is sensitive to real interest rates and to the dollar. And so we've had a period over the last kind of year and a half where the five-year tip yield, which is the real yield, went from minus 200 basis points to positive 200 basis points. At the same time, the dollar index went from 92.5 to 115 for a little while there on the spike, right?

1:09:47It's back down. So if you went and looked at the kind of just the the simple correlation or whatever, you know, you dual axis charts that everyone's getting mad about, you would have said that gold actually should be 1200 to$1 ,400 based upon those two variables based upon the previous relationship. So whereas most people are upset that it didn't do better, I'm ecstatic. It didn't do worse. And I look at those things. I think that real rates, which is very different than nominal rates, but real rates are going to go down from here. I think that the U.S. dollar will likely over the long run go down from here.

1:10:25And I think that gold, the environment for it changed dramatically in the Russian-Ukraine war when the West confiscated reserves. And when the West confiscated reserves, it basically said to other countries, be careful about your U.S. dollar reserves because we can take those away from you. and if I was China sitting on the largest reserves in the world, trillions of dollars or whatever it is, and yet you look at how much gold they own, it's 3 % of those reserves versus kind of, you know, Russia was at 30 or something and lots of countries are at 10. Okay. I would, if I was China, I would just from a prudent, you know, prudent back, you know, backstop, I would say I have to buy gold.

1:11:17I have to start moving some of our reserves into this. I would just do a certain amount every day, every month, and I would just put myself on a program. So ultimately, I believe gold is going higher because central banks are realizing that they need to own more of it because of the actions taken during this war. Kev, does the formation of this new currency among the bricks, is this affecting your gold view at all? Or can you kind of keep that in a separate box? Or is it all one part of the story? Because it could be related in some ways. Yeah, I don't think it is. I know, listen, I'm in some gold bug kind of channels.

1:11:58I don't know how I got there, but I'm there. I'm seeing it. And I see them all excited about this bricks currency that's backed by gold. Like, first of all, Tony, if this was to really happen, like how many people know are involved in this? It's like it's literally, you know, multiple, multiple countries like tens, twenties. And then think about everyone that would be involved. And so my point is that if it ever did happen, gold wouldn't be up twenty thirty dollars beforehand. It would be up two, three, four hundred, five hundred dollars beforehand because there's no way everyone would keep it like quiet.

1:12:36So I'm a seller that this will happen anytime soon. I don't it doesn't affect my reasoning at all. I try to ignore that the noise there. I think that maybe over the long run, it'll be another positive. And if I'm wrong, Tony, so be it goes up for that. But I know I'm not buying it because of that. No, very good to know. It's good to know. I want to know what was behind your thought process. And I like the idea that China waking up to the fact that they don't have enough gold reserves is might be a likely reason why gold hasn't collapsed while real rates have backed off. Right. So you can look at it two ways.

1:13:11And I've been looking at it the way that you have, where if you chart gold against real rates, real rates have backed off. And you're like, how the hell is gold hanging in here? Right. There's some level of positive attribution to gold because of that. So I think you're on to something with who might the buyer be and things like that. So I think that's a really important level of thinking. All right. I think we covered pretty much all the bases that I wanted to cover with you. It was an intense discussion. We talked about the trajectory of the bond market. We talked about interest rate hikes being stimulative, the 60-40 portfolio, equal weight versus market cap.

1:13:47Is there anything we haven't touched on that you'd like to? You know, if you wanted kind of a punt, something to look at, go have a look at the fact that I was listening to Mark Fisher the other day, who's one of my absolute heroes. I think if you're at all interested in day trading, go buy his book. But anyways, Mark Fisher was talking about how the indexers had to buy and roll NatGas and boil in terms of the amount of contracts that this ETF boil has of the outstanding natural gas kind of open interest is huge. And not only that, it's all in one month. and it just creates an interesting situation where like, let's just imagine we got a hurricane or something and that we have 30 % of the open interest that needs to roll.

1:14:37And not only that, it's a negative gamma situation in terms of they need to buy more as it goes up because it's a levered ETF. I just think it's an interesting thing to look at. Yeah, well, we'll keep a close eye on that and what could be, you know, natural gas has been kind of quiet, but it's one of those commodities that kind of sneaks up a young year and starts flying around the board pretty quickly. We may be set up for that. So, Kev, that was a pretty well-rounded discussion. I think we covered, I mean, everything that I could think of. You unpacked a lot of puzzles, and I had a lot of eureka moments.

1:15:06So thank you very much for that. And I hope our audience got as much value out of it as I did. Well, thank you for having me. And if anyone wants to see some of my work, please feel free to give me an email. Kevin at the Macro Tours, and I'm happy to send some stuff along. That's perfect. That's all we needed to hear was where people can reach you. Kevin at the Macro Tours, sounds like it'll get them there. Thank you, everyone, for listening. Thank you so much, Kevin, for participating in this. I thought it was a fantastic conversation. Thanks, man. Great to see you. And too bad we can't go drinking now.

1:15:34Yeah, I know. But we'll do a combo again soon to see how we get on some of these predictions. I thought it was awesome. OK, thanks, Tony. Great job, Kevin. Thank you.

1:15:49What's up, revolutionaries? Thanks for tuning in to the Real Vision Daily Briefing. For more content like this, head over to realvision.com and get unfiltered access to the very best, brightest, and biggest names in finance.

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