Transcripts
Erik: Joining me now is Jeff Currie, Chief Strategist for Energy Pathways at Carlyle. Jeff, it's great to get you back on the show, it's been too long. Let's start with what's going on post the Trump election decision. It seems to me like there's a lot of anomalous pricing in markets, a lot of things are going in directions not everyone expected, including treasuries, particularly. What's driving this is this passive investment versus active investment, as this credit spreads, why does it feel like markets aren't quite doing what everybody expected?
Jeff: Yeah, I think your point, taking it from a really broad perspective here, is it's not just isolated to markets like the credit spreads, or it's not just isolated to equities, where you see 39% of concentration in the top 10 names, or in oil that fails to get a war premium bid. It's in across the entire macro space. So, it's exciting times, lots of opportunities. Let's just go through each one. Let's start, I think, as you pointed out, let's start with treasuries. Those are the markets, I think, where you see much more anomalous pricing. And I think it begins with the credit spreads. You know, you got a situation in which, when you look at US Treasuries sitting there at somewhere around 4.4% right now on the 10-year, versus investment grade running just shy of 5%, we've never seen such tight credit spreads ever, is that an indication that the US is a worse credit than potentially investment grade? I've met people who have made the argument to me, you could see Apple trade through treasuries, or is it, as you point out, being driven by passives out there. You see it in high yield too, that's running somewhere around 7%.
So we're in a very anomalous situation right now. But I think, talking about in the context of the Trump trade, the one thing that fore stepped treasuries was a significant concern around the size of the US deficit, driven around tax cuts and tariffs creating inflationary pressures. That put upward pressure on yields, but that's just part of the story. You got to look at what was going on in the corporates and the tight credit spreads there. The explanation I hear from credit traders is, you had many corporates holding back supply as they waited for rate cuts. Whether or not that's true or not, we'll find out, but I just think, let's put that observation in the context of what's going on in the equity markets. And I think your point about passive investors is also a really critical one. That I'd argue in the post-COVID era has been the biggest shift in markets. We went into COVID with passive investors owning less than 50% of US equity markets, were coming out with passive investors at 60%. The thing that drove that is during the lockdowns, we saw all those checks sent out, and people only had two things, shop online and invest in equities, because fixed income products had a 0% interest rate. And they used these passive ETF vehicles to enter the market, and that's how those percentages got so high. But once they got so high, they crowded out the active investor, and are now the dominant player in at least US equity markets. And that reinforces this idea that big gets bigger, and also most of it's concentrated in the American. And so if it's big and it's American, it's getting bigger, which is why, when you look at concentration, you've got 39% in the top 10 names in the US, which is anomalous. But it doesn't stop there. We can go and we can talk about oil and other markets. I think the key point here is, we're going through a major transition in global markets right now where the marginal buyer is changing, the marginal market is changing. And whether, if it is looking at currency markets, is it gold, or is it in oil? Is it gas and these other markets? So I'd say that the way I'm interpreting all these events is the marginal buyers changing and the marginal market is changing.
Erik: Joining me now is Tressis Chief Economist and fund manager, and of course, best-selling author, Daniel Lacalle. Daniel, it feels to me like maybe the various trades, whether it be dollar north or gold south, the things that happened in reaction to the election of President Elect Donald Trump, feels to me, like maybe those trades are running out of steam. What do you think?
Daniel: I think it's probably run too fast, and we need to at least take a little bit of time to analyze whether the strength of the US dollar is going to continue, and particularly the very complacent view of equities, considering that the earnings season is coming and that there may be some challenges, particularly in the Russell 2000 which has had a phenomenal bounce thanks to the election trade, I understand that there's a strong element of fund flows. I witnessed in different competitors and friends that there was a conscious decision to get into bonds with higher duration, reduce exposure to the United States, increase exposure to Asia and maybe to the Euro area, and that obviously has worked horribly. So, there is certainly a double whammy, right now, happening. On the one side, people are re-balancing their portfolios to an overweight in the United States and reducing those exposures that I just mentioned, and at the same time, the sort of buy in case anyone misses out, the fear of missing out of a very aggressive change in the economy, I don't think we can expect a very aggressive change in the economy, let alone in the earnings profile short term, and therefore we need to be a little bit cautious about that. Maybe the dollar, which has been a huge underweight among investors, is the one that probably has some room to go from where we are today, and we may see some, at least, calming down in the equity and more sort of cyclical stocks.
Erik: Joining me now is Vincent Deluard, who heads up Macro Strategy for Stone X. Vincent, I can't believe it's been four years since we had you on the show, it's great to have you back. listeners. Vincent has shared with us some really excellent research. It's the stuff you normally have to pay for. It's linked in your Research Roundup email. We're going to talk about three separate Stone X Intelligence Reports. Vincent, let's just start with the big picture of, you made the call, as did several of our other favorite guests, our mutual friend Louis Gave called the secular inflation several years ago, as you did. Everybody else was saying it's transitory, it's just going to be short term pandemic effects. You were the guy to say, no, the pandemic is the catalyst that's going to bring about a secular inflation. Seems like you and Louis and number of other smart people are being proven right. Let's just get the big picture update. What's happening with inflation, or do you still have that view that this is the beginning of a secular inflation? Because, look, we're just having what seems like the end of a wave. A lot of people are saying it's ending.
Vincent: Yes, thank you. It's a pleasure to be back here, and thank you for the introduction. The secular call would not be a secular call if we were to change it, just because one measure of inflation, and I'll stress that the CPI is a measure of inflation with certain biases, certain choices, but it's not inflation itself, has come down to levels that are still far above what we had before. So yes, inflation is a process, not an event, and it typically occurs in waves. So seeing some cyclicality in inflation, like that little signing pattern that we are seeing is actually what you would expect. And that's what you see in the past. If you think about the 70s, you had these three ascending waves, right? 1971, 1973, 1979. If you think about the 50s, you had one on the US mobilized. Another one during the war, and then another one after the Korean War. I've actually went all the way back, using Bank of England data, back to the Middle Ages, to test this hypothesis that inflation indeed is a wave like pattern. So the notion that would have a kind of one and done is very, I wouldn't say unprecedented, because I haven't data on all countries. I could say it would be certainly the minority to see a single wave, and then we just go back to the old world. One thing I wanted to rebound upon is also, when you mentioned COVID was a trigger, I think that was, that's factually correct, but I think it's the response from COVID that was the trigger. COVID itself was neither inflationary nor deflationary. I mean, events are somewhat neutral. You could have made a case that COVID was going to be deflationary, if we had not responded to it, if we just had basically, dramatically cut out consumption of commodities. Oil prices were negative. It could have been deflationary. And actually, it was in China when we had completely different response. COVID was deflationary shock. What was inflationary after COVID was the response, the fact that we blew up the deficit. I mean, the deficit increased more than it did during World War II, after COVID. And contrary to World War II, we did not normalize after that. This is a balanced inflationary, this is the policy function, the reaction from the Fed, from the fiscal authorities. This is what creates inflation, and this is what makes me think that is going to come back, not because of some external shock. I obviously cannot predict shock. You know, in 1979 it was the Iranian revolution that triggered it. 1973 was the OPEC gold embargo. There is going to be another shock, and the response to that shock will be inflationary.
Erik: Joining me now is best-selling author and former US presidential advisor, Dr. Pippa Malmgren. Pippa, let's start by informing our listeners we are recording very early on Wednesday morning, just a few hours before former President Trump was reported to have basically won the presidential election in a massive red sweep, with Republicans taking control of the White House and the Senate. The House of Representatives still looks like a little bit early to call decisively, but it appears there's a good chance that Republicans will take both chambers of Congress and the White House. So, the big question is, okay, does that actually mean that this race is over? Or is this just the beginning and we're headed for a mountain of lawfare and so forth? Give us the roadmap of what lays ahead. Do we have to worry about unfaithful electors and refusals to certify results and so forth? Or is this a done deal?
Pippa: So, it's hard to see the lawfare happening given the breadth of this vote return. I mean, this is a sweep by any measure. Now, the media is not going to call it a landslide, but it sort of is a landslide, so that makes it much harder to fight this thing. So, we might get pockets of that, but I don't think that we're going to get what would have happened if the vote had been a lot tighter. And this is the important point. I think, you know, I was up all night, I woke up this morning, early to do this call with you. I think this is much bigger than politics. This is a cultural moment. This is a transformation in our understanding of the whole power structure of the country. So, for example, it is also that the media just got thrown out of office, in the sense that the media did not report this groundswell. The media across the board basically said that Trump was a bad guy, and the policies were all wrong, and refused to report the most important person, I think, in this whole election, which is Bobby Kennedy, who has played an extraordinary part in producing the outcome that we've just seen, but he was completely silenced and dismissed. And so, I think, for example, we got to dig into this, this is why Jeff Bezos at the Washington Post announced that they're not going to endorse a candidate. It wasn't just about that. It was knowing that the minute they announced that, a whole bunch of the staff members would be very upset and they would resign, which is exactly what happened. So now he doesn't have to fire them. And why would he want to fire them? Because, look, he's a tech bro, so he's got access to all the data. He sees this coming as do all the tech bros, and that is partly why they joined with Trump. And he realizes I don't have the team at the Washington Post that can report what's going to happen, because they're so heavily biased against this group of people, they literally won't be able to write the story. So how do you clean out the newsroom to make space for people who can? If you fire them, you got to pay them. If they resign, you don't have to pay anybody. And so, I think Bezos is already telling us the media was wrong footed about this. So that's just one element of the sort of culture aspect of what we're talking about. So, I don't think this is just a political result. This is something much more profound. Does that make sense?
Erik: Joining me now is 42 Macro founder, Darius Dale. Darius, as always, has prepared a fantastic slide deck to accompany this interview. It is the full slide deck which is normally sent out to Darius’ paying subscribers. Accordingly, we do need to redact some of those pages, otherwise those paying subscribers would throw a fit. So, you'll notice that only the slides that we discuss in this interview will be visible in the slide deck that you can download. If you want the whole deck, you'll have to follow up with Darius at 42macro.com. Darius, great to have you back on the show. Obviously, first topic’s got to be, we're recording on Tuesday, seven days before election day in the United States. What should we think about that as investors?
Darius: Appreciate you having me, Erik, thanks again for thanks for the opportunity, my friend. So obviously, the markets are starting to run away. The probability of a Republican controlled government, as you see here on slide 85 of our latest Macro Scouting Report, we show the Polymarket odds. Now, we all know the Polymarket is manipulated by a few whales, but those whales are choosing to manipulate the market in favor of Donald Trump and a Republican sweep. So Republican sweep for a reason, likely for data driven reasons based on polling, based on early voting results. And so, it's really clear, and from our perspective, that the asset markets both factor leadership within the stock market and also the broader rates and currencies markets are really moving in the direction of the implications of Donald Trump's policies.
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