262710182 - 1_2ym1f5n1 - PID 1851201 Good afternoon folks and welcome to the real ambition daily briefing. I'm in Pasadena and quite tellingly, I'm sending live emits the very severe thunderstorm here in Copenhagen, Denmark today, It's been an interesting day in the world of macro. Not least as we've, we've had an official sovereign debt default. Basically. It is too late, the 27th of June, and I am very happy to be joined by an old friend of the show, Peter book while the CIO of bleak, the advisory group, how are you today? Peter addressed. Thanks for having me on again. Of course, Basically few are better at assessing been maggots then you, Peter. Russia defaulted on a few international debt obligations today. In my opinion, probably more of a technical default than anything else. But please unpack this situation a bit for audience. Should we care about this, that default, the Russia. I agree that it's technical and that it was not by their choice. It was of course, forced upon them. Certainly they have the capability of hang back these bonds, but we're not allowed to. If anything. It's the bondholders that are getting screwed. Russia saying, well, we have the money and if you don't want our money, then we'll just keep our money. So I look at this as a very idiosyncratic situation. I would not extrapolate this to broader emerging markets or country ability to pay. And as you said, it's, it's more technical than than anything else. Yeah. I tend to agree. It's been an ongoing debate for a couple of weeks in a row now, whether the Russian economy is doing better or worse than before the invasion of Ukraine. And one of the things that have been debated quite a lot is the level of the Russian ruble because it looks really strong on charts. If you chart it against the US dollar, for example, do you consider the strength of the Russian ruble on the charts as a sign of strength and the Russian economy. I think it just reflects the flows, the oil money that continues to comment, the huge current account surplus that they have as, as their exports obviously go up pretty strongly, and their imports have essentially collapse, the economy itself is in a really tough situation. You don't hear about the thousands and thousands or tens of thousands, hundreds of thousands of people that have lost their jobs with a lot of Western companies closing down. Now some will reopen under a sort of a Russian umbrella, but plenty have lost their jobs. They're losing access to a lot of technology. Whether it's technology at the oil pump from Halliburton, Schlumberger, or Western technology in a variety of other areas. So there are hurting, buy them. Again. It's all about the flows that they're benefiting from. And whether that's also only accepting roubles for payment for oil, were having capital controls within their country or adding up to their strength. But again, it's certainly not reflective of a robust Russian economy. It just reflects the still heavy revenue that's piling in specifically with energy at these very high prices and their ability to still sell, even though the customer mix is obviously different. But Peter, who are the winners and losers of this current situation with, with Russia. I know we have a chart that we can bring up on the Export destinations of a Russian exports. We have Germany, Italy, big countries within the Eurozone high on that list. So who would you claim to be the winners and losers of the current situation? Well, Putin is clearly a winner because he's still able to finance his military machine through the exports of gas, in particular, obviously agriculture as well. But for purposes of this conversation, dollar-wise, it's going to be predominantly oil and gas. So he's able to continue on as is in terms of revenue. I wouldn't say the Russian people because it's not like he's using that money to filter down to the Russian people, Russian people instead. As, as we mentioned, dealing with a very difficult economy. Now from an inflation standpoint, the strength of the rubles helping to mitigate their jump into cost-of-living. That we're at a point where even the bank rushes, not worried about the ruble being too strong and they're doing what they can actually weaken it. Now, other countries that are able to buy Russian barrels at a discount, like India, like China, they're also a beneficiary. I'm not sure what the exact dollar amount is right now, but I know it was a 15 to 20 dollar just count. That these countries were able to procure Russian barrels with. We know what who's hurting of course, is, is European countries that are now getting clipped by the reduction in gas deliveries. Where we're prudent, sort of playing a game with them. That's not helping them. And we'll see to what extent this game of Putin actually starts to hurt him because he's losing more customers. And like I said earlier, losing the technology to continue on producing at the rate at which he was. And therefore, they're not producing as much because hey, there, there there, there wells are not as productive as they once were. And over time that will hurt them. But at least for now, he's able to get away with. Speaking of commodities. I actually think that we've seen some interesting price actions. And in many commodity markets over the past 23 weeks here, we've seen every traced in a few of the very important industrial metals. We've also seen a material retrace meant lower in the price of natural gas in the US, for example. So what do you make of this recent reprising lower in commodity markets? It's clearly in response to global growth concerns. The orange where recession we're on, on everybody's mind. And what that potentially is going to do to the demand side of the supply-demand curve with respect to commodity. It's also in the context of a very sharp run up that we saw where everyone was with volition. We got Certainly off size in terms of that sentence. So the question is, to what extent do we get demand destruction? It going into this downturn, how elastic or inelastic is the demand for, for commodities. And of course we can break it down. Amongst the groups. The demand for food is not necessarily going to author. But if you look within the commodity space, if you can play it as an investor. And we had, we did here, but we had sold their fertilizers, but demand disruption for fertilizers has certainly taken place. And we've gotten some, some, some better delivery yields out of Brazil and Argentina. But if farmers are going to plan less fertilizer the summer, it means that maybe the harvest come October may not be that as robust. Industrial metals, which are probably the most cyclical and the most elastic of the commodity space. Well, that, that certainly gotten her particularly copper. I think energy is certainly much more inelastic that people still have to get into their cars to drive, to work and see friends. And you still need to heat your house and cool it during the summer. So that will likely remain, we're sticking from the demand side. But from a market perspective, like I said, it got overheated. Now remember once talking recession, what do you do? You sell economically sensitive things and certain commodities certainly said that though. If you listen to Jay Paul at the latest Federal Reserve meeting, it almost sounded as if he's started targeting the price at the pump as to make the inflation target for the red reserve, at least indirectly via the channel of inflation expectations. Do you think it will matter for the Federal Reserve outlook if we get a further slide and commodity prices, I think it will matter in where the Fed funds rate ends up. And we've certainly seen that retracing intersexual and features where at the peak pricing in a 4% sort of called terminal rate, which people like to use that term in the middle of next year. And now we're just under we're probably closer to 3.33.4, which actually is where the Fed thinks that they can take the Fed funds rate this year alone. So I do think that and just that as we've seen with the mentality of, of, of the Fed, is that they obviously went extreme on one end. They seem very intent on going extremely other, and so they're going to raise 75 in July. So this decline in commodity prices to your actual question Will help determine whether they go 50 or 75 in September. But I think that they've lost so much credibility in how they cleave this inflation game. Where they of course had their chips all in on transitory. That they are going to take the, the opinion. They're more focused on getting the Fed funds rate to a certain level. Which then they can take a step back and, and, and play it by ear from there. And if the inflation numbers start to come in, well, good, they feel like they did their job. If, if the inflation numbers come in rather shortly and we go into a deep recession, well, at least they then have reached to cut. And I think around 3% is that number. And grants at the dotplot got the 3.4 in their last meeting, but I think there are intent on doing 75 in July which will get you get about 2.5, which is where the Fed funds rate topped out in the fourth quarter 2018. And I think they'll probably go 15 September depending on the data, which we'll get into that 3%. And then from there, it's completely play it by ear. But I think the Fed's credibility in their eyes will be lost if they start having buckling of the knees. Just because oil prices went from 120 to a 100. No, that's not enough for them too. It because they know if they lose any credibility that they're trying to regain. Well in the markets are going to play around with them and made you see a big sharpen phone, the dollar, and a spike in commodity prices. And then it will look like complete idiots. So I think again, the, the, a level of Fed funds rate while they say we were going to do weekends to bring down inflation. I think they're very focused on getting to three because that they believe will give them flexibility to go either way from there. And one last point on this, I wouldn't be surprised if they ended a 2.5 if history is any guide, because we know last 40 years, each hiking cycle ended below the previous hiking peeps. Yeah, that's a very fair point. I've also noted how the correlation between the gasoline price and then the Eurodollar futures in the first quarter of 2023 are very correlated. And it goes right to your point that for the terminal rate, for the ultimate expectation for the federal funds rate level, we should probably watch the development in the commodity space, but not for the very near term outlook. I know Peter, that you want to discuss another central bank also this afternoon because you have a great point in terms of what's going on in Japan. A lot of people are watching the development in the ten-year space and the yield curve. But there's actually maybe an even more interesting development going on. Further up the curve. In Japan, we can bring a chart up on the development and the 40-year point on the yield curve. Please unpack your thinking on Bank of Japan and why this 40-year point is so important to watch. So as you mentioned, we know that the stat or the VHA has essentially fixed your curve out the 10 years with that 10-year trading within a band of minus 25, plus 25. And we keep bumping up against the upper end of that. The reason why I like to look at the 40 year is because because it's the furthest away from DOJ manipulation of not just 25 basis points at the tenure, but a negative ten basis points on the deposit were called overnight rate. So going up 40 years, it's the most market driven corn of the G-tube, a yield curve. Therefore, if you want to look for signals, if there's any signaling left in it. And the GGB market visit, there's some, there's some there. The 40 years is where to go and overnight. It got, the yields got close to 140, which is a fresh 6.5 year high. So it's when I see that tells me that it's getting tougher and tougher for the BAHA to be sitting on that, that 10 year beach ball underwater. And that it's just inevitable that, that that ball is going to, is going to spurt higher. Now, the BAG, I think will widen that band. I've no idea when, but I think they'll have no choice. But they're going to do it would most likely we will be in thin increments of maybe ten basis points. Just a story as a way to cap that the weakness. And again, because just from a signaling standpoint, if they went from 25 to 35, economically really wouldn't matter that much. It's time-based signaling though it could lead to a rally and yen, which I think at some point they're going to want because at the same time as karuna is sitting on yields because he wants to generate is 2% inflation sustainably. These already done that for two straight months. I think that there's a lot of pressure within the Ministry of Finance that they don't want any more weakness in the yeah. Now they don't get it if oil prices stop going up. Because over the past couple of years, there has been some relationship f x lies with the yen and energy prices because we know they import so much energy. So you can draw a chart, pencil the past month, that crude oil and the yen have pretty much move in lockstep. It's broken down a bit of late with when prices pulling back and the yen really not at around 135. But I would really again look at that 40-year yield every day as the real part of the yield curve. That is sort of speaking out with its own voice and not being fully manipulated by the BAHA. And in that regard, we should remember that I think there are two countries that are extremely reliant on foreign energy sources. One being Germany, the second being dependent. That could be the reason why we have this correlation. Between the old price and the doll again, ethics cross. We talked initially about the market slowly but surely reacting to the growth scare that is potentially upcoming. And today we got news out of the US related to the durable goods orders. Of course, one of the gauges that one could look for. When, when assessing the outlook for the US economy. What do you make of the positive surprise on the headline for the durable goods orders? So yes, it, it came up, up seven-tenths the headline, I think it was extract it and also to be the core durable goods or wherever they can. Are you annexing out? It's basically non-defense capital goods exam graph that also slightly be also the prior month was revised upward. So in response, he went to Fed actually raised their second quarter GDP estimate by three-tenths from 0 to plus three-tenths. But these numbers are reported in nominal terms. So even with the upsides Prize in real terms. And yes, the Atlanta Fed is in real terms, but they don't necessarily quickly adjust on the inflation side as quickly as they do on the nominal side. So if you look at May in May PPI numbered, I'm just doing a back of the envelope. Nothing scientific year may, goods prices in ppi, putting aside services was up 1.4% month over month. Headline durable goods orders were up seven tenths. So you can argue that, yes, in nominal terms, durable goods orders went up. But in real terms, they're still following. And I think when you, when you break down the GDP equation and trying to figure out, are we in a recession? Are we about to go into recession? Obviously, the biggest chunk is consumer spending. And on, in real terms, we can argue that that is on the cusp of a breaking down. And then you have gross private investment, which some of that is real estate, residential real estate. But the other component is capital spending. And or we are on the cusp of a downturn in real terms in capital spending. Now, durable goods orders keep in mind, does not include software sniping. Software spending is still going to remain pretty, pretty healthy, but mostly bigger companies. And when you think about investment, investment comes from savings, or theoretically it does. It comes from company cashflow. And if we're going into a growth slowdown and companies have less cash flow, will then just by default, they're going to be investing less in their business because there's less cash to go around. So that is another component which is potentially going to reflect a downstream economy. And then you have trade, which the global economy slowing down. So terms of trade is going to slow. And then you have government spending, which is typically a plus sign. But this is sort of how you should break down the debate about whether we're going into recession or not. So that's why the durable goods numbers that IQ was important about how companies are going to respond from here now, Google, Microsoft, the big companies don't maintain a certain level of CapEx because they have the cashflows to do it. But not everyone does. In a large company space. And certainly not for the small middle sized companies. An economic slowdown. In relation to this debate on whether we are about to enter a recession or not. I wanted to play a clip for you from an interview that aired earlier today on the real vision platform between discussion between Francis get and Mackey lake on the small pockets that are still performing within the US economy. So let's have a lettuce and then get back to the discussion on the US economy. I think people in general are looking for a big crescendo. They're wanting this moment that everything screams. This is the bottom. I think this is an environment where you're not going to get that the bottom might take a couple of months to actually happen. And so second quarter earnings reporting period are going to be increasingly more important. I would tell you that, you know, when I look at the economy and the slowing economy, the economy still working, it's still open, there's still pockets of strength and I think people forget that. You have regional pluses and minuses, typically in the United States just given the size of our overall economy. But it's still open and working. It might not be perfect here today. It might not be growing at 2% plus that might be 1%, it might be 0 wherever it might be, but it's still open. And I think that's something to remind ourselves. You can watch the entire interview if you are an essential plus a pro subscribe on the real bisschen platform. But back to the points of the interview, Peter, either still pockets of the US economy performing above trend or about trend. Well, to his point of view, and US economy, mostly growths. You need labor force increase and productivity and you're going to get GDP growth. But you have cyclical down currents that are called recessions. Just as night follows day you have recession that followed expansions. Obviously, expansions run a lot longer, actually. Then the recessions, but we're still going to get up and many of us go to work and and, and live our lives. Obviously, it'll be different somewhat in a recession. But we still sort of chug along and work through it even though it still is painful and that downturn begs the question of what works in a recession. Well, things work, some things work. But relatively speaking, if I'm Kellogg's and I'm selling snacks and cereals and for full disclosure, we own it. And in an income strategy that we have, yet, people are still going to keep breakfast and they're going to still eat Pop-Tarts, snack, bye me, eat less. Worthy me tray down. And you may go to the supermarket and you may get store brand Corn Flakes instead of Kellogg's Corn Flakes were still buying a box of cereal. But you're changing your spending behavior. And also, we also have to understand what context is this recession occurring out. From a market perspective. It's occurring with valuations that even after this pullback are still very high, are still expecting optimistic earnings growth. And I say optimistic earnings broke because if you look at consensus estimates on, on Blumer for example, which is my data feed. People or the adults are still expecting about $220 a share in earnings. And I find that certain la-la, land of an earnings estimates. So we've credit spreads and even though they've widened, junk bond yields have doubled. Historically speaking. Going into recession, there's still relatively low in yield and tight and spread. So it's that market backdrop in which this economic slowdown is entering in. Now evaluations were low if the S and P 500 was trading at 13 times, earnings and credit spreads were much wider, I would say, yeah, we're answering in a recession, that's going to hurt. But markets can mean maybe able to absorb that to an extent. And we know that, that we do a bear markets common starting with economic downturns. So that always happens, but it's to me, it's just too nonchalant to say, Yeah, well, life goes on in the economy still going to move on. It's not going to close down. Therefore, have no problem buying stocks. We know in bull markets, valuations expand and stats why stocks go up much faster than EPS and GDP growth. The downturn, stocks usually fall more in the economic downturn because multiples fall at the same time, same time an earnings call. So stock prices are just sort of a leveraged review on earnings and the economy. And that's why you get moments in time where stocks grow a lot faster than GDP growth and they fall a lot faster than any decline in GDP. If we look at the ISM Manufacturing Index, I'd say that there is usually a very strong directional correlation to the S and P 500 on nasdaq. For that matter. We actually got a small regional print out of Dallas earlier today showing that the manufacturing sector of Texas is is declining quite rapidly. What do you make of the cyclical manufacturing outlook if we look 123 quarters ahead and repercussions for the equity markets. So going into cities, Dallas, sprint, we had a minus sign in front of New York. We had a minus sign in front of Philly. We had a plus sign in front Kansas City but had fallen or a month. And the Dallas Fred was minus 17.7, which is the lowest level since April or May of 2020 when we were just coming out of the SRP shutdown. So we start to see what the national number is on Friday, the ISM, and we'll get Chicago's regional number on Thursday. But we are seeing likely a contraction in the manufacturing slash good side of US economy. But we know that's where, albeit that's where the excess occurred over the last couple of years. Whether it was with checks to people, it was stayed home work from home. Let's spend on technology and laptops in a deck and a Peloton and this and that. We know that's where a lot of spending took place. And now it's hanging over time. And that is being felt on the good side is seen beings seem, like we said in the manufacturing numbers. The question is, what happens with the services side? Since the services side is really the biggest part of the US economy and we're seeing that at least the burst in travel and entertainment the summer and we'll see how long that lasts. But I think it's safe to say that that US manufacturing that with the recession has begun. And the Dallas number, like I said, confirming New York and Philly. And now whether we see a minus 50 or I should say below 50 print on Friday, we'll have to see the market PMI, which came out last week still is above 50, barely. But we're trending and getting close to. That under 50. Well, if I look at my inch straight based models for the eyes and manufacturing number 2, three quarters ahead. I would basically not be too surprised to see a level below 45 fairly soon and maybe even close to 40. We have a question from, from Ralph on the real vision side, relation to this discussion. Because Ralph is interested in the developments within the mortgage backed security space and whether it's linked to this slowdown in manufacturing. What do you make of the outlook for, for mortgage-backed securities and the link to the economy. Well, I think the first link is the Fed no longer being a buyer. And what implications that has for that market. Because we've seen certainly mortgage spreads, MBS spreads relative to Treasuries. Why now? Also the worry that at some point, maybe sooner rather than later, that the Fed will actually have to start selling their holding some mortgage-backed securities and in order to meet their QT goals. Now, keep in mind though, these are an agency. Mbs is still essentially government paper. So it's not like if you were the conventional bondholder, these aren't money, good. It's just being price right? Now. How they're spread is being price relative to treasuries, which out, without this sort of big gorilla in the market, no longer being there. And that's the effect. So they created so much distortion and they were buying such a big chunk of that market that, that is definitely a huge influence. Now, economically speaking, we know there are a lot less mortgages being issued because of the downstream in house and we know revise or down 75% year over year. Mortgage applications for purchases or down 10 percent. We know that is likely to continue to weekend, so that's the direct impact there on MVS. I want to conclude the show with a question that relates to the initial debate we had on the Russian default. Bo asks us whether these sanctions are simply dangerous from a macro point of view and whether these forced to folds, as we've seen in Russia today, could carry geopolitical repercussions over the next years. I think that they're dangerous in many ways. It was dangerous and that while we're trying to punish Russia, the rest of us are getting her to buy. The rising energy prices, rising food prices, and, and the pain that that we've had to deal with in response in Germany is dealing with pain because they're not getting the full flow of natural gas. Now, some of that is self-imposed because they decided to shut down the nuclear plants. But there, there, there, there isn't, it's not costless to just throw sanctions on another country and assume that that country is the only one that gets hurt. We know we've we've done long-term, long-term damage potentially in the flow of funds by sanctioning the Bank of Russia and, and basically cutting off their access to about half of those reserves. What does that mean for the long-term implications of, of, of trade and energy and whether it's going to be now done in Euro well-being one or in other currencies that are not Euro based, where we're dollar based. And what does that mean? For the hegemony of the US? The US and the dollar. And, and what happens when, let's just say tomorrow, who wakes up and says, What a stupid idea, I need to get out a Ukraine. Well, what do we do with the sanctions to wheat? Automatically take them off to the stay on? We don't know. So it's it's hard to make sanctions. Like I said, laser focused on widening our enemy and think that's the only one that gets hurt. It's like scattering bombs and some of them will hit the country it's intended for. But there's going to be a lot of collateral damage as well on the rest of us. I always want to conclude the daily briefing with the meme that's a trademark of mine as a host. And today's mean relates to debate on on sovereign debt. The final question I have for you peter, these sanctions imposed on Russia, basically pushing Russia toward China, doSave risk of the role of the dollar in the global economic ecosystem as a consequence of the sanctions. Well, let's take, let's take the second largest holder of US treasuries, that being China. Who you can be sure that when Europe and the US put sanctions on Bank of Russia, that the Chinese freaked out and said, Oh my God, I had more than a trillion dollars of these things. What happens if we wake up tomorrow US does to us. So you can be sure that China is going to be continuing on the path of reducing their holdings of not just US treasuries, but possibly US assets. And other countries are going to do the same. And that means just wanting to own less US assets or be potentially subject to the whim of US government if they decide to punish another country. So while the US dollar will still be the mean currency in which global transactions take place. And you can be sure when looking out over larger time horizon, that percentage should go down over time. Yeah, it is a bit worrisome. And when I speak on behalf of the duration of millennials, I can assure you that we are worried about this debt burden being placed the mush to solve for the next many decades. Peter, it was an absolute pleasure to talk to you again this afternoon. Thanks for joining. Thanks interests. Response to check the world's likewise, I will be back tomorrow again with another great friend of the show Tony career. Thanks for now and thanks for watching the real vision daily briefing again, I'm at listening. I'll see you tomorrow.