216647242 - 1_33a5m5xa - PID 1851201 Hey everybody, Welcome to the realization that he briefing. It's Wednesday, January 12th, 2020 to this is alpha, the other of the micro Canvas and I'm here with the one and only that is Dale, founder and CEO of 42 macro a mate, how are you doing? Good man, it's good to have a drink. Came back, man or you don't dream team. Did you actually a trademark that are now someone asked you did that earlier today as I'm paraphrasing, cuckoo, we can live with that by the way. So the news of the day is obviously CPI inflation in America, 7% year on year. How your spring, I guess in 40 years or so, month a month, core to clean up a little bit of the, of the noise is 0.6%, which is still a relatively robust but not growing anymore incrementally month, month. Real wages down. As a result them in nominal wages are up, inflation is higher, even more. So real wages actually drop. Market reaction while yields are unimpressed, there unchanged. Actually Tenure yields are down from the peak of 1.8%. They're hovering around 1.7273%. The front end though is pricing almost for hikes by the Fed. Interestingly, at their shut out, the Eurodollar is rallying. Quite interesting, I would say. And all the answers that were hammered down last week, the nasdaq big coin actually start to over-perform once again. And commodities, on the other hand, the surroundings. So by that a lot of stuff going on. We tried to unpack for our listeners today. What do you think of the overall market reaction and the inflation print that is, yeah, I thought the market reaction was sort of yellows. You'd typically see this in sort of micro investing with, you know, earnings and things like that where there's sort of a whisper number, if you will, on the buy side of in terms of what investors are expecting relative to what economists are expecting. And I think the biggest takeaway is that, you know, this didn't surprise to the upside. Certainly not in a material fashion. And so that's what sort of took, I guess some of the, the real, the air out of this sort of short bonds sort of, you know, kind of roughly should trade if you will. And sort of put some on some, some, some, some impetus back into the kind of tech nasdaq type type exposures. I think if you look at the report, there was a little something for everyone in the port right from the headline perspective, you're going to get the political narrative associated with 7% headline. That's obviously a big deal. And then obviously core CPI continuing to gather momentum, we have that track and at a 7% on a seasonally adjusted annualized basis. So that, that's a big deal. But on the other side, from a dovish perspective, and this is a leading indicator. You look at this sort of SAR for most of the baskets, headline food, energy, shelter, OER, non durables, and it even on a b and basis of those seasonally adjusted annualized rates tick down. And I think the most important number above that, those, those, those statistics is the median CPI rate which slow to 5% on a SAR basis. That's the lowest print we've seen in four months. So kinda, you know, all signs are pointing towards disinflation for 2022, we know that tradable goods inflation is going to display to do or mount. The reality is, is does the Fed understand how much or how tight the labor market is with respect to the wage pressures that are kind of meeting that, meeting that process halfway. Wow, that is to just told the audience that basically these inflation is upon us on a day where inflation as on a nominal basis, CPI nominal headline basis spring that 7% year on year. And you talked about a couple of elements in there because, you know, we, we get sold. A lot of these headlines where we'll look at inflation is 7% or month to month rate is very high, but should decompose it a little bit further. Do you mind rewinding back for it for a bit just to make sure that people understand why do you think the impulse, the inflationary impulses into 2022, we're about to slow down, not to increase. Yeah, absolutely. So they're already slowing rate, like we've seen here. So we've been tracking a lot of economic statistics throughout the pandemic on a seasonally adjusted annualized basis. So either month on month annualized, quarter-on-quarter annuli. So clearly these are month over month statistics and you'll kinda, the one thing I call out is your headline CPI not only decelerated on a seasonally adjusted annualized basis to 6%. That's the lowest point we've seen in three months, but that's down about 40 percent from where it peaked over in June of this year. And same thing with the core inflation momentum. That's still down about 40 percent, even though it tick back up very narrowly, it's still down about 40 percent from where it peaked earlier this year. So we're well past the peak in terms of impulse. And now all we have to do is roll forward in time to sort of accumulate base effects that a push to overall have my statistics down. When you and I have in these conversations six months from now, inflation will be likely fairly, materially lower. But I don't believe the core and stickier parts of inflation Mike, shelter, wages, things of that nature are going to move in a direction quickly enough for the Fed to back off a bit. It's tidy medic. And the result of that is basically that there are two keywords that users use, dear momentum and impulse. Because at the end of the day it's easy to watch at inflation numbers. But what matters is not only the number itself, but the rate of change of the rate of change of the price of this basket of goods. The impulse of these inflationary momentums which are under the hood actually slowing down the mountain. But the fixed income market that showed that actually agrees with that and has been agreeing with that for awhile. I pulled up a chart from the macro campus newsletter I write too, just been pointed out, which is the slope of the US inflation rate given curve. So there will be mislead 10-year inflation Break-even send to your inflation Break-even once, one against each other. And basically scenes around the first quarter of 2021, the market started expecting higher inflation in the short-term, but not the sustainable one. So the curve actually inverted, which means investors expect 10-year inflation down the road to be actually lower. And the short-term spike we're going to see for, for a couple of years. So while the definition of transitory might be debatable because what's transitory effectively, the fixed income market is telling you that long-term inflationary pressures are willing to reduce or diaries were seeing before, the impulse of this inflationary pressures is likely to decline going forward. Yeah, absolutely. Um, and that's consistent with the Fed's forecasts, that's consensus are consistent with economists consensus forecasts. And I do believe the Fed is well aware of. This is always at the Fed's plan all along, right? Which is it was going to be transitory. It peter out. Certainly. They thought it would be a lot of us thought that myself included, it would peter out and the level lower than 7%. But the reality is that forecast is still intact. The big issue in my opinion, this is going back to Friday's jobs report, which continue to be incrementally hawkish with respect to the tightness in the labor market in, and from our vantage point, it doesn't seem like the Fed has really gotten caught on to that in full. It's certainly seems like there's some upside surprise risk with respect to the sort of hawkish contingency on the Fed and how hawkish they're willing to be throughout 2020 to, as a function of those sort of the labor market inflation dynamics. And there is another curve which is actually getting closer and closer to inversion is the 530 SS curve. So the slope of the curve between five and 30, or government bonds in America, which is flattening even further. And so actually let's listen in for a second to what Jared, Delian and B, there are two other discussed on, on a real vision interview. There were effectively talking about the Fed than curbing version. Let's listen into what they said. I think a lot of people are still operating under the assumption that the Fed is, there's dovish institution that is dominated by liberals and academics and they're going to keep rates at 0 forever. I think the Fed is going to surprise to the upside in terms of the velocity of rate hikes. Here the market is pricing in about 3.5 rate hikes for next year. I personally think four is a done deal. We could actually get more. I think Fed funds are probably going to 2%. I think they're going to invert the curve a lot. So when I look ahead to 2022, I mean just in terms of the Fed. Now once you invert the yield curve, then the clock starts ticking. And you have anywhere between 018 months before you get a recession. So next year could be a lot more challenging. I'm not just saying that like reflexively as somebody who's skeptical or bearish all the time. But I mean, it's just the facts. I mean, the Fed is going to get more hawkish in 2022. Interesting remarks, the full interviews available for religion subscribers, all tiers. Now Doris, Jared Delian, an individual spoken about curve inversion, nominal curve inversion. So he's basically depicting the FAD, which is likely to be relatively auction overreact effectively. Can you unpack a little bit if you think the curve is actually going to invert and why is that relevant in the first place for different asset classes, if that happens or doesn't happen. Yeah, So I'll take a step back before we even get into that. Now say this is the second time today, I've been shot up and ensures shared shirt is outstanding. I gotta protect it to that as a guy who likes fancy shirts but and get back into the, into the question, no, I don't think the Fed, I think the Fed is well aware of this sort of curve inversion dynamic. And in my opinion, I think that's why they've been so Sue foot are slow to react to these inflationary pressures in terms of their dotplot, in terms of the messaging and signaling. And so it's my expectation that as they get going with rate hikes and we definitely agree with Jared, but we actually made that call going back to the November job support we got in early December, we said, Hey, they're going to have four times lecture. Because in terms of all the DA analysis, we've been tracking the labor market that is consistent with the feds maximum inclusive mandate, we see two-step functions higher in terms of the rate of improvement over the last couple of months. So for ice is a done deal. I think that's pretty clear. It priced into the Euro dollar market. The reality is with respect to curve inversion, I do believe the quantitative tightening it dynamic that we're with David introduced into the, into the markets going back to the December meeting, but more importantly, the minutes over the last week, that dynamic is what's likely to prevent curve inversion. It's very likely, I believe that as we sort of get into the rate hike process and the curve starts to get flatter and flatter. We may see them introduce a program like Operation Twist, IE, something we saw in 2011 to prevent curve inversion or at least slow the rate of rate of that decline. Are your thoughts on that? Yeah, Well, actually there's his elephant in the room, right? Which is quantitative tightening or they're going to do with the balance sheet. I mean, we can talk about hikes and if they hike three times or four times. But the reality is that the impact of balance sheet reductions, and especially as you were describing, how are they going to reduce the balance sheet and what's the interconnection between that and the issuance. But they're not the government. Actually, that's going to play a pretty large role. And there's a lot of thought on the fact that quantitative tightening might be less hard than initially thought, because the plan, according to a couple of hints bowel gave us seems to be that yes, they want to proceed due to reduced the balance sheet pretty quickly. So let's call it a trillion in 2021 maybe just to shoot a number out there. We don't know exactly yet, but perhaps it's likely. But actually the point is that they plan to collaborate with the US government that is going to shift their issuance more towards the shortened. And they're also going to make Let's say, make sure that the money trapped in the reverse repo facility is going to get basically used to absorb that sort of increased militia ones from the private sector. This seems to be, you know, a little bit of a workaround, diarrheas, but the realities, how long can the workaround balance sheet production without being kryptonite to risk assets. I don't think they can work around it well at all, to be totally honest with you. And the reason I say that is that yes, there's, let's call $1.5 trillion of a reverse repo, sort of looking for more quote on quote unquote, permanent home. That's obviously in treasury bills or something of that nature. And yes, the government can actually start to increase its issuance on that side of the, on that side of the curve in order to sort of help that money find a home. But the reality is we're all, we're moving in the wrong direction as it relates to supplying asset markets with liquidity, the treasure general account balances now going up its bottom to now heading up that the Federal Reserve balance sheet is now peaking is likely to start to come down. And at the end of the day that those are two negative dynamics with respect to a US government that has to capitalize itself. I say this all the time. The US government is at the top of the kidney world's capital structure. It is the Boolean playground. And when it needs cash, it gets its cash and it's either getting it from the Fed. It's either getting it from the foreign official sector, foreign central banks, or it's getting it from us and we have to capitalize the government. And every moment we haven't had to capitalize a US government from material rate since February 2020. And now that we're going to have to start the capitalize the US government again, all ankle Sam, not just paying taxes but actually getting those, the debt issuance taken down. That's going to be a problem for asset markets because a lot of liquidity just simply there from a regulatory standpoint. Yep, exactly. I always want to make sure that our listeners understand that we get into these discussions about what's going to happen in 2022 and maybe in the first quarter, the second quarter. But what does just described as well fits into a more long-term narrative of what real interest rates can be and can trade or an equilibrium level. So that is we're saying, actually if the private sector needs to absorb more supply of collateral, because reserves are going down into the system, out of the system because of quantitative tightening. And therefore it's the private sector. There needs to be basically more involved in absorbing decisions than probably there's going to be a premium required in order for the private sector to step in. That premium is generally higher real yields, especially at the front end where most of this institutional guys are involved. So we're talking about money markets, treasuries, corporates actually recycling their dollars into treasury bills are short and the long end of the real yield market, though, seems to be pretty stubborn. So if you look at 10 year down the road than dirty a real yields, they're pretty low and they are not managing to get higher at all. And this is more of a structural story. There are reasons why those dongle up. It's because if you look at the total debt to GDP, including the private sector and the public sector in America and Japan, in China, in Europe or wherever you want to look at rearranging between three hundred and four hundred percent. So that's servicing costs are simply simply on a real basis, unaffordable. If long-term real yields go up. I pulled up a chart again from the macro compass showing that, structurally speaking, and the, the trick of expanding credit and lowering real borrowing costs has been played in Japan and in Europe with a bit of a lag eight years in the chart. And then in us as well with a bit of a lag, but it's still the same gain. You borrow more, you expand credit. Borrowing costs go down on a real basis because that's new equilibrium to make all of these affordable. And that's how you kick the can down the road. So while why we focus on short-term movements, let's always not forget that there is a structural background on the back. Or do you think differently about this dice? No, I don't think differently about an all lot of the sort of, you know, kinda key drivers of why interest rates and growth have been so low for such a long period of time. Namely debt, namely demographics are the kind of two main culprits. Those I haven't gone anywhere factor obviously moving in the wrong to continue to move in the wrong direction. If you look at our five-year for curve, working-age population growth, if you look at our five-year for occur for old age dependency ratio, those things are actually getting worse at the margins. And so you could make the case that I will make the case that the bond market is smart enough to look through all of these sort of sure notch, not only cyclical dynamics. But also shorter term, shorter duration dynamics with respect to the, to the ocher, the real issue. And this is something we back tested as carefully as it anyone, which is when the bot when you're doing quantitative tightening and you're doing a reflash unary environment that is negative for bonds. You know, the sort of the risk premium for bonds expands. Investors need to demand that they need more yield and eat more returned to hold that, that denture, that security in their assets, in their portfolio mix. When the Fed is doing quantitative tightening in a inflation, that stagflation for most of you are in a deflation. That's what growth and inflation is showing simultaneously in those scenarios, bonds go up in price because the risk premium assigned to other asset classes thing, they certainly get crowded out and those risk premium start to widen. And so that's effectively the reverse of exactly what's happened over the last 18 months or so, 20 months or so couldn't explain any better. How does this play out in other asset classes? We're looking at the nasdaq reading back against more real economy or less valuation intensive sort of sectors in the equity market that we're looking at Bitcoin rolling back and we're also looking at some commodities staging the continuous rarely like oil for example. So how this, how hard, how does this play out in other asset classes then? Yeah, absolutely. So I'll tweet out these charts, but actually put together a quick analysis for everyone to understand sort of what quantitative typing means from out from a, from a, from a marketer's perspective. And so right now we're in this relation regime. The market is pricing in a positive impulse and growth and a positive impulse and inflation. That's, that's sort of the regime that the market is pricing. And currently, we do believe the next regime is likely to be a deflation machine, which is pricing and a negative impulse and growth and a negative impulse and inflation. And oh, by the way, that deflation regime is likely to coincide with quantitative typing on a training bases. And so thinking about sort of thing, Let's look at this across asset classes from an S and P 500 perspective, just using that as a broad measure of beta when the Fed is quantitative tightening and deflation, That's the positive brushy, your annualized expected return for the S&P 500 is plus 21%. When the Fed is quantitative tightening in a deflation regime, that's her growth and inflation or slowing simultaneously, your annualized expected return is minus 7%. When you look at Bitcoin, QT inflation is a hundred eighty, nine hundred eighty seven percent to the upside on annualized basis. Qt and deflation is minus 37 percent on an annualized basis. And then a theorem, it's even more wacky. Qt and reflection is 456% on an annualized return basis in QT and deep relation is minus 120 percent on an annualized basis. And so you can sort of see the dynamics where when growth and inflation are moving in a positive manner to support asset market valuations, to support risk-taking and ultimately support a compression of risk premia. That's very fine and dandy, and that's exactly where we are now. We're not going to be where we are now a few months from now. And that's ultimately what the market risks you inhabit talking about in this program for several months. Yeah, so again guys, it's all about the impulse and the change of direction. So the direction has changed, I guess that's clear to anybody right now. So the monetary policies not accommodative anymore, it's action or tightening path. And also, let's say, and both nervous and I argue we agree in this case that inflationary pressures and growth pressure, so nominal growth pressures are also subsidizing. But the issue here is the impulse at which this is happening. And, you know, as Darwin pointed out, when those impulses become negative at the same time, then in generally, it's a very tough environment for what we call high beta assets out there. You can classify them as you want, but those are the assets that are more vulnerable to a reprisal risk premium across the board. Now, if we, if we move for a second and we switched topic, that is because there has been a piece out from HSBC that talks about China. We always cover the US, which is the backbone of the global economy. We're all built on euro dollars a year. The whole system is based on the US and US centric. But there are other jurisdictions which are very relevant like China. And they have been applying this 0 COVID case policy that had been basically having the U1 and remind me which is strengthening all over the place. And, you know, these guys have also been tightening a credit pretty large, to a large extent in certain sectors like the residential building sector, for example, we've seen of late. There are some shifts happening under the hood. And we've got also a couple of questions about supply chains problem in China that are, or in Eastern Asia in general, that are causing some of these inflationary pressures. And what do you think of the overall Chinese situation? Yeah, we're going to see a change in behavior both from a fiscal and monetary policy perspective and 800 cubic case perspective. Yeah, I floated. So let me try to take, take that byte by byte. So that's the kind of, the, the short answer is yes, we are seeing, we've already seen in our opinion, a change in fiscal and monetary policy. Mostly monetary policy, I would say fiscal sorry, macro-prudential policy and chat and this sort of easing up on the tightness in terms of credit availability and in the real estate sector, which obviously is, yes, roughly around 24, 25 percent of Chinese GDP. So that's a material. You know, sort of sea change in terms of their willingness to tighten and actually slow the economy to, to, to wrestle, wrestle lot of excess leverage in that sector. So that's good, but on a lag basis. So we're continuing to obviously get high-frequency data out of the Chinese economy every day and overnight. We got their credit data and their inflation data. And both of those datasets confirm that a lot of the tightening we have seen are still flowing through the system on a lag. And so you look at my favorite metric in terms of track and Chinese credit growth. That's a total sociopath, our total loans of financial institutions. And the reason I track that there's no 83 percent of all private financial sector credit in China on the mainland is on bank balance sheets. So that's a really good metric to track, to understand the whole system that slowed to 11.6% on a year-by-year basis. That's the lowest probably seen since May of 2 thousand to 2002. I think I was a freshman or sophomore in high school in 2002. And so that's a meaningful, That's a meaningful number. And you also saw the CPI slow as well. Pbi so as well. So that disinflation and tightening that we've seen in China is still flowing through the system on a lag. But ultimately the changes they made it the margins at the bare minimum, put a floor under the Chinese grow with our model has that bottoming in March of this year. So we're kind of near that needier and ultimately inflecting and training I are kind of into and through the second, third quarter of this year. So what we'll see on that part relates to the supply chain disruptions out that that was a very important part of the question as well. China has a 0, put the policy bit inspect to managing the pandemic. But obviously all Macron being is transmissible as it is. You know, I think I'll Macron, in our opinion, has the potential to break that policy. And if it doesn't break that policy, it's very likely that the Winter Olympics break that policy. You can have people flying in from all over the world with 0 COBIT policy. So in our opinion, I think that policy, that the risk an RPGN is to the upside as it relates to market sentiment around China and Chinese growth. Because ultimately we do believe that policy is at risk of being terminated. And as it relates to what China's sort of COVID zero-tolerance policy is done. Our supply chains recently, I think we're past peak from a supply chain disruption perspective. Actually start making that call back in November and we start to get data that we're getting, that we're now getting data that are confirming that the two most important datasets that i've, I've tracked that really confirm that or the percentage of respondents in the ISM Manufacturing and Services surveys that's reporting slower supplier delivery times. And obviously if you pull up a 56 to your chart of those of those indicators, you'll their way up into the right kind of in no man's land, but they were actually starting to crash on the manufacturing front, that one sort of crash beyond December to 34.7, I suppose probably seen since November 2020, the services one crash that thirty-six point for us will offspring received since last March. So we're moving in the right direction as relates to disinflation bulk of the US and Britain and abroad. So those are whoever you cut and you, and you slice and dice this it seems that the underlying thesis behind your, your macro framework now is that the impulse of monetary policy tightening is actually accelerating on the backdrop of an impulse of nominal growth which is decelerating pretty aggressively. That seems to be your base case macro scenario, which again guys, it's a probabilistic assessment. Nobody here as a crystal ball. So we're probably that is applies a certain mass probability that scenario to happen and considers it to be the base case. My question is, I tend to agree, by the way, would that macro scenario. My question is, if you are just, you know, along Lonely investor and you have a six months arise and right here, you're looking to preserve your purchasing power and your capital. How would you allocate queue and our yoga capital? Looking at the sonata, you that in mind, well, it depends. That's a great question. I think it depends on if you're a high turnover, a long low tone of your investors, your high turnover investor. I do believe this deflation trait that were admired and has legs, its very nascent, it's very new. We're still continue to see a build up inflation pressure. If you look at our inter market signals that we run in 42 macro. And then if you look at our sort of sort of inter or intra market signals which are even more telling in support of deflation. And then ultimately you're going to have to make a pivot. I believe you'll kinda the timing of when investors are likely to have to make that pivot will come in and around late Q1, early Q2, sometime in that timeframe where the markets are really start to sniff ahead to this deflation plus quantitative technique scenario. And ultimately that'll be the lay of the land for a really extended period of time. If you're a low turnover investor and you don't want to sort of play for the relation and you just want to manage risk. A kind of a six month four bases heading into that deflation. That the reality is you're going to want to be in low Beta, as we talked about this a bunch already, low beta stocks going to remain MongoDB equities, but fixed income is the most obvious sort of underweight. They cross a lot of investors asset allocations that will eventually get a bid, particularly on the long end of the curve, log into the treasury curve long in a book or things of that nature. Yeah, I have to say for a load to another investor with a medium term horizon in from the view then I personally would try to steer away from the High be the sectors of the equity market and the high-beta assets out there anyway. So there are quality growth stocks, you can add them in. The nasa is already turning, but the Nozick's and index, it also includes less low-quality tech name. So you can be more selective that if you want to be invested in secular trends in the fixed income market, especially the longer know the fixed income market seems to really struggle to go and dirty bombs basically due to yield anywhere higher than 2.15%. Because as we discussed before, if the Federal Reserve ease more aggressive short-term and tightens up and he's more reactive and proactive, I should say in this case, then obviously you're going to have risk premiums down the curve, actually term premiums not picking up. So the uncertainty around the long-term projections of future nominal growth actually is not that much which gives certainty to owners of lung and bond not to demand higher risk premiums. And therefore it's, it's, it seems to be a relatively okay plays well worth to try and preserve your capital right now. Especially to avoid drill down to nine sectors of the equity market or, or other asset classes. We have one last question that someone lascia from the audience can actually, and objects can happen real quick. You said something to me, I think is so very important to unpack very quickly. Which is sort of the, the, kind of the, the uncertainty around growth is over from a longer term perspective, which is what the long into the curve really cares about, is very low. And I would argue that the, the certainty around grow from a short-term perspective is so high and it's skewed to the upside with respect to consensus forecasts, it actually amplifies what you just said. So right now if you look at Bloomberg consensus forecast for real GDP growth in the calendar year 2020, two, that's 3.9%. That's a 170 basis points or of nearly, almost a double relative to where our five-year trend is. And so there's a lot of growth expectation in the market. And to the extent we start to see any slowdown in growth that is bigger than consensus expects in terms of this growth normalization process, monetary policy normalization process, fiscal policy normalization process of growth stumbles at all at any point in time this year, you could really see a collapse and risk premium. The bonds had been long into the treasury market and a blow out risk premia in risk assets, particularly high Beta risk assets. Well, not much I can add to that. Thanks for pointing that out. I think it was very helpful for the audience. Diaries. Thanks for being on. I just wanted to make sure that the audience knows that tomorrow the revision daily briefing is back. Ashmem done. We'll be back with Katie Stockton to talk to us and the conversation continue continuous on the exchange. So if you have questions for Doris and myself, just shoot at us, will be always happy to answer those. Thanks for coming on the real vision daily briefing. Now if you're a mammal appreciating schedule back in an extra document.