262906472 - 1_rgvye5nx - PID 1851201 Welcome to the revision daily briefing. It's Tuesday, June 28, 2022. I've ash Bennington, joined today by Andreas steno Larson. Before we get to undress, let's take a quick look at US equity markets. Nasdaq closing down looks like almost exactly 3% here on the day. Under 11,200, looks like 11,181 is that number bounces a little bit on the screen at the closing bell, S and P 500, down over 2.72%, 0.01% under 3900, closing out the day at 3,822. Finally, Dow Jones Industrial Average, the best performer of the day or the least worst, depending upon your perspective, minus one spot, 55 percent closing underweight, 31 thousand at 30,951. Andreas, welcome back to real vision daily briefing. Thank you so much as well. It's great to have your undress. I've been hanging out and crypto land the last week or so, bring us up to speed. Big picture what's happening right now? Well, I think once again, we've actually had this weird to rally into the month and in particular inequities. I've seen this pattern unfold basically over the last six or seven months in a row where we've had this material rally into month-end. And right, right by the month and we've had a slowdown to get an inequities. And I think that is exactly what's happening. Again. Calling back to last week, looks like nasdaq was up about 7%, S and P 500 up more than 6%. Dow Jones Industrial Average up more than 5%. But when you zoom the camera out, an ugly start to the year I was reading an Edward Jones report this morning. In terms OF US equities were down 20 percent or thereabouts depending upon the index from the highs, worst, six months, first, six months of the year since 1970, despite the gains we made last week. Do you think about it in the big picture? Well, I basically think that this is a, another bear market rally. Because if you look at the forward-looking indicators for the US economy, they still look extremely bad. Take for example, the ISM Manufacturing Index. When I use my forward-looking model based on interest rates, I basically expect the manufacturing index to print maybe below 40 by in this year. And we know that there is a strong correlation between this index and equities. So as long as the cyclical momentum in the US economy is turning worse and worse by the month. You should basically be still sell equities on every rally. Yeah, let's take a look at the chart. I know we have a chart that you were looking at on the S and P. Let's pop that up perhaps you can walk us through. Yeah. I mean, basically what you see is that every time we get towards the end of the month, we have these rebalancing flows trying to push up the index. And what happens is basically that the usual, let's say 60, 40 portfolios, the rebalance back towards equities because of the drop in equity indices. So exactly that happened again this month. When equities drop, portfolio managers, they have to buy back equities to keep the allocation intact. But by the start of the new month, we see a bear market again. And this is a very strong pattern, month after month currently. Yes, sir. What you're talking about here are the rebalancing effects that institutional traders, institutional portfolio managers have to deal with. Basically just as a part of doing that job in terms of rebalancing, obviously has some Through of x into markets more generally hits retail traders and investors as well. Exactly. To be very practical, if you run a mandate with a, let's say 60, 40, split between equities and bonds and equities that down materially over the month, then you basically have to buy more equities to reflect the allocation mandate that you have. And that is exactly what is happening every month and at the moment, when we start in this bear market channel. And I essentially expected to continue through the aorta. Let's talk a little bit about another data point that came out today. Fresh news. I'm talking here of course about consumer confidence index. It looks like this, this, this print is it 98.7? This is from a downwardly revise number of 10 3 spot to in May. This is obviously a dismal number, decade low. What's your thought on consumer confidence? Where are people getting the influences this on the inflation side of the ledger, is this on the fear of recession or slowing growth side? What's your perspective on this and what does it mean more broadly? Well, I think of it this way. When you face, make it a real wages as a consumer, then you turn very negative on the outlook. And that is exactly what is happening at the moment. We see it across the globe, maybe most materially in the US, but we also see it in Germany. We see it elsewhere. And I think the reason is that you basically face a cost pressure that you cannot cope with. Since wages are not following suit when it comes to inflation. And it's very, very simple in that because households are simple. When you cannot pay the bills with the same kind of confidence you could in the month prior. Then, of course, your confidence turns more and more sour by the month. And I think usually you would expect a correlation between the consumer confidence and unemployment rates, but with the time lag. So what we usually see is that consumer confidence drops. And then, let's say 69 months later, we start to see rising unemployment rates. And I basically expect the exact same pattern to unfold this time around. Because, I mean, right now everything is being put to a stop. It's pretty visible when you look across the various forward-looking indicators we have for the US economy. Yeah, talking of forward-looking indicators at revision, we obviously live and breathe markets. One of the things that we've been talking about a little bit behind the scenes. Here at real vision, a story that came out in The Wall Street Journal late yesterday afternoon about the impact of rising rates and declining tech valuations on the convertible bond market. Obviously, this is kind of an interesting one because they're hybrid securities. On the one hand, like fixed income on the other like equity, both sides of that ledger getting hammered over the last several months. I'm wondering if you can give us a little bit of context on this. It makes sense to see, we're seeing cost of borrowing rise across the board, cost of capital for companies increasing while meanwhile their valuations are declining. Probably shouldn't be much of a surprise that the initial issuance of convertible securities is in decline. But I'm curious, undress, how do you see this is more of a bellwether for markets. What does it mean for people who aren't in the convertible bond market? Well, I mean, first of all, let's start with the definition of a convertible bond is basically a hybrid between equity and debt. And it is used by corporations when they already very indebted and when the market is extremely benign. So I mean, through 2020 and 2021, we saw a lot of corporations issuing higher rates as a consequence of the very benign markets. And now we see an extreme the pricing of these hybrids. Because ultimately, as a corporation, you're basically able to turn this into equity if you want to. And I think right now that there's a clear risk that a lot of cooperation. So we'll actually turn this into equity. And once that happens, the entire market freezes due to the risk of other issues. Following the same path. I know this from my own professional life. Hybrids are trading in an extremely poor mood right now as a consequence of the risk of this being turned into equity. And that is not what investors want. And what is the signal, if anything, undress from your perspective about what's happening more broadly in terms of credit conditions, in terms of the bond market, in terms of the cost of capital that companies are paying to finance their ongoing operations. Well, I guess this is the clearest signal that we can get that funding conditions are extremely tight, right? Compare it to two years ago, right? Because in late 2020, right? About every corporation could issue hybrid, and the market would just buy those hybrids with an arm and a leg, right? And right now, no one wants to own a hybrid due to the much tighter financial conditions, due to the rise in interest rates, et cetera. So the alternative as a portfolio manager is just much better. Buying senior unsecured bonds. Stuff like that instead of buying hybrids. So the pricing of hybrids is, well, it's basically just lift the screen. Yeah, it's a grim prognosis, indeed. Switching gears here. Another interesting story on the day Kathy would overt arc saying to us is already in recession. Of course, the official recession dating is done by NBER that the dating agency that actually handles the official calls, National Bureau of Economic Research that's done ex post. It's done after we've had two quarters of consecutive growth. But Kathy would come out this great bold statement, I suppose you could say I saying, Hey, look, we all feel like we're in a recession. We're in a recession. What's your take on that? Well, I think she's right. I've product shot with me today showing the branding amount of Google activity in terms of searches on the word recession. And we've basically hit a new all-time high in June. And I think it's a consequence of people basically expecting things to turn Barry sour very soon. And the interesting thing here is, if you look at that time series history of Google activity, every time we've had a spike in the activity on Google in terms of searches for recession. We've actually already been in a recession. So I think the answer is yes. And the Fed is obviously get to acknowledge that. The market has yet to acknowledge that. But I find it very lucky. That's extremely interesting chart, we've talked about the formal definition of recession here in the dating agency and all that. But in reality, essentially what this chart tells you is when folks think they're in a recession for long enough and when they feel that strongly enough, we're generally in a recession. Exactly. And I mean, those of you working the private sector right now, you can probably feel it as well. I mean, right in my professional life, it's very easy to feel that everything is being paused. Everyone is uncertain about what's going to happen over the next 12 quarters. And as soon as that everybody sort of agrees that we need to take a step back and wait for something to happen. Then obviously the recession arrives. Addressed. I want to move on and switch gears in just a second. But first before we do, I know it's a jam-packed show. Any other charts that you wanted to show us. Well, I think it's really interesting to watch the development in commodity space. And if we look at the price action over the past, say, two to three weeks, we have a couple of very interesting price patterns to watch. In particular in industrial commodities. If we look at the copper price, for example, I would clear to say now that we're in a bear market for copper, we are also in a bear market for zinc. We are in a bear market for aluminum, et cetera. Industry fill metals leading to the manufacturing cycle. First of all, I think this is a show that I enable. I think there's a table that we have that show some of these prices. If our producers want to show that right now as, as Andreas is walking through. Exactly. And I think it's linked to both the slowdown that we see in the manufacturing cycle globally. But also secondly to the recession in China. China is obviously in a recession already due to the lockdown policies related to COVID. And I mean, everybody knows by now that China is a big consumer of these industrial metals. So, I mean, this is a signal to me that inflation exactly headed down. Now we have bear markets, lot of important commodities. And if I'm right that we already on the verge of a recession, or maybe even amidst one, then I would expect a landslide in commodities during the second half of the year. Yeah, I mean, that's a really grim table I saw earlier in the day. And it really is just an impressively unpleasant look at what's happened from peak in fall 2020 to in the commodities market. Nickel down about 50 percent. Obviously some unusual micro economic dynamics there. But just looking down across that chart, this feels really broad base in terms of what we see in industrial metals. What we see in energy with NAT, Gas and Brent and some other significant double-digit 20 plus percent drops about a fifth down from the top. And zinc copper and iron ore? Yeah, exactly. And to me this is kind of a confirmation that the market has started to Prize in this slowdown that we will be faced with over the coming couple of quarters. So I mean, every time we see a recession, every time we see a slow down in global trade. And every time we see a material slowdown in the construction sector in China, we should also expect. Commodities to follow south. And this is an important bellwether also for interest rates and for the central bank outlook during the second half of the year. You know, Andrea's continuing on with that very story. I wanted to take a look with a show that we just released here on religion today on six to eight. This is it's all about the business cycle. Michael guy at the Chief Investment Officer and Portfolio Manager at Rosseau investments, hosted by undressed and it's Larson available on the essential plus and pro tier. Let's take a look because it speaks precisely to that point. I use these one-liners on Twitter and one of the one liners I use a lot for the Bitcoin community was when an investment becomes religion, it's time to lose faith. Because if you end up having this unrelenting belief in over-confidence in any particular investment theme, you could ultimately be right in the very long-term, but that doesn't mean you're going to be right tomorrow, right? People seem to have this fervor about them when they identify with an investment and kind of get into these echo chambers of cult like behaviors as to why something is going to take over the world, or why a theme is going to be the next major thing to invest. And I started seeing a lot of that when it came to oil. The last several months. Twitter spaces, everyone's talk about oil. There's a crisis coming. But I agree with all that stuff, okay, But again, the path that matters more than the prediction of where it was going to go. It's how it plays out between two endpoints. We got to a point where I think, you know, there was this a hashtag trending at some point where it's about Canadian oil gang. All right, so when I see that my country and antennas go up because it suggests that there's this unbelievable belief that oil and commodities are going to keep running in the near term. And markets are funny and that they often humble people that are over-confident. So from that perspective, you always have to think about the counter trade, right? Everybody tries to predict the future, but nobody can predict the future in reality, okay? But if everyone's betting on a very particular future, the payout is always high spending against crowd, right? Which is really the core what Confucianism, as it seems very plausible to me, funerary pulse would mean that you have, you know, what could be a sizable correction and oil and commodities across the board. Lots of interesting points in that conversation. Right now available on real vision, on the essential plus and procure all three tiers on revisions, capital markets, macro side. You know, really interesting points Michael guy had made. I especially like his reference early in the clip to the dangers when an investment becomes a religion. But more to the point here, when we're talking about commodities, he's talking about this is contrary and call a sizable correction in oil and commodities, we should say, closing out the day here, AI, one-on-one spot 71, up about 2% here on the day. One spot nine, 53. Yeah, exactly. I mean, of course the supply side is not going to save us on the energy front. We know that by now, but it is almost crystal clear by now that the Fed is trying to manufacturer a slowdown in demand, and in particular, a slowdown in the demand for commodities. We know that poll almost explicitly targets the prices. And so they want to see demand destruction in the commodity space. And I think that is exactly what is ongoing right now. We have demand destruction ongoing across the globe. We see it in forward-looking indicators. We see it in some of the more volatile commodities. And we see it in the live data. And by the end of the day, that is what is needed to bring the supply and demand curves back in. Check. Yeah, undress. Lots of questions ripping in right now from the real vision website, from the exchange, our social media platform here at religion, and of PK from YouTube. First question, a longtime viewer of ours, bone Nieto wants now undress. There's a lot of talk about a recessionary winter and I'm in that camp, he says, My question is at this point, is the correction slash recession, Do you think it's going to be economic winter? Do you think it'll be mild, severe, or nuclear? But I hope that it won't turn into like a nuclear war. At least put by the end of the day. I think the most likely scenario is a very swift but deep recession. And the reason why I say so is that the move that we've seen in interest rates over the course of the past. Say, two to three quarters is out of this world when you measure it in standard deviations. And that is important when the world is rely on cheap funding and cheap debt in general. And if you look at interest rate based models for growth over the next say, two to three quarters, they look extremely grim. I would argue that it's likely that we see manufacturing PMI says lowers 35 to 40 in Q1 next year. But then I would also argue that it's likely that we see. Serial pivot from most global central banks. And I guess in a year from now, we could basically be back talking about QE, negative interest rates and all that do to the response from central banks. So this slowdown. By the way, bonita added ash before the show is over, please make sure undress takes about he's a real player and a tremendous addition to the RV team. And of course, I agree completely with that. So lots of new fans out here undress. But I wanted to move on to our next question. This is from Roger bows from the real vision website. If you sell equity is on every rally, how do you not run out of equities? That's a very fair question. I mean, if you look at a typical portfolio, Let's take my own. That's an example. I'm usually invested in equities to the extend of say, 70 to 80 percent of the portfolio when times are good at. And currently I'm trying to sell every time I find the price action to be interesting in that regards. So close to a month and I'm trying to bring down my equity allocation and find something else to invest in. It's not easy right now. But I've allocated a bit towards gold. I've allocated a bit towards TLT, the long been ETF. Basically just to protect myself. When when we're faced with this slowdown during the second half the year. Yeah. Here's a question about Europe. Were you, of course, are currently located. It comes to us from Ralph Humphrey, from the real vision website. Does Andreas have any thoughts about Turkey getting over its objection to allowing Finland and Sweden into nato? This obviously, of course, a late breaking story. Well, and it is actually directly related to one single politician, the Swedish parliament. There is a Kurt in the Swedish government. And that's a bad, again, is not fun of her. And that is exactly why he's trying to block Swedish membership of the, of the nato alliance. And by the end of the day, I think what will happen is that Sweden will cave in on this particular topic and basically allow it again to get his wish and both Finland and Sweden will join nato. I'm very certain about that. I live just did into border of Sweden. And this, of course, is a hot potato politically. But very interesting that I did. It's old down to one politician from the current part of Turkey. And at again, is very much against her. It is interesting obviously as we talk in these sort of big macro focused story, is that it can come down in the end to these critical issues, to just a matter of personalities, one individual on one side or the other who has an objection to a particular policy course can have that impact that really changes things. Which is one of the reasons why we need to watch is so closely and why we're so happy that you're joining us from Europe to have your insights on all of these conversations switching gears here. This one comes to us from Tim New York, from the real vision website. H, y, g, junk bonds, I should say for those who aren't familiar, it's the iShares. I box high yield corporate bond ETF that Tim is referencing here. Hig, junk bond markets, thoughts on the sector and where this can drop to what a market rolls over. And then he adds, cheers, I don't know, it sounds British. He might, maybe he's a Brit here in New York. Tim, New York. Cheers, cheers, sounds very British way. Love it. I mean, if you look at the high-yield sector, I consider it very correlated to the equity market in general. So when I have a bearish view on the index label on equities, I also hold the barriers view on corporate bonds, maybe in particular the high-yield sector. The reason is that we don't have the backing of central banks any longer. The marginal buyer has gone. And with inflation running close to double did the territory across the globe. It's very tricky to find a good argument by corporate bonds at current yield levels. So currently it's almost like catching a falling knife to buy, buy these bonds. Address, we've gone through a number of questions here. I want you to allow you some time at the end a frame out your thesis. Final thoughts, key takeaways that you'd like to leave our viewers with the likelihood of listeners with how are you thinking about this going forward? I feel very certain that we, at least on the verge of a recession. The final confirmation is that everybody is searching for the word recession on Google because it essentially means that everybody's planning for it. And as soon as everyone's talking about it, discussing it in meeting rooms, all the executives are debating how to deal with it. Then basically everything comes to a standstill for, for a couple of quarters. And I think we need to grow accustomed to that thought. Q3, Q4 will turn into negative quarters for growth. It will turn into negative quarters for equities, credit markets, most at, as a class, It's basically, but hopefully it will also kill inflation. Yeah, I wanted to ask you actually about that as we close here on the day what you think of inflation, what your big picture thesis is, how you'd like to leave viewers with thoughts on that particular topic. Well, to be honest, I've tried to call the peak a couple of times already during this. Not with a lot of success, but I think more and more evidence points to the fact that below the surface, the inflation pressure is clearly abating. Now, if you look at inflation expectations traded in markets, that they've basically treat it down since March or April. If you look at bond yields, we've basically seeing, I guess the peak in momentum in long been kills. And below the surface we see a material building of inventories in corporations, which to me is signal that demand is banning fast now. And we know that when demand slower, aggressively, ultimately the price and it needs to adjust in a negative direction. By the end of the day, it is exactly what we need by now. An adjustment to the demand side to bring prices down. Yeah, This is the thesis of the cause and effect and cure of high prices as high prices. In other words, high prices create lower prices because the demand destruction that accompanies them. You've talked about how challenging it is to get right. We should probably add that markets have gotten this wrong. They've under-priced inflation risk in the, yeah, in the past. And so while we see some of those signs abating, it's tough to know exactly what's going to happen next. We're still at the high-end CPI, 8.6%. Exactly. And I mean, one lesson to be learned is that both central banks and markets, they underprice the development in inflation, both on the way up but also on the way down. And I think that's what's going to happen over the next couple of quarters. I address. This is a lot of fun. We need to do it more often than absolute the ash. Thank you very much for joining us. My pleasure. And thanks again for watching the real vision daily briefing tomorrow, undressed and alarms and we'll be back this time hosting dairy Estelle, have a good night, everybody.