268719102 - 1_t19tprhw - PID 1851201 Hi everyone and welcome to the real vision daily briefing. I'm Glass-Steagall Act and send it to you live from Copenhagen, Denmark, Wednesday, August 3rd. It's been another crazy day and markets we have equities rallying once again. And I am pleased to be joined by Peter Bu Guan, the CIO of bleakly Advisory Group. Peter, it's good to have you back on the show. Welcome back. Thanks. Peter. I wanted to start with it. Tweet from earlier today from a friend at Harrison. He basically quoted you and now I'm reading out loud. For decades, the Fed always gave the buckets bulky AND especially when the kitsch cried out for it. Now the kids are going to have to do without police elaborate. Yeah, I wrote that in my daily book report and I was really referring to a lot of Defense speak. Then we got yesterday that resulted in the sharp jump in interest rates across the curve. But particularly on short end wherever the two-year went up about 15 basis points. Because the market started to have this belief and Powell fed into it at their last press conference. That the Fed was almost done raising interest rates and they're there at neutral, even though they're not. And I think that they got a sort of a reminder that the Fed is still intent on raising interest rates. That was reiterated today by Bullard who was on CNBC, who wants a three-and-a-half percent plus Fed funds rate by the, by the end of the year. And when you look at last couple of decades, it was always the markets that we're given, the candy that they wanted from the Fed. And every time the kid wind, though, the parent gave the kid more candy. And because of high inflation, even though it's probably peaking out and it's going to start to slow down. There's still the belief that the Fed is going to give us more candy, but that inflation is why they're not going to. And I think that, that is something that the central bankers have tried to reiterate, sort of reinforce last couple of days. The markets are still sort of whistling past that. Thinking that, okay, well, maybe so, but if we go into recession, you can be sure you're going to stop. That's all we're looking for. So Peter, if we look at various sentiment scores at the boatman, they look extremely downbeat. And at the same time we have the Federal Reserve now pushing back on markets again with these hawkish comments, how can equities rally in such an environment? What's your take on that? Well, I think the Center for the rally over the past month was firstly, a contrarian setup where you had in multiple sentiment gauges, extreme bearish, particularly industries intelligence. The AAAI, where bears are swamping the number of balls. And so that in other metrics as well. And that was a good setup for this. Then you throw in, of course, as I mentioned about hopes that the Fed is almost done or is at least as slowing down the pace of the rate increases because they'll most likely hike 50 from in September from the 75 basis point case that they accelerate it to over the prior two meetings in earnings that are beating lowered expectations. And still the whole PM that we are going to have. Even if it's a recession, a mild one, that won't be a big deal and everything will be just fine. I think that's the setup for this. But in, in any beer market, which I still firmly believe that we're in. These hope rallies and with everyone thinking that the worst is over. But if you just look at a chart in particularly the nasdaq where tech is obviously a big driver of this rally. All it is is just a rally into the downtrend, Live from the January peak. So I wouldn't be logged into this. I also want to remind investors than four weeks, September 1st, QT ramps up to 95 billion a month. So good luck rallying. In the teeth of that. Peter, no one's talking about quantitative typing at the moment. It's like every been buddies sort of centered on these interest rate hikes. But beneath the surface, this balance sheet withdrawal will basically continue throughout the course of the second half of the year. Would you consider the balance sheet shrinkage from the Federal Reserve more important for us at markets that the discussion and interest rates. I think that the QE, in its purpose, stated purpose spied Bernanke who created the US version of it. Compared to how the bank ended. His stated purpose was to ease financial conditions and livestock prices. So low, if you're consistent and symmetric with that, each should do the exact opposite when we're in the middle of it now, we're obviously doing it right now, but on a pretty small scale, doubling it will, I think at some point get the markets attention. On the right side, the right side. And they actual movement and interest rates has more of an impact on actual economic activity. Yes, it does. Fluid through to valuation models. It does flew through into pricing of credit spreads and evaluations and stocks. No question. But in terms of a direct impact, I would say q0 has a direct impact on stocks. We're shifting the Fed funds rate and it's sort of distribution effect on the rest of the yield curve has more of an impact on, firstly, the interest rate sensitive parts of the economy, like housing and autos, and more so indirectly in terms of the cost of capital. Generally speaking. Peter, we've received a bunch of data today. And as we know by now, the Fed is now clearly data-dependent. Looking at interest rates from meeting to meeting. One of the key gauges out today was the ISM services gauge. And it actually jumped to a three-month high. But if we look beneath the surface, the message probably a little less. Or do you think the FET will take comfort in this ISM report from today? The Fed will take comfort in any economic data point that doesn't badly deteriorated because it, they'll feel like it sort of buys them time to continue this rate hiking and buys in time to an event. And eventually inflation does start to receive. So that gets into their, their tolerance of a software economy. It's when things start to accelerate in this situation that they start to get worried when you start to see a notable increase in the unemployment rate. But the ISM, just for context, the bounds came off the lowest level since 2020. And the market IHS market, we OF US services for July came in at 47.3, so that was firmly below 50. And the IHS market number is water in its in its in its survey, includes a lot of small, medium-sized businesses as well, where ISM is more focused on bigger companies. And you're sort of seeing that bifurcation generally in the economy, you have higher income people that are managing this inflation situation better than lower-income people. You're going to have bigger companies that are going to outperform smaller companies just because they have the resources, they have the buying power, they have a leverage. In terms of supply chain. Just think that if you're going to try to get a container, well, you're in the back of the line compared to a Walmart if you're just a local retailers. So that's my, my sort of my point there. But we have to also understand that the economy doesn't grow at once all contract the Watts has its own internal cycles in a broader cycle. And as we talked about before, this interview, it's not a light switch, you just turn on and off. It's either recession or expansion. There's a dimmer, there's a lot of in-between. And I think we're beginning to see obviously putting aside the two negative prints and GDP. This, this, this, I know in the world of COVID It's bath, use the word virus, but let's use the word virus here is that the COVID didn't infect the whole world all at once. It was something that has spread and metastasized. And we have, we have that going on in the economy. It starting out in certain pockets, starting out in weakness and housing, as I mentioned in lower-income spending, smaller businesses are getting impacted. But it's going to start to metastasize because then that flows into capital spending decisions which is beginning to weaken. We saw very core prints in some of the regional manufacturing numbers in terms of their six month outlook. And then we have to see, okay, once it starts impacting the higher ends consumer, when does it start impacting water business? Well, it is impacting WordPress. We're seeing the advertising business is getting, is getting clipped as companies use that lab refers to the cost and readjust their, their, their, their budgets so it is beginning to spread. And that's why this whole debate about is a recession, not a recession technical not or it's all semantics. The trajectory of growth is down and it is spreading. And how you want to define it, and how you want to time it, I think is right now irrelevant. Peter, if we look at the current growth pace in three, I wanted to play a sound bite for you. A debate I a hat with a David Wu, the former Head of Strategy at Bank of America earlier today. He is arguing that q3 will be a strong corner. So let's listen to his argumentation and get back to that debate. So if you look across the market, I would argue the market doesn't understand. The world has changed. The market doesn't want to think about these longer-term issues. Okay? Yeah, I realized that the earnings season so far it's been pretty good. Right? And by the way, the earnings season, it's been pretty good overall, tells me that we are not. Okay. That we're not in a recession. I was the first one to say there was gonna be a reception in the US before Thanksgiving. I said this already back in basically March. By my view, the recession is already ended. The recession start in Q1 or Q2 has already ended. I think Q3 economy is gonna do okay? Okay, because the price shock associated with energy and food would have dissipated in Q3, which means the moderation of inflation, which means you're going to actually see a pickup in real GDP growth. Because you're going to see actually a pickup in real, basically income growth. But that would only strengthen the need for the Fed to keep going. So, and then so that's why for me, for, is when the reckoning is really going to cover the entire discussion between David Wu and I will be available on Monday on the real vision platform for plus Pro and essential subscribers. A lot of good stuff also on the current situation in Taiwan. Peter, back to you and your take on the Q3 growth pace. If we take the ISM report today at face value, it looks as if the economy is still growing or we can have a session on what's your take? Well, it's ending. Inventories are key swing factor. So inventories in the first, second quarters, rags. And I think yeah, maybe if we haven't seen an inventory builds, so if that shows up in Q3, maybe that gives us a lift. The question is, is what the offsets are going to be in terms of consumer spending on a real basis. Obviously everything's on a real basis when looking at that. And how capital spending is, housing is obviously going to be shrinking still. I think we're seeing broader capital spending within some of the regional manufacturing surveys that are looking squishy. And to meet consumer spending, maybe it's gonna get a lift and travel and leisure, just that as we saw in the second quarter number with Europe. But if we do see a plus number in Q3, I expect it to be barely. And then we'll start to resume the fourth-quarter contraction after we sort of run down this jump in inventories because I think companies are gonna be pretty good at clearing out some of their excess inventories. Because keep in mind a lot of this excess inventories was just, they were making the assumption that COVID spending trends will continue. And that it was obviously not the case, but in an inflationary environment, you put you put a for sale sign in front of something, it's going to sell pretty quickly. But I still think that the general trajectory of economic activity is slowing. And also, when you, I've argued this for awhile is that we have credit cycles now, we don't have normal economic cycles. And these credit cycles are driven by the cost of capital and what the Fed does. And when rates go up, it squeezes things and growth slows. And when the Fed uses easiest things and things grow. So to think that we're going to somehow grow through the most aggressive re hiking cycle in 40 years. And a pretty rapid increase just generally in market rates. I just think as such, which wishful thinking we all hope we do. We don't want to see recession, we don't want to see this downturn. But in a very interest rate sensitive, easy money sensitive economy, I don't see how we just sort of coast right through what's going on here. The FET probably now tracks the most lagging of lagging indicators, namely the unemployment rate and also the spot inflation from month to month. If we get a decent Q3, will that allow the Fed to hike interest rates into four and maybe into one next year. I think, I think the Fed wants to get the Fed funds rate. It's about 3.5. Well, they're gonna get it to three in September. And then they'll, they'll sort of play it by ear from there. In this sort of ties into what they think with the neutral rate is, even though the neutral rate is just some made-up cockamamie econometric model number that they spit out. And people have to understand that a two-and-a-half percent neutral rate is under the assumption of 2% inflation and 4% unemployment rate. If you have the unemployment rate below 4% and you have inflation much higher than the neutral rate is clearly well above two-and-a-half percent. I think the Fed, in terms of what will guide them on when they stop raising interest rates will not be GDP. It will be the unemployment rate. And if the unemployment rate goes from 3.6 will obviously see the updated number on Friday. If all of a sudden it goes to 4.5 rather quickly, that will, will ring alarm bells there. Now, 4.5 historically is very low. But when you have the participation rate as low as it is, that helps to explain that you're not going to need necessarily high unemployment rate. Historically speaking, in order to see a notable decline in the jobs market. And we're already seeing, speaking of the labor market in this lagging type data, initial jobless claims are at the highest level since November. And yes, on an absolute basis for peace of firings is relatively modest. But the trajectory now it is also clear. Again, the highest level, actually t months, it's high salt since November, the pace of firings is clearly going up. And just keep in mind that the mentality of a business and getting to your point about lagging is that if I'm running a wall or a local business and my business starts to slow on that. I don't just start firing people. I take a step back. I tried to cut some costs. I tried to maybe delay some of my capital spending plans. Then, then at some point things don't get better or maybe limit hiring. And then after going through that exercise and things aren't getting better and if they're getting worse, that only then do I start to fire people. And the reverse is true on the flip side when you decide to hire. So that's why it's a very much a lagging indicator. And it's just amazes me how the Federal Reserve and all these trained economists continue to conduct policy based on what they see, but what they see is behind them. All you can do is look at a chart since the 1880s and see that recessions begin soon after, a bottom and the unemployment rate. So it was a Fed Governor, Chris Waller who maybe was three weeks ago, who was like scratching his head and interview like I can't I can't We're see recession with the unemployment rate only 3.6%. I'm thinking, Chris, just just look at a chart, look at the history of this stuff. And you shouldn't be scratching your head easily times when you should be preparing for one, not wondering and thinking that it's not possible. Peter, if, if I allow myself to play the devil's advocate here for a short while, we have a bunch of job openings still in the US. We got the latest number from June, was it yesterday? Albeit with a drop compared to May but still at extremely elevated levels when we look at job openings, Could this be a game changer for the labor market compared to earlier cycles? Yeah, I mean, there are a lot of unique characteristics to what's going on in the economy. Where you have tech companies that are either limiting hiring or firing the excessive number of workers they took on in this expansion. But at the same time you have restaurants and hotels, and airports and airlines. I can't find enough people. So there is this, there is some strange dynamics within the labor market, but also there are strange dynamics when it comes to the inventory situations. You have Target and Walmart and other retailers that over ordered what they thought was going to be a continuation of trend of spending on a lease goods and they got stuck with excess stuff. But then you have some purposeful increases in inventory because people don't want to get stuck again with a lack of inventory, particularly like you look at the balance sheet. Inventory numbers with Mattel and Hasbro, they've gone up sharply because they don't want to play a game with Christmas again. They don't want stuff showing up in January. They want their toys on the shelves in September and October, early November, the latest for that Christmas holiday. So they pulled forward a lot of inventory built because of this more different environment that we're in. So there are definite crosscurrents here. And I think that's also what's making it somewhat confusing and trying to figure out where the economy goes from here. You listened to the CEO of Starbucks last night in their conference call. Oh yeah, everything's fine. We're not seeing any any trade down behavior or consumers are still spending as is. And then you hear from Verizon and AT&T and consumers are delaying paying their cell phone bills. And McDonald's acknowledging that people are trading down. So there is, there is a lot of mixed signals here. But that also gets to my point that it doesn't go from expansion to contraction just like that. It starts to show up in different areas and then starts to spread. And I think that we have to be prepared for more spreading. David Wu also mentioned a potential day of reckoning during fall as a consequence of the FET false for the Eigen interest rates through Q3. Would you concur with such a timing for the next sell-off inequities? Well, yeah. Well, it could happen. I think we don't have to yeah. I mean, it's going to coincide with QT ramping up. Qt ramps up, and we still are feeling the impacts of a lot of these interest rate hikes and inflation. Well, we'll moderate will still remain sticky. Yeah, this is just a bear market rally in and come fall is when you start to roll over again. Talking about inflation and getting back to the feds of vigilance, that newfound vigilance actually, I would say if, if we've had the first six months we've seen CPI will see the July number in a week. If you have, if you have 0 inflation, 0 month over month for the next six months, December year over year print will still be above 6%. We're not going to see zeros. So let's just say we're going to see two tenths of a percent every month for the next six months prints through the end of the year, the December CPI year view will be off seven-and-a-half percent. So we're still dealing with the sticky, persistent inflation that I think is going to be an issue for profit margins still, even though things are easing up. And I think still growth is only going to continue to slow. And then gets to the question of how deep is this slowdown going to be? Maybe it'll be mild, maybe it will be not. Is it gonna be lengthy is going to be short. And I think it'll be somewhat mile, but lengthy. I don't think we get out of this so quickly again, because I think inflation is going to be persistent and the Feds not going to be there. The candy man is not going to be there so quickly. To go back to how we started this, what I wrote this morning to bail us out with rate costs. They'll try, but I don't think it's necessarily going to have the impact that's intended. Peter's speaking of inflation. If we look at the prices paid component of the ISM report today, it actually declined quite a bit compared to last month. We had the same signal from the manufacturing sector earlier this week. Would you consider such signals a hint that actual inflation is now decelerating? It definitely is on the good side. I thought we saw that with CPI a month ago, where we saw the rate of change in core goods prices moderate for the fourth straight month. It was offset though by an act further acceleration and services. So we are going to continue to see a slowdown in the rate of increase in goods. It's just a question of how much it's offset by, like I said, services. And it's gonna be offset to a great extent because rental increases are still going to show up in CPI for awhile, even though actual rent growth on a year-by-year basis because of just consumers, sing, getting sticker shock and just the rate of change that comps getting tougher. So rents are gonna start to slow, but within the CPI NPC calculations, they're going to continue to accelerate. But as I mentioned, even if inflation is 0 through the end of the year, the full year, it's still going to be north of 6%. But yes, we have basically peaked and inflation and it is going to slow, buy it. Even if it starts to slow. The embedded inflation still in the system will take this time to work through both in terms of consumer behavior, business profit margins, and a level of interest rates and the ability of the Fed to, to respond to any deeper slowdown an economy. We've received a bunch of questions in relation to this inflation debate over the past few days here, real vision, one of them centered around the disconnect that we see between the natural gas price still being within spitting distance of all time highs. And then the landslide that we've seen in, for example, the wheat price. So food prices in general, what do you make up that diverges because usually we see a pretty tight correlation between the two. You do. But I think because of the influence of Russia and on the energy side, and someone on the green side, and of course Ukraine on the green side is, has thrown some mud into this analysis and calculation. And, you know, you're not in normal times when, when natural gas prices on a, on a US or a million BTU equivalent basis is about 60. And in the US were paying about eight. That's a highly unusual situation. And we feel so keep in mind, there's this belief that commodity prices go up, That's inflationary. Once they come down, everything's fine, It's deflationary. But we understand that from Kellogg's. And I buy a lot of wheat. And let's just say I'm on hedge because Kellogg's does hedge a lot of their, their grant exposure. And we prices go up sharply. And even if they come in off their heights, even if they come in 20, 30%, but they're still well, if they're lows, I have a higher cost structure and then what I had before. And when it spikes, I couldn't immediately pass that on throughout my supply chain and into my vendors and into my customers being the retailers. Because they wouldn't accept a sharp increase in my prices. I layer in those price increases. And that's what a lot of companies have done. They pieced out, I mean, you look at some companies, they've raised prices 345 different times because they couldn't do it all at once. So I think it's good that we're seeing some relief on the food side. Unfortunately not on the natural gas side. We're obviously seeing relief on the oil side and the gasoline side. And what drivers are paying, which is a good thing, no question. But that doesn't mean that the inflation rate just goes wet. It is a relief off the pressure point. It is a relief off the boil. But it's still at a level that keeps interest rate's elevated. Keeps central banks that will continue to height because there's still so far off sides. And I'd like to do is look at the ECB. I'm not even going to talk about the Bank of Japan because they are sort of like robotically staying in place. But the ECB that's dealing with inflation worth of 8% and they've rates at 0. Even if the price of oil went down to 70 and we prices went to $12 a bushel is the ECB is still having an issue with 0 interest rate policy. So keep in mind again, like I'm saying, this in the context of going into COVID and disinflation burst, is that the world sat on a foundation of one to 2% inflation and 0 and negative interest rates. So even if you go down to an inflation level, three to 4%, that is a new regime. Because that will also imply interest rates that are well above what we were before. And so we're not just going to just go back to the way we were pre-COVID both on the right side, the inflation side, the profit margin side, and the multiple side because of this in terms of markets. Peter, We have a question from the audience related to the Libor rate. The Libor rate increased to the highest levels that we've seen since 2008 as far as I'm concerned. And the viewer here asks you whether There's sort of an embedded liquidity risk scenario in the current pricing of libel. So there was no doubt that in 0708, you'd look at libor and it was a great sort of stress measure. And certainly live war. And its spread to the risk-free rate. It was definitely whenever that spread wide and people were worried about the banking system and so on. I think, I think this time around it's really just following that policy. And it's just sort of just lagging. Or we're really moving coincident with the increase in the fed funds rate rather than being metric of bank financial stress. There's a question also in relation to the gold position that you apparently have. According to the viewer here, he's asking you, despite the inflation that we've seen, the loan gold trade didn't go anywhere. Will it perform better in the pivot scenario compared to what we've just been through. It's been hugely disappointing because, because of the actions of the Fed and other central banks or some other central banks. Not all in their, their, their rate increases that lead to a good size rally and the dollar as well. So that's been the factor in the price of gold. Physical demand for gold has been strong for the last couple of years. It's just the paper price of gold definitely gets, gets, gets jerked around by where interest rates are and where the dollar is. Then begs the question, okay, It's been definitely disappointing up to this point. What would be the point of continuing to hold gold if inflation now is going to start to slow down. And I argue that inflation, that real rates, which are more negative than what we saw in the 1970s. If you look at spot, CPI, spot inflation relative to short rates, rather than looking at the tips for your, your real interest rate metric. That real interest rates are still gonna be pretty well embedded. And God knows, when we'll see positive real interest rates, at least in the US and certainly in Europe and other parts that have interest rates very low. And you look at the dollar because that's obviously going to be a big influence on where gold goes. And we can all debate whether data is gonna go up or down from here. But I think it's important to, to debate what the factors were in, in creating this rally in the dollar. Up until a couple of months ago, the dollar rally was really against the pound. The euro and yen traded poorly against a lot of the other commodity currencies. It wasn't too long ago, early this year where the Brazilian reality is that a multiyear high against the dollar, both because of high commodity prices, but also because the Brazilian Central Bank was very aggressive and raising interest rates. But then when the fifth even stepped up its interest rate pattern to 75 basis points, then the golf shirt to rally against everything. And it was a ferocious rally, no question about it. And that was certainly a wet blanket on gold and silver. But now that other central banks have caught up and got more aggressive, Swiss National Bank surprised us, the ECB surprise just getting rates back to 0, the Bank of England is going to raise interest rates by 50 basis points. This week. From the pace of 25, Bank of Canada surprised us with 100 basis point rate hike from 75, that the dollar is now beginning to look a little bit choppy. Which tells me, well, if the dollar rallies was just an interest rate differential thing, predominantly, obviously it's got its own unique thing with Europe because of what they're dealing with, an energy prices and so on. But if it's just an interest rate differential thing, well, well, the Fed is now slowing the pace of their rate increases most likely. And other central banks are catching up. So maybe this dollar rally doesn't have much traction left. And if the case combining with deeply negative real interest rates than maybe gold gets his legs back. I've made it my trademarked always conclude the real vision daily briefing with a meme, Peter. And today's meme relates to the price action that we've seen in bunk package through July. It seems as if at least the bunk bargain is zooming in on the recession risks now. But at the same time, equities look more towards the hope that we get a soft landing. So let's see whether this divergence between the bond market focus and the equity market focus will dissipate again over the coming months. Peter, it was a pleasure to host you again today. Thanks you for joining the real vision daily briefing. Thanks for having me always a fun conversation. We will be back tomorrow. My colleague, mucky lake will host areas stale. It was a pleasure to be here with you today, Peter. Thank you for watching out there. We'll be back tomorrow.