Wealthion’s Andrew Brill sits down with Variant Perception’s CEO, Tian Yang, to unpack his intriguing concept of a “Schrödinger’s Recession,” where the U.S. economy continues growing despite traditional recessionary signals flashing red. Tian also explains why the Fed’s preemptive rate cuts were the right move and how resilient household balance sheets have helped the economy avoid a downturn. He also discusses China’s economic struggles, recent stimulus measures, and why the latest Chinese market rally may be short-lived. Are these factors enough to keep the U.S. on track for a soft landing?
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Tian Yang 0:00
The key is that this is not a normal business cycle. This is the post covid business cycle where there are literally some things that have not been seen. You know, in recent history, we’ve weathered a lot of the drags that would have historically resulted in a recession. We crossed the Rubicon. Fiscal policy is okay again.
Andrew Brill 0:24
Third quarter earnings season rolls on. I’m your host, Andrew brill. We’ll talk about where the economy is headed and the possibility of a recession coming up right now. And if you need help being financially resilient, head over to wealthion.com/free for a free no obligation portfolio review, I’d like to welcome in Tian Yang, Head of Research and CEO of variant perception. Diane, thanks for joining me. Can you tell us a little about yourself and your research and proprietary models you use for investment advice? Yeah?
Tian Yang 0:58
Hi, Andrew, yeah. No, very glad to be here. So what we do at variant perception is that we try to simplify down macro and the capital cycle. So we take lots of different factors, like growth, inflation, policy, liquidity, you know, the things that kind of should matter for investing, but try and abstract it down to actionable tools to generate portfolios. So I think in terms of how to character categorize us, I would say we’re kind of more top down and bottom up, and a lot more data and quantitatively driven than you know, finger in the air insights. So that’s probably how I would frame ourselves.
Andrew Brill 1:38
I appreciate I’ve read a bunch of your reports. And I appreciate you, because I know this is all very technical, and I appreciate you dumbing it down for people like me that can ingest it and read it and understand it a little bit, but they are great reports. And I want to start by asking you your take on the present economy here in the US, and then we’ll get over to China as
Tian Yang 2:01
well. Yeah, first of all, certainly I wouldn’t want people to think that this is just for people who think they’re super small, right? I certainly don’t think of myself as that. I think the goal is to essentially figure out which are the parts of the economy that we can model that are repeatable over time, and essentially model that, and then that leaves kind of the room to understand how is today different or not, to to kind of the past so and obviously that that leads us very nicely as a segue onto the US economy. So clearly, there’s a lot of different opinions out there. I would say pretty polarized opinions on the economy. It’s probably not a coincidence that you know, if you look at consumer confidence surveys and the like, they’ve become much more polarizing and actually less useful to predict the economy in recent years. So I think if this was a bog standard business cycle, there would be a lot of things that are concerning about the US economy, right, in terms of some of the labor market statistics and things like that. But the key is that this is not a normal business cycle. This is the post covid business cycle where there are literally some things that have not been seen. You know, in recent history, from the very large fiscal deficits, the large control the government has, you know, the prevalence of industrial policy and right the way through to the fact that, yeah, asset prices have held up very well. You know, the wealth effects been very strong the cycle. So, yeah, and the fact that even though the Fed hiked interest rates a lot, which historically has been very, very worrying, you know, us, mortgage rates have stayed low, right? Because lots of people locked in their mortgages, household debt service ratios have not gone up. So you’ve kind of had a lot of headwinds that’s buffeted the economy over the last kind of, you know, 1824, months, but essentially, none of them have synced up to drag the economy into a recession. And now that the Fed is cutting rates, and things are normalizing a bit, you know, once the US election is done and the uncertainty is removed, actually, you know, I think the economy is actually going to be okay. So, you know, as far as we can see, we think the economy is kind of just growing a little bit below trend, but still positive growth. But most importantly all, the policymakers are very focused on the economy, and they’re very ready to step in, which kind of helps to cut off the left tail a little bit. So
Andrew Brill 4:27
in your article, you talk about schrodingers, and I don’t know if I’m pronouncing that right, recession. Can you explain to us what exactly that is and where we are with that?
Tian Yang 4:37
Oh, yeah. So, so this is the very famous schrodingers Cat experimenter, where he essentially says, you know, you have a box. You put the cat with some poison inside the box. Before you open the box, is the cat dead or alive? Well, it’s both simultaneous until you open the box that you find out. And I think that’s been a very nice analogy for for this part. Covid economy we’ve been going through where we’ve had, you know, various sides, right? There’s been like, you know, jumps in layoffs, right? You know, certain things like Sam rule, which are linked to, historically, jumps in unemployment that normally Mark recessions, right? There’s been some of these worrying signs. Yet there’s been some pretty good headline growth numbers, headline consumer numbers. So, yeah, so I think that’s where the analogy to schrodingers recession comes in, where we had lots of differing factors. So it’s simultaneously been a recession and not a recession. And I think what’s been happening year to date, so far is that, broadly speaking, a lot of the leading indicators in the economy have been stabilizing and recovering. There’s obviously, you know, a bit of a bit of noise. This is a pretty consequential US election that’s distorting some of the data. But broadly speaking, we’re kind of saying, If you lift the box now, it does look like we’ve weathered a lot of the drags that would have historically resulted in a recession, but due to the fiscal you know, due to the government intervention, due to the fiscal policies, you know, due to the better household balance sheets. You know, the order deleveraging post covid, they have helped to kind of hold hold things up this time around. So when you lift the box, it looks like no recession.
Andrew Brill 6:16
So Tian, if we’re averting a recession, obviously economy, as you say, is growing but slower. What’s keeping us from entering a recession? If that’s possible, actually?
Tian Yang 6:30
Yeah, so obviously there’s some pretty credible people talking about how the Fed’s already behind the curve, right? It doesn’t matter if it cuts too late. So I think it’s, it’s worth thinking about recessions as kind of a phase shift, rather than, like a smooth process, right? I think that the analogy is kind of like, you boil water and boil boil it, and then it’s that moment it turns to steam. That’s kind of the phase shift when you go into a recession. So if you look historically, it’s not like, you know, growth goes from 2% to 1% to zero to minus one, and smooth, right? It’s kind of a jump. And so the only situations in which these kind of jumpy feedback loop phase shift recessions happen is when everything aligns. So that’s so it’s not just so much that growth is slowing, because growth slows and accelerates all the time. The key is that a lot of these feedback loop mechanisms are in place. So for example, if say the Fed was going to hike interest rates and credit spreads widen, then clearly businesses will have to pay more to borrow. And so if they start to struggle, they will lay off workers. If they lay off workers, their incomes go down, then consumption goes down, so more businesses revenue get hurt, and that feedback loop kicks in, and then that’s very hard for policymakers to stop, and that’s what the recession is, right? It’s kind of these feedback loops that accelerate and you get the phase shift. The difference this time around is that only really the start of 2023 met those kind of initial signs of a phase shift, which, you know, after kind of Silicon Valley Bank, the Fed, actually managed to step in and bail everything out, and they actually stabilize. The ban growth held up. And I think since then, none of these historically needed kind of sequences are actually in place today, so we’re pretty much out of sync, right? You know, we’re we had the housing stress last year, right? In terms of transactions, certainly, manufacturing was in recession. Last year is kind of coming, you know, it’s kind of stabilizing now, obviously there’s some concerns around election uncertainty, but if you just look at delivery times, they’re kind of picking up again. US consumer, right? You know, it’s been fine. It’s not doing amazing. People clearly concerned about personal finances, inflation, price levels clearly do matter. But in aggregate, the data is held up because it’s being a pretty bifurcated consumer, the bottom ones that are struggling, price levels, credit card debt stress, that really is a problem. But the top third have been doing pretty well, or their asset prices up. House prices are up, right? You know, they’re selling low mortgages. The biggest companies done well. They locked in issue debt when it was much cheaper. So we haven’t really had that feedback loop, that kind of, you know, incomes falling leading to more layoffs, right? That’s kind of what’s been missing. So in that sense, it, yeah, that’s kind of what you wouldn’t expect to see. And obviously, we don’t have a crystal ball. We can’t see exactly what’s going to happen in the future, but right now, it doesn’t seem that obvious. We’re going to get kind of big income shocks that will lead to more mass layoffs, that lead to more income shocks, right? Plus, plus, as I said, when the government deficit is running six 7% of GDP, and there’s a lot of politically driven needs to spend money, right, whether it’s on entitlement, but also industrial policy, you know, in the name of national security, that’s a lot of spending to come. And that also, again. And helps prop up the private sector balance sheets and stop or at least ameliorate the worst, the worst risks of like these income, layoff, recession shocks. It’s
Andrew Brill 10:11
interesting. You said that the lower third of the income distribution is they’re struggling a little bit. And it would seem that, you know, with GDP is obviously what people are spending money on. If those people can’t spend money the bottom third, are we relying on the top third or half to spend more money? And should we be addressing and is that what the Fed did when they lowered rates, is trying to address the lower third, trying to bring them back up to a point where they can contribute more to GDP also,
Tian Yang 10:46
yeah, I guess the answer is probably yes or no, yes, yes and no, but, but I think the short version is that, in general, the bottom third obviously going to have more of their income spent on necessity, necessary goods, necessity staples. So the bottom third actually matter for inflation quite a lot. But obviously the top third tends to make the big budget purchases a lot of discretionary, especially a lot of service, travel and so forth, right? That’s kind of the typical pattern. So it kind of matters more for kind of the discretionary components, and against that, you have a pretty extreme shift post covid, where you initially have a lot of spending on goods, when we’re all sat at home surfing the internet, going on Amazon. And obviously since then, there’s been a huge shift towards service spending, and that’s what’s been rock solid. And obviously service spending, and the service sector does employ a lot of jobs, along with the government, right? And that’s also holding up the labor market. So, so in that sense, that’s actually been the underlying trend. Obviously, when the Fed Acts it, there’s generally a lag from when they change policy to when it feeds through. So it won’t be immediate, but the signaling is important, and the fact that the Fed is cutting when there isn’t obvious signs of stress, that’s the biggest difference. So you can interpret it as almost slightly preemptive, right? Normally, if you go back, let’s just take, you know, say, like, in Well, not everything is going to be like, you know, two bands, seven and eight, great financial crisis and stuff, right? But typically, usually, central banks are cutting a lot after the data is really bad already and things are broken, and we’re obviously in recession, and just as you say, this time around, in aggregate, things are okay. So, yeah, I think it’s probably more a signaling at the margin from the Fed that’s important. And most importantly, it enables a kind of more synchronized global easing cycle from other central banks. You know, the feds, by far the most important central banking in the world. And when the Fed cuts, it allows everyone else to cut, right? So it’s not necessarily a coincidence that China also ease afterwards, right? And the ECB is cutting rates, and everyone suddenly has a lot more scope to cut rates because the Fed’s cutting so I think it’s probably more of these global impacts and the signaling that that’s going to be that’s going to be more important. So
Andrew Brill 13:03
if we go back to the analogy used of the boiling water, they didn’t really wait for it to turn to steam before they they threw the pasta in. They did that a little bit before to try and eliminate the turning to steam.
Tian Yang 13:15
Yeah, yeah, absolutely. Like, like, I say, if you’re going just like, go on Twitter or x now, and you look on social media, there’s a lot of vitriol and hate directed the central bankers. Oh, yes, but some of that might be valid. Some might not be. I mean, personally, I think Jerome Powell has shown himself to be an extremely pragmatic, you know, real world person, right? He’s not beholden to some dogma on how the economy should or shouldn’t work, right? He’s been responsive to the data. Has he made mistake? Yeah, you know, he said it was transitory. You know, it wasn’t, but he’s been pragmatic and tried to navigate things well and and, you know, there’s a chance for him to pull off essentially what Volcker did without engineering a massive recession, right? And I think he wants to secure that. I think the key difference is that the central bankers are also self aware. They are aware that the economies change. Maybe the old models doesn’t necessarily work, and they have to be data dependent. You know, that’s being thrown in their face as if, oh, they’re supposed to be these omnipotent people with a crystal ball, right? But, you know, they’re just regular people, and they’re trying to do their best, right? And I think German power has actually done a very good job, in my opinion, in navigating through the last few years. If you had someone really ideological who’s like, right? You know, this is the Phillips Curve, we have to have 10% unemployment to get inflation down 10 points. Then yeah, maybe that would have been different.
Andrew Brill 14:36
Yeah. I think that, you know, if you models obviously changing. For someone like you, you have to model things and use more data and stuff like that. So if the Fed just decided, Oh, we’re just going to rely on the old models, there’s gonna be a big problem. You know, times change and things change. Obviously, covid changed a lot of things, so those models would have to change. But, yeah.
Tian Yang 14:59
I mean, that’s such a great point, right? So we have, so for example, we build lots of lead indicators for growth, inflation, you know, policy for most of the top 30 economies, and we have various causal discovery processes. So it’s like, you know, the machine tries to figure out how inputs are changing. And you see it very clearly, especially in the US, as you know, for example, in recent years, in the US, services, new orders become like is a new input that’s suddenly very important, and it’s kind of intuitive. If you look at the shift towards good, you know, towards good spend initially, and services afterwards, and then, yeah, it’s telling you things like consumer confidence is no longer predictive, right? Because, again, we’re a lot more polarized, right? Republican Democrats going to report consumer confidence according to their political leaning. So, yeah. So you see it in real time, how the models are shifting and the inputs are changing. And, yeah, and that’s, that’s a in a way, it makes me feel better that someone like Powell talks about, you know, being data dependent. It’s a good thing, right?
Andrew Brill 16:04
Yeah, I mean data dependent. I in your article, you have the US probability graph of a recession, and for the first time in the last month, it’s actually dropped below 50% so that’s a really nice graph that, you know, maybe we’re not going to have a recession, but in your estimation, have have we embarked on this soft landing that everybody’s been talking about? Um,
Tian Yang 16:31
yeah. So the way we think about the economy, like I said, um, you know when, when we start to think about the economy? You know, you have all these very nice quadrant graphs, right? Oh, the growth is accelerating, and now we’re slowing down. Then we have recession recovery again. That’s true 80% of the time, right? Most of the time, the economy is a smooth wave shape, and there’s cycles, but then there’s that jump process we talked about, that’s a recession. So in that sense, the way we try and model things is we have these smooth cycle lead indicators. And those actually basically started bottoming out in August of last year already and started turning up. But you also have this one zero risk warning indicator, and as you say, that’s just been, you know, 50 and jump, very volatile jumping, which tells you about how, how weird environment it’s been and now, now that they’re broadly starting to align, yeah, it does look like it will be the quote, unquote soft landing. But the key is not so much where there’s a soft landing. The key is, will that impact asset prices? Right? And this matters a lot, because if you look at this year, if you know equities, I would argue, probably largely discounted it already. If you look at where earnings expectations are, and obviously after the very good non farm payrolls numbers, bond markets also realized and discounted it, right? So we went from bond markets pricing and the pretty big recession, yields collapsing to now pretty much yields normalizing around 10 year US yield around 4% feels about right. So now you’re kind of back to probably a pretty decent environment for your 6040, right? This is a necessary time to be a hero and and make a huge level bet either way, because I think asset markets are largely discounted it, and then from here, we kind of need to just observe and see if the there’s any kind of major deviation that comes up right before making the next move. So that’s probably the more important question. Tiana,
Andrew Brill 18:27
the the Fed has started a rate cutting cycle. Do you think that the 50 basis points was enough? Was it not enough? Was it too much? Because the economic data seems to say that we’re, we’re it obviously inflation isn’t where they want it yet at the 2% level, but it’s, it’s, I wouldn’t say, inching down, but maybe it’s a quarter of an inching down. It’s coming down, but very, very slowly. Um,
Tian Yang 18:55
so I think that the the actual, the actual decision itself is probably less important than what it did to the markets, because obviously, financial markets are forward looking. So in the money markets, you know what the Fed’s going to do is priced out for the next few years, right to the nth degree already. So the entire curve is moving. If you look at sofa futures, Fed Funds Futures, is all there, and what were the impact? And because, obviously they surprised, the impact was they really, I think, caused quite a big stop out in the money markets, and quite a big shift where there was a bit of probably panic that if what did, what does the Fed know that the market didn’t. So you had a very, very extreme move in discounting, where, you know, the market thought the Fed was going to cut to like 3% like in three three and a half percent by the middle of 25 so, like, going super fast, right? So that initial decision might have scared people a bit, that people thought the Fed knew something, and that they would have to cut. Super fast, like they would in a recession. And obviously, as you say, since then, the data’s been fine. And because the data’s been fine, a lot of those moves had to come back out. And so now, if you actually look at where, where the money markets are, things feel about fair, right? I would say in nominal terms. So the Fed to cut the Fed funds rate to around 4% feels about right, to get us to neutral. And I think what, as we mentioned, right pal, has a window to do this. What’s really important as central bankers, and that’s why it’s such a tough job. Not only do you have to predict what will happen with the economy, you also have to think about what a market’s doing, and you don’t want to freak the markets out, and you have to message it correctly. So in that sense, I think Powell actually did again, the pragmatic things we said. The market was discounting a very aggressive fed easing cycle. Whether you do 50 or not, initially, the market definitely saw it into the middle of 2025, so the Fed so Powell had a window, or he took it, he cut rates without necessarily hugely upsetting everyone, just, you know, it was a little bit of a surprise and and ultimately, his job is now that inflation, as I say, is roughly done, right? It’s no longer the kind of major issue. Clearly levels a little bit high, but the rate of change is good. Yeah, he just wants to wants to get interest rates down to more neutral range. And again, be data dependent, right? And see how things go. But rates are a little bit high, so he just need, needs to get it down as fast as possible to neutral. And then from there, observe the what is actually happening is that if you look at the the the Federal Reserve Board, a lot of the members that will give their projections for like the long term, long term policy rates are right. You know this magical, mythical R star that you’ll see in the presses all the time. So, you know it looks like from the median, the Fed probably thinks the real neutral rate is more like three to three and a half range, something like that. But on a lot of things we look out on the models, the neutral is probably more like 4% plus, if you’re talking about nominal policy rates. So there is a risk that if the Fed does, you know, underestimate where, where where the neutral rate is, they will cut too fast. And if you cut too fast, you might actually re accelerate the economy in the second half of 2025 right? Just in terms of normal lag. So it’s actually looking more like that might become the risk now than the other way around. But regardless, yeah, I think again, getting to neutral as fast as possible makes sense, because one pal can secure his place as Volcker without a recession. And two, when the you know the last thing you want to do is needlessly upset the market, unless there’s a very good reason. So if the market gives you a window, just try and cut and get to where you want to be as fast as possible. So you see
Andrew Brill 22:56
another another cut coming in November.
Tian Yang 22:59
Yeah. I mean, they should, right, unless something big happens, right? They just want, I, I just think they want to keep going. But obviously, like, how much difference does any 125 bit or not make? It won’t be a huge amount, right. Obviously. Basically, we’re discounted to get around four and under by Q, 1x and that’s the key, right? The key is not going to be whether they cut, necessarily, but the messaging around it right? Like, if you look at the press conferences, all the questions about, hey, Mr. Chairman, what do you think about this inflation number? Right? Everyone’s trying to get a sense of how quickly can we get to where they think the neutral is.
Andrew Brill 23:36
So how long does it take for a rate cut to really make a difference, and and I’ll get to my next question about the bond market. But it seems that they cut rates, but the bond market went in a different direction than they thought it might.
Tian Yang 23:55
Yeah, so this is, I guess, the in geek speak you’re talking about, you know, monetary policy transmission, right? Like, how, how effective it can be. So, so if, if the central bank, especially if the US Federal Reserve, communicates, well, they can obviously instantly move a lot of prices to where it needs to be. And so it can have a much more outsized impact than just from overnight rates that they, in theory, move. So in that sense, yeah, it depends on basically how much floating rate that there is, who’s sensitive to it, and then how well they can move the market in general, in the US, the policy transmission mechanism has historically been pretty good. But, like I say this, you know, I guess coming full circle, right? And if we look at, you know, how the post covid cycle has been, you know, a lot of you know, the a lot of people’s mortgages are much lower rates, right? So just because you start cutting, we’re quite far away from where most people finance. So it’s not going to we’re not in that range where it’s super sensitive, right? A lot of companies to. Advantage of the boom years after covid, when the government flooded, flooded economy and markets with trillions and trillions of dollars, right? All these companies issued lots of loans, issued leverage loans, issued high yield debt. They’ve all logged in, you know, lots of lots of financing as well, right? So in that sense, it’s probably become less sensitive, and that’s arguably why the neutral rate is higher, and arguably why, even though the Fed has hiked rates by a loss since covid, it hasn’t had the typical recessionary impact you would have expected based on history, right? The monetary policy transmission seems to have diminished. So
Andrew Brill 25:42
I want to talk about the bond market a little bit because, and I mean, I read your, your article on the bonds, it said, you know, the twos and 10s are getting a lot of a lot of attention because that that price hasn’t really dropped all that much. But if I’m correct, it’s the three month bonds that the Fed looks at, you know, against each other when they’re looking at interest rates. Am I reading that correctly? Right? Right?
Tian Yang 26:09
Um, yeah. So this is linked to the, you know, the the, the conventional wisdom is that the yield curve is one of the best predictors of recessions, right? You know, it’s kind of undefeated, if you’ll eventually be right. And what we’ve seen this time is that the yield curve has had one of the longest period of inversions ever without recession and but the argument goes normally when it uninverts Either, you know, when the two year yield goes back below the 10 year yield, that’s normally the beginning of a recession. The Fed researchers did a lot of work on this before, and what they found is that the main curve they actually look at is the three months interest rate against the three months interest rates 18 months forward. So it’s like a forward space, right? So you’re kind of so effectively is saying, what does the market think three months rates are going to be 18 months from now, very roughly, right versus today? And is it going to be higher or lower? And that curve, and that earning version they found, is more predictive of recessions. And so that curve hasn’t moved, basically, that hasn’t actually, that’s still kind of pretty inverted as of right now. But obviously things can change, and it’s also just worth bearing in mind again, when we live in a world where there is a bit more uncertainty around inflation, right in terms of the volatility of inflation, that will affect how good nominal nominal your curve is. And also, you know, the market is not fully self determining, right? We know the Fed does QE Qt, they can impact the amount of bonds in the system. You know, the Treasury, in recent years has changed how they issue bonds. So they’ve gone from issuing very long duration, long data bonds, to issuing more short term bills. And so again, that’s taken kind of the supply of duration away from the market. So being a bunch of these things that’s happened that’s impacted the kind of supply of bonds available for for kind of private sector to invest in. And so the net result has actually been to suppress a little bit the what’s called the time frame, essentially just the additional risk people put on longer dated yields, so that there’s, like, a bunch of these things that’s kind of kicked in. So it’s more saying the the 210s might be a bit more noisy than historically, right? You certainly shouldn’t be relying on it as the main thing
Andrew Brill 28:32
is the bond market, somebody something, somebody should be thinking about investing in right now. Or do you think those rates are going to continue to come down? So
Tian Yang 28:40
I guess it depends on time horizon, because obviously much of the hedge fund industry, especially if you’re a global macro PM, speculating and trading on these is kind of a very big part of the job description. But I think if you’re an individual longer term investor, and you don’t want to stare your screens every day, you know, you probably need to look 135, 10 years ahead, right, in terms of where you want to be. And I think that’s where the problem kicks in, because we know another big legacy of covid is that, you know, we cross the Rubicon, right? Fiscal policy is okay again, and it’s very easy for governments to to turn back to it when there’s a emergency, right? So, you know, I always, you know, I think the analogy is very similar to the fair Treasury accord that started in 1942 where, again, the emergency was fight to fight the Nazis. So that’s when the central bank has to step in help finance government debt. The government issues a lot of debt to do all the things they need to do, and in the name of a very important moral cause, right? And so with covid, covid became this, this emergency that was a moral issue. And therefore, regardless of all these concerns we had around deficits, you know, we have to, we have to step in. The government has to increase that deficit. And what you’re seeing more and more is that there’s more crises that, whether real or imagine that can happen, that can justify why the government needs to spend money on project a, project B, Project C, right? You know, you don’t hear the Tea Party anymore, right? There’s not much of a voice against it, and it’s a pretty global, synchronized path where, you know, I think in the future, when there is crisis, when there’s economic downturns, it’s much, much more likely fiscal policy will be used rather than just monetary policy. And obviously, if you issue a bunch of government debt, it will be a bit more inflationary, right, when you start doing that. So I think that’s like a pretty big regime change that does make nominal bonds pretty unattractive. So, you know, there’s a reason gold’s doing well, right? There’s a reason you need real assets in your portfolio. If you need fixed income, you can look at mortgage backed security, especially agency mortgage backed securities, right? You don’t have credit risk, same credit as a government. You get a bit of a pickup, looking at TIPS, right? So you’re protected in terms of get some inflation protection. So I would say, yeah, like for most investors, practically, you know, if you’re not close to retirement, you need to lock in certain things, right? If you’re not buying annuities and stuff, I do think the world we’re going to it’s hard to see how governments don’t spend, don’t want to spend, spend money. It’s funny, right? And obviously we’ll talk about China, but it’s kind of like, obviously China is a big thing, especially, you know, since she’s come to power, and before, the thinking was oh, China’s joined the WTO, the US and China will converge. Bring everyone’s mind the convergence is Chinese policy will converge all the way with the US, and we’ll have this system instead, if you look at in the real world, the convergence actually happened a little bit this way. Right us is also doing industrial policy. Right us is also intervening a lot more in the economies. Right us is directing more where credit goes. Those are like more Chinese style, managing the economy than not, and that’s the convergence we’re seeing.
Andrew Brill 32:02
So we went to them, they didn’t come to us. Well, it’s probably a little bit both. There probably wasn’t China in the middle, I guess. Yeah, yeah. I was reading an article Tian that said that our dollar buys more groceries now than it did in 2019. Did wages go up that high to meet prices, because when I go to the grocery store, that’s not what I’m feeling
Tian Yang 32:25
really. Yeah, I’m surprised. Who’s I mean, I guess it depends on if, yeah, I don’t know, right. That doesn’t sound right to me. But maybe you’ll change your basket. Maybe instead of your fancy luxury brand is so we just bought the most basic, and that ends up being the same. Um, because, obviously, price level is the price level, right? Inflation is a rate of change. The price level jump that hasn’t come back, and wage growth has been somewhat uneven depending on what sector you’re in. So, uh, so again, this might be a bifurcated consumer composition impact, I suspect, right. Yeah. I’m quite surprised by that, yeah.
Andrew Brill 33:06
So let’s talk about China a little bit. I know that you were skeptical about the stimulus, but what is happening with the Chinese economy, and how is that affecting the global economy? Well,
Tian Yang 33:17
yeah, I mean, I think the framing when it all kicked off on that Tuesday morning was, I think this is a tradable bazooka, and tradable means next one to three months. So regardless of what you think on China, if you can be flexible, there’s money to be made by buying it, right? So I frame this. It’s a tradable bazooka, but not a real economic bazooka, in the sense that economic bazooka is where China would need to really address a lot of their structural economic problems quickly. And if you address it quickly, then it’s not a case of where the Chinese equity is going to be up 50% right? If you address the economic issues, then you want to buy Chinese equities because, because it’s going to be up 300% that’s the difference. So I don’t think with that. I think for Western investors, you don’t have to invest in China, right? There’s other things to do. So the one option is, and it could be the right answer, just yeah, whatever it is, what it is, I don’t need to participate if you want to participate. I think the thing to think, to realize, is, I think, the Chinese way of thinking and doing things a little bit different. You know, Western policymaker bazooka literally means bazooka. Like, we’re gonna, you’re gonna know what we’re gonna do now. It’s gonna be upfront. You’ll know the size, the amount, the impact. The market will discount it and way away, I think in the Chinese kind of, you know, Mo the way, you know, the phrase is typically like crossing the river by feeling out the stones. So decisions. May we try things for a bit. We see how it goes. We do things a little bit more. Things go through some committees, and what, you know, this gets signed off, and we do more, like you do, kind of eventually get there, but it probably isn’t as you. A, you know, flashback wall of exciting that, yes, this is resolved now, and I think that that’s one of the probably gaps in what’s going to drive a lot of the volatility. But obviously the structural problem is extremely well known right at this point. We’re, like, three years into this. So it’s not like anyone is not, not, not aware of China and the problems. But I do think, you know, the analogy is probably somewhat similar to when they end the zero covid That clearly the pain point was there had been hit for the authorities in terms of local government finances, you know, in terms of the economic stress and, you know, unemployment, youth unemployment, you know, things that matter socially, right? So I think because those pain points were hit again, like any government is very reasonable for them to want to do something about it, right? But, and that will clearly be beneficial for shifting the narrative, stabilizing the economy. Obviously, there’s a lot of policies to try and boost equity prices, like directly, you know, facilities for people to borrow money to buy equities, pretty direct. So in that sense, I think it’s pretty tradable. But I don’t think this spells the major changing how China wants to operate and how it sees itself in the world, right? Like, you know, the phrase, like capitalism with Chinese characteristics, right? There’s, there’s a different order of priority. I would say it’s not just about profit maximization and growth maximization, right? Like, there’s a lot more concerns around national security, food security, energy security, if you look at how many, like, you know, solar panels, China’s building, right? You know, they want to reduce that dependence on importing oil that comes from the Strait of Hormuz that, you know, if an adversary wants to cut you off, you just cut off, right? There’s tons of more, I guess, real world geopolitical things that I think they deem was important and now obviously takes slightly higher priority than the economy. So it’s like a balancing act. Do
Andrew Brill 36:57
you think the stimulus, stimulus that they had announced, was enough. I mean, if they’re, they’re crossing the river stone by stone. As you said, it seems like, well, maybe we’ll, we’ll move slowly and try and move this along. But China’s economy has been not so great for a while. Does it need some does it need a bazooka, like you say, to get it moving? Yeah, I
Tian Yang 37:20
think they’ve pretty much done all they can on the monetary policy side, and that’s not going to be enough, right? So everyone’s obsessed with fiscal policy. I think all the magnitude wise, yeah, you need. I mean, the numbers badly around are like, you know, 2 trillion, 3 trillion, 5 trillion RMB. So to give you all the magnitude that’s around, you know, three to 5% of GDP worth, I think if they go towards 5% of GDP, that might start making a difference, right? Because the economy is in such bad shapes, you need some mega, mega amount to shift the to shift the needle so it could happen. I think that, no, I think we, as I say, we had a breaking point in terms of the the we’re not breaking but the pain point, right? That authorities want to react, but it’s going to take a lot and, and I don’t think there’s a long term change of direction. So that’s why it’s more just, you know, it’s almost a bit like, obviously, you know, we have to talk to a lot of clients about this, and then obviously a lot of friends, and obviously a lot of people care. And it’s kind of like in your system, how important is the market, right? You should just ask that, like, is the market as a allocation maximum? How much do you respect the price, if you truly like, let market prices allocate everything that you truly believe in, the power and invisible hand and for the efficiency, I think, in China, the market is just viewed as one tool in the tool belt, right? But when the economy is not doing so well, they need some stuff, then you can maybe go to the private sector, go to the market mechanism, a bit more, and then when you don’t need it, you probably don’t need as much. And I think that’s probably the biggest mindset difference that we’ll have to see if it shifts. But yeah, if it doesn’t, it’s hard to be too structurally bullish, but for a trade, and you know, in terms of how much everyone hates it, yeah. I mean, there’s no reason why we wouldn’t rally to year end, begin the next year, right even, yeah,
Andrew Brill 39:08
because when they announced the first round of stimulus, their market shot up 20% pretty quickly, and then came right back down when there was announced, well, there is no more stimulus. Now they’re talking about more stimulus, and it might be, could it be a time to sink some money into Chinese equities, let it ride up and then pull it back out again?
Tian Yang 39:30
Yeah, like I said, I think from an allocation point of view, allocation means you buy, you know, and then you don’t have to stay at your screen every day, right? It’s not like so if you happen to go on holiday, you miss it, suddenly it’s back down 20% that’s not really what you want. So I think from an allocation point of view, I would be pretty skeptical, okay, right now, but obviously from a trading point of view, yeah, I think there’s, there’s going to be a drip, drip drip of more announcements to come. The difference now versus I think anytime in the last three years is you. Feels like people want to believe there’s this interesting situation we’re in where, you know, there’s always something for the bulls and the bears, right? Those are, you know, when the party makers will pull they off, right? You know, the people who optimistic, they point at these things, oh yeah, this is, you see what I told you, this coming. And then the people who bearish, like, I see this, they didn’t do this. I told you this is going to go bad, and they seem to be doing a good job of giving a little bit to both and just keeping it going. So yeah, that’s why I think overall, I think the direction of travel is a bit is more fiscal coming. It’s probably not as much as the market wants. It’s probably not the oil and consumer stimulus they want, but I think it can boost asset prices for a while. Yeah.
Andrew Brill 40:40
So is it in your research, is there a particular sect, sector or region that you find most attractive for investments?
Tian Yang 40:47
Yeah. So the way we do is we essentially try to stack all the kind of most important models we have for the macro economy, for longer term industrial capital cycles, and different models for crowding and positioning, right? So in that sense, we try and marry it all together into into kind of an engine that we can spit out weights on, obviously, for the context of this particular core, I think, you know, we, I think the key is to not necessarily take massive, one, zero, binary risk and to try and unnecessary, be a hero, right? The key is to protect capital and compound this slowly over time. So the version of the engine we have for that recommends, yeah, pretty much right now, if your benchmark is, say, 6040 equity bonds, stick to benchmark within sector tills is tilted more towards like communication services, staple and a little bit discretionary and underway to more heavily concentrated in kind of like, like financials and healthcare and a little bit industrials, right? So you can see it’s not necessarily full on risk on risk off or full on cyclical or defensive. It’s more trying to look for a bit of relative value and a bit of relative allocation right now to give you a little bit extra performance. So, so that’s more the kind of till in the in the model right now.
Andrew Brill 42:08
So what’s your feeling on gold? Gold is reaching new highs and commodities. Obviously, our government here in the US is not going to stop spending money. So gold could be a decent bet against some stuff. But what about commodities as well? Or they’ve been suffering for a good portion of time. Is it time to start thinking about commodities again? Yeah, so
Tian Yang 42:32
I think gold is just, you should have some gold, just like a core allocation, right? It’s like a clean, real asset that should cover us for, you know, the risks around fiscal profitacy, and you know, more of those things we talked about, right goals? Kind of your defensive asset if government bonds don’t work anymore, right in the future downturn. So that’s why gold, I think, is relevant structurally. And that’s a core, core, core holding on commodities, you, I think it depends. You probably have to be a bit a bit more granular than just buying the commodity ETF, because I do think, as I mentioned right on things like China, it’s not super clear that oil demand is going to surge a lot, even with China stimulus, because they’re trying to wean themselves off oil a little bit at the same time, obviously there’s a lot of supply coming on board. OPEC is struggling a little bit to keep the the the quotas together, right? So you don’t have a very good outlook on demand supply. Yes, the US does need to refill its strategic reserves. But why would us not? What way if Trump wins, you know, MBS in Saudi Arabia goes okay, you know, I want to maintain market share. And then oil prices crash, and then Trump fills up the SPR and then it goes down with the best oil traders ever. When you draw it down and boil it back, right, it could happen. So, so, yeah, I think oil is pretty tricky. I want to think that’s very interesting. If there’s things that are strategically important and in limited supply, things like copper, rare earths, things linked to the renewable transition, cobalt, lithium, all these things, I think those are potentially more interesting depending on, you know, the kind of producers that you can find, right? So I’m not that interesting iron or oil, because that’s a pure China play. And I say I’m skeptical China’s really going to go back to the same old real estate infrastructure led kind of, kind of boost the growth, but certainly for gold or some of these other things out are more geopolitically important. Yeah, you know, I think there’s a, there’s good opportunity there.
Andrew Brill 44:39
Oh, Dan, thanks so much for joining me. I really appreciate it and the great insights. And you know, I love to read your stuff. I think it’s great. Where can we find you, either on social media or your research,
Tian Yang 44:52
yeah, well, marionperception.com, right? And you know, you can find us from there. Obviously, we’re on Twitter, um. Um, we’re probably not as active on Twitter as some other people, but, you know, we try and put out a few charts a day. Keep it focused on the data. Don’t get too involved in some of the the personal, the personal elements on Twitter. Sorrentino,
Andrew Brill 45:17
media professional, is what you’re trying to say.
Tian Yang 45:21
I don’t think I’m smart witted enough to win those Twitter Yeah,
Andrew Brill 45:27
I don’t think anybody wins when people get into those those Twitter wars, but yeah, thank you so much again for joining me. I really appreciate it.
Tian Yang 45:36
Thanks for having me.
Andrew Brill 45:37
Thanks so much for watching our discussion here on wealthion with Tian Yang. He certainly has opinions on markets and the facts to back him up. If you need more facts and help being financially resilient, head over to wealthion.com/free for a free no obligation, portfolio review. And of course, if you could like and subscribe to the channel, we would greatly appreciate it. Don’t forget to turn on notifications. So you know when we post new videos to the channel, and please do the social media thing with us all, the links are right below in the description. And if you like this content and are looking for more ways to achieve long term wealth, watch this video next. Thanks again for watching until next time. Stay informed. Be empowered and may your investments flourish.
