In this week’s edition of Wealthion’s Weekly Market Recap, Andrew Brill highlights key insights from our expert guests:
David Woo warns that escalating Israel-Iran tensions could shock global markets. Jonathan Wellum highlights U.S. market complacency and defensive investment strategies. Tian Yang explains his concept of ‘Schrödinger’s Recession,’ and Michael Nicoletos explains how global liquidity will drive U.S. markets higher.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://bit.ly/4eFzIxb
Andrew Brill 0:00
The ups and downs of the tech sector continue, and a lot of people have turned to gold as it hits a new high. If you need help navigating all of this, you can head over to wealthion.com/free, for a free no obligation. Financial Review. I’m your host. Andrew brill, let’s see what our experts had to say this week.
Andrew Brill 0:22
He is the CEO of David Wu Unbound, and a former top Wall Street analyst. David Wu joined wealthion this week and expressed concern over upcoming turmoil in the market due to the conflict between Israel and Iran. He also is concerned over Israel’s lack of transparency about their plan with respect to their border conflicts and how it will affect the upcoming presidential election.
James Connor 0:47
Tensions continue to rise between Israel and Iran, and I want to get your current assessment on what’s happening there and what’s going to happen in the coming weeks and months.
David Woo 0:55
Hi James. I mean, thanks for having me. I mean, as you said, I’m in Israel, and all I can tell you is, from my standpoint, you know, I think you know, if you think about geopolitical risk in the Middle East over the past year, since, you know, the the attack on Israel on October 7, I would say geopolitical risk right now is probably at the highest level, in fact, any time I can remember for the last 2030, years. And what I mean by very high is that, you know, the risk of a direct war between Israel and Iran, the two arch rivals in the region, is very, very high. I don’t think it’s been higher. I think in my lifetime, in any event. And I think from that point of view, if over the past year, the market had been concerned about a regional war Okay, only, I mean, the market didn’t really care about the Israel Gaza war, you know that? Mean, people got killed, but the market didn’t really care. And nor did it care about the Ukraine war, as long as the Russians and the, you know, the Ukrainians were bogged down, you know, like the market wasn’t worried that it was going to have spillover effect, much like basically the Gaza war, but Israel and Iran is a very different story, obviously, because Iran being, you know, a major oil exporter and so from that point of view, and Israel obviously goes out saying it’s very important in tech and so on so forth, in terms of us basically presence in the Middle East. But I think in general, there is no doubt. I think all people need to know is this, which is that Israel is going to retaliate after the strike against Israel two weeks ago. Now, basically by Iran. I can still tell you that it was a pretty scary moment. I was hiding in my own I’ve got a nuclear shelter here in my house with my dogs, who are were completely traumatized because the explosions were really, really very loud. I’m talking about explosions of the Israeli anti missile system, basically taking down those Iranian incoming missiles. But the point here is this, what you need to basically know is that Israel will strike back. Probably will be very soon, soon, meaning that in days, as opposed to in weeks. And I would say, most importantly, there’s a very good chance I think Israel is going to strike at Iran’s nuclear capabilities. And I think this is very important, because there are two questions that I think people are interested right now. One is basically what exactly Israel is going to hit, and two, what is Iran going to do afterwards? Okay, now, first of all, I think on the question of what Israel is going to hit. I mean, there’s been a lot of speculation. Is Israel going to, you know, basically, is Israel going to hit Iran’s oil fields? I think that’s going to be the last thing on Israel’s basically agenda. Because, first of all, oil fields, you know, you could basically blow them up. But they could be, they could be repaired. Actually, the end, they’ll be up and coming. They’ll be up and going again after three months. So you can only bring about temporary disruption if you were to target oil fields, and then at the same time, of course, if Israel were to take out Iranian oil fields, forget about what it means for oil price. Immediately, most likely Iran will retaliate by basically attacking the oil fields of Israeli allies in the Gulf, meaning UAE, maybe even Saudi Arabia, and so on and so forth. And I think from that point of view, last thing Israel wants to do is to basically put its allies, okay, in the Gulf, in an awkward position. So I think that’s the first thing. I don’t think oil as much as I do think that there could be secondary impact on oil price. I don’t think the effect is going to be of the first order to the extent. I think Israel, if they can, basically, if they can, somehow not basically touch the oil fields, I think they will go out of their way to basically avoid it. Now, of course, the real question is, Will Israel try to go after Iran’s nuclear program, I think that is obviously, you know, the most important question everybody’s asking, right? Let’s put it this way. You know, as you probably might have heard last week, there was an earthquake in Iran that was that was recorded as a 4.5 Richter scale earthquake, and it was 10 kilometers deep. And. Was very close to a nuclear reactor. Okay? And so a lot of people, a lot of experts, have been sort of speculating whether that was in a nuclear test. Okay? Now, again, let’s just say it’s 5050, okay. It was a nuclear test or not. What we do know, even from Anthony Blinken, who is, you know, I don’t know if he’s an authority on this issue, but certainly he is very pro Iran. So I think from that point of view, if he says so, I’m going to take it as a given. Even he admitted recently that Iran is only one to two weeks away from basically getting a bomb. Getting a bomb, meaning, let’s be very precise about this. Iran has enriched a lot of basically 60% purity uranium, okay, enough for them to make five bonds if they were to go to 99% and what infinitely blink means by one to two weeks is that if Iran tomorrow to decide to go for the purity 99% Guess what? It will take them about a couple of weeks to basically, to basically moved from 60% to 99% in order to make enough, basically to make enough material to make at least one bomb. Okay, so Iran is is either already in a nuclear threshold or has already crossed it. We don’t know. We also know basically that six months in the last, basically few months, Iran has successfully tested nuclear bomb detonators. Okay. At the same time, we know as a fact that Iran now has very good ballistic missiles. I mean, the ones that they shot at Israel, you know, two weeks ago they were called basically the Fatah 110, missiles. These things actually have a range about 300 kilometers. They can carry, you know, you know, essentially up to half a ton of weight, which was a lot of explosives. And on top of that, most importantly, they’re equipped with precision guidance. Okay, so basically, Iran already has the delivery mechanism. They’ve got the detonators, and they’re just couple of weeks from basically crossing the nuclear threshold if they haven’t done so already, like no sane country at this point, will say, You know what, let’s just leave it alone. Let’s wait. Let’s sit on our hands for another couple more years and see what happens. Israel has no choice, because at this moment, this is existential Okay, so I think from that point of view, whether Israel has the capabilities or not, I think everything they’re going to be doing, I think is going to be trying to slow down Iran’s nuclear capabilities development. I think what they can now, of course, I think they’re probably going to hit the infrastructure of the of the Revolutionary Guards, because, you know, the regime in Tehran is propped up only by the Revolutionary Guards, who are widely hated across the country. So I think from that point of view, like Israel is definitely going to go after the military infrastructure, the missile sites, the launchers, the airplanes, the they don’t have much of an Air Force, but the tanks, the training center, the whole shebang. Okay, so I think it’s going to be something like that. Now, I think, you know, I think obviously the question is, like, Where does the US come into this? Okay, now, the only thing we know is this, who knows? I mean, there’s a lot of, you know, smoking error and this kind of thing. But I think, you know, I do trust Okay? Media reports that claim that, you know, Israel has not so far shared its plan with the US. Okay, that makes sense to me. I did many different levels, but let’s just take that as a given right now, that Israel has not your share its plan with the US. What does that mean? You might say to me, the fact that Israel has not shared its plan with the US means, number one, that more likely than not, Israel is going to do something bigger than what the US will basically out. Well, Biden will basically will allow, okay, so from that point of view, like that’s one reason not to share with the US, if you think that us is going to try to hold you back, so therefore you don’t even tell the US, just go and do it. Okay. The second thing I think we can assume, if Israel indeed, hasn’t shared its plan with the US, is that Israel plans to do this by itself, and it has the capabilities to go do it by itself. Now, again, Israel has been preparing for this the last 20 years. I’m going to assume that Israelis have the abilities. They know what they can or cannot do, the constraint, and so on, so forth. So I think from that point of view, this is going to be a very important thing, and by the way, as far as the US concerned, and this is where we can bring in the US election, to some extent, which is that everybody knows okay, that if Israel and Iran were to go to war, okay, that this will probably help boost Trump, okay in the election, right? Because, you know, if you look at various different polls. The feeling is that, I think you know, that most voters feel that, you know, from actually, the you know is will be better for the US in terms of foreign policy than Kamala Harris. So any sort of, you know, foreign sudden escalation in terms of geopolitical conflict, you know, I mean a war between Israel and Iran. It’s going to be like front page news. It’s going to be like, you know, literally, every day. That’s all you’re going to be reading about. It. That sort of thing, I think, which will signal failure of US policy towards Iran over the last whatever, four years under Biden. There’s no doubt that’s going to benefit Trump and to the extent, I think Jerusalem does not want to be viewed as trying to influence the US election
David Woo 10:47
by, you know, sort of like by attacking Iran. I think you’re going to have to assume that beaming India will probably want to get this thing done sooner rather than later, sooner, meaning the next basically week, 10 days, as opposed to getting too close to the US election. Because if Israel were to attack, let’s just say, a week before the US election, there will be a lot of people saying, Oh, wow, Israel was interfering with the US election, that so on so forth. I don’t think Israel wants Israel is not. Israel needs to hit Iran. Not because of the US election, Israel needs to hit Iran because it’s an existential threat. So I think, from that point of view, I think that this is going to happen sooner rather than later. Our partner
Andrew Brill 11:29
ra Jonathan Wellum of rockling, joined us and raised concern over long term growth sustainability because of the deficit. He talked about rockling strategy for long term growth and wondered if equities are becoming overexposed to risk because of complacency, he also discussed the whole TD Bank finds itself in after some hefty fines.
James Connor 11:53
So Jonathan, even though you’re based in Toronto, much of your portfolio is comprised of us names, or you’re well acquainted with the US markets. What’s your take on the US economy right now? Do you have any concerns? Well,
Jonathan Wellum 12:04
this the concerns that we’ve talked about even you know in the past. First of all, the economy is chugging along. It’s it’s amazingly resilient. It’s probably one of the most resilient economies in the world. And that’s testimony to a very dynamic market, and certainly a dynamic economy, and dynamic investors down there. Also, I think it’s indicative of a lot of deficit spending. And so as we know, the government is spending on about 6% of GDP or more in terms of its deficit. So debt continues to go up, but overall it’s been very resilient. It’s not growing quickly, as we know the numbers, and there’s been lots of adjustments to the to the employment numbers and so forth, but it has been chugging along, plodding along, better than, certainly the European economies, better than the Canadian economy. And as we know, China also, although they’re doing a lot of stimulus. So overall, not too bad for the US, but we have the same concerns. A lot of deficit, you know, deficit spending, massive debt. Where does all this go? These are all structural. It’s going to be very difficult to get out of that situation. And they’re going to have to, you know, more and more pressure to continue lowering interest rates in order to get the interest cost down and to keep the economy above above water. So,
James Connor 13:16
and I’m glad you brought up TD Bank. I was going to ask you about that, and so just to lay the groundwork for our viewers, TD Bank got hit last week on the back of an official ruling out of the SEC. The fine was over $3 billion number of restrictions on terms of future growth in the US, and that’s what was driving the growth at TD Bank, and now it’s probably the worst performing bank in North America. It’s down 8% on the year. So would you not revisit it, given the evaluations, or do you think it’s there’s more to come on the downside? Yeah, it’s good
Jonathan Wellum 13:50
question. And so no, we will revisit it. We’ll it won’t be for a few more months. We’ll let things just settle out, because our overall view in the banks is is neutral at best, and so we’re not enthusiastic about it. We’re looking at other spaces, but it is setting up for a perfect opportunity to buy a very well run bank. I mean, obviously they made a major mistake in a couple of the segments in the US. And unfortunately, that can happen with collusion amongst a number of employees, and it was serious. And as we know, if you get into trouble in the States, they’ll take you out to the woodshed and really beat you up and extract as much money out of you as possible. But the bigger issue for TD Bank is that they are now limited in growth. They’ve been slapped and so from a regulatory point of view, they really can’t grow the business in the states now for a couple of years, and that is probably the biggest impact in terms of valuation on the bank, because Canada is already super saturated. As you know, it’s already an oligopolistic situation up here. So it’s, it’s really not a lot of growth in the Canadian marketplace, and everybody’s up to their eyeballs and debt anyway in Canada. So expanding their balance sheets in Canada is going to be a trickier business. So that’s. So that’s something though, that we will be definitely looking at. And there could be a great entry point and opportunity when this thing, when all the dust settles, and that shouldn’t be too far out, and certainly banks learn from their mistakes, and we’ll see about that. Could be a great opportunity. Yeah,
James Connor 15:16
I recently spoke with another fellow Canadian, David Rosenberg, and his big concern is one of complacency, and he’s also concerned that many people are too overexposed to equities, especially baby boomers, and he’s made mention of the fact that no one does research anymore. They just buy right and are you concerned that there’s this level of complacency out there, and regardless of what’s happening in China. China’s maybe imploding, regardless of the hostilities in the Middle East, regardless of what’s happening in the US or in this upcoming election, the the S, P and the Nasdaq just keep going higher every day. Do you are you concerned at all about this level of complacency that’s out there?
Jonathan Wellum 15:56
Yeah, no. I mean, David Rosenberg, I think, is an excellent analyst. I followed him from his Merrill Lynch days, and and keep, keep up with what he is saying. He’s is a, he’s a very, you know, prudent individual. He’s very numbers oriented. He gets right into the nitty gritty. And I like that. And he’s, he’s prepared to take a contrary position, which I love. And so I do think that he is exactly right. People are complacent, and that’s largely because, with interest rates being so low, up until more recently, you had to sort of look for a dividend. You had to look for that return. You weren’t getting it on cash. And so people did go into the market. And we’ve now had, I mean, other than the covid situation, where the price, you know, the stock markets, dropped for a couple of months, but not for very long. We really haven’t had a down market in any substantial way since 2010 so, you know, you’ve got 1415, years of a bias to the upside, and there’s no question. Then you get complacency into, you know, being priced in. And so people just start to expect that they’re going to get 10% rates of return, 15% rates of return year after year. But as I think David Rosenberg also points out, you’ve got this massive aging of the population, and you’re going to have more and more people living off of some of their investments. And so if they are heavily weighted in equities, and there’s anything that happens to the equity markets, they could they come off a little bit. You could get a knee jerk reaction, more of a knee jerk reaction, because of the allocation to equities is so high that people could come out, and that could certainly cause a larger down, downdraft in equities. So no, I think people need to be careful, and there is a certain degree of complacency. The way we try to get around that is we do own what we hope to be assets that can go up when the market goes down. And so, you know, we have a little bit more in precious metals, certainly a lot more than the average investment advisor or the average Canadian is we would be running, you know, high teens, maybe, maybe 18% of our assets are more exposed to precious metals. And some of the commodities, which we think would be somewhat of a hedge over time to a week to a week stock market. So
James Connor 18:02
yeah, and I want to spend a couple of minutes on your investment style at rocklink and how it compares to that with Warren Buffett. And maybe you can just tell us about it. And what’s your investment style. Well, we try
Jonathan Wellum 18:15
to use many of the same principles that Warren Buffett utilizes, and that is that do we try to look at companies with with moats, good protection around them, predictable businesses with a track record that is is excellent in fairly, you know, strong long term growth industries try to buy companies again that really do produce free cash flow and are good investors in terms of investing back in their business. So they, you know, they have their own built in, you know, hurdle rates and things like that. So you can get this natural compounding. And so we, you know, we try to utilize, you know, strong balance sheets, very defensive businesses, but can grow, grow quickly. So, you know, we, that’s where we try to utilize a similar type of investment philosophy. We’re not looking at speculative stocks. We’re not looking at junior securities. We’re not looking at stocks that have, you know, a great idea and sound it might turn out well, but they’ve already proven by their track record that they know how to make money, and they have a cash flow that’s coming out of that we can value, and we don’t have to be, you know, making wild assumptions in order to justify the valuation of those businesses. So some of our top holdings would include business that are in the technology space. So we would have, you know, some of the rover technologies, which is a major software kind of company, but a lot of industrial software, so it’s a leader in a number of different industry verticals. We love that type of business, as you know, software business, a great cash flow business, reoccurring. You get embedded in people’s businesses. You have high retention rates, things like that. Buffett, of course, does not invest in precious metals, and so we would differ with them there. But when we go into the space, we try to. Go through royalty companies. So they’re really investment bankers to the mining businesses. And we like that, because they do create a cash flow stream that you can value, and you can look at the counterparty risk in countries that they’re in, and, you know, build up a comfort zone with the risk profile, things like that. And, you know, we own some consumer, you know, consumer staple businesses, which, of course, Buffett likes companies like church and Dwight. We’ve gone nestle in the past. We’ve We’ve lightened up our position there more recently. And in Financials, you know, financials, even though we don’t own some of the banks, we also certainly will invest in other financials, like the like the Brookfield companies, which are, you know, infrastructure, but also financial companies, and you know, Burford capital, which provides litigation, finance, things like that. So in all the companies that we’re looking at, do they have a long standing business? Are they run by sharp people? They know how to allocate capital. They’re generating free cash flow. We can value them in the marketplace and justify what we’re paying for them today, and the future looks pretty bright for them in terms of the industry dynamics and growth opportunities.
James Connor 21:04
You mentioned royalty companies. So what royalty companies do you currently own?
Jonathan Wellum 21:08
We do have exposure to, you know, the big the big ones, you know, Franco, Nevada, and we’ve actually started adding a little bit more to it once it got sort of knocked down a little bit because of the trial and tribulation there in in Panama, with the cobray mine, where they, they had the copper mine shut down. But we do want some Franco Nevada and wheaton precious metals has been a very, very large holding for us for some time. And Randy Smallwood runs a, you know, a really beautiful business. There lots of, lots of growth and good capital allocator. And, oh, Cisco royalties. And we also have some sandstorm, which is a very strong company, with their profile, they have a doubling, it looks, certainly built into their business, a doubling of revenue over the next five years. And I think Nolan Watson’s position that company very well. Even if the price of gold goes sideways, you’re going to get a lot of growth in that business over the next few years. So those are some of the, some of the major royalty positions that
James Connor 22:04
we have. And how many names would you have in your portfolio?
Jonathan Wellum 22:06
We like to focus. I mean, one of the things that from our perspective, is people often deworcify, to use Peter Lynch’s old expression. I think he had that in one up and one Wall Street. But fantastic book he wrote back in the late 80s, early 90s, and so you can be in too many places. That’s why we don’t we’re not big ETF guys and index investing. So we typically have 20 to 25 stocks, with our top five or six companies being, you know, 35 to 40% of the portfolio. So for us, it’s all about knowing the companies, researching them and then having a heavier focus on the companies that we really like that we think are well positioned and can grow very quickly over the next little while. And we think that’s the way that you can outperform and also manage risk, because you understand the businesses really well.
Andrew Brill 22:56
Deanne Yang, who is the founder and CEO of variant percept and joined wealthion and explained what schrodinger’s recession is and what is keeping the US from entering a recession. He also touched on the inverted yield curve and the challenges the bond market faces ahead. Tian also spoke about China and how its economic challenges affect the global markets. So 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 23:32
Oh, yeah, yeah. So, so this is the very famous cat experiment. He essentially says, you know, you have a box, you put the cow 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 post covid economy we’ve been going through, where we’ve had, you know, various size, right? There’s been like, you know, jumps in layoffs, right? You know, certain things like Sorrentino media, 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 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 left the box, it looks like no recession.
Andrew Brill 25:10
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 25:24
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, um, 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 it’s 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, after kind of Silicon Valley Bank, the Fed, actually managed to step in and bail everything out, and they actually stabilized a bit, and 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. It’s 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 1/3 are struggling. Price levels, credit card debt stress, that really is a problem, but the top third have been doing pretty well, or the asset prices up. House prices are up, right? You know, they sell on 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, 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. I
Andrew Brill 29:05
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?
Tian Yang 29:33
Right? 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. 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 is. Was 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, rate. 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 yield 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 210s might be a bit more noisy than historically, right? You certainly shouldn’t be relying on it as the main thing. So
Andrew Brill 31:56
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?
Tian Yang 32:07
Well, 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 framed it as 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 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 is going to 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 made, 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 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, in terms of the economic stress and unemployment, youth unemployment, 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. Asia changing how China wants to operate and how it sees itself in the world, right? Like the phrase like capitalism with Chinese characteristics, right? 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? 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 not I think they deem was important, and now obviously takes slightly higher priority than the economy, so it’s like a balancing
Andrew Brill 35:46
act. Michael nicolettos, founder and CEO of defi advisors, joined us on speak up this week. He explained why the world economy is really important in how US monetary policy makers are working for the entire world, and not just the United States. He also spoke about the strength of the dollar and state of the US economy, with its March upward. Michael also touched on the sustainability of the stock markets. Michael, I want to ask you, what do you believe to be the state of the economy here in the United States we’ll get to overseas, because I know that you’re an expert there as well, and have a lot of opinions about China, but I want to ask you first about the United States. Well,
Michael Nicoletos 36:27
clearly, there’s a slowdown. The question is, if this slowdown will become a recession, if you ask 100 people, you get probably not 100 different answers, but you get a few different answers. So it’s hard to say what’s going to happen. It’s clearly there’s a slowdown. The Fed wants to get ahead of the curve by cutting rates aggressively. We saw the first 50 basis points, and it looked like that. It’s going to cut another 50 until the end of the year. And I think probably if we continue to cut rates at this pace, we might avoid the recession, or we might have a very shallow recession. If I can say that, I don’t believe we’re going to have a hard land now this is not a standalone case, meaning that the ECB is cutting rates. China is giving tremendous amount of liquidity in the system. So all that liquidity helps. Eventually, the US will come that later in the discussion, I guess. But my view is that the liquidity all over the world ends up in the US. So given that it’s the most competitive and the largest market in the world, money tends to come to the US, and that helps the US in many ways. And
Andrew Brill 37:40
that’ll you think that’ll strengthen the dollar? $1 seems to be somewhat strong right now, but do you think that that the increased liquidity around the world will help the dollar?
Michael Nicoletos 37:49
I think structurally, we’re in $1 bull market. I think in the next few years we’re going to see the dollar much higher. We don’t see the dollar high right now because PCB was forced to cut trades because the European Union is mostly in the recession. So to a common and we saw also the yen falling, and we saw the Chinese currency falling. So I think, and we know that central banks talk to each other, it feels to me that, among other things, the Fed wants to help the entire system and lower the dollar. So to give liquidity into the entire world system, the dollar is a funding currency of the world. So when the dollar rates go down and the value of the dollar goes down, it alleviates pressure from mostly emerging markets and for foreign companies which borrow in dollars. So this is the dollar by itself, helps the entire world, given that everyone’s cutting rates at the same time, besides Japan, it helps the entire liquidity system to come into the markets.
Andrew Brill 38:48
It’s an interesting concept that the US would try and keep the dollar a little bit lower to help the rest of the world explain to our viewers how the world economy is really important, because a lot of people worry about themselves and their own pocketbook. But if the world is struggling, the US seems to be doing great. It still isn’t doing all that well. Is it? Well,
Michael Nicoletos 39:09
okay, the US has the, let’s say, the privilege of its economy being driven by the consumer. More than 70% of the GDP is driven by the consumer. So as long as the employment market is good and the US people make money and they consume the US economy does well, in principle. Now clearly there are more things to add to it, but this is the the advantage that the US has, clearly, when there’s a global recession. Exports fall. Us. Companies can’t export a lot, and they have enough, and they get affected on their balance sheet. So it’s not it affects, it clearly affects the US, but I think it affects less than to affect someone else. And given that the US has the US dollar and the. US. Dollar is a global reserve currency which accounts for more than 80% of global transactions. The US has the unique privilege of being able to issue as many as much debt as it wants, or as many dollars, because global demand is so huge that they can afford to do that. Other countries, which are not the global reserve currency cannot do that in that magnitude, and that’s why we see sometimes currency crisis around the world, especially in emerging markets, which have liquidity needs a bit different than the US.
Andrew Brill 40:30
It’s an interesting concept, and I don’t think you know, and I’m so happy you’re here, because nobody’s put it in those terms, where the the US, federal, you know, policy makers actually thinking about the global economy, not just the United States, whereas we just think about the United States. But it’s a, it’s a, I think that it’s a really, really good point, that we’re not just working for ourselves. We have to work for the entire world, because we are the currency of the world, basically. So I think that it’s a that’s a great point. I appreciate you making that.
Michael Nicoletos 41:05
Let me, let me say a few things. We’ve seen a lot of discussions about the new BRIC currency, which is supposed to substitute the dollar as a global reserve currency. And the argument is that the huge deficits and the huge debt make the dollar unsustainable. Now, if you take the pre currencies and you see their financials, trust me, they’re not better than the US also, most of them have capital controls. But again, if, if that was the case, you would see other currencies strengthening and getting a part of that dominance. But that doesn’t happen. So the US has the privilege and the responsibility of having that, that utility. Now, if they cannibalize it and they weaponize it in you know, I’m saying, if they were to do that, they were to strengthen the dollar, then they didn’t, they would increase the probability of other countries trying to find another way and finding another currency, that would not be easy. It will take 10 years and more, but they the drive would actually be serious. I don’t think the efforts which we see now are very serious. And I don’t think there’s a threat at this stage for the US dollar.
Andrew Brill 42:16
How much does that affect trade? When the dollar becomes too strong, how much does that affect trade? Us, exports
Unknown Speaker 42:23
or imports?
Andrew Brill 42:24
Well,
Michael Nicoletos 42:26
it affects it in the current account. So if it strengthens, it exports less. If it weakens, exports more. But that’s not the only thing that the US is looking at. There are a lot of other issues in the economy that you need to pay attention to the exports are one, one component of the economy. But as I said before, the consumer is the driving force in the US. So the first and most important thing is to look what the consumer is doing. So this is why the Fed is looking at the CPI and the inflation to see if it’s coming down. Because when prices go up, which pressure the consumer to spend less when unemployment rises again, it’s the same thing. That’s why the Fed has a dual mandate of price stability and full employment. It needs to focus on these two things to keep the economy, the US economy, growing and continue to grow as it has the past years.
Andrew Brill 43:21
So Michael, let’s look at the markets for a minute. The US stock market equities just keep rising and rising. Obviously, that’s got almost nothing to do with the economy, but How sustainable is the US equity market right now? Well,
Michael Nicoletos 43:36
let me put it first of all, markets are a relative game, not an absolute King. So when you’re an investor, you need to find where to put your money. So there are a lot of options, but if you look at it, if you step away and you see where it’s the best market to invest, you’ll see that the US is the best market right now. So in terms of growth, in terms of prospects, in terms of transparency, in terms of structure, the US, the US economy, that the US bond market, for example, trades like, I think, 15 trillion a month, when Europe trades like less than, if I’m not mistaken around five, six so, and China around 2 trillion. So you understand, when you have such a broad market, it tends to help investors feel comfortable to invest in now. What more drives markets right now is not valuations, it’s liquidity. And if we look at global with liquidity, we see it clearly increasing, and that liquidity is what driving is driving markets. Many will come up and say, Guys, the valuations are through the roof. They don’t justify the earnings. Okay? I hear that, for example, the hottest topic is Nvidia. Okay, so we’ve seen Nvidia in every headline. But again, first of all, Nvidia always outperforms its forecasts and has a forward be. Of let’s say around 3640 I haven’t checked today where it is. I want to remind investors, because I used to trade the market in 9999 and 2000 when liquidity comes into the market, and it comes at the paces we see now, because it is the pace with which liquidity comes into the system is unprecedented from any standard markets tend to go crazy, and I think we’re at the stage where equity markets in the US will do very well in the next six months, even if valuations don’t justify just because the liquidity will be there and you need to put your money somewhere. And versus other equity markets, the US is the most appealing one. Thank
Andrew Brill 45:43
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