FYI: Adam’s Notes have not been updated for the past 2 months, given how busy Adam is now creating videos every day. We are working to bring on additional resources to free him back up enough to resume writing these Notes soon, as the kind feedback from this Wealthion community tells us they are highly valued.
Welcome to ‘AdamsNotes’, concise summaries of Wealthion’s interviews with top macro experts.
These notes capture Adam’s key takeaways from his discussions with his guests. They’re not meant to be exhaustive transcripts; rather they’re the distilled insights that differentiate each interview from all the others.
To get access to Adam’s key takeaways, please enter your email below:
Expert: Ted Oakley
Date Recorded: 1.12.23
PART1: Expect A Mass Die-Off Of Public Companies Later This Year
[Notes will be posted shortly]
Expert: Tom Lee
Date Recorded: 1.16.23
PART1: Market To Rise 20%+ This Year, Says Wall Street’s Biggest Bull
The global economy is proving shockingly resilient. Europe is avoiding a recession, growth in the US looks set to pick up given falling energy prices & China is re-opening.
Sell-side consensus is crazy bearish. Only 1 in 25 analysis expects the markets to be flat or down this year. On the buy-side, positioning is very bearish, too. Tom thinks the herd will be surprised — especially since history shows that more often than not, the year following a negative year sees strong performance.
VIX has been returning to its former muted levels, setting the table for rising assets.
So Tom’s “base case” for 2023 predicts the S&P 500 will be up by 20%. But he thinks there good potential for further upside than that.
Tom also thinks that inflation come down — and is already coming down — faster than the Fed projects. The bond market seems to agree with this. So he sees the terminal rate is lower than what the Fed currently believes, and sees that Fed hitting it faster than it expects.
Basically, Tom believes the bond market is projecting a soft landing, whereas many pundits are fearful of a hard one. The big question investors need to ask themselves right now is: which side is right? (Tom obviously believes bonds will be)
As for an “earnings recession” in 2023, Tom believes that’s already priced in to stocks. So if earnings aren’t as bad this year, stocks should pop. Also, pretty soon stocks should be priced on 2024 projected earnings — which Tom expects will be strong given a recovery in the business cycle.
Giving additional boost to this should be (according to Tom) a weakening US dollar and moderating input prices as the bulk of supply chain shortages and inventory disruptions are now behind us. Tom expects the US dollar to weaken because he thinks the Fed will have to become more dovish soon, while he thinks the ECB and other central banks will remain hawkish for longer — making the USD weaker on a relative basis.
China is now normalizing/recovering. That will bring goods inflation down & remove substantial current tail risk. Again, good for equity multiples.
Yes, we may have a recession. But if it’s not as bad as is already priced in, which Tom thinks is likely, markets should rise.
Closing thoughts: Markets often panic. Last year it was panicked about inflation. If inflation dies faster than expected, then expectations will need to be readjusted & stocks should be re-priced substantially higher.
Follow Tom:
- website: FSinsight.com
- Twitter: @fundstrat
Expert: Steen Jakobsen
Date Recorded: 1.3.23
PART1: Tanking The Economy To Force A Fed Pivot Is The “Most Stupid” Policy
[Notes delayed by Adam’s power outage. They’ll be posted as soon as his power has been restored. We apologize for the delay.]
Expert: David Rosenberg
Date Recorded: 12.21.22
PART1: “Investors Better Buckle Up” For The Rocky Year Ahead
Last time he was on the channel, David estimated there was an 80% chance of a recession, 20% chance of a “soft landing”.
But when the Fed tightens into an inverting yield curve, the odds of recession go up to 90%.
And with the Fed tightening into the steepest yield curve in history, recession odds are now pretty much 100%
At this point, it’s “irresponsible” and “dangerous” to ignore this high risk of a recession next year.
When forced to choose, the Fed will prioritize taming inflation over avoiding recession. So David isn’t shocked at Powell’s actions here. It’s clearly fixated on destroying demand in attempt to bring inflation back down to 2%
The Fed is forecasting a 4.6% unemployment rate next year. Rosenberg thinks this will be reached once the recession is in full force & will likely feel like the “pain” Powell has been warning businesses & households to prepare for. That size increase in the unemployed (which corresponds to 1.5-2 million jobs lost) will put fear in society.
David sees disinflation & deflation as the themes for 2023.
Stephanie worries that the system is much more unstable this time (vs the 1970s) due to the massively bigger amount of debt & speculation in the system. Raising rates this far this fast could result in real systemic shock.
And what’s puzzling to her is that Powell seems intent on removing the “Fed put”, but investors aren’t willing to believe him. The market is still pricing in a coming Fed policy pivot, even though Powell is doing his utmost to convince the market he’s not going to reverse course.
David isn’t surprised at the market’s expectations, as it’s been well-conditioned over the past several decades to expect the Fed to cave.
He’s also not surprised by Powell’s determination. Looking back at past Fed minutes since Powell became a governor back in 2012, he has been a hawk – often pushing back on the Fed’s easing policies. He has expressed concern over the asset bubbles.
David thinks that the Fed is now trying to break the market’s Pavlovian response to its policies. It wants the markets to go back to focusing more on fundamentals. They may be of the mind that they’ve hiked too much, but fear pausing because that will send the market zooming higher again when the Fed instead wants financial conditions to continue to tighten.
So we’re likely to get a recession and it will be worse than necessary due to the Fed’s overtightening.
David thinks we’re getting to the tail end of the tightening cycle. Depending on what happens with inflation & with the economy as we go into next year, the Fed will likely pivot at some point.
When the recession arrives in force, capital will flee to safety. Credit demand will go down, lending will contract, and capital will move into US Treasurys — the perfect hedge against disinflation. By this logic, US Treasury yields should go down a lot, pushing up the price of these bonds. It’s only a question of “How much?” at this point.
The dollar’s relative strength will likely start waning over 2023 as the other major world central banks “catch up” to the Fed, right as the Fed stops hiking/tightening.
David is bullish both US Treasurys and gold in 2023 (the “bond/bullion barbell”). He’s less sanguine on the equity markets, but does think that the Emerging Markets (esp Asia) offer better value right now — though he does think the equity bear market has further to run. As for sectors, he likes defense, food & energy.
Stock markets tend to bottom 70% of the way into a recession, well into the Fed’s easing efforts. The Fed is still tightening & the recession has barely started. So a new market low is very likely ahead.
In terms of corporate debt, David advises to be short-duration.
Expert: Luke Gromen
Date Recorded: 12.12.22
PART1: Ballooning Deficit Caused By Higher US Debt Costs Likely To Force The Fed To Pivot
The economy is hurtling towards a hard landing. The Fed is going to break something.
Fed remittances to the US Treasury have fallen off a cliff, going negative for the first time in decades – meaning it is now draining capital, not adding profits, to the US Treasury. This isn’t apocalyptic in and of itself, but it’s a sign that ALL players using the model “borrow short, lend long” are now bleeding – due to fast-rising interest rates.
And as companies have to refinance their existing debt at these higher rates, the situation becomes increasingly dire. Bid/ask spreads should increasingly blow out as things worsen, which will start putting more and more players in danger of insolvency.
In short: the timer has been set on a systemic “break”. We just need to wait to see where the break occurs.
Luke estimates we’re currently in the “6th inning” in terms of the sovereign debt crisis. The energy crisis of 2022 certainly accelerated the timeline. We’re already seeing serious stresses (UK gilt market crisis, Yen seriously devaluing) that indicate instability is rising.
The Fed has injected some stealth liquidity of late, which has helped relieve some of the pressure. The dollar has come down a bit, helping our allies.
But Luke expects this relief to be short-lived, as the US fiscal picture is deteriorating. Higher interest rates are rising the cost of servicing the federal debt AT THE SAME TIME AS tax receipts are falling. So the deficit is exploding and the Treasury is having to issue far more USTs than it expected.
Either the US Treasury has to sell more bonds to cover the gap, which will drive yields up and further strengthen the USD. Or the Fed will have to pivot and step in as the buyer. This is the either/or moment we’re hurtling towards.
The Everything Bubble in assets was also driving a bubble in tax receipts. And the low interest rates that powered the bubble kept US debt service costs artificially low. This pushed the US debt service cost below 100% of tax receipts.
But now we have the opposite: falling tax receipts and higher debt service costs. Debt service costs are now rocketing higher than tax receipts – hence the exploding deficit. It’s likely to increase 40-50% in 2023. And about ⅓ of US Treasury debt will re-price within the year to a higher rate, which will further exacerbate the situation.
And with the Fed continuing to hike/tighten over the next quarter, Luke expects Q1 to get quite rocky – possibly non-linear in terms of downside for the economy & markets. Without a Fed pivot and the Treasury increasing spending, expect more USD strength and weakness & stock/bonds.
Luke thinks the ballooning deficit is likely to force the Fed to pivot (barring something even more serious ‘breaking’ sooner)
Similarly, our allies are pushing us to weaken the USD to give them more relief. If we want them to help us compete/combat against China/Russia, they’re saying we won’t be in a position to do that if you kill us with a continuing rising dollar. Which makes Luke more confident, again, that the Fed will be forced to step in and buy the Treasury’s increased bond issuance ( = pivot), probably within the next 3-6 months.
And at a high level, Luke (and many of the veteran Wall Street experts he talks with) calculates that the US – as well as every other country – is insolvent at 5% interest rates given the massive amounts of sovereign debt these days. So he just doesn’t see how Jerome Powell can make good on his plan to hike rates to 5% and them hold them there for many months.
PART2: [to be released tomorrow along with the video]
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Expert: Felix Zulauf
Date Recorded: 12.6.22
PART1: Bust/Boom Cycle Ahead As “Decade Of The Rollercoasters” Kicks Off
The tightening process followed by the world’s central banks in 2022 has been contributing to the global economic slowdown.
China is suffering the most from this slowdown & it will take the nation years to get through it (through 2028). Europe/UK is in the second-worst shape, and will experience long-term structural challenges (e.g., energy, political shifts, war repercussion) that will disadvantage it going forward.
The US is in a relatively better position. It’s still benefiting from the massive fiscal stimulus issued post-pandemic. While interest rate-sensitive segments are getting hit, the services sectors are doing ok.
In total, the global economy will struggle through mid-2023.The US will experience a mild recession. Most other nations are likely to experience a more serious one.
Stocks will perform poorly, too through at least Q1 2023, even US stocks as 50% of S&P earnings come from outside the US.
The hiking/tightening into a weakening economy is likely to trigger a major credit event as money becomes more expensive/scarce. China is the likeliest candidate as the deflation from its collapsing real estate loan market is severe & the contagion risk to foreign banks is high. The central banks will be forced to pivot when the credit event occurs. To be clear: Felix thinks Jerome Powell will not be able to pause and keep rates high for a prolonged period – the credit event will demand he revert back to cutting rates/easing.
This is why Felix expects the markets to decline from here until such a pivot happens. His best guess on timing is that something will “break” by late Q1, forcing the pivot response. That policy pivot will unleash a recovery in financial asset prices through the rest of 2023 and well into 2024. He expects commodities to run even more bullishly, persisting through 2025.
As financial assets rebound, Felix expects this will be led in the first phase by the growth stocks & bonds. Then the leadership will transition to the cyclical stocks & commodities (energy, metals and precious metals)
What happens to inflation? CPI and commodity prices will decrease from here until the pivot. Following the pivot, the stimulus will have the biggest boosting impact on scarce resources. In Felix’s mind, that’s commodities – especially now that global trade is becoming increasingly bifurcated (US/WEST vs BRICs). Inflation could roar back to double-digits through 2025/2026.
During this period, bonds yields will rise again as investors start demanding higher returns for the higher inflation cost. Felix can see UST 10 year yields above 8%. Ultimately, those high rates are going to trigger another economic downturn after 2025.
That’s why Felix predicts the next decade will be a “decade of the rollercoasters”, swinging the economy & the markets from bust, to boom, back to bust.
And this is a uniquely bad environment for the passive investing strategies & vehicles that dominate the investing landscape today. To protect & grow wealth through this coming decade, investors will need to actively manage – most people should focus less on picking investments and more on picketing the right advisor to guide them through this era.
The dominance of the West is likely sunsetting. Geopolitically, the coming decade will be one of decline/de-globalization for the developed world. It’s now a divided world and supply chains will never return to what they were. It will be less efficient, more pricey and more inflationary. And the ones who will suffer most will be the bottom 99%.
Felix worries about a trend towards socialism in the world’s democracies, and if things get bad enough, true social unrest/revolt/revolution. He also worries about more ‘administered’ governments (more Soviet-style controls).
In Felix’s opinion, the US made a tragic blunder by weaponizing the dollar & the financial system vs Russia in response to the Ukraine invasion. It shocked the rest of the world and added a massive incentivized nations to accelerate their de-dollarization plans. He sees the end of the Petrodollar and the end of the US dollar as the single world reserve currency as likely inevitable now. He thinks the influence of the US on the world will be “less and less” over the coming decades.
In the short term, Felix expects the dollar to strengthen again through Q1 as things deteriorate. But should a pivot indeed happen in Q2, the dollar will start weakening upon its announcement. Bond yields will follow a similar trajectory. Felix thinks bonds will have a “great 6 month rally” starting when the pivot is announced.
In terms of the strength of the rally of the stock rally a pivot will unleash, Felix thinks stocks could go up 2x between mid-2024 through end 2024.
In terms of his own portfolio, Felix is “neutral” right now and looking to go “net short” heading into 2023. Between now and end Q1, he expects most assets to decline (even gold), so he recommends most investors build dry powder now in order to be able to deploy it in the post-pivot bull cycle.
Felix encourages the average investor to follow active professional financial advice in this market, but to get it from a seasoned advisor who has experience & respect for the kind of macro cycles we’re dealing with.
Follow Felix:
- FelixZulauf.com
Expert: Michael Green
Date Recorded: 11.28.22
PART1: Avoiding Recession In 2023 “Almost Impossible”
The economy was set on its heels by COVID, an instability which the subsequent policy choices (i.e., extreme tightening of financial conditions) have exacerbated. This will likely manifest in a serious global recession in 2023.
Michael thinks it ironic that the opponents of central bank intervention when the Fed was easing are now cheering the tightening. In his opinion, if you’re against intervention, you should be against it in either direction. Excessive tightening can create big problems in the same way excessive excessive easing does.
Mike is a big fan of free markets and the signals they send to market participants. If left to work things out for themselves, markets will find equilibrium. But by constantly intervening, the central planners distort these signals and thus keep the system in a state of dis-equilibrium.
Much of the post-pandemic inflation we’ve seen Mike claims is less due to the stimulus issued & more due to the supply chain disruptions first, and now due to a policy increase in the cost of capital.
In Mike’s opinion, the Fed’s 2020 policy response prevented the US economy from spiraling into a downwards spiral after the country went into lockdown. But, it had a cost that needs to be paid AND it kept stimulating easing for far too long, especially after the fiscal side kicked in and the credit spreads came back down.
In terms of the markets today, Mike is seeing a lot of similarities between today and the 2008 crisis, where things were relatively contained until something major broke (Lehman). In particular, Mike’s very concerned that passive investment products have continued to experience inflows. The data shows that these passive inflows drastically distort prices in the direction of their flow. If they start experiencing outflows, triggered perhaps by substantial layoffs, they could bring the markets down big in a hurry.
And the danger now is that by hiking interest rates & causing bond yields to rise substantially, the Fed is incentivizing capital to flow from equities into bonds. This is putting pressure on those passive equity instruments, pushing them closer to the point at which their inflows shift from net positive to net negative.
To make matters worse, there’s a lot of political infighting amongst the top executives at the Fed. It’s not confidence-inspiring.
Mike thinks the Fed’s hiking/tightening regime will indeed “break something”. The disinflation we’re now seeing in many assets will build steam and may possible tip into outright deflation in 2023. The exact path & timing is hard to predict as Mike expects the Fed to alter policy in response (“pivot”) and that will make things more volatile. We also still have yet to feel the full impact of the many rate hikes the Fed has already made — those are going to be slamming into over the next few quarters (and the Fed is still hiking!)
So Mike is underweight equities right now, as a safety measure. He’s also bearing cyclical industrials, energy & companies with limited pricing power.
Expert: Jim Rogers
Date Recorded: 11.15.22
PART1: Worst Recession + Worst Bear Market Of Our Lifetime Approaching Fast
World economy has never spent as much or borrowed as much as it has over the past decade. The economy is floating on historic stimulus/debt and we are approaching the limits of what the system can handle.
Because the distortion is the greatest in history, the resulting correction/bear market, mathematically, will have to be the biggest in history, too.
Given the two possible paths of defaults or inflating away the currency, Jim is confident that our authorities will take the inflation route. “They’re going to print money until we run out of trees”, he predicts. Bureaucrats will never willingly embrace austerity.
In regards to the current hiking/tightening, which Jim believes will be short-lived, expect the most interest-rate sensitives assets to falter first & most — like mortgages and the real estate market.
The last time we dealt with massive inflation, the 1970s, America was a creditor nation. Now it’s in massive debt. It simply can’t handle the double-digit interest rates that Volker used to tame inflation back then. The extreme state of our national indebtedness ensures that the coming downturn will be the worst we’ve yet seen.
If he were put in control of the system, Jim would abolish the Fed, he’d cut government spending with a chainsaw, stop printing money & let the market determine what interest rates should be.
Jim expects the unfolding housing downturn will be epic. Same thing with the labor market — he thinks an awful lot of layoffs lie ahead. So Jim advises taking preparatory steps today to make yourself less vulnerable to a market crash, a housing rollover and job losses should they indeed arrive at scale next year.
The US has given a lot of geopolitical players an incentive to de-dollarize, especially in how it has weaponized the financial system against Russia. He expects competition to the US dollar to accelerate from here. It can happen: Jim remembers when the pound sterling lost its reserve currency status.
He doesn’t expect the US to lose its reserve status overnight. More likely, he sees ‘competing currency blocs’ emerging over time. And then, perhaps after a large war, one of them pulling ahead as the new reserve currency. This process will likely happen over decades.
Of course, Jim is still a big advocate for the precious metals. His strong sense is that these new currencies will likely be backed by hard assets, likely gold and/or silver. The East is hoovering up the world’s gold as the West willingly sells it, receiving physical bullion in exchange for paper — pretty smart:
Despite all the reasons to be pessimistic right now, there’s chance the current market rally could run further than most imagine right now — especially if peace in Ukraine is declared and China re-opens from its COVID lockdown. Long secular bull markets usually end in a massive blow-off top.
If indeed the market rallies from here, Jim thinks it will be “the last rally” before the massive downward correction he expects. He advises investors should use it to unload assets at these higher prices and build reserves to come back into the market to by at much better valuations after the bear market returns and eventually bottoms.
The only asset class that’s cheap right now is hard assets. Jim advises owning some now, and being prepared to own more if/when inflation ramps back up — especially if central planners react to a market crash by firing back up the money printers.
Jim’s advice: act as if you only have 25 investments to make over your entire lifetime. Do your research, don’t be hasty, don’t reach for excessive risk — and monitor how they perform vs your expectations and react accordingly. “Be boring” in your investing approach, he advises.
As for raising successful, happy kids: encourage them to be authentic, to develop self-understanding, to pursue their interests & not worry about what “conventional wisdom” thinks.
Expert: Alf Peccatiello
Date Recorded: 11.14.22
PART1: Fed Now Causing Massive Damage To The Economy
The economy is clearly slowing down. If you look at things on a rate of change basis, everything, sales, earnings, inflation — even jobs — are decelerating fast.
Alf expects inflation to increase by 0.3-0.4% MoM for the next few quarters, and thinks it will be down to 4% YoY by mid 2023. He thinks, mechanically, it’s near impossible for CPI to fall faster than that. He thinks it will fall faster in the second half of 2023, with core inflation reaching <2% levels by Dec 2023.
Alf expects a bad recession ahead, stemming from the Fed’s hard braking right now. He predicts the unemployment will be double next year, earning growth to be -15%, and US housing prices to fall at least -15%.
Alf doesn’t see Powell pivoting before he raises the FFR to 5%. He thinks Powell is too committed and he doesn’t see anything breaking too badly right now that could force his hand.
That doesn’t mean things will be rosy. Alf estimates the “neutral rate” is around 2-2.5% — which is why he expects a 5% FFR will result in massive damage to the economy. In fact, he thinks it already occurring — for example, the housing market is in full seizure right now.
We’ve never seen rates rise this fast. Yet S&P earnings are still expected to grow by 6% next year. Alf sees that most analysts (stocks, housing, etc) are still far too optimistic in their outlooks/projections. Expect 2023 to deliver rolling disappointments to investors as these estimates are forced downwards.
Alf sees the coming market correction as likely being similar to the DotCom bust in terms of swiftness & severity.
The bond market is clearly telling us it expects inflation to comes down. The inflation swap market is expecting inflation to be at 2.7% a year from now (and Alf expects <2%).
Today’s sharply inverted yield curves are screaming that recession is dead ahead. They predict recessions with 90%+ accuracy. Alf thinks it will really be clear to everyone that we’re in a recession in Q1 of next year. Layoffs will start getting bad around April.
The average housing analyst expects housing to decline by -2% next year. Alf thinks this is way too optimistic. Also, as housing prices get hit hard and transactions/new builds dry up, that impacts a material percentage of the US economy because so many jobs are tied to servicing the housing industry. And of course, other industries will suffering at this same time, too, so Alf expects material job losses next year.
For those who have not yet read our free guide to defending against/dealing with layoffs, go to https://wealthion.com/layoff
As for the financial markets, Alf is very skeptical of the recent rally in stocks. He thinks the probability is much higher that the bear market continues from here, even though the market could possibly rise to the end of the year first. In his estimation, S&P 4,000-4,1000 is “thin air” for prices.
Alf expects the bear market to hit a new low next year, likely bottoming around 3,300-3,400.
Expert: Jim Bianco
Date Recorded: 11.14.22
PART1: FTX Scandal Inflicting Lasting Damage To Cryptoverse & Financial Markets
Inflation has peaked, but it’s not going to come down as fast as the market is currently expecting. Jim sees it slowly coming down to ~4% and being stubborn after that. He expects a recession in 2023.
To understand the FTX fiasco, it’s helpful to understand the assets involved:
- Sam Bankman-Fried is the 30-year old CEO and founder of FTX
- There are two FTX companies:
- The smaller one is US-based. The assets here are likely in better shape
- The bigger one, called FTX.xom is based in the Bahamas. This is where the vast majority of assets where & where the lion’s share of the losses & fraud occurred
- FTX has its own crypto token, FTT, which it used like a printing press
- Alameda Research is a hedge fund that traded in cryptocurrencies
- FTX Ventures is a backer of a lot of crypto protocol developers
When the Terra Luna stablecoin imploded, it blew up Alameda, though that was not revealed – which was pretty easy for SBF to conceal, as his company had no real Board or oversight. To do so, he took customer funds on deposit at FTX and gave them to Alameda as loans to keep it solvent. Alameda used these loans to buy up all the faltering crypto ventures is was invested in (e.g., Celsius) to avoid having to mark its investments in them to market.
This kind of malfeasance is nothing new. We’ve seen this many times in history, most recently in MF Global. It’s not unique to crypto.
In fact, because crypt is unregulated and FTX operates outside of the US, it’s not clear if he truly broke any laws. At this moment, the best avenue to prosecute SBF may be to go after him for violating FTX’s Terms of Service.
The SEC doesn’t have regulation in place yet for cryptos, even though many players in the ecosystem have been begging for it.. Instead, the SEC has been ‘slow walking’ the process. Ironically, it had been collaborating most closely with FTX in its exploration of which regulations to put in place.
Another specious practice of FTX has been to create (out of thin air) more FTT tokens, which it then lent to Alameda to go out and buy ‘legit’ tokens like Ether, Bitcoin & stablecoins to hold on its balance sheet. This gave it a tremendous advantage, to exchange funny-money FTT for other assets.
The staff at FTX/Alameda were all extremely young and in many cases, quite inexperienced. SBF is only 30. The CEO of Alameda (who is romantically linked to SBF) is 28 and had little prior trading experience. All the staff at Alameda were in their 20s and dating one another. It’s amazing so few, so young and so inexperienced a group was in charge of tens of $billions with no supervision.
So how did the world find out that FTX as a giant ponzi scheme?
Two weeks ago, Coindesk got hold of FTX’s balance sheet and revealed how the FTT token loans to Alameda were being used to buy other assets. Binance, the biggest crypto exchange in the world, owned a lot of FTT tokens and became worried about how many of these tokens were being printed. Binance’s CEO, CZ, decided to sell his FTT tokens and publicly announced this intent on Twitter and criticized SBF for his efforts to influence SEC regulations to favor FTX over other competitors. The selling of FTT tokens exposed how vulnerable FTX was and started a ‘bank run’, FTX imploded over the following 48 hours.
FTX is now in bankruptcy, and for the most part, clients will lose most of their money. That’s about $10-14 billion. FTX investors have pretty much lost everything.
The contagion from this is going to be epic across the cryptoverse. A number of them may die off, too. Blockfi is a firm many are very worried about at the moment. The entanglement is extreme, and the fallout may be so big that it also spills over into the general financial markets.
The crypto universe does not have a central bank like the financial system does, to backstop losses during a big crisis. That makes it a lot more vulnerable here.
Apart from the largest exchange, Binance, capital is flowing out of all the other crypto exchanges right now. Crypto.com is looking very shaky right now.
There’s a ton of reputational damage resulting from the FTX fraud and the lack of oversight leading up to it. Sequoia Ventures is one – a leading VC firm that invested $200mil in FTX. It clearly was not doing its job well in understanding its investment. This will result in institutional capital shunning cryptos for a long time – setting the clock back years in terms of adoption.
To re-attract capital, the crypto ecosystem is going to have to totally re-set itself. Clear out the scammers & the crapcoins & the ‘get rich quick’ mentality. Get back to basics. Emphasize decentralized protocols. Focus on disrupting the financial system.
To clear out all the malinvestment & bad actors, Jim thinks a bigger reckoning is needed and that crypto prices need to go lower – and will. A crypto “ice age” is likely ahead.
A lot of people are getting tarred with this scandal, including SEC head Gary Gensler, IEX’s Brad Katsuyama, Kevin O’Leary, SBF’s parents (who are compliance attorneys), the Democratic party (SBF was its #2 top donor), Bill Clinton, Tom & Gisele Brady…and the list is growing by the minute.
There’s also a lot of suspicion that SBF donated a lot of $ to the Democrats, the Dems then sent a lot of money to Ukraine, and then a lot of that money was then invested by Ukraine back into FTX.
Amazingly, Michael Lewis has been embedded in FTX for the past 6 months working on a book about the company. We’re going to have one hell of a story from him once he’s done writing.
As best we know right now, SBF is being detained in the Bahamas with several FTX execs. The Alameda CEO is in Hong Kong, rumored to be trying to get to Dubai to avoid extradition. SBF has gone radio silent, though his account has been sending strange unintelligible fragmented tweets over the past 24 hours.
Remaining client assets have been getting mysteriously hacked/stolen from FTX – up to $1billion. If this is SBF or a lieutenant transferring exchange assets onto a cold storage device, he’s the only person with the access code. It may be his insurance against authorities – i.e., “without my help, no one will get anything”
Jim thinks that gold should benefit from all this, as ‘sound money’ investors leave crypto and look for an acceptable solution.
PART2: [to come out tomorrow when video is released]
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Expert: James Rickards
Date Recorded: 10.31.22
PART1: Liquidity Crisis + Recession + Unrest – Will 2023 Be Worse Than 2008?
The global economy is weakening very quickly, everywhere.
China is falling into recession, exacerbated by its real estate market meltdown, COVID lockdowns, and aging demographics.
Europe is teetering on the border of recession right now, but the economy is going to downshift hard over the winter. Its growth is going to be compromised for years by a shortfall of affordable energy.
The US is also in substantial slowdown, despite the deceptively high 2.6% Q3 GDP print (which was driven by net exports). Jim expects a severe recession – made worse by the Fed – to arrive by Q4.
The 500-pound gorilla in the room is the global liquidity crisis (i.e. collateral shortage) that’s unfolding. The inverted yield curves & Eurodollar futures curve are warning us of this. Signs of financial distress are multiplying. And the Fed’s continued tightening is going to make the situation worse. In short, he thinks it could be worse than what we experienced in 2008.
The Fed is hell-bent on taming inflation. It will be comfortable throwing the jobs market under the bus in that pursuit (and is in the process of doing so). Unless absolutely forced to do otherwise, Jim think once it pauses (likely around a Fed Funds Rate 5%), it will hold rates flat, likely through 2024.
Jim thinks the Fed’s zeal going after inflation is too much at this point. In his opinion, it should stop. Because he thinks CPI will come down organically given the disinflationary & deflationary forces at play, and that all the current hiking/tightening is going to push the economy far farther down into the coming recession, making it unnecessarily much worse.
The supply chain issues we’re now dealing with actually pre-date the COVID pandemic. Their roots are in the trade disruptions caused by the new tariffs against China under the Trump administration. COVID and the war in Ukraine have certainly exacerbated things.
Global supply chains are in the process of being re-drawn. It going to take about a decade before they’re finalized. The new system will place a much higher priority on resilience & national security than the old one did.
Global trade will break into 2 main trading blocs: the US+allies & China/Russia. This will be pretty seismic. Prices will be higher and trade volumes will be less than the old system.
And while these disruptions to the supply chain are inflationary, Jim thinks the forces of deflation are stronger and will soon win out. Yes, we have cost-push inflation going on now, but that will subside. But we don’t have demand-pull inflation — and demand is continuing to weaken, so it’s unlikely to become an issue (barring some new major unforeseen development).
As result, Jim predicts 2023 will be defined by disinflation, first, and then deflation.
PART2: Surprised? The U.S. Market Looks Best-Positioned In The Long Run
The plummeting prices for shipping containers is an important data point showing that the flow of real things is rapidly slowing (=disinflation)
Important to know that the supply chain is not “part” of the economy, it IS the economy.
The US actually looks the best-positioned to come out of the current shake-up of the global supply chain better than other major nations. It’s re-shoring key industries like semiconductors, it has plenty of friendly trading partners & good resources per capita.
Jim emphasizes true diversification: allocating across asset classes:
- cash (hold a significant % right now, to use as ‘dry powder’ to deploy once the bear market is over)
- stocks (big fan of the oil major stocks like BP, Chevron, Exxon)
- bonds (thinks US Treasurys look good right now as he expects rates to come down)
- gold (~10%)
- private equity
- real estate
- farmland
Follow Jim:
- Twitter: @JamesGRickards
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Expert: Chris Brightman
Date Recorded: 10.25.22
PART1: Risk Of A Financial ‘Accident’ Is High
It’s a very challenging time: very few people left in the financial system have any experience with a stagflationary market like we have now (and even those folks were young in their careers at the time, so it’s a distant memory).
Volatility has worsened while liquidity is drying up, even in the massive US Treasury market. That’s a big concern.
The rise in inflation was a policy choice, it happened on purpose. The Fed made a mistake by waiting for rising inflation well above its target and weakening employment to act — they waited way too long. And this was exacerbated by the parallel $trillions of fiscal policy.
Chris thinks the markets are underestimating how stubborn inflation is going be to tame. He also thinks a ‘pretty nasty’ recession lies ahead — so stagflation is the future, as he sees it.
As for interest rates, Chris thinks they’ll need to go to a minimum of 5%, but could easily go up to 7%
For many investors, especially younger ones, Chris recommends letting diversification, position sizing & compounding work for you — as they will give you a mathematical advantage. His formula:
- invest 1/3 of your income each month
- diversify it across a port of domestic & intl stocks & bonds, real estate (e.g., REITs), commodiites & other assets
- each month, put your monthly contribution into the asset that’s down the most since the previous month (buying at lower valuations)
- Do this until you retire, then do it in reverse (sell a monthly stake from the asset that has appreciated the most)
Follow Research Affiliates:
- Website: https://www.researchaffiliates.com/
- Twitter: @RA_Insights
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Expert: James Grant
Date Recorded: 10.26.22
PART1: Stagflation & Bear Markets To Define 2023
Extreme interest rate suppression down to 0% by the central banks has deformed pricing, resulting in excessive malinvestment & creating the “Everything Bubble”. Now that rates are starting to normalize (i.e. rise), they’re throwing the system into distress.
Rates in the US and much of the developed world have been rising faster than at any point in living history. That is creating shockwaves that are de-stabilizing the system and will keep arriving for some time. So Jim predicts most of the damage that will be done still lies ahead of us.
Jim sees Private Equity as a space ripe for reckoning. Lots of debt has been used to make acquisitions in this space, making the margin for error narrrower and narrower. Now with rates this high (and going higher), it wouldn’t surprise him to see a lot of bankruptcies.
Jim is concerned that the twin negative wealth effect losses in the stock market + losses in the housing market will further crimp consumer spending, causing corporations to layoff workers, further crimping consumer spending.
If Jim were in charge, no one would even know the Fed Chairman’s name. He wants the Fed out of the game of trying to influence/guide markets and public perception of the economy’s trajectory. The Fed would stop intervening, except as a very short-term lender of last resort in true periods of crisis. But it would get out of the bailout game. He would back the currency by gold. As for interest rates, the Fed should stop trying to influence any yields beyond the short-term borrowing floor it sets.
Jim thinks stagflation is the likely trajectory from here. History shows that inflation takes a lot longer to peak than our authorities tell us it will. The last great inflation era here in the US, too the better part of 20 years to fully get tamed (despite assurances all along the way is was ‘almost under control’). Jim compares inflation to an underground coal seam fire — it often looks like its out, but is really smoldering below ground, to erupt again.
Jim doesn’t see inflation going back to under 2% anytime soon and that bond yields will remain elevated.
Despite this, Jim thinks good values will start emerging along the way for those investors paying attention.
PART2: Be Bearish Stocks, But Time To Be Bullish Bonds?
Jim thinks young investors don’t need to worry too much about current market valuations. They should start DCAing into the market and let the miracle of compounding take care of them over the coming decades.
Older investors should be more cautious, as the near-term risks remain to the downside.
Jim likes:
- TIPS
- US Treasurys — thinks the long-dated UST should appreciate well when Fed pauses/pivots
- I-bonds
- Mortgage REITs
- Financial Institutions outside of the US
- Gold & miners
Follow Jim at:
- Website: https://grantspub.com/
- Twitter: @GrantsPub
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Expert: Tavi Costa
Date Recorded: 10.17.22
PART1: Charts Show An Inescapable Recession Is Barreling Down On Us
The bullish thesis is pretty much relying on things being so oversold a short-term bounce is justified. But that’s not a rationale that the long-term bottom is in. We haven’t seen the washout that traditional bear markets end with.
The most speculative assets (ARKK, meme stocks, Chinese equities, NFLX/META/etc) are down near their 2020 lows. But the S&P is still ~40% above its 2020 lows — suggesting the rest of the stock market will catch up by falling further.
Despite getting beaten up price-wise due to rising USD, there’s a great fundamental case for the commodities space. The S&P/commodities ratio is barely above it’s all-time low, but gaining steam towards mean-reversion. Prices may continue to fall in the short term, due to recession/Fed demand destruction, but secular supply shortfalls (due to decades of underinvestment in exploration & production) are going to prop commodity prices for a long time. Good time to be entering/accumulating the sector.
Higher interest rates/bond yields, central banks draining liquidity, USD increasing — the global economy can’t sustain the current trajectory (we’re already seeing breakages in Japan & the UK). Consumers are starting to buckle. And that will exacerbate the emerging corporate earnings recession. It’s very hard to be bullish given this environment. Tavi sees stagflation ahead.
Consumer sentiment is collapsing while corp profit margins remain near all-time highs. Once consumers start to reduce their spending, this will pull corp profits back to earth. This will then lead to layoffs, which will reduce consumer spending even further.
Tavi expects much more volatility in FX markets like we had in the ’70s and ’80s. Credit spreads have yet to really start blowing out. He thinks things are going to get a lot more turbulent.
Consumer real wages continue to fall, and now the household savings rate is plummeting. It’s the worst of both worlds: your tax home pay buys less, and so you’re not able to save as much. It’s no wonder that households are back to record revolving debt levels and are adding to it at record amounts every month.
US equity markets have lost over $13 trillion so far this year. This, plus the growing anxiety over the fast-accelerating weakness in the housing market, is creating a ‘negative wealth effect’ that will crimp household consumption further.
Global corporate earnings MUST come down substantially. Fundamentally, they’re far too optimistic gvien the data being released this earnings season. But technically, when the dollar surges, earnings gets revised down. But so far, we haven’t seen anywhere near the estimates reductions needed to account for the dollar’s huge move to-date.
There are 3 paths nations are following right now:
- suppressing the price of debt (e.g., Japan)
- price stability/fighting inflation (e.g. US, Brazil)
- letting both currency & bond market decline (e.g. EU)
Tavi predicts a financial instability event will force the Fed to pivot before it gets inflation fully contained. He thinks this will catch the Fed and market participants by surprise, because by definition, these kind of breaks happen very swiftly, as usually where folks aren’t looking.
Shorting is becoming attractive to Tavi, but he emphasizes it’s challenging to pick the right companies & get the timing right. But he is adding shorts to his portfolio.
PART2: For Hard Times, Own Hard Assets
Tavi advises that investors have a portion of their portfolios allocated to secular inflation. In his case, he’s long:
- precious & base metals (mostly explorers)
- energy
- agriculture & fertilizer
- resource-producing emerging markets (he’s particularly bullish on Brazil)
- currencies (long resource exporters, short net importers)
Given his general macro bearishness, Tavi is short companies that:
- have weak business models/prospects
- are vulnerable to the rising cost of capital (“zombie” companies)
- mega caps that saw disproportionate share appreciation over the past several years (e.g., AAPL, MSFT, TSLA)
He’s also short corporate bonds. More accurately, he’s long the credit spread between government bonds & corporate bonds, because he expects it to widen. He achieves this by being long US Treasurys & short corp bonds.
Tavi also has a much smaller percentage of his portfolio dedicated to asymmetric/”black swan” bets, most notably:
- the de-pegging of the Hong Kong dollar
- further devaluation of the Chinese yuan
When asked for specific companies he likes, Tavi shared:
- Snowline Gold (SNWGF)
- Pacific Ridge (PEXZF)
- Barksdale Resources (BRKCF)
- Petrobras (PBR)
- EWZ (A Brazil ETF)
Follow Tavi:
- Website: crescat.net
- Twitter: @tavicosta
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Expert: Marc Faber
Date Recorded: 10.10.22
PART1: A Massive Systemic Shock Is Coming & The Fed Is Actively Courting It
The global economy has not recovered to its 2018/2019 pre-COVID peak. Valuations are still very elevated, even though down 20%+ from the start of the year.
Global money supply (liquidity) has been in contraction this year, and when this happens, asset prices tend to come down. Not very surprising.
Corporate earnings estimates have come down substantially already in many countries, but not for the US. S&P earnings estimates are still recklessly optimistic in defiance of the unfolding data. Demand destruction from inflation & Fed interest rate hikes are swiftly impacting sales. This lends a high probability that coming earnings contraction/guidance downgrades will force stock prices down materially in the future.
Both stocks, bonds, real estate and commodities are getting beaten up this year, so there’s been no place to hide — except cash, which investors have been told for years “is trash”.
True cost of living increase is much higher than CPI reflects. Real world food inflation is close to 39%. This is crimping consumer spending.
There are no easy answers here. The authorities basically have 2 bad choices:
- Stop raising interest rates — but inflation will resume its upward march & the currency’s purchasing power
- Keep raising rates — this will create great pain for consumers & businesses, and will likely create systemic breakages
We are in this pickle because the central banks held interest rates too low for too long, and intervened with too much stimulus. We made the system dependent on central bank largess. And now, like an addict, it will go into shock without it.
Capitalism has been seriously compromised. In the past, yes, some entrepreneurs (e.g. robber barons) accumulated great wealth, but they did it by creating productive industries that increased the standard of living for all (e.g., railroads). US became great because its wealth was widely distributed across the nation. Most other countries have 1 or 2 centers of industry/population. US has 50+, made possible by rail, canal & road system AND limited government.
But today, too much wealth is being created without any social benefit, and oftentimes social impairment.
In past centuries, politicians who acted against the interests of the people were often beheaded. There were severe repercussions. But today, there are no repercussions for poor governance. Good or bad, politicians know there’s a cushy board job waiting for them once they leave politicians.
Empires don’t fail from external pressures. They fail from within. Marc fears we are failing from within as the ruling class takes more and more of the spoils and the lower classes gravitate towards the false promise of socialism. The woke crowd is driving policies that are not based in reality (Marc says “common sense has died”) & putting us on a trajectory that simply can’t sustain.
Sadly, most people are unaware/complicit in this devolution — and Marc imagines they will remain indifferent until & unless things fail to the point where it creates enough pain to continue the status quo.
Jerome Powell is (finally) doing the right thing policy-wise. That said, he bears substantial culpability for the bad situation in which we find ourselves. Marc thinks the Fed now needs to “hit the financial system into the face with a fist” to show it it’s serious in its commitment to do whatever it takes to bring inflation back down.
The Fed is way behind the curve at this point. According to the Taylor Rule, the Fed Funds Rate should be over 9% (compared to 3% today).
We need to cut government’s size down, to something like 20% of the economy. Right now it’s much higher than that and strangling productivity/growth.
Marc thinks that the only thing that really will drive us to start pursuing more sensible/sustainable policies is “hardship”. The majority of the public won’t awaken to the big issues & demand the right kind of change until the status quo becomes too painful to pursue.
PART2: ‘A Lot Of People Will Lose All Their Money’ – Huge Market Losses Lie Ahead
In this environment, investors have to ask themselves: “How do I hedge?” Marc thinks *diversification* is the best way to do that.
He thinks that we may now be in a secular era of rising interest rates. This could result in a “lost decade” (or more) for stocks. Inflation-adjusted, it could be much worse than that.
We’re now in a lengthy environment of unattractive returns of assets. Expect more taxes/regulations/meddling from the government, making things even worse. This will unfairly injure the smaller investor than the already-rich who can pay advisors to help them side-step the worst of these.
Geographic diversification is a good idea. Hold assets in different countries AND own it in accounts located in those countries (e.g., don’t own foreign assets in your domestic account).
The current US strength will one day reverse — that will have major repercussions. Investors should prepare a game plan in advance, so that whenever it happens, they’re positioned to ride its descent.
Emerging markets should start performing relatively better than US markets over the coming years. Some markets are screaming deals right now. Yes, they may fall farther in the near term — but their growth prospects are better in the long term. Marc thinks Latin/South America is particularly well-positioned. He thinks there are good values today in Vietnam, Indonesia & Hong Kong (though again, they could get even better if the global markets fall further in the near term).
Marc is heavy cash right now (as a hedge), including bonds that mature within 1 year. He’s quite bearish in the near term: “I think a lot of people will lose all of their money. Many of the rest will lose half their money.”. Marc thinks he may (hopefully) lose only 15%. It’s going to be hard in the short term to make gains.
Interest in the precious metals is weak right now. PMs are “an avenue to lose less money” — folks should own it. Use the current price weakness to accumulate.
Follow Marc:
- Website: https://www.gloomboomdoom.com/
- Twitter: @gloomboomdoom
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Expert: Bill Fleckenstein
Date Recorded: 10.3.22
PART1: Bond Market Rebellion = ‘Game Over’ For Central Bank Control
The global economy is in a dramatic deceleration & the US is on the brink of recession (if not already in one).
This time, we can’t be as confident about outcomes as we were able to be back in the ’01 & ’08 recessions. This isn’t 2008 when we had a powder keg of bad loans waiting to blow up the banking system — the banks are much better capitalized (in the US. Europe is in a much worse shape).
But the financial system is more vulnerable this time as the asset bubbles are more extreme & the economy is super-financialized at this point. In the past, what was happening in the economy drove the action in the financial markets. Now, the financial markets are pushing the economy around.
Looking at the bond markets, Bill sees rising yields as taking the printing press out of the hands of the central banks. As more printing creates more inflation, the bond market demands higher yields to accommodate for the risk. The emergency rescue by the BoE shows that the bond (gilt) market is increasingly demanding the central banks jump to its tune.
While the Fed looks the best-positioned of the other world central banks, Bill has no doubt that financial instability will force the Fed to pivot at some point. In his mind, the era of central bank omnipotence & freedom to do whatever they want is over. We’re going to go back to an era similar to late 60s/70s, where it was more of a back&forth between the bond market and the Fed.
Inflation is tying the Fed’s hands in a way they haven’t been since the ’80s. Bill thinks it’s going to be harder to get under control than the Fed is saying. He thinks it’s going to take a while to tame & the Fed will likely be forced to pivot by financial instability before inflation is fully snuffed out. And then inflation will pick back up again.
Bill think government solvency is the big risk here. With interest rates rising so much, the ability of the US to service is national debt gets called into question. Which, if course, will be made worse if we indeed go into recession and tax receipts fall as debt service costs are rising.
Higher rates will cripple indebted corporations and pull down home prices substantially.
UK gilt market emergency last week a great example of the kind of financial instability/”trouble in the bond market” that Bill is concerned we’ll see more of. Just as it threatened to wipe out Britain’s pension funds, Bill thinks the US pension system is similarly vulnerable — as pensions here are fully speculative/leveraged investments that will get blown up by higher rates/market correction. Bill sees the BoE forced rescue is a preview of what’s to come for other countries, including the US.
The central banks have created the mess we find ourselves in. They deformed/distorted the system and provided perverted incentives that encouraged market players to pursue malinvestment/excessive risk.
While Bill sees the bond market eventually “giving up” on the central banks, he stresses this is a process. It will take time, likely over a series of emergencies that the CB have to step in to patch. The BoE’s actions last week are a classic milestone in this progression. So it’s underway — it’s not going to happen overnight, but the trajectory is that the bond market is losing faith in the CBs as this progresses. And this will result in the bond market pushing yields higher than the CBs want.
Bill doesn’t think the stock market can hold up for much longer. Earning estimates are still too rosy & will need to come down. He expects a “particularly ugly” earnings seasons, especially for multinational tech stocks which are being slammed by the rising US dollar. Unless the Fed signals soon that it’s going to slow down its hiking campaign and sparks a rally, Bill thinks stocks are more likely to sink through the rest of the year.
If by December the market realizes the Fed can’t truly get inflation under control (and if the cost of debt service has reached painful levels + earnings season was bad), Bill thinks a big downward price capitulation should happen.
Bill suspects inflation will persist because the monetary & fiscal (i.e. politicians) authorities are too dependent on stimulus as a tool, plus the global supply of key commodities is compromised & no amount of stimulus will fix that in the near term. Also, wages are rising in a way they haven’t for decades.
On the commodities side (Bill is very bullish long term on hard assets), we will be dealing with shortages for YEARS due to decades of under-investment in exploration and CAPEX.
PART2: “It’s Gonna Get Ugly’ In The Markets As Earning Disappoint
Follow Bill:
- Website: Fleckensteincapital.com
- Twitter: @fleckcap
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Expert: Pedro da Costa
Date Recorded: 10.3.22
Title: Don’t Count On More QE Stimulus, The Fed Is Likely Retiring It
We’re at a dangerous and pivotal moment when the central bank tightening gets ever closer to possibly triggering serious financial instability. The desperate bond market rescue by the BoE last week is a good example of this.
The Fed realizes that it’s ‘behind the curve’ and now is playing for its very credibility (as Alf Peccatiello has said) and Pedro believes it’s more resolute than the market realizes to doing ‘whatever it takes’ to tame inflation. That means job losses, recession & failure of weaker businesses are acceptable “collateral damage” in its pursuit.
Given its past track record, given the crudeness of its tools & given the severity of the challenge, the Fed is unlikely to gracefully manage the outcome of bringing inflation under control. A financial instability episode may very well help bring inflation down — but that’s not something to root for.
Also, given the unprecedented level of debt now, the Fed has much less wiggle room than it has had in the past. We may already have passed the maximum tolerable level of Fed Funds Rate for the system. And given how fast rates have been rising (the fastest in history), the likelihood we send the system into shock is probable.
But the policymakers are less concerned — right now — about these systemic instability risks. They are laser-focused on inflation and fear doing “too little” to get it under control. They’s willing to suffer some “breakage” if necessary to get a win on inflation.
The Fed et al are chasing lagging indicators. They may be doing this intentionally, as they provide justification for the aggressive moves the Fed is taking now (because, like payrolls, they show the economy is still ‘robust’).
The risk here is that when the Fed decides to pause/pivot, there will still be waves of tightening measures that continue to roll in given the time delay (~9 months?) between Fed action and when the impact is seen in the economy.
Pedro thinks the Fed is trying wean the markets off of their assumption of a “Fed put”. It realizes that it has created a monster in encouraging too many players to chase excessive risk assuming the Fed will always step in to protect them from losses. In fact, Pedro thinks that QE as a stimulant may get retired from the Fed toolbox. It will likely still be used as a short-term emergency measure in a true crisis. But the days of tens of $billions in asset purchases per month may be over, even if the Fed “pivots”.
Pedro thinks that not only will Powell tighten higher for longer, but that if/when he pivots it will be due to serious financial instability. So those waiting for a pivot to go “all in” on the markets expecting prices to rocket higher — he thinks this is a risky gamble. If a pivot happens under these conditions, it will likely be because scary damage is happening which should NOT be bullish for assets.
UK a great recent example of the financial instability threats we’re talking about. Open question now is whether the UK can continue its inflation-fighting measures. It may have just hit the limit — it may not be able to tighten any further without breaking its bond/gilt market.
Fiscal policy is increasingly a wildcard now, too. It’s what served as the trigger in the UK. We could see the same here, where Congress wants to stimulate while the Fed wants to tighten — but Pedro not too worried given that we’ll likely have a divided Congress post the Nov elections.
Pedro is concerned that the destabilizing impact of a sizable correction in the housing market is under-appreciated right now. Yes, banks may be better capitalized than they were in 2008, but the drag on consumer spending and the knock-on effects of many related industries could be much more substantial than folks currently are prepared for.
While not a financial advisor, Pedro thinks this a “risk off” time for investors & those pinning their hopes on a Fed pivot setting off a new bullish run for stocks are likely setting themselves up for disappointment.
The US dollar is likely to remain strong for a good time from here. It has a lot of unique advantages that aren’t going to change anytime soon. Relative to other major currencies (e.g., yen, euro, pound), it’s in a much better position.
Somewhat surprisingly, Pedro reports that the policymakers he talks with are lukewarm or outright skeptical of CBDCs. He thinks it will be a long time, maybe never, that the US issues its own.
Follow Pedro:
- Website: marketnews.com
- Twitter: @pdacosta
- Podcast: FedSpeak
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Expert: Daniele DiMartino Booth
Date Recorded: 9.26.22
PART1: Fed Sacrificing Markets & Global Economy In Crusade To Kill Inflation
We’re at a difficult-to-describe time with central bank policy. The number of major world economies in distress right now is more prevalent than at any other time in Danielle’s career (yes, that includes the GFC)
Powell leaned hard on the Fed’s dot plot to show how aligned & committed his team is to doing “whatever it takes” to get inflation under control. Gone is the former dovish bent to the FOMC. This was the most emphatic message Danielle has ever seen the Fed give in a presser.
The Fed is dispensing with niceties & subtleties at this point. “We are willing to take the Fed into a painful recession if that’s what it takes to kill inflation” is what Powell is telling us.
Danielle thinks Jerome Powell is doing what needs to be done right now. But she doubts another Fed chair with his background will be appointed again anytime soon.
The Fed is breaking developed economies right now. She thinks he’s doing this intentionally (somewhat) to break the market’s blind dependence on “the Fed put”. This, of course, risks triggering a systemic crisis.
In her recent interview with Lacy Hunt, Danielle was reminded that the Fed has other tools to deal with financial instability other than bailouts – e.g. the discount window. This can/should be used to take the weaker players out. In her (and Lacy’s) opinion, it should have been used in 2008 vs bailing out the banks. We should use it this time around for companies that start to fail.
Also, the Fed can get out of the QE business. No one is expecting this right now. But it could decide to stop doing it. Powell may be thinking this. He may be trying to get the Fed’s Fund rate high enough now that going forward, 2% may be the new floor. He may have realized that ZIRP was a terrible policy and is positioning the Fed to not go down that low again.
Fiscal stimulus is likely to be much less likely for the next few years, too, should a divided Congress result from the mid-term elections.
The deflationary demographics of the West are very troubling. If we’re lucky enough that inflation does get tamed soon, we still have a massive issue of Too Much Debt/Worsening Demographics that needs to be confronted.
Danielle is very concerned that the coming recession/market correction could be worse than 2008. Financial asset prices, real estate prices & the auto prices all still need to come down substantially. And then substantial layoffs will likely follow. This process usually follows a step function: where sellers hold out for as long as they can, and then suddenly capitulate and prices plunge. It’s made worse by the current high use of leverage in the system. This is highly likely going to extremely painful – a substantial part of the wealth gain over the past decade may vaporize
PART2: S&P To Drop To 3000, Possibly Lower?
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Expert: Simon Hunt
Date Recorded: 9.9.22
PART1: A Global Depression By 2025?
The big “new” factor in Simon’s outlook since his last appearance on this channel (in March) is the now-open hostilities between the Western Alliance (the US + friends) and Russia/Eastern Alliance.
Ukraine is a dangerous WW3 proxy war that is threatening to boil over. This is going to have enormous implications for monetary policy, as central banks will have to take military needs into their policy strategies.
Tightening will eventually create a crisis that will force central banks to return to QE. The economy will be damaged, unemployment will be much higher, and future stimulus may need to be directed (at least in part) to the war machine.
Simon sees the dollar weakening from there, falling 13% into the Spring.
After a dip, QE will re-stoke inflation. The dollar will then plunge into 2023-2024, asset prices will shoot higher in a blow-off top, UST 10yr yields will rise to 10%+, oil prices will be $250/barrel, food prices will be through the roof…this will destabilize markets & the economy, all while war demands mount…eventually plunging the world into a global depression in 2025.
Back to the schism between East & West: the Shanghai Coalition met back in 2001 & struck an agreement to devise a long-term strategy to create an alternative monetary system to enable them to be less dependent on the US dollar. In short, the East’s plans to separate from the West have been in progress for a long time.
Simon sees this new competing currency — which will be backed by a basket of commodities and priced in grams of gold — will likely be released within 3 years or less.
This will be highly de-stabilizing, and will play out through the 2025-2027 global Depression Simon expects. The US is highly likely not going to let this new competing world currency emerge without a strong fight…though Simon thinks the US dollar may have to revert to a gold backing. But for sure, this battle will involve war of one or several sorts.
Simon’s forecast
- Rest of 2022: economy slows, inflation comes down, markets sink
- 2023-2024: central banks pivot, asset prices (and inflation) re-ignite — this is the “last chance to build wealth” in Simon’s eyes — high inflation + high interest rates (11% range) + war demands grind the economy down
- 2025-2027: economy sinks into global depression
Once the new asset-backed currency is launched, Simon expects the price of hard assets around the world to appreciate substantially relative to paper assets.
In the immediate term (next few months), Simon sees the gold price going lower as the USD strengthens, but after that, once the dollar starts falling, he sees it going to $2,500/oz, possibly a lot higher.
HIs sources tell him that Russia (12,000 tons) and China (52,000 tons) have far more tons of gold than they’ve admitted to. For comparison, the US reports 8,000 tons.
PART2: 2023-2024 Will Be The ‘Last Hurrah’ For Assets Before Deflationary Winter
Follow Simon:
- http://www.shss.com/
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Expert: Jim Rickards/Stephanie Pomboy
Date Recorded: 9.9.22
PART1: A 2008-Style Liquidity Crisis + Recession Is The Big Threat Now
Despite lots of reasons to be concerned about the US…
- US Debt/GDP is very worrisomely high (on par with countries like Lebanon)
- Our deficit spending is out of control
- Our trade deficit is under control
- US is in recession and slowing further
- Unemployment rate is drastically undercounted vs the actual potential workforce
…expect the US dollar to get stronger. Why? Because trouble in the Eurodollar market – which we have now – increases the demand for dollars
The money the Fed creates doesn’t really go into the economy. It goes right back to the Fed as excess reserves, earning interest for the big banks who sold assets to the Fed.
The money that actually circulates in the economy is generated by the commercial banks, via fractional lending.
In Jim’s mind, regarding the money supply, the Fed doesn’t matter. The commercial banks and the Eurodollar market do. When those players get nervous to lend to each other, the economy slows, velocity slows, and a dollar shortage results.
During these nervous times, players around the world want US Treasurys as a safe haven for their capital. These are dollar-denominated and only issued by America. This creates a big demand ex-US for dollars to buy these assets.
So, it’s likely the USD will keep rising until “something breaks”. Right now, yield curves & the Eurodollar futures curve are inverted. This strongly suggests the market expects a recession in the near-term.
Jim is concerned we may be heading into a recession+liquidity crisis similar to what we experienced during the 2008 GFC.
A financial crisis spreads just like a virus does. The contagion equation is the same. Shifts in narrative/confidence can cause fear to spread quickly – sometimes creating the bad outcome it’s afraid of (e.g., a run on the bank). Or sometimes the opposite (e.g., asset bubbles).
The Fed pivot narrative brought a lot of capital back into the market, which resulted in the July rally. But the “logic” behind this narrative wasn’t necessarily correct. But it drove prices higher…until Powell brought the hammer down at Jackson Hole. The fundamentals can’t be dismissed no matter how much the market would prefer they could. The markets are dreaming of a ‘soft landing’, but Jim thinks it’s going to be more like a plane crash.
The rate of change of the Fed Funds Rate is staggering. Never has it risen by such a big % this fast. This WILL shock the system. For example, bonds & housing are going to get clobbered. The damage these fast-rising rates are going to cause is going to be severe.
Once the Fed sees this damage, they’ll pivot – but, of course, it will be too late. They’ll have made the recession way worse by all their tightening and it will take a lot of effort/time to reverse that. And inflation may not be under control by this time if the cost-push drivers caused by supply chain shortages are still persisting then.
PART2: 15% Inflation Ahead If Fed Pivots To Soon
Constricting corporate margins are still another shoe to drop – one more reason to expect asset prices to drop.
Jim is very confident CBDCs are on their way. In fact, he says they are happening (present tense – see China & Europe). These are less “new currencies” and more new payment channels for the existing currencies. Jim thinks the Fed is now accelerating its plans to launch a digital dollar.
A digital currency replaces physical cash and can make the payments system obsolete. They can disintermediate the payment system (no need for credit cards, payment gateways, etc). Once cash is digital, the government now knows where every cent is and can impose negative interest rates with impunity and there will be nowhere to hide. Also, every dollar can now be taxed automatically by the IRS. This quickly gets Orwellian. If you behave in ways the government doesn’t like, they can freeze/seize your assets (see Canada’s recent response to the trucker protest). USDCs are programmable, too – so the gov’t can send stimulus $ that expires, if it wants to goose the economy in the short term.
Jim sees the only way to skirt a CBDC system like this is buying gold, silver & real estate.
Follow Jim:
- Twitter: @JamesGRickards
- New Book: Sold Out
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Expert: Ted Oakley
Date Recorded: 8.31.22
PART1: Bear Market NOT Over & Is Headed To New Lows
The global economy is slowing down, but there’s still enough optimism that we’ll return to growth soon. That hope will likely fade soon, pushing markets down further. This is the normal sentiment shift of a bear market.
Last years profit margins of 13% were the highest we’ve ever seen. Those are coming down due to demand destruction, rising input costs & risking cost of capital. Forward earnings forecasts will have to adjust downwards & mathematically assets prices will have to, as well.
2022’s market action is classic bear market:
- big drawdown
- 17-19% rally
- renewed market roll-over (not necessarily a crash, more of a prolonged grind down to new lows)
Sentiment is a very important indicator here. We’re not likely to reach the bottom of the bear market until everyone is disgusted with stocks. Ted thinks that’s likely 2-4 quarters away.
It’s important to keep in mind that we’re coming off the biggest asset bubble Ted has seen in his career. And it’s been easy for investors over the past decade+. So they are inexperienced investing in bear market or for inflation. The carnage to portfolios is likely to be substantial before this is over. (This is compelling reason to work with a financial advisor who DOES have experience/awareness of how to invest in this kind of market)
Inflationary eras push stock multiples downwards & raise bond yields. It “changes the whole landscape” for investing, which is why you need to know the rules for investing in an inflationary environment. You need to be lot more nimble than in a disinflationary environment — the key is knowing what to be in & when to be in it. Ted agrees with Sven Henrich’s advice that in this kind of market you need to be “perma-flexible”
Ted is prioritizing dependable income streams (e.g. oil, oil & gas pipelines, medical real estate, preferred stocks, short-dated USTs, dividend-paying miners) as well as maintaining cash reserves. The key is to offset inflation while staying liquid in order to protect & then deploy your capital when things bottom.
Another key is not getting suckered in before the bottom truly arrives. Adjusted S&P earnings is something Ted will be watching closely — he wants to see that multiple down to 12-15x.
Ted’s experience tells him that the last 25% of the decline in a bear market tends to happen quickly right at the end. It’s a flush-out. He’s waiting for that — but doesn’t expect it for 2-4 quarters. He expects great values to be available once it happens and is excited at that prospect. But you have to stay safe&liquid between now and then in order to take advantage of the opportunity. So patience & defense will be rewarded.
The Fed’s interest rate hikes/Quantitative Tightening (QT) is going to push the economy too far into recession for comfort. We will see big layoffs, but it may still be a quarter or two before that manifests as companies resist firing employees until they absolutely have to.
Ted sees a lot of similarities between today’s Fed & that of the 1970s, except that debt levels are so much higher now. The economy is much more vulnerable to rate hikes today.
Like the mid-70s, Ted things the next few years in the market could be very choppy. Violent swings up and down, ending in new lows. You can make good money in that kind of volatile environment, but you “can’t overstay the party” (i.e., you need to close out your positions before the next turn)
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Expert: Justin Huhn
Date Recorded: 9.5.22
PART1: Nuclear Power THE Answer To The Global Energy Crisis?
Nuclear is 10-11% of total global electricity generation. That represents about 30% of the world’s no-carbon/low-carbon electrical energy production. This is set to grow at a rate of about 1-3% over the coming decades.
It’s a growth sector, as more countries are re-embracing nuclear. Though this is a little hard to see in the numbers as many countries are still growing their fossil-based fuel usage at high rates (e.g., China opens a new coal plant every week).
There are 50-55 reactors under construction globally right now, plus numerous countries are starting to reverse their planned exits from nuclear power.
US has the most reactors (92), France is 2nd (nuclear makes up 70% of France’s electrical production), China is right behind France & building new reactors like crazy.
The principal advantages of nuclear power:
- baseload: always on, dependable, reliable (not intermittent like solar or wind)
- emissions-free
- highly efficient: 80-90% efficiency (vs ~20% for solar/wind)
- cheap production (after large up-front construction expenses)
- long-lived production (US plants can operate for up to a century)
- safe (by far lowest human mortality history of any energy source)
The cons do not seem to be nearly as bad as public perception perceives them to be:
- Radioactive waste: The amount is quite small (all of America’s nuclear waste fits about 30′ high on a single football field). If stored well (and we’ve had no major accidents to-date), even open leakage doesn’t really offer a public health threat. There are current technologies that can recycle a percentage of this fuel and new technologies promise that almost all of it may be able to be recycled. It’s also worth noting that the environmental & human damage from waste of other energy sources in many ways is much worse than nuclear’s track record.
- Meltdown risk: This is a valid concern, but it’s not nearly as big as risk as the public fears. Chernobyl reactors didn’t have a containment dome — ALL operational reactors today have one. The odds of another Chernobyl is almost nil. New reactor fuels & technologies offer much safer ways to operate reactors in the future — some promise potentially 0% meltdown risk.
The Inflation Reduction Act includes $30 billion in credits for nuclear energy production. That’s enough capital to refurbish all of America’s reactors. It’s interesting that nuclear appears on the fast-track to be reclassified as a “green” energy source.
The new advanced reactor technologies, like small modular reactors (SMRs), are really promising. The use High Assay Low-Enriched Uranium (HALEU). These could operate continuously for ~20 years without needing to shut down and refuel, compared to every 18 months for today’s large light-water reactors. They also offer a lot more flexibility, up-down ramping potential, and scalability. Also, SMRs allow for economies-of-scale that have not been available to-date in reactor construction & operation.
Uranium is a highly-abundant metal in the Earth’s crust. It has U-234, U-235 & U-238. U235 is the fissile one we use in power generation. It’s an incredibly dense fuel: 1 Uranium pellet the size of a gummy bear has about the same energy potential as 100,000 tons of coal.
Kazakstan produces 40% of the world’s mined uranium (60,000 tons per year – about half of this goes to China). Canada a big producer in the West.
Other non-uranium nuclear fuels offer tempting promise. Thorium is one — Justin doesn’t think we’ll see thorium reactors before the 2030s. Fusion could be a game-changer — but unlikely to be seen at commercial scale until the 2040s-2050s
Justin just doesn’t see a successful transition to a global energy system independent of fossil fuels without nuclear.
PART2: 5-Year Boom Ahead For Uranium Sector Given Growing World Demand For Nuclear Energy
There used to be a major glut of uranium following Fukushima. Japan shut down all if its reactors, which immediately turned off 15% of world demand. Germany, too, shut down half of its fleet in the next few years. Mines continued production during this period (as these mines are very expensive to shut down), so oversupply drove uranium prices down to lows of $18/pound.
That glut is now gone and the world is producing (135 mil pounds less uranium per year than annual demand (200 mil pounds) & the industry is now dealing with a deficit.
The uranium market spot market is small and trading is relatively thin, making it more sensitive to price changes when something notable happens. Last year, when Sprott launched its Physical Uranium Trust, it bought a tremendous amount of uranium driving the price up, now around $50/pound.
The West consumes 70% of the world’s uranium, but only produces 40% of the world’s enriched uranium. In 2022, the tensions with Russia, which enriches uranium, is adding supply constraints to the sector. Western countries are currently accepting deliveries for existing contracts, but are not striking new contracts with Russia.
Another factor is that Western enrichers have been ‘overfeeding’ their manufacturing recently. They used to ‘underfeed’, which allowed them to sell extra U-6 into the spot market — this is now gone. This has notably decreased uranium supply on the spot market.
The main ways to invest in this sector are to own:
- Uranium ETFs
- Yellowcake
- Sprott Physical Uranium Trust
- Uranium miner ETFs
- Individual uranium miners
Follow Justin:
- Twitter: @UraniumInsider
- Website: https://uraniuminsider.com
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Expert: Sven Henrich
Date Recorded: 8.29.22
PART1: A Restrictive Fed Has Changed EVERYTHING For The Markets
Markets are in a “big mess”.
We’ve come out of a long cycle of permanent central planner intervention with a record-low cost of carry. That has now reversed — Fed & other central banks tightening, rates rising. Given how high debt levels are now, the economy can’t withstand these higher rates for very long without breaking down.
No surprise that it looks like we are now in a classic bear market.
We’ve recently been in a classic relief rally. One that’s probably over now. It was caused because readings had become too oversold in the short term + the markets erroneous interpreted Powell’s July comments as dovish + the Biden Admin passed stimulative legislation (Inflation Reduction Act + student load forgiveness). Powell “shot this optimism for a near-term pivot in the head” at Jackson Hole last Friday.
We are now, with the clear support of Powell/the Fed, in a restrictive policy world. Everything has changed as a result.
The continuation of the secular bear market will be confirmed if we hit new lows beyond those seen in June.
QT is about to hit full force, draining $95 billion per month off of the Fed’s balance sheet. This will be the largest that we’ve ever seen in history before. This will pull asset prices down — likely hard. Looking at the Buffett Indicator, Sven notes that equity prices could easily come down 40%+ based on similar corrections in the past.
Sven looks at current market prices and thinks there’s still way too much froth/optimism: “still in la-la land”.
Cost carry (i.e. cost of capital) is increasing the downward gravitational pull on all assets. Especially housing, which has been in a bubble but is now rolling over due to fast-rising mortgage rates.
Corp profits compressing due to higher input costs, slowing demand & higher cost of debt — mathematically stock prices must go lower. 2023 earnings projects are “way too optimistic” currently.
Sven sees the economy running into recession, which current Fed tightening is going to make more severe. get ready for layoffs, etc. Powell will eventually pivot, but likely after the economy is suffering badly. If/when Powell pivots, inflation better be under control or else we’ll likely get stuck in an ease/tighten cycle like the Fed was in during the 1970s.
The markets are going to be much more volatile from here than the past decade. Perma-bulls and perma-bears will lose. In this environment, those who are “perma-flexible” will succeed.
Sven is actually happy with the current market climate, because as a trader, volatility gives him a lot more opportunities to make profit (lots more chances to buy low & sell higher). Even if the direction is downwards overall, there will lots of rallies along the way.
As long as the markets don’t crash, the credit markets function & unemployment isn’t too high, Powell will keep tightening for as long as he can get away with. It’s important that he recently mentioned that it will require “pain” to cure inflation.
The Fed is hugely culpable here. It created this mess — the inflation, the asset bubble, the massive wealth inequality, the resulting social anger. We rail at the Fed + other central banks because their policies disproportionately benefit the rich and injure the poor.
If made emperor, Sven would substantially reduce the power/influence of central banks. Sven is very worried that the democratic process is increasingly inefficient at addressing the problems we’re facing. We’ve been hollowing out the middle class for too many years, we have no accountability of the mistakes/abuses perpetrated by those in power.
A great example of this: buybacks have been rampant, enriching the executives & big investors. When these companies get in trouble, they get bailed out. There’s no consequence for recklessness, in fact there’s incentive for it. We’re rewarding moral hazard & zombifying our corporate sector.
PART 2: No Bull Case Left For Markets Now That A Fed Pivot Isn’t Happening Soon
A new bull market won’t be in place until the S&P brakes and stays above its 200 DMA & 50WMA. That hasn’t happened, which is why Sven is confident the July rally was a relief rally inside of a larger bear market.
August ended as a monthly reversal candle. This strongly suggests new lows ahead over the next 4-6 weeks.
History suggests that the end of the year could have a big rally. That seems hard to believe, but Sven will be watching the tape closely.
But being frank, Sven thinks there’s no real bull case left now that Powell has dashed hopes of a Fed pivot anytime soon. The only real catalyst he can imagine is a material weakening of the US dollar, but that seems unlikely while the Fed is hiking rates and doing QT.
While he thinks a big market drop is certainly possible, Sven is very open to the market experiencing lots of “chop” over the next 6-9 months. He’s actually excited by this increase in volatility because it provides a lot more opportunity for him to make trading profits, both up and down.
At a high level though, he wouldn’t be surprised to see the markets decline by 40% over the next year, given how distorted asset prices remain today. This would be a good thing in his mind, to get the froth out of the system and reduce some of today’s current wealth inequality.
Sven angry at how Fed & government policies have tremendously rewarded the rich, destabilized the system & when things break, it’s the lower classes that suffer far more disproportionately. He’s seeing this in real-time right now in Europe with skyrocketing energy prices.
Sven sees potential long-term opportunity in crypto — sees it going through a Dot-Com bust right now that’s cratering prices. He thinks there could be good opportunity to pick up the big players (Bitcoin, etc) at super-low prices in a bit.
In general, Sven is looking forward to being an aggressive buyer in many assets, but it’s not now. Should a big bear correction indeed occur, he’ll be looking for the signs to re-enter at scale.
Right now though, he thinks holding a healthy amount of cash is wise — to deploy later when surer bets are available.
Follow Sven:
- Twitter: @NorthmanTrader
- Website: https://northmantrader.com
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Expert: Kyle Bass
Date Recorded: 8.24.22
PART1: War Between The US & China Within 2 Years?
The data clearly says the US is headed into recession, Europe will experience an even deeper one, and China is really starting to struggle.
The Federal Reserve will stay aggressive and will be hiking rates into this recession. Once the recession arrives in full force, Kyle expects the Fed to pause and, within a year from now, be back to cutting rates.
CPI won’t be tamed by the mid-term elections. Housing market data starting to look really bearish and is accelerating downwards fast. By November, we won’t be debating whether we’re in recession or not; everyone will know we are.
The latest payrolls report is deceiving. It’s very lagging. Also, payrolls are one of the last data sets to soften when a recession arrives (usually by 5-10 months following the start of a recession). So the Fed is putting too much weight on a flawed indicator.
High inflation is going to be an issue for a while, as the 40% increase in M2 since the pandemic is still sloshing around in the system. Rate hikes aren’t enough to address that. QT will do it. So after 3-6 months of $95bil of monthly QT, we should start to see some notable progress in taming inflation. This is why Kyle thinks markets will head lower over the next few quarters & advises investors to wait for prices to come down before re-entering the markets.
Kyle highly recommends re-reading Bernanke’s helicopter speech.
As the Fed continues to hike from here, the magnitude & speed of which the Fed has been hiking will “shut the economy off”. It’s just not able to handle rates this high, this fast. Kyle thinks the Fed is going to have to stop rate hikes & QT by the time its balance sheet is down to $7 trillion.
Once the full force of the recession arrives, it’s going to “mind-boggling”. This is going to force the Fed to pivot back to easing/stimulating.
Energy prices are going to remain elevated for a long time for a variety of supply issues. We have deeply under-invested in the capex of our fossil fuel industry & the unrealistic assumptions of the current transition plans to a green infrastructure are worsening the situation. These higher energy prices will thwart central banks’ attempts to contain inflation over the coming decade. FYI: Kyle is a big fan of small modular nuclear reactors.
Real estate comprises 40% of China’s GDP, and it’s in trouble. China allowed RE prices to grow to stupid levels: 36x average household income (at the worst of the US housing bubble, it was 6x in the US). Housing volume sales are already down 30%. Prices are down 7%. This is going to shave 3% off of China’s GDP. It’s possible China’s GDP growth may be 0% this year.
Europe of course is in even worse shape. The US is the best of the markets. He recommends that, when it’s time again to deploy capital (not right now), investors do so in the US.
China’s Xi looks like he’ll succeed in becoming emperor-for-life. But he has a lot of challenges. The RE market implosion. China’s demographic profile is super-unstable. Its banking sector is 3x more leveraged than the US’ was right before the 2008 GFC. Kyle sees him getting more heavy-handed to deal with the coming issues.
Taiwan is a very serious risk. Kyle is connected with the US military planning around Taiwan. Right now, it has revised its projections, now anticipating that China will attempt to takeover Taiwan within the next 1-2 years. Kyle thinks it “probable” (over 50% chance) this will result in war between China & the US and recommends foreign investors get ALL of their money out of China “right now”.
The US holds a superior economic weapon over China — the US can collapse the Chinese economy in a matter of weeks. But, China has other weapons against the US — for example, China produces nearly all of the medications & antibiotics America depends on.
PART2: Own These Assets To Survive The New Era Of Stagflation
As he expects the markets to fall farther through the rest of this year, Kyle recommends having a large % cash position. But views this as a short-term move.
Once the market bottoms and the Fed pivots, he likes the following assets:
- US companies
- Hard assets/commodities – especially energy plays
- He thinks this is the “golden era for investing in hydrocarbons”
- Productive real estate — Kyle has a lot of his wealth in this now
- He sees continued migration of population to rural areas within 2 hours of metros in low-tax states
- Multinational companies that avoid China
- “think beyond the traditional stock & bond markets”
In sum, he recommends prioritizing the purchasing power of your wealth through the coming stagflationary environment
Follow Kyle:
- Twitter: @Jkylebass
- Website: https://www.cem-tx.com/
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Expert: Diego Parrilla
Date Recorded: 8.16.22
PART1: European & Global Economies Are Dangerously Fragile
Money & fiscal stimulus without limits do not solve problems, they ultimately transform/exacerbate those problems into inflation, asset bubbles, wealth-inequality & trade wars. We’re seeing the repercussions of the past stimulus programs now all hitting at the same time, when the economic system is very vulnerable. The resulting damage is going to be substantial.
The rate hikes that the world’s central banks are pursuing are going to expose how fragile the system is. The markets’ current complacency in light of this is very concerning. If the Fed indeed keeps hiking rates (as it is saying it will), at some point the market will have to downshift its current bullishness and financial assets will re-price downwards.
Short-term thinking and hubris on behalf of the central banks & politicians are largely responsible for the situation we find ourselves in. They’ve taken far too extreme measures (stimulus, deficit spending, borrowing, taxes, etc) than they should have, and many were falsely sold to us as “temporary”. Over time, these extreme measures have to get bigger and more extreme b/c the law of diminishing returns kicks in.
The bad decisions of central banks & governments accrete at a step-by-step pace until they reach an unintended extreme. For example, at each step, the EU has taken measures to weaken the Euro vs the USD in order to gain trade advantage. But now, the dollar is so much stronger that it’s creating more pain for Europe than the low Euro is helping trade. Basically, the limits of our human thinking send us on trajectories no sane people would choose at the beginning.
Trade wars end up trumping currency wars. If another nation weakens its currency too unfairly, tariffs get passed to equalize things. Regarding the USD/Euro, Diego expects the US dollar will continue to strengthen for some time ahead.
The natural gas crisis in Europe is creating a massive disruption of prices and volumes. Nat gas prices in Europe are 10x what they are in the US and currently volumes are substantially less than historic averages. There’s a lot less that central planners can do here – they obviously can’t print up new gas. They can issue consumers subsidies, but that further distorts volumes, usually sends prices higher in the longer term & requires more national printing/borrowing to finance. Asia is in similar trouble – though not as extreme as Europe. The US is in a WAY better position re: energy resilience.
Strong dollar is really helping US out now b/c it basically allows the US to export its inflation to everyone else. This increases the pain other countries are feeling.
The European energy crisis is getting worse not better. The outlook for the coming winter is brutal. Inventory levels are already historically low. Russia hand is only strengthening at this time and beyond hoping for an internal coup that displaces Putin, Europe does not seem to many good near-term options in dealing with Russia.
Diego thinks the world – and particularly Europe – is trapped in stagflation, likely for a good while.
Europe’s premature transition to “green” energy is going to have to be revised. Nuclear plants in the process of being decommissioned may be returned to operation. Diego sees nuclear as soon being classified as a green energy source. Some of today’s geo-political enemies (Syria, Iran, Venezuela) may become tomorrow’s trade partner as nations bend their “hard lines” because they simply need the fossil fuels those countries control. China and India becoming bigger buyers of Russian oil shows that the world is polarizing & alliances are evolving/shifting quickly.
Part 2: Markets To Get Much More “Volatile & Hostile” From Here
Interest rates – both in absolute terms and relative to inflation – will drive the action from here.
The Fed is going to keep hiking for as long as it can get away with. And as long as the market keeps rallying, that just give the Fed more runway to hike even further. At some point, the market is going to realize this and asset prices are going to correct – likely hard.
Base case: central banks will hike, but not far enough to truly contain inflation. Then we’ll be stuck in an era where the CBs have to ease/tighten on & off – this will be a very volatile environment.
Diego thinks of portfolio management as managing a sports team, like soccer. You need a balance across strikers (offense), defenders & goalkeepers. Up until recently, you did pretty well with all strikers on the field. But now you need a good mix. The defenders/goalie will do well as assets fall & the strikers will do well when asset prices rise. The key is you need to embrace the volatility – know that part of your portfolio will likely be going down at any time, but hopefully the other side is gaining more during.
Like Thomas Thornton, Diego emphases that portfolio sizing & active rebalancing are critical to success. Don’t use leverage – it will kill you in this kind of environment. And diversification is a must.
Diego manages his firm’s defensive macro fund. In it he likes gold for the medium/long term. He also likes the US dollar (he thinks it will continue to strengthen). He likes long duration assets.
Most important: he has a long inflation bias. Assets that do well under inflation should do well in this new era.
He does not think that Europe offers many goodr the time being.
Follow Diego:
- Twitter: @ParrillaDiego
- Website: https://www.qua options right now given its woes, and recommends investors put their capital elsewhere fodrigafunds.es/
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Expert: Michael Pento
Date Recorded: 8.9.22
PART1: Stocks To Fall 40% By Spring?
We’re still in a bear market:
- Phase 1 (Jan-summer): 20% decline in S&P starting from record valuations, record high inflation, keen anticipation of a hawkish Fed
- Phase 2 (starting by Oct if not sooner): intense earnings & economic recession, full bursting of 3 biggest asset bubbles in history: stocks, bonds & real estate
The 2nd derivative – the rate-of-change of the rate-of-change – is key to look at here. Michael watches this closely with both economic growth and inflation. Both are telling him recession is ahead & disinflation will be the theme of the rest of the year.
Current bounce is due to peaking inflation convincing markets that Powell will stop hiking sooner. Michael thinks it will be proven wrong.
Michael expects Disinflation over the rest of this year, ending in a massive market & real estate price plunge as the Fed’s hikes end up freezing the credit markets. The Fed will then respond by aggressively reverting to stimulating/easing, eventually (but it will take a while) re-inflating asset prices while making Inflation a big problem again.
The Fed pivot is likely a lot farther out than most are expecting. 8.5% CPI is still REALLY hot so the Fed still has a massive monster to fight. The latest payroll report shows near record employment. And the market is still rallying strongly. This all indicates the Fed isn’t near “breaking something”. So it will likely hike higher for longer – for as long as inflation remains a big problem and the market/jobs data aren’t terrible.
The Fed started hiking interest rates in March. We’re now on a trajectory to hit a Fed Funds Rate of 3.3% by end of year. On a rate of change basis, that’s the fastest we’ve ever seen. Also, the Fed’s QT program will soon be reducing its balance sheet by $95 billion per month. Now, there’s a ~9 month lag before Fed policy changes are felt in the economy – meaning, we’ve had a massive change, the impact of which we’ll only really start feeling at year end/early 2023. THAT’S when the Fed’s efforts to destroy demand & slow the economy will be felt – likely right when it realizes the economy is slower than it wants it to be. This is a big reason Michael thinks the recession ahead will be really large & really painful.
Interest rates matter a lot more today than in the past because the economy is much more vulnerable and overleveraged than ever. Market cap/GDP is extremely high and US Debt/GDP is at a record high. In the past, the economy started struggling at 6% interest rates, then 5%, then kept getting lower. At this stage, Michael thinks a 3.3% Fed Funds rate is untenable for the economy – and it may go higher. So to his calculation, the Fed will mathematically be breaking the economy within the coming few months.
Valuation-wise, Michael sees potential for the markets to fall by 40% from these levels. S&P 3000-3200 wouldn’t surprise him by Spring of 2023.
But as bad as things get in the US, the rest of the world is going to be in worse shape. This is going to be a global recession/correction, putting the screws to other countries with a stronger dollar. Brent Johnson’s Milkshake Theory applies here.
Inflation is really going to hamstring the central banks from reverting to their QE/ZIRP/NIRP playbooks. As long as it stays high, they can’t be aggressive – at least until the economy goes into cardiac arrest, providing them the aircover. But if they do return to QE/ZIRP/NIRP and inflation remains elevated, the bond market will likely go into revolt and demand higher yields going forward as a result (Bill Fleckenstein’s prediction). Social unrest may soon follow, too.
The real estate market is weakening fast. We’ve just seen the fastest increase in homes for sale inventory in history. Housing matters a lot because ⅔ of households own their homes, while 89% of all stocks are owned by the top 10%. A drop in home values generates a much bigger negative wealth effect for society. Michael thinks they could possibly fall 20% on average – not catastrophic, but it would wipe out the equity of everyone who bought over the past year. Another danger is that institutional investors now own a much larger percent of residential homes than ever. If they get into trouble, they may dump these en masse, cratering property values.
Pension funds are in terrible shape, too. A massive looming crisis.
PART 2: These Are The Assets You Want To Own For A Market Crash
Two signs of the weakness of today’s market:
- Corp earnings were negative for Q2 if you remove the Energy sector
- The 2-10 yield curve is more deeply inverted than it has been in 40 years (this inverted yield curve is one of the best predictors we have of coming recession)
These are NOT signs of a bull market..
Pento is positioned for the major market correction he expects by being in the “4Horsemen of the Economic Apocalypse”
- Cash
- US dollar (via UUP ETF)
- US Treasury bonds (both short & long-duration)
- Shorts (via ETFs with high Sharp ratios)
He also holds a 5% gold position + a 3% position in utilities
Michael is preparing to increase his short position. Now that the market is rallying after the 8.5% CPI print, he’s increasing his shorts.
Michael’s portfolio does not use options, margin or leverage
He expects the USD to remain strong until a Fed pivot (which he doesn’t think can happen anytime soon)
Expects NextEra Energy to benefit from green spending in the Inflation Reduction Act. Also thinks utilities will benefit from falling interest rates whenever Fed pivots
Thinks gold/miners could underperform until Fed pivots & returns to QE and dollar starts weakening. Expects PMs to get sold in a violent market sell-off. But once market bottoms & QE resumes, sending real interest rates lower, he thinks PM + miners will do very well.
Michael warns that when the Fed begins it pivot, it will take a good while before that policy shift starts hitting the economy. That moment may actually be the best time to increase shorts – as history shows some of the bigger bear market drawdowns happen right after the Fed switched direction. So his transition out of the 4 Horsemen will be gradual.
In closing: he thinks the economic storm is “just starting” & predicts the bear market will go a lot lower after this rally.
Follow Michael:
- Email: mpento@pentoport.com
- Website: https://pentoport.com/
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Expert: Jesse Felder
Date Recorded: 8.8.22
PART1: A ‘Massive Re-Pricing’ In Assets Lies Ahead
We’re in the early stages of an economic recession & bear market
2 major indicators he’s paying close attention to:
The first is insider buying/selling. This is a highly reliable leading indicator for where the economy & the markets are headed in the next 1-2 years. In mid/late-2021, insider activity was the most bearish Jesse had ever seen it. Sell-to-buy ratio went over 30 (20 is elevated bearish, down around 10 is considered bullish). This gave Jesse a heads up warning that 2022 would likely be a down year for markets.
Here in mid-2022, insiders are becoming less bearish amidst the current short term rally, but the long term sell-to-buy ratio is still well within bearish territory of 16-17.
The second is the current trifecta of economic headwinds: rising USD + rising interest rates + rising oil prices. Any of these is considered a leading indicator of slower economic growth to come. But all 3 together? That does not bode well for the economy/corp earnings/financial asset prices over the coming 1-2 years.
It’s very clear we’re entering an earnings recession, but the markets have rallied because Q2 earnings & future guidance weren’t as dire as investors were expecting. This underscores the power that sentiment plays in the current market environment. Retail investors especially have been especially intense in swinging from long to short then long again over the past year. They’ve been extremely aggressive in taking leverage positions – ETFs, options, etc. This behavior forces the market to become more volatile. The point here is that wild & whipsawing sentiment is making the market more dangerous, especially for the retail investor.
This raises the risk of retail investors losing trust in the markets should the bear market resume. Most already believe the market isn’t a fair playing field: that it’s slanted towards the interests of the big players. Millennials & Gen Z are already optin out, preferring to invest in crypto & real estate as an alternative.
Passive investing’s days are over in Jesse’s opinion. It was enabled by a prolonged era of extreme monetary intervention in the markets, which he thinks is ending. Believes we’ve returned (after a long time) to an environment where investors need to “invest” – i.e., research specific companies and select them based on their fundamentals.
The rise of inflation and the reversal of globalization is a HUGE paradigm shift that the market doesn’t appropriately appreciate yet. The Fed’s hands are tied while inflation remains a challenge, and it likely will be for a long time because the new principal trends in play (on-shoring, tightening labor force) are inflationary. Taming inflation is going to be a protracted, painful process – and likely won’t go back to the disinflationary trajectory we’ve been on since the 1980s. A massive repricing across asset classes is needed & a new rulebook for investing is required.
This is why the market is in such danger. The market hasn’t woken up to this paradigm shift AND valuations, despite the correction this year, are still very close to record highs. There’s a lot of room to fall here, especially as profit margins are at all-time highs. Jeremey Grantham claims they mean revert more than almost any other data set. So they are due for a whopper of a mean reversion from these elevated levels. Will the trigger be a market event? Or a social one? As history shows, too-high profits inevitably lead to wealth inequality that resolved via re-distribution (either effected by the State or an angry rebelling populace). It’s no surprise that Congress is discussing higher corp tax rates.
Part 2: Stocks Overvalued By 50%, At Least? Why This Bear Market Has A Lot Farther To Go
As for how far the market could drop, Jesse can pretty easily make an argument that financial assets could fall 50% before being considered ‘fairly valued’. The 1973-74 bear market looks like a good analogue to where we are in 2022 given similarities in inflation & Fed policy. The S&P was cut in half during this period.
Assets Jesse likes at this point:
- Energy – especially infrastructure/distribution stocks & producers. Undervalued and still paying ~8% dividend rates.
- Gold – dramatically undervalued (own both miners + physical)
- Overall commodity sector – still at historic valuation lows relative to S&P. Jesse prefers the producers vs owing the commodities themselves. Thinks demand for commodity stocks will get so intense before this commodity bull run that it will be like meme/crypto mania – though we’re still in the early innings at this point
Follow Jesse:
- Twitter: @jessefelder
- Website: https://thefelderreport.com/
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Expert: Brent Johnson
Date Recorded: 8.4.22
PART1: The Dollar To Get Even Stronger? Latest Update On The Dollar Milkshake Theory
Understanding The Dollar Milkshake Theory “”DMT”):
- The Milkshake: Over the past several decades, central banks & governments around the world have engaged in a tremendous amount of money printing/stimulus to paper over all the debts they’ve continuously taken on. This has led to a global ‘milkshake’ of liquidity.
- The Straw: given that the US dollar has global reserve currency status (other countries need dollars to buy oil & service their dollar-denominated debts) and its capital markets are seen as the safest/most trusted, when trouble hits the global economy, capital flees into the US dollar/markets. In this way, the US holds the ‘straw’ that drinks the global ‘milkshake’ of liquidity. Brent says “It doesn’t matter who mixes the milkshake. What matters is who holds the straw to drink it. And that’s the US.”
DMT is the framework by which Brent sees a sovereign debt crisis playing out.
A global sovereign debt crisis is frightening because debt is critical to how most nations & their industries fund economic activity. As that debt becomes harder to obtain & more expensive to service, economies destabilize. That leads to serious economic hardship (e.g., recession, unemployment, loss of essential services) that, if it gets severe enough, can trigger social unrest/revolt (see: Sri Lanka)
There’s $300 Trillion of global debt right now (ignoring derivatives). Much of that debt is owned by foreign countries by STILL denominated in dollars. So when the dollar strengthens (as it’s been doing this year), it makes the cost of this debt burden higher. And unlike the US, these countries can’t print new dollars to address this.
The big danger here is that the weaker countries may fail, and if they do, that creates repercussions that can take down larger countries, and cascade further from there. Currently, we’re seeing concerning degrees of buckling in countries like: Sri Lanka, El Salavador, Peru, Ecuador, Chile, Egypt, Argentina, Turkey. Even major players like Japan and Europe are seeing major stresses in their currencies.
Brent believes that, deserved or not, the US holds advantages the rest of the world doesn’t, and as a result, global capital will flow into US and enable it to be the ‘last domino standing’ as the global sovereign debt crisis unfolds.
He’s not a fan of the US/dollar. He agrees both have serious problems. BUT, he sees all other countries/fiat currencies as having worse problems.
He can relate to those who hold alternative assets like gold & crypto as a “superior form of money” to the dollar. BUT he thinks it naive to expect them to supplant the dollar, at least anytime soon (ie. decades). Like it or not, the world runs on the dollar. You likely won’t get far or do well if you set up your life/portfolio to fight that.
Dollars & dollar-denominated debt held outside of the US is called the ‘Eurodollar system’. The size of the Eurodollar system dwarfs the dollar supply within the US.
So it has a disproportionate influence on the strength of the US dollar vs other currencies.
But there is no central body managing its supply, like a Federal Reserve. So if the supply of Eurodollars starts shrinking due to a contracting global economy, there’s no entity to stimulate it with freshly-printed new Eurodollars.
That means that, regardless of what the Federal Reserve does, the Eurodollar market action may have more power over what happens with the global strength of the dollar.
This explains why the purchasing power of the dollar is declining within the US due to the $trillions in domestic stimulus WHILE the dollar has risen to a 20-year high vs other currencies.
Hyperinflation = when there are no external buyers for your domestic currency (i.e., no one wants it). Weaker countries start printing more and more currency as they struggle, and once the world no longer wants to own their depreciating currency, it rapidly builds up within their borders and they fall into hyperinflation.
Capital fleeing those struggling countries/regions runs into the US for safety & liquidity.
Brent thinks it will be very difficult for the dollar to be replaced as the world reserve currency. Relative to every other currency, it has a much better track record of stability, liquidity, acceptance & trust. And the entire global economy & financial system are standardized to it. There is a truly massive switching cost to replacing it. So you have to have a REALLY compelling & attractive reason for the world to switch off the dollar. No other currency currently is close to offering one. Doesn’t mean it won’t happen (Brent actually thinks the dollar will one day lose it), but it will likely take decades at least, and probably a war that America loses.
Brent does not think the Fed will pivot anytime soon. Thinks it will pivot only under 2 scenarios: either when inflation is under control or if a “break” forces it to. Doesn’t see it feeling pressure to pivot while inflation is still hot, the S&P is above 4000 and rising, and unemployment remains low.
The Dollar Milkshake Theory in some ways is the Fed’s best friend right now, because it’s driving foreign capital into the US capital markets – supporting them & keeping them from crashing – while the Fed is tightening. It’s helping the Fed to get the Fed Funds Rate higher without “breaking” the markets or US corporations.
PT 2: [to come when video launches tomorrow]
_____________________________
Expert: Thomas Thornton
Date Recorded: 8.1.22
PART1: Hedge Fund Expert Warns: This Is A ‘Very Hard Market’ With “Few To Hide’
We’re dealing with the repercussions of too much worldwide stimulus. Inflation genie is out of the bottle & going to be a challenge to put back in it.
This is a difficult market. Few very places to hide. Bonds have been an absolute nightmare for investors. Energy is in the process of doing a rug-pull. Precious metals, bitcoin have disappointed. Cash only real safe haven.
This is a TACTICAL year: trajectory is lower, punctuated by short-lived rallies – right now, the herd is chasing the current rally & likely to get burned.
This is a great market for traders who have trained for volatility. But it’s awful for the average retail investor (who hasn’t). It’s an exceptionally hard market for those deploying the traditional playbook that worked well over the past decade. Success starts by realizing it’s a very different market than what you’re used to.
CPI likely peaked in June. But it’s going to remain elevated. And unemployment is still very low. Tom thinks the Fed will continue tightening for as long as these two conditions continue. Thinks it will tighten higher for longer than most pivot-predictors are anticipating. If you look at the CPI & unemployment rate charts from the 1980s when finally Volker broke inflation, they support the argument that the Fed has a long way to go before it pivots.
We’re on track for a recession and likely not a ‘soft’ one.
Consumers (especially on the low end) and companies will continue to suffer as long as inflation remains >5%. More demand destruction/margin compression lies ahead. Tom expects worse rev/profit guidance to come out as the year progresses, forcing asset prices down further still. This is a big reason why he thinks this bear market isn’t over yet.
There was a huge emerging productivity boom (led by the move to the mobile internet) that served to cushion how bad the Great Recession in 2008 was. We don’t have a similar ‘cushion’ this time around. Prob will result in a harsher recession than many are expecting. Don’t underestimate the scope of coming job losses; once they start, they snowball. Wouldn’t be surprised to see 6% unemployment.
Beware of the Fed pivot. It may happen, but it may not produce the results many are expecting. Easing may not goose the economic growth folks want in the time they want. And the bond market may well revolt, sending credit yields higher – Tom agrees with Bill Fleckenstein’s prediction of this.
The current rally actually decreases the likelihood of a Fed pivot. Fed needs to see something really scary to give it the aircover to return to easing. That’s not going to happen with the S&P above 4000.
Those worrying about a Fed policy error that “breaks something” need to realize that that error already happened. It was in easing & stimulating for far too long, creating history’s largest asset bubble and deforming our markets. We’re now dealing with the bullwhip effect of reacting to that principal “error”
Thinks market could pop higher if July CPI is indeed lower than June. Tom thinks this may be short-lived though, esp as Aug CPI could be higher again – and if that happens, he thinks those jumping in the current rally could get badly burned.
This year, Tom has made more money on the short side than the long side, though he has placed more trades on the long side. He attributes his 27% gain this year to his discipline with position sizing. Any position is never <2% or >5%. This helps prevent his bad bets from doing too much damage. His is not a get-rich-quick strategy; it’s a way to do well in the longer run by containing risk. This year, Tom has been in cash much more and much more often than normal – a sign of how poor his confidence is in today’s options on both the long & the short side.
PART 2: A Sideways Market For Several Years?
Best case scenario for the S&P: a retest the June lows. There’s a lot of support around 3500/3600. If mega cap names like Apple, Microsoft, Google, etc start underperforming, he thinks 3000 is realistic.
There a lot of uncertainty coming up with the Nov elections. We could see a repeat of 2000, where political instability combined with sinking corp margins and pulled everything down. Also, there are a lot black swans risks out there right now that could negatively impact markets further.
Fed’s actions have a lag effect of 3-6 months before being seen in the economy. We may see the demand destruction impact hit in full force right as companies announce disappointing Q3 earnings. Could swiftly freak out the markets.
Tom advises to use market correction as an opportunity to upgrade the quality of your holdings. Add great companies at better values. FYI: Tom is shorting right now, so he expects lower prices ahead.
Tom likes Paramount as a stock. Thinks it’s quite undervalued and well-positioned in the media sector.
Sentiment is a really significant predictive indicator. Inflows are dwarfing outflows right now (i.e., majority is still bullish). We haven’t seen a capitulation in equities yet this year. We maybe have in bonds.
Tom likes to compile data from numerous sentiment sources. Two he likes in particular: Investors Intelligence (in a bear market formation right now) & Daily Sentiment Index (at a midpoint right now).
The DeMARK Exhaustion Signals applied to the CPI have been extremely accurate over the past century. Tom monitors this closely.
Market could go sideways for a long time from here – thinks it could trade in a choppy range between 3500-4300 on the S&P for several years.
Tom’s investing best practices:
- Don’t be afraid to take losses for tax-loss harvesting. They will shelter past or future gains, and give you the chance to move poorly-performing capital into better prospects.
- Don’t be afraid to sell too early. If it looks like you’re wrong, get out while the bleeding is light.
- Once you have gains, lock in a portion of them. Better to lock in at least 50% of your earlier gains, than risk losing all of them.
- Beware of sentiment as an important indicator. As emotions (yours or the public’s) start to run hot, step back and question if the passion is overtaking reason. Tom writes his emotions down in a notebook, in order to analyze them and reduce their power over him.
- As mentioned earlier: respect position sizing! Don’t over-concentrate or spread yourself too thin.
Follow Tom:
- website: http://hedgefundtelemetry.com/
- Twitter: @tommythornton
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Expert: Louis-Vincent Gave
Date Recorded: 7.26.22
PART1: Inflation Here To Stay As Globalization Dies?
We’re in an “ursa minor” (-20%) bear market right now. The danger is we’ll enter an “ursus magnus” one (-40%) as the major world economies slide further into recession.
- Time for defense right now. That requires a different portfolio allocation than the standard 60/40
- Recession risk by region:
- Europe definitely in one. Things there look dire. Europe is in a full-blown energy crisis.
- China looks to be in recession, too. Though China’s slowdown is mostly government-driven, which can be more easily reduced as things are opened back up.
- US is a wild card. There’s likely still enough stimulus ‘pig going through the python’ to keep the economy propped up for a good while. Maybe it has a short & shallow recession, but it’s not going to fall off a cliff.
The energy-driven slowdown in Europe is likely to be inflationary. Will further disrupt global supply chains as less energy to produce goods (Eurozone economy now deeply integrated, so production shortages in one country will cascade across the others). Euro likely to continue to weaken vs USD (exacerbating inflation within the Eurozone)
Europe is fighting a 2-front war: climate change + Russia. That’s one front too many and both are exacerbating its energy crisis. Until policy shifts to sustainably addressing its energy woes, Louis doesn’t recommend deploying investment capital in Europe.
The Era of Globalization is now reversing. This is a massively important development. Geopolitical risk matters much more in this new era. For example: Industry is being weaponized now in a way it has rarely been before:
- US weaponized semi-conductors vs China under the Trump admin
- The West weaponized the financial industry against Russia after it invaded Ukraine
- Now, Russia has weaponized energy fuels against the West
Ongoing supply chain shortages and inflationary price pressures are likely to continue in this environment
Globalization was profoundly disinflationary. Now that “it’s over”, secular inflation is likely to gain the upper hand. Those investors who don’t realize this and position as they have in the past are likely to be at risk.
China’s goal is not “global domination”; it’s “global independence”. Banning them from semiconductors has only fed its desire to be self-sufficient.
- Its biggest weakness today is its dependence on US dollars to get what it wants. It has a strong incentive to de-dollarize.
- With the boycott of Russia, the West has given China a tremendous gift. Russia is now motivated to sell resources cheaply to China in exchange for renminbi. This is also giving China more bargaining power to demand that other countries settle trade in its currency, too.
- If they succeed in de-dollarizing, this will have HUGE implications for the opportunities available to investors in Asia (=will create a lot of new opportunities for big returns). Louis thinks China’s odds of winning are getting a lot better.
- Louis thinks the big trend here will be the lowering of China bond yields (Chinese bond yields are now below US Treasury yields!). A similar playbook played out in Germany 35 years ago. Betting on rising bond prices in China and/or the Asian countries that benefit from trade with it should be a big tailwind to bet on.
PART 2: De-Dollarization Is Accelerating, Propelled By China & Russia
Louis’ thoughts on investing:
- Step 1: Have to realize that the game has changed. Multi-decade era of globalization is now over, secular disinflation is now shifting to secular inflation. You need a different portfolio allocation for this (just like you need a different team on the football field when you’re on defense vs offense). The traditional 60/40 portfolio likely won’t perform as well as it did in the past
- Focus on assets with intrinsic value. Bonds with negative real yields don’t have any. Take the 40% of your portfolio in negative yielding bonds & shift it into positive real-yielding EM debt or energy plays.
- Look for growth in equities. Louis prefers buying undervalued equities and undervalued currencies. He doesn’t like the Euro, but he thinks companies in Japan, Korea, Canada look attractive.
- As we navigate this bear market, which could very well get worse, Louis thinks it wise to hold cash and precious metals, too
- Think of your portfolio as a sport team: every one has a specific & differentiated role to play. Cash/gold are to protect against loss – they’re not for speculative gain, as certain equities are. So construct the ‘team’ intelligently. And while in a bear market, beef up the ‘loss protection’ part of your team.
The paths out of a bear market:
- Energy prices collapse
- The central banks aggressively stimulate
- USD tanks
- Investors capitulate & don’t want to touch stocks
As we’re not seeing any of these yet, it’s unlikely this bear market is near over
Follow Louis at
- Gavekal.com
- haymaker.substack.com/
