Top Experts Predict What’s Next For Markets – Highlights From The Recent Wealthion Conference

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Hear what the experts had to say at the recent Wealthion Fall online conference. Insights from Lacy Hunt, Grant Williams, Stephanie Pomboy, Brent Johnson, Lyn Alden, Alf Peccatiello, Matt Taibbi, Doomberg, Rick Rule, Jeff Clark, Lance Roberts & more.

GET THE REPLAY VIDEOS for Wealthion’s online conference at https://wealthion.com/conference

AdamsNotes

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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 different each interview from all the others.

To get access to Adam’s key takeaways, please enter your email below:

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:

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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” 

  1. Cash
  2. US dollar (via UUP ETF)
  3. US Treasury bonds (both short & long-duration)
  4. 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:

_____________________________

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/

_____________________________

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: 

_____________________________

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/

Havoc As Strong Dollar At 20-Year High While Inflation Hits 9.1% | Lance Roberts & Adam Taggart

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The US dollar index hit a 20-year high of 109 this week.

This is creating increasing pain for other countries, especially those with Eurodollar loans, as servicing those is becoming more expensive — at the same time that import costs are rising.

Multinational companies are also feeling the squeeze, as their overseas revenue declines due to weakening demand and increasingly unfavorable exchange rates.

Somewhat ironically, this is happening at the same time when US inflation, as measured by the Consumer Price Index, is spiking to a 41-year high of 9.1%

.

Financial advisor Lance Roberts doesn’t see much reason for the dollar strength to abate anytime soon.

So what will be the most likely repercussions from this?

For everything that mattered to markets this week, watch this week’s Market Recap featuring Lance Roberts.