S&P To Fall 20%+ Once Markets Stop Deluding Themselves About A ‘Soft Landing’ | Alf Peccatiello

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Recession or soft landing?

Today’s guest says that’s the most important question for investors to answer correctly here at the start of 2023.

The Fed is telling us: “Don’t worry, we’ve got this under control”. And right now, it appears both the stock and bond markets agree with it.

On the other hand, there’s a growing stampede of macro data warning that a recession — likely a bad one — is unavoidable at this point.

Which outcome is more likely?

To dig into this, we welcome Alf Peccatiello, publisher of the Macro Compass and former bond portfolio manager, back to

the program.

If you enjoyed this interview, Alf delivers more macro insights and actionable portfolio strategy at The Macro Compass. Check out his products here: TheMacroCompass.com/subscribe

Transcript

Alf Peccatiello 0:00
It looks to me pretty myopic as if markets are choosing to focus on the green shoots that are there but they are making the base case pricing very, very lala land that’s how I would define it at this stage

Adam Taggart 0:14
Well, welcome to wealthy on home wealthy on founder Adam Taggart, recession or soft landing. Today’s guest says that’s the most important question for investors to answer correctly here at the start of 2023. The Fed is telling us Don’t worry, we got this all under control. And right now, it appears both the stock and bond markets agree with it. On the other hand, there’s a growing stampede of macro data warning that a recession likely a bad one is unavoidable at this point. Which outcome is more likely to dig into this we welcome Alf Peccatiello, publisher of the macro compass and former bond portfolio manager back to the program. Elf. It’s great to see you. Thanks so much for joining us late your time from the Netherlands.

Alf Peccatiello 1:05
Yeah, what time is it? 6:30pm. I’ve done worse than that. Happy to be here Adam.

Adam Taggart 1:10
civilized, then. We’ll look I’ll thanks for joining us. And like I said, I want to get into that question recession or soft landing. Before we do though, let me just start with a high level question I’d like to ask you every time you come on the program, what is your current assessment of the global economy and financial markets.

Alf Peccatiello 1:29
So financial markets are much more exuberantly pricing in that a soft landing or an immaculate this inflationary episode are the base case. I think that’s wrong. You need to respect the fact that China is reopening them, that’s the second largest economy in the world. They have pent up stimulus from 2022, consumers can now finally go around and spend it they’re not locked home anymore. And China is very relevant for global economies. So you need to respect that short term cyclical growth push. That doesn’t mean that the tightening of financial conditions in 2022. And the delay the effect it has on net negative effect it has on growth is not going to unfold. I think markets are getting too exuberant. And they’re extrapolating that is short term cyclical growth. Bush means that effectively inflation can come down in an immaculate disinflation episode, while we can avoid a recession, and everything’s going to be fine. And I think that base case pricing is becoming too entrenched, and probably it’s wrong. Okay.

Adam Taggart 2:46
That’s great. I have some questions about China that had laid around. But let me let me pull them up here and just ask. So like how you described it a short term cyclical growth push from China’s reopening here? How, how transient do you expect that that growth push to be is that something that’s going to be a surge for quarter or two, and then kind of Aquila braid longer than that.

Alf Peccatiello 3:12
So I think a couple of quarters is what you need to look at here. Markets care a lot about the rate of change of growth and the rate of change of inflation. And here, you need to be honest, clearly, you are going to be seeing a positive rate of change in growth in the short term. To give you some statistics, there are countries like Germany who are effectively the largest trade partner of China. So the moment China reopens countries like Germany are going to temporarily benefit from it, then Korea, Australia, all these open economies that are either geographically close, or they have some direct business with China, they are going to benefit from it, temporarily speaking, because the moment that the growth cyclical pushes exhausted from a rate of change perspective, that’s likely going to happen, say in six months or them, you are going to go back into what are the secular drivers of growth? What is the long term what I call gravitational pull force. And from that perspective, you are still going south, both on a growth and an inflation perspective. Now the market your Adam is basically choosing to focus on the green shoots, both on inflation and on growth. So what it’s doing is, it’s saying look, inflation is going to come down very rapidly. On the piece on the macro converse, I highlighted that inflation swap traders so the market implied expectations for inflation are at two and a half percent By late summer. So again, I want to repeat that late summers literally in seven months. And three they’re surprising inflation in the US to drop to two Two and a half percent Biden. Wow, that’s a rapid decline in inflation. So they’re focusing on the good side of it, you know, if inflation comes down, right, and that’s great. It’s great because the Fed has an easier life. They don’t need to push so hard if inflation really comes down that fast. But they’re also thinking that growth is going to be much better because China reopens and so we avoid a recession. And at the same time, inflation comes down. That’s immaculate this inflation that’s a soft landing, effectively soft landing. And I think that it’s a bit myopic, to just take the green shoots coming from both angles, because let me send you let me give you another angles, for instance, China reopens we have seen what happens to the supply chains of large economies reopening. That’s the US, that’s Europe, where you have temporary labor shortage, because a lot of people are actually sick, like COVID. So you have some supply disruptions, then you have a lot of nominal growth activity, you have people spending people consuming, you have the renminbi strengthening as well. So that seems to me like inflationary overall, commodities are rolling out, as we speak copper base metals, they’re rattling markets are completely ignoring that as if it doesn’t matter for inflation. But but they’re extrapolating the growth side of it. So again, it looks to me pretty myopic as if markets are choosing to focus on the green shoots that are there, but they are making the base case pricing. Very, very lala land, that’s how I would define it at this stage.

Adam Taggart 6:42
Okay, so let me just make sure I caught all that. So the China reopening, it’s going to goose growth, economic growth worldwide, primarily, you know, in especially in those countries that are have open economies, like you said that trade with China, you think there’s going to be a surge, let’s say maybe over the next six months, that’s going to begin to dissipate, that growth is also going to potentially be inflationary, as China’s placing more demand on commodities, you say we’re seeing some early signs of that already. And you’re basically saying the market is ignoring the potential inflationary part of that just focusing on the growth, it’s seeing CPI come down, and other macro factors to say, hey, we think inflation is not going to be a problem anymore. So they’re kind of writing off whatever impact China might have. It sounds like you’re saying that’s a mistake.

And then we have the there was the inflation part. And then there was the economic growth part. So

you know, right now, at least the Fed and the other central other major central banks are still taking a hawkish stance, and the Fed is saying, Look, I’m gonna, I’m gonna get to five, yeah, I might get there more slowly at this point. And then I’m gonna hold it there. And I’m gonna see what happens because we’ve got a bunch of rate hikes that we’ve already made. And I got to see the impact that they have on the economy is there’s a delay there. And so once they hit, let’s see what they do. And that’s got to have a drag on economic growth. Right. So I’m kind of curious as to what’s going to win out, right, the delayed effects of all the hiking and tightening that have done so far that have yet to arrive, versus China’s boost, like which one on a net net basis? Are we going to grow? Are we going to contract as a global economy? And it sounds like what you’re saying is the market is just like, not even looking right now, at the potential effects of a with that delayed impact that have but also, if the Fed indeed does hang out, we have a much higher cost of capital than we’ve had in the past. And that’s going to be highly restrictive to growth. I see you sort of reacting as I’m saying this. So it seems like you’re saying the markets are really just not paying attention to that right now.

Alf Peccatiello 9:05
Look on the piece of on the macro economists that released the free for everybody or them, I looked at market probabilities, because at the end of the day, nobody has a crystal ball, right. But we have to we have to try and extrapolate what markets are pricing. And what do we think instead, the probabilities are for what’s coming ahead. And you’re right, because the market is basically assigning a very high probability 60 to 70%. You can go and read it in the article. How do I extrapolate these probabilities, that effectively a soft landing will unfold and a soft landing means the Chinese growth push will allow us to avoid the recession. But at the same time, the Chinese reopening will not spur inflation again. So you have basically the market pricing in stuff like, again, we talked about inflation at two and a half percent but then we have earnings growing 4% It’s not there. Rapid this growth in earnings, but it’s still not recessionary earnings setup right in a recession on average earnings drop by 30%. The market is still looking at earnings growing by 4%, you know, mild growth, so we avoid the recession. People are telling me off, but the bond market is pricing the recession. And that’s not true at all. Because in a recession, the Federal Reserve doesn’t only cut rates to neutral. So the market right now is pricing Yes, 200 basis point of cuts for the next 18 months. That’s true. And it’s a lot. But that will be reducing rates from 5% to 3%. And trust me, if you get a recession, the Fed doesn’t hold rates at 3%. A recession means people are losing their job, inflation is collapsing. Profits are down 20 30% Sorry, but the Fed doesn’t keep rates at 3%. In a recession. In average recession, the Fed cuts way below neutral interest rates and brings rates to 1% 0%. If necessary. In a recession, inflation goes to 0% to negative for a certain period of time. If you look at the past history, over the last 100 years, every time you had a recession, inflation dropped by seven or eight percentage points, on average, in 2008. People forget that. But in 2008, we entered the recession, with inflation, I think in the 5% area. And temporarily, we went into deflation on a year on year basis. And it only took nine months. So if you get the recession, people are losing their job inflation is collapsing, companies are seeing their profits slash negative earnings growth, the Fed doesn’t keep rates at 3%. Guys, the Fed cuts at zero at that point. And the bond market isn’t pricing that the bond market is in pricing that inflation collapses to zero. It’s pricing a very nice immaculate does inflation back to 2%. The Fed cuts rates but only to 3%. So back to kind of neutral rates. And most importantly, I’m credit spreads. Like guys, I don’t know what kind of recession Have you ever seen or studied in the past. But there is a chart in the article that looks at high yield credit spreads. It’s a very simple chart. It’s the spread of lowly rated corporates over treasuries. So it looks at the cost of capital for issuing that for this junk corporates. The average level of these credit spreads over the last 20 years is roughly 500 basis points. So you know, if you’re a low rate corporate, you need to pay the premium over treasuries to issue bonds. That makes sense, this premium changes as the economy accelerates or decelerates. And you know, the more the economy’s strong, the tighter the spreads are, and vice versa. In a recession. These credit spreads are on average 1000 basis points 10% over three years, it can be seven 812 depends on the depth and on the rapidity of the recession and how bad it is. Right now we’re at 400 basis points. So again, guys, we are below the 20 year average. Can you tell me the bond market is pricing recession, the bond market is pricing, a very nice and comfortable soft landing. That’s where we stand. What do I think of it? I think the recession narrative will prevail, because the tightening of financial conditions has been extremely rapid, very, very vicious and strong. It takes time to work through the economy, and it’s working its way the pace of hiring is slowing down. Retail sales adjusted for inflation are negative, you’re trending down negatively. So you have signs that all forward looking indicators are looking at the recession. So we are slowly walking there yet, markets are choosing to focus on the growth impulse coming from China, ignoring the inflationary impulse potentially. And they are choosing to ignore the big picture, which is the economic is walking into a recession where basically pricing lala land. That’s how I would summarize it.

Adam Taggart 14:00
Okay, I’m glad you went to the credit spreads chart because that was one of the things I was going to bring up here too, that the bond market, just to your point just doesn’t seem worried right now. And we’ve long said that the bond market is sort of where the smartest guys in the room usually hang out. And you were a bond portfolio trader, you know, back in your pre macro compass days. So it is interesting that, you know, apparently the smartest guys just just aren’t that worried here. So I want to put up one other chart too, that you would put either in one of your articles or on Twitter, but this is a this is a tweet you put out. It shows the short dated volume of the s&p as a percent of total volume. So these are these are basically trades that expire within 24 hours. I’m assuming that maybe then these are options trades. Yes. But you know, you’re saying here more and more investors are treating the stock market like a lottery. Right if you just look Get the growth of this. I mean, it’s it’s gone up fourfold in the past, from looking at this correctly, six years or so maybe even more than fourfold in six years. So it just seems, you know, right now like it’s, it’s a lot of hot speculation. And maybe I’m reading too much from that, because there may be some other reasons why people are taking a 24 hour or less trade. But I mean, this does not seem like something you would see in a market. That’s conservative.

Alf Peccatiello 15:29
Yes. And you are now slowly but surely bringing me to talk about our friend Jay Powell. Because the charter just refers to other myths, one of the main many, many signs of the fact that animal spirits have not fully disappeared from markets. Yes, we have cleared accesses in a couple of places. House prices in the San Francisco Bay Area are down 30% from their peak, three 0%. Down from the peak. Many unprofitable companies have gone bust that has happened in the tech space in the crypto space. So we have cleared some excesses definitely we have. But now we still have retail investors going and chase this. Zero Day to expire options, zero DTE, they’re called basically lottery tickets, we effectively overpay for these options, and you have them expire in six hours, we get your adrenaline shot at the end of the day and try to see if you made money or not at the end of the day, that’s one signs of animal spirits. But to take a step back and do it in a more broad way. If you look at the market cap of stuff like shiba inu, sorry, the Sheba coin or whatever it’s called over there, or if you look at the financial condition index more broadly, from the from the Bloomberg or Goldman Sachs financial conditions index, you see that these financial conditions are now as loose as they were in March 2022. That’s mesmerizing. You have had the Federal Reserve hiking rates by 400 basis points since March. And financial conditions are back at the same level at the very first hike that they did. Can you imagine that? It’s basically its market saying, now you guys will hike rates to 5%. Now we don’t care, we don’t believe you actually going to just go and buy all the high beta unprofitable stop, you’re gonna buy some super volatile altcoins we’re gonna push it again, but Bed Bath and Beyond up 50% in a day. Those are animal spirits. Those are animal spirits coming back. Now imagine you’re Jerome Powell, you have a Federal Reserve meeting coming up in a week or so. Inflation is coming down from a momentum perspective. core services X housing. So that’s like the stickiest part of the inflation basket on a three month annualized basis, it’s down to two and a half percent. So that’s the sound, you know, it’s it shows that the sticky components of the inflation basket are slowly but surely coming down to levels more acceptable for the Federal Reserve, then there is housing inflation, okay, that’s gonna take a while it lags what’s really happening in the housing market. There are goods that are commodities, but the sticky part of the inflationary basket is coming down. So if you’re Powell, you could say, you know, we’re on the good path. The moment he says that, this market is going to push up 20% In six months, easy. It’s gonna try and loosen up conditions, animal spirits back again, if you’re Powell, there’s one thing you want to avoid here, just purely from a risk management perspective, which is a repeat of the 70s where you relax too early. People say okay, it’s over mortgage rates dropped by to 300 basis points. And you restart all over again, the frenzy where people go out and buy a second house, a third house, they rent it out, they invest in whatever they can. animal spirits, you want to avoid animal spirits want to refrain them. And if you ask me, animal spirits, they are already big to lose and running hot for what’s the Federal Reserve trying to bring down inflation. So I think just from a risk management perspective, but we’ll we’ll have to do some homework and calm people down because it’s getting a bit too soft lending ish, Lala Land and animal spirits are back. And you don’t want that.

Adam Taggart 19:35
Okay, so that’s, that’s been the battle that Powell has kind of had all last year with the markets. You know, he trained them or he and the Fed, train them for, you know, whatever the past 15 years that the feds always going to, you know, add more alcohol to the Punchbowl. And he’s trying to say no, no, no, no, you know, it’s time to sober up everybody and He’s constantly having to like come back out after the Fed releases data that the market finds some way to interpret it as as bullish, right? And starts loosening financial conditions because the market gets all euphoric again, and then powers to come up as to terrapins speech and you know, give the harder language, right. So you’re basically saying he’s, you expect him to do more of that going forward, and probably even next year in the next week or so when we hear hear from the Fed again. So you’re not as I’m saying that, but as we look towards 2023, you know, you’ve said in the past, when I’ve interviewed you that the Fed is, it’s in a fight here for its very own credibility, right. And you just mentioned that it doesn’t want to have a repeat of the 70s, as well, which are two big reasons to say it really needs to be steadfast in charting the course, until inflation is well and truly under control. So how do you think the Fed and perhaps maybe the other major central banks are going to act in 2023? Do you see Powell really delivering on getting up to five or wherever he’s going, and then holding it there for a prolonged period of time, even if it sounds like the market doesn’t think those but even if things start breaking because of those high rates.

Alf Peccatiello 21:24
So in short, I expect them to act stupid. And stupid is basically being late, being late and being because of incentive schemes simply being overly tight, and not losing when it’s necessary. So let me translate what it means really, my models are pointing to a recession starting in the US roughly May, April to May, a recession, Adam is defined as people losing their job unemployment rate going up, and earnings growth being negative on a trending basis, six months, over six months, year on year, but you need earnings to drop and you need unemployment rate to go up. Okay. So that means non farm payrolls in the 50k, area, zero non farm payrolls, that kind of numbers, you know, and then my models are saying that this is roughly coming around May, of course, an average expectation, I don’t have a crystal ball, but that’s where the microphone was wanting to leave approach is pointing to now your power. And what you will be doing is probably want to raise rates to 5%. That’s what you’re already promised to market. So you have to get there. Because if you don’t, then again, it’s going to be animal spirits running over, because people are going to be saying, Oh, the guy isn’t serious, even to getting to 5%. So we can challenge him. So he’s gonna get there, slowly but surely. And then, let’s say I’m right at them when a recession hits. I think at that point, because when the recession hits, inflation will be coming down rapidly as well. There’s going to be a short period, maybe three months, where Powell is in denial, effectively,

Adam Taggart 23:00
and it says that expressed by just a wait and see mode. But yeah, I’m pausing now.

Alf Peccatiello 23:04
Right? Yes, there’s gonna be saying like, Okay, we are at 5% By April, roughly. And then we pause in May June, we get the recession, the start of a recession. Okay. Now, what Powell is going to be saying is, guys, come on, I mean, it’s look at look at the job market is still very tight, and people are gonna be saying, Yes, but you look, I mean, people, our unemployment rate is starting to go up, you need to do something. And you’ll be saying no, in reality knows you need to do something, but it just wants to make sure really that inflation is on the right path, it’s gonna take three or four months. So you’ll have this very weird window, where it’s very clear that the recession is it and yet power will be just doing risk management, which is I’m not going to cut rates because I want to make sure that inflation is coming up. That will be a very bad period for markets, if you ask me because you are you are you basically feel the pain. That will be the point where people start to price a Fed pivot, because it’s coming at that point, you know that the proper recessionary fed pivot is coming, and that’s not the Fed cutting to 3%. Adam, it’s the Fed cutting to two or 1%. But that will be the moment when people realize, oops, if a Fed pivot is coming, it’s because we are in a recession. So there is nothing particularly happy about this fed pivot it’s yeah, you’ll get credit spreads widening, you’ll get stocks getting hit, you get a 2001 setup basically when the Fed cut interest rates by 475 basis points. So people forget that. The Fed cut rates in 2001 during the recession, from six and a half percent to 175. In 13 to 15 months. Earnings dropped by I think 40% or something from peak to trough between 2000 and mid of 2002 and the stock market despite the fact that at cut already Basically to as low as they could, and very rapidly, the stock market continued to drop from December 2000, to the bottom of the bear market in June 2000. And do by roughly another 20%. That’s despite Fed funds being cut to one point 75, one and a half percent. And I think that will be the base case that needs to unfold the cyclical growth. up with this inflationary soft landing, as a base case, I think it’s way too optimistic. And it just focuses on the green shoots, cherry picking and selectively eliminating the potential dangers, either that the Chinese reopening is very strong, but then he pushes inflation up, Adam, I mean, I can’t believe that people are saying, Look, we get these commodities rallying, but it’s going to do nothing to inflation, it’s going to be fine. Or the other risk, which in my opinion, is the biggest risk, medium to long term is that, yes, you get this inflation. Yes, you do. And the Chinese growth push is gonna fade away somewhere in three to four months. And the recessionary dynamics are going to come back with a vengeance. And you are not pricing those. You’re just surprising. A disinflationary, lala land soft lending, I think assigning such a high probability to that outcome. It’s poor risk management, by markets, it’s animal spirits coming back, basically. And I Okay, got it.

Adam Taggart 26:24
Got it. And again, we’re all talking probabilities here, alpha, and you’ll have a chance to come back on this channel and update us if things materially changed in your models. But sounds like what you’re saying is is a bit of a head fake the next quarter or two from the Chinese China’s growth impulse, which then begins to moderate right around the time, the Fed hits 5%. And then holds there for a couple of months, as we really start to begin to see the recession arrive, right, we start seeing the earnings fall, we start seeing the layoffs really begin to build further steam. And then it sounds like after that you think the Fed might say okay, you know, like, we now think inflation is pretty slayed. And now we’re actually kind of worried about what we’ve done. And so they start, they started using pretty quickly pivot, and they start bringing rates down pretty quickly. And I just want to dig in on this. You talked about how in past fed pivots, they tend to pivot pretty extremely. Right? Do you do you see them doing the same here as well? Do you think it’s more likely that it’s not that it’s just sort of a slow progression, and they bring it down to two or whatever, that you think we might be headed back close to ZURB? In terms of the response from here.

Alf Peccatiello 27:38
So the first, the answer to this is, I think you’re looking at a non negligible probability that fed funds will be below 2%. In 2024. I don’t see that as an impossible thing at all. What people do here is a mistake for them is that they mix structural trends with cycles. And that’s a very, very dangerous thing to do in macro. So people are telling me off, Fed Funds will never be one and a half 1% anymore. Impossible. Because the inflation picture has changed. Long term, it has changed the globalization onshoring. And all these things are actually there. It’s true that those things have on the margin changed from prior to pandemic. People are mixing the time horizons, though, because a recession is a sharp, cyclical decline in growth and inflation. And the average recession brings inflation down by seven to eight percentage points. That means that inflation moves from the peak being seven to 8% in the US to zero. In a median recession, historically speaking. The Fed will be looking at that point at inflation at 0% 1%. cyclically speaking, it doesn’t stay there forever. But at that point, you’re looking at that and you’re looking at loss in the job market. Why? Why would the Fed keep rates at two and a half percent? At that point, imagine you’re the Fed put yourself in their shoes. We have lost in the labor market. You have earnings, an earnings recession, and you have inflation at 1%. Let’s say why would you have fed funds at 3%? It doesn’t make any sense. At that point. The mandate of the Fed is labor market and inflation. Well, inflation is below target at that point in the median recession, secretly speaking, temporarily speaking, and the labor market is falling apart. Why would you want to have fed funds at 3%? It doesn’t make any sense. Actually, I think that specifically speaking the market in late 23 beginning of 24 is going to be the reflection of how tight the fiscal and the monetary policy was in 2022. And in 2023.

Adam Taggart 29:52
Got it and would this be an apt analogy, Alf? Cuz you have followed, you know, Fed policy much more closely than than the average person Some? Yeah, I think they like to position themselves that they’re like a precision driver. Right? Where I, I think and kind of how you’re describing how they’ve acted in the past is the much more drive like just turning the wheel all the way to one side. And it turned into we all decide, and they’re much more of an extreme lurcher than they are this, you know, precision needle threader

Alf Peccatiello 30:27
You’re right. They when you talk to them, and because of my previous job running this 20 billion portfolio, I could speak to some of these policymakers, which is a good experience. So you ask them, you know, how do you think what’s your framework? What’s your incentive scheme? And the answer is no. inflation target is 2%. I want to make sure I linearly tighten when things are too hot, and I linearly lose when things are not going well. All very controllable. These these terms and this? Yeah, well, their semantic area that they use is all about start to score control credibility, this is the type of words they use. And indeed, if you get a recession, the first thing you’re going to be doing is bring back rates to two and a half percent level of neutral. That’s the first step you do you you lose in immediately policy to what you consider being a neutral stance. But in a recession, neutral stance is not enough, you have to do more. So what they tend to do, because they’re always very late in reacting as they were late in reacting to inflation, they need to lurch very rapidly. As you’re saying all of a sudden, we’ve got Powell raising rates to 5% and 1 trillion of Qt a year and you pile it up and let’s go, you are going to be having the same thing. When you have the cyclical downturn. And I know we are humans, we have recency bias. So right now because Fed Funds are at 5%, we are talking about Qt, we cannot even fathom the idea that fed funds will be at 1%. But yes, they will. If you get a recession, it’s all about cycles and cycles are a different story than trends, long term structural trends. Yes, maybe the new average of inflation is 3% is not 2% anymore, maybe. But it takes a decade, for that one fold. In a recession, you’re still gonna get inflation Back Zero 1%. And as you said correctly, Adam at that point, the Fed doesn’t want to do controllable things anymore, they want to repair and repairing means an urgency to act. So even if you can’t imagine it now, if you got the recession Fed funds might well be 1% in 2024.

Adam Taggart 32:35
Okay, and obviously, you know, that’s going to have all sorts of repercussions for how you allocate capital, but both for the overtightening. And then for the the Fed, massive pivot down the road. So I want to get to that in just a second. Real quick. You know, at the beginning, I talked about how the stock and the bond market from your perspective are being excessively sanguine here and not worried. You know, they’re they’re pricing in this immaculate disinflation, I love that term, by the way. But you’ve also written that, you know, if you look at the macro data, it tells a really different story. And you cite a number of examples. But I want to put up one chart here that you’ve shared, which is the top 10 leading indicator index from the Conference Board that has 100% hit rate on anticipating recessions. And that thing, basically, is screaming recession ahead at this point.

Alf Peccatiello 33:28
Yes, this is one of the many forward looking indicators that we study in truck at the macro compass to try and understand how the what’s the direction of travel for the economy? Now, it’s, I think the answer is pretty loud. And its growth is coming down, inflation is coming down full stop. There is not much to debate about that, like other than one of the strongest, most reliable sectors of the economy that is for leading is the housing market, for good reasons. You know, it’s a very large sector. Actually, the real estate market is the largest asset class in the world. It’s largest than stocks and bonds combined. When I say this, I’m like, Whoa, it’s really big. It is very large. And everybody has actually in the US 80 plus percent of housing transactions are backed by a mortgage. So we’re talking about a highly leveraged market very prone to changes in interest rates and also a significant portion of the employment together with ancillary activities. We are talking about 16 to 18% of the workforce, which is employed in housing related activities. Wow. A very relevant sector to observe. What are you observing there are them I am observing a leading sector that is completely frozen, like literally frozen? housing sales down 40 45%? year on year 40 45%. year on year? Yeah, even 50 in certain markets. He’s you want to talk me up short 50% It’s really frozen and it’s frozen because the marginal by was cut out of the market, he can’t afford it. Mortgage rates are too high house prices on paper are still too high. Let’s talk about the on paper part for a second. KKR and Blackstone are amongst the largest real estate institutional investors in the world. They both have large Real Estate Investment Trusts investment funds, right? So you park money into those and they invest in commercial real estate and housing on your behalf. Blackstone in their breeds fund as locked people in basically raising gates for redemptions not allowing investors to get their money out. So basically, you you’re stuck in KKR, as recently announced exactly the same thing. What does this tell you, this tells you that they don’t want people to get out their assets out of these funds, because if they get their assets out of these funds, the KKR and Blackstone are forced to sell their real estate holdings, they need to liquidate their holdings. And there is no buyer at the price that they will put into their funds. There is there is no no buyer at these prices. So what this tells me is it’s a frozen market. And institutions, large institutions are trying their best not to have to be the first one to offload. This danger really starts a cascade of negative price action. So we’re looking at the market, which is at best frozen. And I think it’s not going to be that way for very long, because it just takes a couple of institutional investors that are forced to sell to then start a negative cascading effect. And this is one of the leading sectors and markets and one of the biggest markets in the world. So leading indicators, this is just one of many examples. They’re all pointing in the same direction.

Adam Taggart 36:39
Yeah, and I’m glad you picked housing because it’s one I talk about a lot. And I have housing analysts on this program relatively frequently. And you just reinforced a number of key points that we make, you know, housing is priced at the margin. And even in a in a quote unquote, frozen market, there are transactions that just have to happen, right people die, they get divorced, you know, they get forced to move for some reason or another. And it’s those transactions that still set the market price, right. So you can actually, you know, have a lot of it, I think we’re seeing this right now, both in the institutional side, as you said, but also in the retail side, where the sellers are trying to just hold steady, Hey, everybody, let’s just hang together, let’s not sell at these prices, right, let’s protect all our market value. But there’s a first mover advantage to bolting. And when those marginal price marginal transactions start to begin to bring the price down, you’re gonna have, you know, either some distressed sellers, or just somebody who doesn’t want to be caught holding the bag, get out, you know, use that as their point to get out, and then everybody’s going to start chasing that market down.

Alf Peccatiello 37:44
Okay, that’s exactly how it works. So the best possible outcome for these large institutional investors that nobody has to be a forced seller, but that doesn’t work, there’s always somebody that has to be a forced seller. And when he goes, then there is a second mover advantage, which is, wow, it has started, I need to get out now, because I don’t, I can’t wait anymore. And that then re accelerates in a vicious circle, actually, the move down in prices, the housing market has always worked like that. It’s a lagging market, in terms of prices, but it’s a leading market in terms of telling you, what’s the state of the economy of the housing market, right rebounding, then it means the economy will be doing probably better in six months, the housing market has come to a complete halt for the last 12 months. And it’s just one of the many leading indicators pointing to the very same direction rose down inflation now.

Adam Taggart 38:35
Yeah, and one thing I will say is different this time about the housing market is at least in the residential side is there’s there’s so much more institutional ownership in the residential stock than there used to be. And so if you have any of those players get into trouble. They have the potential to dump a lot of inventory on the market, you know, all at once. So it could really be a catalyst to do a downward cycle. I’m not saying that exactly is gonna happen. But the risk of that happening is certainly a lot higher now than it was in the last market downturn, just because we didn’t have housing market downturn, because we just didn’t have institutional penetration like this. The other thing that’s important about housing as I know, you know, alphas it’s much more widely owned than financial financial assets are least in the US, right, the top 10% own, like over 80% of all the financial assets that are out there. So whatever happens in the stock market is influential, but it’s not that relevant to the average American what happens to housing is a lot more relevant to a lot more Americans so people start seeing home prices coming down. You know, that the then curtail their spending, there’s a negative wealth effect that’s associated with that. And if that gets paired with job layoffs, which you’ve said you expect to see come back middle of this year with a vengeance. That’s like another barrel of a shotgun that’s going to tighten Schumer spending in his course consumer spending is 70% of GDP. So you know, this all can really start a negative snowball effect in terms of, you know, economic growth or net point, probably economic contraction. You’re nodding as I’m saying all this. The last thing I want to say about housing just, you talked about the eye, I was shocked to hear this stat the other day about the the Bay Area, San Francisco Bay Area being down 30% from the peak, which was last March, I live in the Bay Area. And, you know, prices here have gotten stupid. You know, I’m surprised the median price is down that much just because I’m not visibly seeing price corrections that much yet where I live, but you know, this is sticky. And it takes a little while for this stuff to really propagate. But, you know, we’re seeing we’re beginning to see markets that are really showing price declines like that, like it doesn’t, you know, people have been saying, yeah, there a couple of markets that maybe get a little hot that have now kind of cooled off or flatlined. You can’t ignore a 30% decrease in median price in less than a year. Right. But also, KB Homes, which is one of the largest home builders in America, you might have seen this elf, they just announced that their cancellation rate in q4 was 68%. That was up from something like maybe 15% a year prior. Right. So two thirds of the contracts that they had entered into to have their homes bought got cancelled by buyers, right. I mean, that just shows you to your point, that is a market with a buyers of just really just going on strike right now. And that builds because, you know, once people start seeing the price declines, especially from the stupid heights that they’ve been at, well, nobody’s gonna want to stretch anymore to get into a house because they don’t want to catch the falling knife. They’re just going to wait. Right? And the more people that step back and wait, you know, the less buying pressure there is and the more gravity begins to play on these prices. So you know, I think housing is really going to be an important leading indicator here. Like you’ve been saying

Alf Peccatiello 42:02
them, I think you’re an excellent macro analyst.

Adam Taggart 42:05
Yeah. All right. All right. Well, look at there’s room for me at your substack I’m heading over there. All right, well, let’s now shift to kind of where the rubber meets the road. You’ve given us great macro outlook here. I know, alphabet that you you know, manage portfolios, public and otherwise, based upon your macro views. So I’m curious, you know, where do you see the markets going? From here? I’m gonna guess you’re gonna say, the bottom of the bear market that started last year is probably likely not in. And so if that’s true, how much downside do you think is left?

Alf Peccatiello 42:40
The bottom is not in? I would say this is again, my base case. I’ve been wrong plenty of times. I might be wrong again. But my base case is at the bottom for equity markets. Surely credit markets, housing markets is not in at all. This is my first answer. And when I look at potential for drawdowns, my base case is for the s&p 500 to probably trade in the 33 34,000 or 3400 area. The reason why not lower is that earnings and valuations almost never bought them at the same time, Adam. So if you get into a recession, which is my base case, then earnings have way way to go down from here 20 30%, historically, at least. But valuations at that point would probably not collapse further, because when you get that kind of earnings recession unfolding, as we discussed, ultimately, the Fed caves in when the Fed caves in and brings Fed funds to 1%. Over time, it’s reasonable that valuations at least do not contract anymore. Let me put it like that. So earnings and valuations never bought them at the same time. That’s why despite expecting a very large decline in earnings, I think the s&p has way to go down. I mean, 3334 under this, like 20% Plus from where we are today. So there’s quite a drawdown yet to go. But still, I would like people to remind that earnings and valuations never bought them at the same time. So it’s very, it’s a bit complicated to see the SMP much lower than that.

Adam Taggart 44:17
Okay. And while you were talking, I put up the chart that you would put on in your report recently that that showed that lag, or showed that that, you know, prices recover before earnings do, I just want to add one element to it, which is in past rate cutting cycles when the Fed has pivoted. The markets usually have taken a quarter or two to recover. Once the Fed started the pivot. In other words, you don’t have the pivot announced and then the markets go off to the races. Usually, you have these really bad conditions stocks continue to worsen for a while. So we’re gonna we’re gonna see basically, I’m just trying to get the progression right. So we’ll see the now Turn of the pivot than a quarter or two later, we’ll see the bottom in the stock market. And then a quarter two after that we’ll see a bottom in earnings.

Alf Peccatiello 45:07
Yeah, actually, that’s the correct progression, actually, this time is all I’m going to be saying something heavy this time is different, very expensive words in finance. But what I’m going to be why I’m going to be saying that is, we talked about the stubborn lay to gain power. So this time, you’re going to be seeing an earnings recession coming in, at least in my base case, pretty evidently. And still, you’re going to have that period, very negative for markets where power is going to refuse to cave in. So there was a period where earnings keep dropping, and you see the recession is evident. It’s ear, job market losses, earnings recession, historically, the Federal Reserve would pivot, not immediately, but maybe after two to three months max or them. And this time, I think the spirit can be a bit longer because Powell is going to have some restraint, to cave in rapidly. So there is a period where for markets will look pretty bad. Four to five months, where a recession, it becomes clear, but Powell takes time to pay, but it ultimately does. He does pay within steel, historically, from that period onwards, there is another three to four months, as you said, Until valuations can finally bottom and also the SMP can bottom with it. So I think it’s hard to look 912 months ahead, but between now and maybe the next seven to eight months, you still should expect the bottom to be ahead of us and not behind us. And then there is the bond market, which is interesting, because one thing I’d like to say to people is you are paid to wait, you have a luxery that we haven’t had in 20 years, right? You are literally paid a four and a half percent risk free short term interest rate by putting your money in parking them into money market funds into some short dated ETF that replicates T bills by simply buying T bills, whatever you want to do. But basically you’re you’re you’re insured a four and a half percent yearly risk free return at the moment annualized to wait. I mean, that’s incredible. It’s basically having optionality of looking at these very turbulent market conditions on them and trying to assess whether it makes sense to deploy capital. That’s an optionality for which you normally pay, you are not paid for options. And now you have an option, you can just stay out, please for a portion of your portfolio and get paid to wait and patiently assess where the macro landscape will bring you. That’s incredible. Add them and use that optionality, I think,

Adam Taggart 47:43
great. So that’s exactly where I was headed. So from from a stock standpoint, just to quickly reiterate, make sure I clearly heard you, you, your base case shows the Fed, basically pausing around May, right, you’re then gonna have that extended period where we begin to see the worsening of the recession or whatnot. So stocks will be probably not performing great from that. You said that could last, I don’t know, three to five months, whatever, then the Fed sees how bad things are, and it pivots and then you still have the drift down towards the bottom from that. So stocks may not bottom till turn the year ish. And I realized we’re talking far enough out that we need to have you back on, you know, long before to give us an update bonds, though, you’re saying, hey, you know, they give you a chance to get paid to wait to see what happens here. And presumably when the Fed certainly when the Fed pivots, but maybe even when the Fed pauses, the bond market will probably likely respond well to that because people know that the tightening and the hiking are kind of ending. And that should be, you know, interpreted as positive for bonds. So basically, my point is, is bond prices should probably if they’re going to respond favorably, they’re going to do away before stocks do.

Alf Peccatiello 49:01
Yes, you are not only paid from yield to maturity perspective to wait, so you lock in that yield and you’re paid that yield to wait. And on top of it, you have the potential price appreciation when the bond market smells that the Federal Reserve is about to pivot. Because if it’s true that the stock market doesn’t immediately rally, when the Fed validates the recessionary pivot the 2001 light pivot the bond market does because that gets immediately reflected in bond prices. When the bond market smells that the Fed is about to do a pivot a recession like pivot I mean cutting rates to 1% or 2%. That needs to be reflected in bond prices. So in 2001, again, that’s your example, your roadmap bottom 10 year treasuries in total return basis, rallied 10% for the entire year. So by investing in treasuries summing up your coupons and your price appreciations, you made 10%. That’s because the Fed cut rates in the market that to embed these rate cuts into mom prices. The SMP dropped by 12%. That very same year. So that dichotomy between bonds and equities, I think it’s something that will come back to the table in 2023.

Adam Taggart 50:10
Okay, great. And I think that’s a big opportunity for investors to be really watching closely here. Based on your expertise in the bond market elf. How attractive is the opportunity in bonds right now just on a historical basis, and I’ll preface this by saying, I have talked to some analysts on this program who have said, it looks the most attractive they’ve seen it in their lifetime. I don’t want to put those words in your mouth. But are we have that kind of level of opportunity here in bonds? Or would you make it more modern?

Alf Peccatiello 50:42
I think that was October, November, actually, October last year was incredible. You could buy five year treasuries at over 4%. That was pretty decent. I think. Right now, I think the risk reward opportunity in front end short, dated bonds is extremely attractive. As we discussed, you get paid for four and a half percent to wait. It’s beautiful. And I wouldn’t really pass on that opportunity. On long dated bonds, they, of course, already discount 200 basis point of cuts by the Federal Reserve, they do discount that. Now, why don’t we discuss the fact that my base case is a recession in a recession, the Fed cuts rates to by more than 200 basis points, right? That’s right by maybe three 400. So as that needs to be priced in bonds, further, there is upside. But again, it’s a risk reward. I might be wrong. If I’m wrong than the potential to lose money from a price perspective in bonds at these levels with 20 basis points already priced in. Let me say it’s not the best I’ve seen in my lifetime. I please let me put it like that. But it is it is an asset that I favorably look at, especially compared to equities or credits or housing, definitely. And especially the shorter end of the bond market. Because if it’s true that perhaps the Fed doesn’t cut rates by 400 basis point, if we are going to slow down on inflation and growth, no way the Fed is going to keep rates at 5% for another two years. Adam? That’s

Adam Taggart 52:10
right. Okay, great. And I’m just curious on the longer end of the curve, let’s say the Fed does only bring rates down by 200 basis points, those bonds wouldn’t really lose money. In that case, they just wouldn’t have the upside appreciation that we would normally expect to in a normal cutting cycle.

Alf Peccatiello 52:30
Yet. Yes, in principle, there is only one problem, which is the curve might steepen. So what happens is, if you really have this little soft landing, scenario unfolding, let’s say that really realizes what happens is the Fed cuts rates to 3%, as you say, that’s already priced in so you don’t lose money from that it’s there. But what happens at that point is, well, if we have avoided the recession, and now fed funds are at two and a half percent, Adam, that maybe the economy can keep growing again. And as it does, it gets reflected into the back end of the curve and the curve steepens. So over time, you might lose some money because lala land unfolds, and the cutting cycle was already priced in in your bombs. So you don’t get a tailwind from that. But maybe the reacceleration of the economy actually hits you a little bit. Again, the risk reward is not bad at all. So I’m not saying I don’t like long bonds run. That’s not what I’m saying. I’m saying from a risk reward perspective. It looked amazing. In October, it looks okay. Now, if you expect the recession, certainly, it looks okay. The front end like two year bonds, those look more attractive from a risk reward perspective, because the ability you have to lose money there. It’s pretty limited, if you also,

Adam Taggart 53:50
okay, got it. And I’m gonna wrap things up here. But real quick. You talked about sort of the law scenario, if it were to happen, which you don’t think is the likely outcome. You’ve got some risk there. What about the breaking something scenario? Right. So we talked about a Fed pivot because of a recession. But what if that is coincident with something really bad breaking, maybe even forcing the Feds hand before later, was late in the years? You think? What does that?

Alf Peccatiello 54:20
I have to say that that isn’t low probability scenario for basically one main reason is that the Federal Reserve will be shrinking the balance sheet by over a trillion a year, trillion a year. And people seem to be ignoring that. Or people told me that the reverse repo facility is going to sterilize the QT. That doesn’t work. Because money market funds can only invest in bills. They cannot buy bonds that the Fed isn’t buying anymore. Other money market funds are limited by guidelines to invest on in six to 12 months deals. So unless the Treasury all of a sudden only starts it shoe bills, which that that man’s management strategy doesn’t change overnight that rapidly Adam, the US Treasury is going to keep issuing three 510 and 30 year bonds. And money market funds cannot buy them. It’s very simple. They just can’t buy them. Which means q t is going to shrink the Fed’s balance sheet and it’s going to shrink bank reserves, which are the interbank liquidity. This is money for banks. This is what also lubricates the financial system. These are going to be coming down very rapidly. When they come down very rapidly, there is one thing that generally doesn’t hold very well, which is the repo market. The repo market is a market that needs lubricants, and banks are amongst the largest actors, the more reserves they have, the more they support the repo market, the less reserves they have, the less liquidity they have, the more likely they are to just pull back. Do you remember 2019, where we had that sudden spike, why? Because the Fed was doing Qt for already one year and a half. at a slower pace than today. By the way, now we’re looking at a very, very rapid pace of QT. And Waller released an interview which is a Fed governor. And he doesn’t seem to be impressed at all he wants to keep going. So there is a chance that this diminished liquidity where the Fed doesn’t seem to cave in can create some trouble in the repo market. If that happens, there is no other way around the Fed has to step in the repo market underpins the largest market in the world, which is the function of the Treasury market. It cannot stop working. It’s very simple. It cannot. And the moment it does the entire financial architecture is in trouble because the base of the pyramid the most the under market, underpinning the most liquid risk free, most traded asset in the world, which is treasuries doesn’t work and that can’t be allowed. So the Fed will step in if that’s the case.

Adam Taggart 56:56
Okay. So I would just say to put it in context for investors, that would be probably not good for stocks. And that would be probably very good for long dated US Treasuries, because you get a crisis trade going in there as well. That’s true. Yeah. Okay. All right. Great. Well, um, real quick question I’m getting to next ALF is where should people go to, you know, follow you and your work? If they enjoyed this fantastic discussion that you’ve given us real quick, we talked generally about stocks and bonds. But as you are looking to portfolio allocations, are there any other particular assets, you think are worth talking about real quickly in terms of whether you’re adding to them in your portfolio or removing them? And for one example, I know we’ve talked about gold a little bit in the past, I’m not trying to lead with gold. But if there’s any other asset like that you think it’s worth talking about before we part here, I

Alf Peccatiello 57:48
think base metals are very interesting, talking about commodities. Because when you hear me talking, of course, I laid out my long term macro view, but I’m an investor that also looks at tactical opportunities. And so when China reopens them, obviously, it’s a big push for this base metals. I mean, China needs and uses large amounts of copper, and zinc, aluminum, and all these guys, right. So I think even if it’s contrary to your long term, macro view, you need to be nimble, you don’t need to have an ego. And if China’s reopening, and it is supportive for these base metals, on a short term perspective, why not having some in your portfolio, for example, that goes to show again, that macro investing, there is no space for being attached to a certain narrative, you have to have a data driven framework and approach and be able to really identify short term tactical trends, long term cycles, and mingle them in your portfolio management approach. I think base metals are a good example of a short term, decent risk reward potential here.

Adam Taggart 58:51
Great. All right, two questions on them, then are you investing more than the actual commodities themselves? Or are you investing in, you know, miners?

Alf Peccatiello 59:02
That’s another lesson I learned very hard when running money. Do not if you can avoid proxy trading. Proxy trading means you have a brilliant idea. But instead of expressing that idea, you look for something that looks very close to that idea. So in that case, is you like base metals, for instance, so you like copper, and instead of buying copper, you go and buy Chilean pesos? Because Chile is a large exporter of copper, right? That will be exactly proxy trading. And risks are very high and rewards are normally not not super high from doing this. So I would rather stick to the commodities themselves if I need to choose.

Adam Taggart 59:43
Okay, great. And then are there any particular base metals that have your focus right now in particular?

Alf Peccatiello 59:48
Yeah, I think I think everything that China is a large user of and I put the chart on Twitter, I mean, copper is the general suspect, but also steal a lot minimum, zinc, nickel are all base metals that China consumes and uses a lot. In some cases, China accounts for over 60% of global demand in these metals. So he’s talking about a large buyer coming back online.

Adam Taggart 1:00:15
All right, great. Well, like our Thank you, you’ve given a ton for our viewers to go research and dig into. This is exactly the type of interview that accredited, wealthy and for so thank you for delivering such a great discussion here. All right. Now, final question, which is for folks that have really enjoyed this conversation, maybe learning about you for the first time in this interview, where can they go to follow you and your work,

Alf Peccatiello 1:00:37
they can go to the macro compass.com. That’s the website where they find all the products that me and my team offer. Hi, I’ve managed a $20 billion portfolio in my previous life. And I’ve decided to just step back from banking and make sure that I can share my data driven macro approach portfolio, straight ideas, and much more with you guys, at the end of the day, because in a bank, I couldn’t, and now I can, and all of that, if you enjoyed this interview, this was a very nice appetizer, will the analysis we try and run on the macro compass. So that’s it, the macro compass.com.

Adam Taggart 1:01:15
Okay, great. And you have a phenomenal substack, which people can find out about on the macro compass.com Highly recommend people check that out. And if you’re very active on Twitter, you’re one of the guys I follow daily, what is your Twitter handle

Alf Peccatiello 1:01:31
at macro Alf and on Twitter, you’ll find snippets of macro urine, their commentary charts. Occasionally, some pizza and Buster pictures. I’m Italian after all,

Adam Taggart 1:01:47
from a true Italian even though he lives in the Netherlands right now. All right, alpha look in wrapping things up here. You know, you do a phenomenal job of helping educate people where the macro puck is going, and then give them you know, specific market opportunities to look at and consider. You know, a lot of people have regular lives. And that information is super useful. But in terms of like, okay, how do I manifest that advice in my particular portfolio, something that I recommend that people do on this channel a lot is work with a good professional financial adviser who follows and understands all the macro trends, risks and opportunities that you talk about health and then makes it personal for the investor themselves to say, okay, for your specific situation, your goals, your risk, tolerance, etc. I think this is a good way to implement it, right? A lot of people, you know, don’t have the bandwidth to do it themselves, maybe don’t have the experience to do it themselves, which is why I recommend that people work with such an advisor like that, folks, if you’ve got a good one, great. Stick with them. Subscribe to elf services, share that information with your advisor and say, Hey, make sure you’re taking this into account with my portfolio management. If you don’t have a good advisor like that, or with like a second opinion from what he does consider talking to one of the financial advisors that wealthy on endorses, you can set up a free consultation with them, it doesn’t cost anything, there’s no commitment to work with them. They just offer it as a public service to help people make more intelligent decisions around their money. If you want to set up one of those consultations, just go to wealthy on.com and fill out the short form there. And folks if you’ve enjoyed having Elf on this program as much as I have and I’ve enjoyed it a lot please help us get off to come back to this program by supporting this channel by hitting the like button then clicking on the red subscribe button below as well as that little bell icon right next to it off my friend thanks so much for coming back on the channel and giving us such a great discussion. It’s always such a pleasure when you’re on

Alf Peccatiello 1:03:42
the show. Thanks for inviting me and I cherish the work that wealth Ian has done you have really helped a lot of people get a better understanding of macro you have fantastic guests. You’re a great analyst yourself and a great host so give it

Adam Taggart 1:03:54
up. Oh you’re very kind buddy mutual admiration society. Thanks so much again, everybody else thanks so much for watching.

Transcribed by https://otter.ai

David Rosenberg & Stephanie Pomboy: “Investors Better Buckle Up” For The Rocky Year Ahead

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Stephanie Pomboy returns to Wealthion to interview highly-respected economist David Rosenberg about his macro & market outlook for 2023.

Without revealing too many spoilers, David sees a painful recession and new bear market bottom ahead for the coming year.

Sven Henrich: A Restrictive Fed Has Changed EVERYTHING For The Markets

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https://youtu.be/ZruwEOYAHCU

Two weeks ago on this program, in our weekly market recap, financial advisors Lance Roberts made the statement: “All the fundamentals are bearish, but the all technical action is bullish”

We discussed how one of them was likely to prevail in the near future.

Well, here just two weeks later, the market action is looking a lot more shaky.

But to get the best sense of exactly what the technicals are telling us right now, we’re fortunate to welcome Sven Henrich of NorthmanTrader back on the program to discuss both his latest macro and market outlooks.