Hidden Forces

Published on: June 26th, 2020

As the crisis ignited (though not caused) by CV-19 develops, Raoul examines how it breaks down into phases. The initial liquidity crisis has morphed into the hope phase. After hope comes insolvency. Insolvency is a much harder nut to crack. Businesses must struggle with the legacy of misallocation of capital, debt, outdated business models, excess staffing, supply chains and political uncertainty. Consumers will need to reassess consumption patterns as the cosy blanket of income support is tugged away. Debt deflation looms large. Central Banks are ill-equipped to help.


  • DS
    David S.
    26 June 2020 @ 20:46
    What bond trade are you considering?
    • DT
      DEVON T.
      29 June 2020 @ 12:13
      I'd love to know as well.
  • BF
    Brad F.
    26 June 2020 @ 21:02
    Join 209 other RV Pro subscribers and two RV Co-Founders in the free, unofficial RV Fans Slack channel to discuss this and all things finance. https://bit.ly/slack-rv-fans Thumbs up if you are on Slack already!
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 19:37
      So I spoke to the Realvision guys and they told me its fine. RV is working on a more permanent solution but a number of RV guys are on the (unofficial) Slack channel.
    • HM
      Harry M. | Real Vision
      28 June 2020 @ 20:38
      Its a great question Hendrik.
    • HK
      Hendrik K.
      28 June 2020 @ 16:33
      is this real or Spam / Phishing? Thanks
    • DR
      Derrick R.
      27 June 2020 @ 03:16
      Yes, the RV Slack is amazing!
  • HK
    Hendrik K.
    26 June 2020 @ 21:20
    Thanks for Detailed Update, but on the Closing you reference Druckenmillers bearish view ... didnt he changed his view couple of weeks later after the NY interview (and made me feel worse staying in mostly cash): Druck May: https://www.bloomberg.com/news/articles/2020-05-12/druckenmiller-says-v-shaped-recovery-for-u-s-is-a-fantasy Druck June: https://www.cnbc.com/2020/06/08/stanley-druckenmiller-said-hes-been-humbled-by-market-comeback-underestimated-the-fed.html
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 19:54
      So I have very little risk on too, although I did ride some small proportion of the rally. For what little its worth, Mr. Druckenmiller noted that it was the steps the Fed took, particularly in backstopping the corporate bond market which have been critical in preventing a wider sell off/collapse. His points on where the vulnerabilities lie in the system are well made (and also made by RP). The Fed has definitely prevented some very bad situations becoming worse. The question is whether they will have to act again, and whether they will be prepared to do what it takes again, should it become necessary again. I think there is a lot of value in seeing why someone like Stan D got it wrong this time. And also how humble he is when he gets it wrong.
  • BR
    Brian R.
    26 June 2020 @ 21:43
    thanks Raoul, very compelling - if it wasn't already, it certainly is now. Battle stations manned and ready, thanks for early release.
  • JS
    Jim S.
    26 June 2020 @ 22:37
    I was saying that same thing to myself on may way to work. How do we get inflation with > 15% unemployment. I just don’t see it — maybe in a few years, but not in the next 12months. Great piece.
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 19:56
      A fair point. I would note that the US has managed to have previous periods of stagflation, although it did not persist. I also agree that the next 12 months is probably not a period of rampant inflation, even if there will be supply chain disruption which can mean localized inflation.
  • KS
    Karin S.
    26 June 2020 @ 23:36
    I'm scared
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 19:57
      I have been scared since 2008. I do wonder what will be left standing at the end of this period. Regardless, life goes on and we do the best we can. Diversify and think through all your bets and all your risks.
  • dg
    daniel g.
    27 June 2020 @ 00:59
    Can we think about effects of possible government (not fed) interventions? How about a $1T infrastructure building program, puts around 10m people back to work outdoors ?
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 20:00
      I am hearing of these kind of proposals washing around DC. I think a lot of people understand the scenarios RP has outlined. But you need very specific political circumstances to overcome opposition to some policies. We will see post election where things are.
    • BF
      Brad F.
      27 June 2020 @ 06:43
      Do you see enough “shovel ready” projects to get this number of people back into the workforce in time to stop the damage? I think it will take years.
  • VR
    Vince R.
    27 June 2020 @ 02:03
    Congratulations on finding your own created index, BBBGMI index that is correlated to a number of things. As you know much better than I, correlation does not equal causation. It is interesting, true. Bears watching, true. I agree with you and believe you that the bond market is what to watch. Like what 2 yr, 5 yr, 10 yr all did today. Starting to see movement in the right direction on the /ZT August 110.5 calls you recommended we take a small position in a few weeks ago. But have a hard time buying into the arguement on the dollar rise just because of a correlation to a new index you created. I know it's just supporting evidence to your already existing thesis. All in all I am very thankful for all the work you, and Julian and the RV team do for us. Thank you!!!
    • BF
      Brad F.
      27 June 2020 @ 06:41
      In this case I don’t think we need to see a causal relationship to the index for the trade setup to be valid. We would need to see a breakdown in those correlations to invalidate the trade. It would be helpful to understand what really drives the correlation, but we can say for sure that the data puts the probability of the expected outcome far higher than the risk/reward on the trade, and that’s all we need for a positive expected value.
  • BS
    Brian S.
    27 June 2020 @ 02:59
    This is my visualization, we saw a massive tsunami approaching, as the tide went down we freaked out and built a wall, now the tide is coming in and the wall is only making the volume of water larger on the other side, if the wall breaks, the destruction will be even worse then if there was no wall at all. We better hope the Fed knows what they are doing, otherwise they would have only enhanced the economic chaos.
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 20:11
      The Fed has protected most banks and a lot of those who had serious mismatches in liabilities relative to assets. However there have been losses. Who has lost the money and can they meet their obligations?
  • RD
    Raj D.
    27 June 2020 @ 03:54
    much appreciated Raoul, I will be interested to hear you commentary on what has transpired since the report was published ie changes to banking / Volcker rule / company buybacks etc bonds etc dramatic drop yesterday, nearing critical support levels escalating Covid negative news it seems the markets have been left with 2 days to dwell on this data and build up panic for a big sell off Monday Your comment "The liquidity firehose is about to reverse. Yes, the Fed will step back in eventually, but not with the SPX at 3000. They will come back when there is more pain" has me thinking we won't see an immediate stimulus reaction, which would lead to further panic selling
  • JC
    Justin C.
    27 June 2020 @ 05:15
    It will be interesting to see how this next deflationary push affects gold and gold equities. I think the latter are likely to be sold off for liquidity, but not sure gold itself will sell off due to what should be the apparent clear and present systemic instability. As always, incredibly well organized data, interpretations and conclusions are summarized here. Cheers to you and your team for the EXCELLENT work you do! Have a great weekend.
    • ML
      Michael L.
      28 June 2020 @ 07:41
      Agreed on all points and absolutely echo the second comment!
  • JJ
    JW2 J.
    27 June 2020 @ 07:55
    Just finished reading the report - I feel like I ran a mile at speed ! It is fascinating to see you expose the underlying dynamics of an exuberant equity market vs a real economy problem. Continue discussion on the RV Fans Slack channel...
  • JL
    James L.
    27 June 2020 @ 18:05
    Raoul, I stuggle with the dollar UP for a very long period given Julian and Hedgeye see it as a short. I lean in your direction! Given that I avoid futures, what are your thoughts about buying the ETF-EUO (2x short Euro)? Your report is excellent particularly the BBB Credit and Bank Index comparisons. Ed Harrison's Daily Briefing from last night totally supports your banking risk analysis and points out that the FED is seriouly concerned, as well. Would you short the bank index XLF or KBE at this point?
  • DB
    Dan B.
    28 June 2020 @ 01:33
    You mention the Stimulus measures being temporary except loans and that this won’t help in a solvency crisis / only helps in a liquidity crisis, can you explain this a bit more please ?
  • DF
    David F.
    28 June 2020 @ 11:01
    Salutary warning Raoul, thanks.
  • PC
    Peter C.
    28 June 2020 @ 11:19
    Raoul, it is a great piece and it looks like it will all play out as you describe it but I do wonder if the behavior of the fed and governement are fully assessed. Just playing devil's advocate here but what if the Cares act continues in some form and consumption remains artificially high? The 2nd wave may give the leverage needed to do so. And what if the fed starts increasing its balance sheet once more, absorbing the impacts of the treasury? As "social worker" Powell confirms, he doesn't care about inflating the asset bubble in the process. They have done it for a decade already and feel a lot of support in their actions (especially by congress). Also, if the big BBB's face solvency issues down the road, the governement could still bail them out and safe the equity holder in the process, even if they need to absorb a minority share for the governement. Who will stop them doing it? With a democrat in the house this socialization of society might even accelerate. As long as deflationary pressures continue and the dollar shows sufficient strength, monetary and fiscal spending may look like the perfect solution for the problem. MMT all the way! Of course, eventually the release valve will be the dollar and stagflation will be the end result. Do you think the scenario above is not realistic? Or do you believe that this scenario might play out but that the governement will be too slow to act so we need to deal with the insolvency crisis first in the short term?
    • HM
      Harry M. | Real Vision
      29 June 2020 @ 20:27
      Forgive me for answering in RPs absence. Im sure he will correct if I do not characterize his views correctly. So I think the scenario you paint is entirely plausible, and is remarkably close to Julian's scenario. I think RP believes the deflationary forces are simply too big to be reversed by Fed or UST action. Ultimately, if the private sector cant pay debt back, then we have reached the limit of monetary policy for sure. The broader question is whether we as a society are willing to do what it takes fiscally to prevent the deflationary outcome.
  • ip
    ivo p.
    28 June 2020 @ 13:07
    Thanks Raoul! Awesome again! I was hoping you would touch copper in this one... Why is it not aligning with your deflationary view (most of the other commodities are).
    • MC
      Mike C.
      30 June 2020 @ 01:12
      This links to my question to RP in his previous update as to why he uses CRB Raw index. His answer was that it filters out the influence of speculation in commodity prices which could give false inflation signals. Indeed the bond market is not buying the inflation story. I note Hedgeye are calling for stagflation but its an inflation call driven by a weak USD view. Note though that copper has remaind strong while the USD has regained some ground in the last week. There have been a lot of production cuts so maybe a talk with an SME to discuss supply side dynamics might reveal if this strength in base metals is a head fake or not. Note that Iron ore prices look like they have peaked for now too.
    • RP
      Raoul P. | Founder
      29 June 2020 @ 21:43
      Its a puzzle to me...