Meeting of Minds – August 2017

Published on: August 28th, 2017

Raoul wraps up his Retirement Crisis analysis with some prescriptions for preemptive action while Julian’s piece on Europe sets the scene for a sudden change in correlation between equities and bonds in the Eurozone.


  • GD
    Gus D.
    22 September 2017 @ 01:31
    Raoul - Unsure if this has been asked before, but in surely the point of a professional pension fund manager is to scale up the cap structure (i.e. reduce equity holdings and increase bond/cash allocations) gradually as an individual approaches retirement. By saying that pension funds are maxed out from an equity allocation perspective, are you taking the view that they haven't been doing this?
  • GS
    Garrett S.
    7 September 2017 @ 03:19
    Raoul- Explain to me how Trump gets his massive tax plan and infrastructure plan without massively growing the debt and slashing rates. I think the plan would be a replay of 1987 in equities with the Feds hitting the button on another QE while politicians (wink wink) work together to pass a major tax overhaul bill. Lets not forget Mnuchin was just at Fort Knox and Trump hasn't revealed any real plans on his tax overhaul. What's that, a 3 month extension on the federal debt???? What a deal maker!!! PS the market isn't going to be buying the USD when they already know what the plan is.
  • RI
    R I.
    6 September 2017 @ 13:26
    Raoul - The US economy is currently transitioning away from the baby boomers to the millennials, such that the growth rate for the highest spending cohort (35-55 year olds) will be increasingly positive starting this year and through the next 5 years. How does that fact fit into your analysis? Doesn't that serve as a mitigant to the downside case you've laid out in this and prior reports?
    • RP
      Raoul P. | Founder
      6 September 2017 @ 23:00
      I dont think they have thr spending power to offset this yet. In due course, they will step in but they are still economically too small
  • gm
    gordon m.
    4 September 2017 @ 18:30
    Raoul - regarding your advice to not follow the crowd (sell what is popular etc), these days practically everywhere I look there is talk of the US equity markets being overpriced and ripe for a crash. Barron's even proclaimed this in a huge headline in a recent edition. So, if so many people think this, and I am only asking this slightly tongue in cheek, it is a serious question, does this then mean that the contrarian and safer view may be to stay invested ?
    • RP
      Raoul P. | Founder
      6 September 2017 @ 22:59
      I think there is room for a blow off top...
  • vt
    vadim t.
    28 August 2017 @ 19:14
    There is very little chance (I'd say no chance at all, but for an accuracy' sake...) that we'll have a bear market during the next recession. Quite the opposite it'll be the buying opportunity and the market will crash anybody who dare to short it, underestimating "whatever it takes" -tool is very expensive. There will be no crisis 2008 -style nor smaller neither bigger, no big bear market without a civil war or social disorder first and even then i'm not sure how "so called markets" will react. The will be flash-crashes or 5+% very sharp corrections here and there but it'll be next to impossible to make money on them. The next crisis will be very different it'll be huge but we gonna be very surprised how isolated "markets" will be at that time.
    • vt
      vadim t.
      29 August 2017 @ 18:45
      Turned out today is a perfect day just to illustrate the point. Free market, huh? From Marketwatch today: "Investors now think central bankers will protect us from nuclear war". Raoul, seriously, how do you see this: CBs just take a vacation and let the market fall? What's the screenplay?
    • CY
      C Y.
      31 August 2017 @ 13:55
      its nice to see the central bankers have you convinced of their omnipotence.
    • RP
      Raoul P. | Founder
      2 September 2017 @ 12:57
      Surpressed volatility leads to hyper volatility. If the central banks really did buy enough equities to stop them falling, which I think is likely at some point, then the currencies or bond markets will take the strain. In Japan they bought bonds too, so you are eventually left with the currency market, which will react in time.
  • RM
    R M.
    28 August 2017 @ 23:30
    Excellent reports, thank you. R&J: Can a US recession in the next 1-3 years be mitigated by growth in Asia and Europe, both of which are doing well? What indicators can we use to watch for Asia (China/India) potential slowdowns? Repeating a question below, as long as EEM holds over 42, is there any reason currently to Asia? Thanks, enjoying Macro Insiders!
    • RP
      Raoul P. | Founder
      2 September 2017 @ 12:55
      Yes, strong growth elsewhere can certainly extend the business cycle. It is questionable whether there is really strong growth in Asia. That being said, Im am not concerned too much yet, but like Julian, would take some money off the table. I am still long some EM>
  • SH
    Santiago H.
    29 August 2017 @ 18:37
    Hi Raoul, What's the median retirement savings held by Baby Boomers? I seem to remember ~20K (avg around ~150K BUT of course a heavy tail skews this metric). If this number is correct, do you think it's still enough to see impact driven by massive equity selling? I can picture the change in consumption patterns and the challenges the SS system faces, but I'm having a harder time trying to quantify the potential impact of equity selling. Would love your view on this. Thanks!
    • RP
      Raoul P. | Founder
      2 September 2017 @ 12:53
      That is direct ownership of equities. You need to add in pension funds and mutual fund ownership. Those too need to be drawn down on in retirement unless you are lucky enough to have more than enough money.
  • DP
    Devraj P.
    30 August 2017 @ 04:10
    What I am wondering if problems are already known would there be any way it can be solved other than triggering recession? Aren't there any options? What are they? I love to understand the other side to fully know how to play this..
    • RP
      Raoul P. | Founder
      2 September 2017 @ 12:51
      The point being, a recession is inevitable. It is a function of the capitalist system. Thus, there needs to be a discussion of when it comes, not if it comes. The only variable that is likely to change is the latter - an extended business cycle, which seems a reasonable probability.
  • TA
    The A.
    30 August 2017 @ 19:57
    Raoul, I know you read no other research. But you are so bearish... The funny thing however is I agree with your view and have had a very similar view for several years. However, I read as much other research as I can, I want to know why other people have a different vision, how is it otherwise possible to find the mistakes in my own thinking is my reasoning for doing this. On your oil special for RealVision you interviewed a few different guests but they all had the same vision. Wouldn't it be more helpful to really try to understand why smart people like Russell Clark and Jawad Mian have a completely opposite view of the world as you (on growth, oil, the dollar,...)? You told in a previous Insider Talks that you are looking at why the commodity cycle might go on longer than expected. This would be very interesting research to read. Is it because the data from EM and Europe is so strong now, does Russell Clark has a point when he said people focus to much on the US and the world is shifting more to the east which may imply that your ism business cycle model becomes less relevant to monitor the world economy. I once heard you say somewhere that you have roundtable discussions at your home with prominent macro managers, so all in all you are probably aware of the opposite visions. It would just be very helpful if you try to explain where the reasonings behing them go wrong. Thank you very much. (of course you can't write everything in one piece, I'm just being impatient)
    • CY
      C Y.
      31 August 2017 @ 13:52
      when a response starts with "I know you read no other research" you know you're about to get a real gem of a response.
    • CS
      C S.
      2 September 2017 @ 01:47
      My guess is it was a slip of the 'tongue', lol
    • RP
      Raoul P. | Founder
      2 September 2017 @ 12:49
      Thanks. What people really are paying for is our personal thought processes. If we just discuss others views then we are a aggregator and not an originator. The more insitutional level research products are all about orginal content. It is really for the reader to assimilate others views and reach their own conclusions. This is one of the reasons Julian and I teamed up, so there are some differing views without it being overly confusing. I am always cognitive of the alternative narratives and it is against that backdrop I write. As time develops you'l see when I get it dead wrong and how i deal with that and also if my framework changes. For examples, the very elevated ISM means that I cant be bearish of equities beyond a quick correction. My long term macro framework is more bearish as we are nearing the end of the business cycle and there are large structural issues at play. I'll try to write some more on my framework in the next In focus or Meeting of Minds so you get a better understanding of my thought process.
  • JV
    Jason V.
    31 August 2017 @ 08:58
    Julian, To clarify from the perspective of the retail investor, the best trade here is to short the VGK ETF (buy puts, perhaps looking around six months out - March 18?) to participate in the potential DAX fall? What target do you have in mind? Would you recommend entering the trade now, or rather waiting for the potential catalysts you mentioned, eg. spike in Bund yields above 0.6%? Also, regarding the gold trade, GDX, are you happy that overhead resistance has been cleared and it would now be a good time to enter the trade? Many thanks, Jason.
    • JB
      Julian B. | Contributor
      31 August 2017 @ 16:58
      Hi Jason that's a pretty decent way of playing it. As for timing now is not ideal since we've already seen some of the down move and underperformance in the DAX. Personally, I'd wait either for renewed highs in EURUSD or ideally a clear change in the market's growth/inflation metric that triggers a move in Bunds. As for GDX, yes it looks like we have a clear breakout. The next test is a band of resistance of previous highs that comes in around 25.80
    • JV
      Jason V.
      31 August 2017 @ 19:54
      Excellent. Very much appreciated. Thanks, Julian.
  • KA
    Kelly A.
    30 August 2017 @ 00:13
    Raoul's list of "what is going to happen" reminds me of Nouriel Roubini's work in 2007-08. Seems surreal at first, but... NR's call was prescient --and i was lucky enough to hear his domino list of catastrophe while I was on a trip in Europe. USA media wasn't playing his song until it was too late to get out unscathed. I was lucky to hear and believe and started selling at every opportunity. NR hasn't made a great call since then [to my knowledge], though. I subscribed for awhile, but it was a waste. I should check again though to hear what he has to say. Vadim T, below, makes great points, however, about CB's having to ride to the rescue and buy equities. That also makes rationale sense to me, and i really don't want to heed Raoul when it comes to selling my house now ;-). But, although i agree with Vadim's insightful point, i fear that once the panic is on with the BBs, the panic is ON. That means CBs won't have much they can do because it could all happen so fast. Perplexing. I've never looked into reverse mortgages, but perhaps it is time to hang an expensive home with some financial institutions and let them worry about a housing collapse???? Raoul, thoughts? You're the one giving us nightmares... how about a little sleeping tonic!?
    • vt
      vadim t.
      30 August 2017 @ 21:14
      If it starts happening too fast CBs just will turn off the "markets" for as long as they need. As simple as that.
  • JM
    John M.
    29 August 2017 @ 06:25
    Julian, Given your view on rates I assume you would suggest selling things like TLT? Thank you.
    • JB
      Julian B. | Contributor
      30 August 2017 @ 14:53
      Hi John, yes I do as my models suggest 2.6% on 10yrs is fair value. That said timing has been very tough and inflows into bond ETFs surprising strong. Watch the technicals
  • PG
    Paul G.
    30 August 2017 @ 03:40
    Raoul, any update on thoughts re USD?
  • NS
    Nicky S.
    30 August 2017 @ 01:00
    Raoul, I really like the line of thinking that you outlined in part 2 and have started thinking through the impact on multifamily realestate once the tide begins moving out. Would love for the group to check my logic but I'm thinking if BBs begin to sell retail houses in mass then this would put pressure on asset prices, leveraged commercial players would get squeezed again but rents could possibly rise due to demand vs inventory. This could push CAP rates higher and offer solid returns moving into the next cycle.
  • SD
    S D.
    29 August 2017 @ 18:10
    This is really great stuff. A pity that there is little to no public discussion about such a important topic for so many people. Thank you Raoul and Julian.
  • JE
    Jos E.
    28 August 2017 @ 16:39
    Julian, a question/comment. I'm a fellow Brit and your comment about low oil prices being stimulatory in Europe leaves me wondering; what is the mechanism for this? I suspect you are implying the oil price drop translates into much lower prices for petrol and therefore leaves more money in consumers pockets. However, the price at the pump in Europe/UK is primarily (80%ish) made up of taxes, so the 50% drop in oil prices mentioned (assuming passed on - which they often aren't in full) only translates into a roughly 10% drop in fuel prices. Ergo, perhaps the stimulatory effect is pretty limited. If you are talking about some other derivative impact then I apologise in advance and would love to hear what it is. Thanks.
    • JB
      Julian B. | Contributor
      28 August 2017 @ 18:11
      Hi Jos. E yes you are right the percentage of a gallon of petrol that is taxation effectively dampens the effect of swings in the underlying price of oil. However, it doesn't negate them. So from the end of 2014 until the lows of last year the price of litre of diesel fell 25-30% depending on the country and while it's bounced its still way down.
    • JE
      Jos E.
      29 August 2017 @ 07:00
      Thanks. I guess the recovery in Europe is a lot more broad based anyway so not really a significant portion of the thesis in any case
  • gm
    gordon m.
    28 August 2017 @ 16:33
    Raoul, when you say boomers should sell their equities, do you mean just US equities or all equities ? Various discussions in Realvision in recent months have recommended investing outside of the US, in recovering economies (e.g. Greece), in cheap markets (e.g. Russia), in gold and miners, and so forth. Do you subscribe to this or are you saying to dispose of all equities, of all types, everywhere ?
    • RP
      Raoul P. | Founder
      29 August 2017 @ 00:46
      Dispose of what everyone else owns and own what others dont, i guess would be the key thing. This way, you avoid being a forced seller. Also, a lower weight in equities overall becomes key, along with diversification of asset classes.
    • gm
      gordon m.
      29 August 2017 @ 02:05
      The corollary then would be to also short what everyone owns, presumably. Although timing that is tough.
  • IO
    Igor O.
    28 August 2017 @ 20:54
    Just listened Julian talking with Chris MacIntosh on his podcast. He made an interesting point in the end, that in collapse environment right stocks being store of value and medium of exchange. I'd like to see this subject expanded further.
  • DW
    Daniel W.
    28 August 2017 @ 15:15
    Thanks for outlining your Thesis Julien. In Terms of a potential spasm in higher yield in core europe, do you think it makes sense to accumulate puts now or would you wait for clearer signs - like yield > 0.6? Thank you again!