Meeting Of Minds – October 2018

Published on: October 26th, 2018

In his Meeting of Minds contribution, Raoul examines how financial conditions have already tightened when you allow for the ever-rising scale of private sector debt which is now reeling under affordability strain. He predicts a recession in 2019. Julian explains why the Fed has an intellectual framework that justifies further tightening but demonstrates that the reaction function of the equity market will dictate the delivery of that framework.

Comments

  • AA
    ANUSHKA A.
    25 November 2018 @ 00:25
    Hi Raoul. Is there any data you can pull out on the 401K.. in total how much is invested in which assets classes and showing trend.... to concur with ur view i am looking for when 401k balances will start to reduce and which assets classes are the money coming out of
  • DY
    Dmytro Y.
    31 October 2018 @ 04:16
    Julian hi, you said in below comments "if and when the Fed starts to ease again for me thats the signal that yields take two steps forward". Would this be bullish or bearish for metals like Gold? Thank you
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:59
      If the Fed is forced by asset weakness to ease again Dmytro I think that would be very bullish for precious metals
  • MG
    Miguel G.
    5 November 2018 @ 14:50
    Can we get an email alert please when a new post is uploaded to macro insider subs
  • MD
    Michael D.
    5 November 2018 @ 00:07
    Hi Raoul, Very interested to hear more re your tweet earlier today about lightening up "a lot of risk in short eq's, short commods, long dollars, but not bonds". Suppose shld reduce short EEM and EUR/USD too? Going long anything? Best,
  • TW
    Timothy W.
    1 November 2018 @ 13:58
    Hi Raoul and Julian, In general, what is your weapon-of-choice to play the currency markets? Options spreads? I’m sure it’s a case-by-case basis based on r/r etc., but just generally what are some of your favorite instruments? Thanks, Tim
  • FM
    Fraser M.
    1 November 2018 @ 09:48
    50 million 'new home' sales since 2007? This must be existing home sales?
  • PM
    Philip M.
    31 October 2018 @ 19:55
    Fascinating and useful to see how Residential Fixed Investment as a percentage of Total Fixed Investment leads ISM. This continued analysis has really changed my trading, especially my research approach. Would be grateful for more discussion (or review) on the EDZ0 trade from May.
  • lD
    lance D.
    31 October 2018 @ 15:07
    Hi guys i have a question, i have literally copied & pasted the following sentence from a historic comment - "I look at US macro and the data is pointing to the economy slowing down in Q3 in rate of change terms" My question is - how do i go about looking @ the data and then decide that the economy is going to grow or decline in a future Quarter? maybe this is covered on the rvtv platform (apologies if it is) if so which video? if not maybe an idea for a future video perhaps OR maybe some body could give directions how i could achieve the above Question right here if possible. Thanks
  • RM
    Ritwik M.
    30 October 2018 @ 19:10
    Good Read
  • ap
    andrew p.
    30 October 2018 @ 10:28
    I am confused as there have been no trade recommendations with entry exit levels during this volatile period ?
    • lD
      lance D.
      30 October 2018 @ 11:49
      Andrew check out the in focus pieces & flash updates. you will find recommended levels to watch.cheers
    • lD
      lance D.
      30 October 2018 @ 18:30
      IF you look at butterflies & hurricanes piece it was choca full I've just gone over it myself just now . i actually missed some big moves
  • ap
    andrew p.
    30 October 2018 @ 10:28
    I am confused as there have been no trade recommendations with entry exit levels during this volatile period ?
  • ap
    andrew p.
    30 October 2018 @ 10:28
    I am confused as there have been no trade recommendations with entry exit levels during this volatile period ?
  • ap
    andrew p.
    30 October 2018 @ 10:28
    I am confused as there have been no trade recommendations with entry exit levels during this volatile period ?
  • ap
    andrew p.
    30 October 2018 @ 10:27
    I am confused as there have been no trade recommendations with entry exit levels during this volatile period ?
  • ap
    andrew p.
    30 October 2018 @ 10:27
    I am confused as there have been no trade recommendations with entry exit levels during this volatile period ?
  • KR
    Kieran R.
    29 October 2018 @ 23:44
    Best piece ever
  • RM
    R M.
    28 October 2018 @ 19:52
    Gents, excellent work! Same question for both of you please: When the fed starts to ease again, is there a concern that the fed may lose control of the long end of the curve? (Roaul has tweeted he is alrady in the 10 year, so I guess your not worried?) And how best to position for the ease? Gold or treasuries?
    • SV
      Steven V.
      28 October 2018 @ 20:49
      The Fed hasn't had control over the long end of the curve since the 1980's. I'd strongly recommend reading, "Greenspan’s Conundrum and the Fed’s Ability to Affect Long - Term Yields" that was published by D Thornton of the St. Louis Federal Reserve in August 2012.
    • RM
      R M.
      28 October 2018 @ 23:00
      Steve, thanks, understood....to be clear will the bond vigilantes demand higher rates for long term credit even if short rates fall? I think Raoul believes 10 year rates have peaked, but Julian thinks the 10 year may have more to go....Your thoughts Steve? Buying the 10 year now?
    • JB
      Julian B. | Contributor
      29 October 2018 @ 15:41
      Hi RM, As you know vs Raoul, I'm a structural bear on fixed income and believe we saw the low in yields in 2016. That said the move to higher yields can't be linear, because as we can see higher rates/yields undermine stocks and rate sensitive sectors like housing and autos. Hence, we have said that the process to higher yields will be "one step forward, one step back". Thus with stocks under pressure and economic growth at risk of weakening, we appear to be on the cusp of a step back. However, if and when the Fed starts to ease again for me thats the signal that yields take two steps forward.
    • RM
      R M.
      29 October 2018 @ 18:35
      Thanks Julian, appreciate the reply, looking forward to a piece about what happens when the Fed blinks.....
  • SN
    Sean N.
    29 October 2018 @ 18:04
    Awesome in depth analysis from both Raoul and Julian! As usual, so hard to sort out the short to medium term scenarios. Maybe Raoul is right and 'real life' economic conditions are at their peak and about to start falling steadily, and take everything else down with them. Or perhaps as Julian states the topping process can be more rounded, and the Fed can keep tightening longer. Like Grant always likes to say, "it's going to be a hard needle to thread". Politics and behavioral psychology dominate the short term moves ... Would be great to see both your updated views (and where you agree) on the long term adjustment that seems inevitable here and how / when to position for it. I have trouble seeing a future where my dollar doesn't buy a lot less than it did in the past... Thanks!
  • ag
    anthony g.
    27 October 2018 @ 21:19
    Good article - some thoughts - from Rosenberg to Hedgeye - Raoul is more right than Julian on this one in my view - We shall see.
    • JB
      Julian B. | Contributor
      29 October 2018 @ 16:19
      I'll take that bet! ;)
    • RP
      Raoul P. | Founder
      29 October 2018 @ 17:21
      haha... Im not going to fall foul to hubris so I'll just wait and see...
  • HO
    H2 O.
    28 October 2018 @ 21:05
    Currently Fed and eurodollar futures are pricing 2-3 rate hikes next year. My view has been that Dec will be the last one, and terminal value for the Fed balance sheet will be much bigger than initially planned. They should wrap up balance sheet shrinkage in Q1 next year IMO. This matches with much of Raoul's analysis. If this happens, and markets reprice based on such adjusted expectations. How would this change your outlook? Especially where it applies to the max range for the current USD cycle. Thanks for a great update.
    • JB
      Julian B. | Contributor
      29 October 2018 @ 15:35
      Hi, H20 I'm not sure that the Q was directed at me but anyway. I think its a realistic assumption to assume Dec provides at least a pause IF stocks fall further, remain weak and if housing continues to falter (you might want to go back and read our piece on housing from the spring). At that point, my guess (will depend on what the Fed does with the balance sheet) I think a lot of things could change, especially if the dollar peaks.
    • HO
      H2 O.
      29 October 2018 @ 16:39
      Thanks very much. Have the property piece in front of me now. For others interested, see Meeting of Minds from April 28.
  • CP
    CRAIG P.
    29 October 2018 @ 14:47
    Thoughts on the strategy of 1) shortening fixed income maturities for now, 2) awaiting interest rates to peak (probably in sync with the economy rolling over) and then 3) extending maturities. And if we finally have our "come to Jesus" moment with all the debt we have accumulated forcing rates up, stay short. The likelihood of our finally facing our borrowing binge dramatically increases going into a recession.
    • JB
      Julian B. | Contributor
      29 October 2018 @ 16:24
      Hi Craig, The purpose of this piece was to say that with stocks now starting to fall financial conditions are starting to tighten rapidly. Now, I'm not a structural fixed income bull but I'd be careful about being too far from benchmark at this point.
  • PN
    Paul N.
    27 October 2018 @ 04:51
    Julian, do you have any thoughts or counterpoints on Raoul’s idea that financial conditions are actually very tight despite the Goldman chart saying otherwise? Thanks.
    • JB
      Julian B. | Contributor
      29 October 2018 @ 16:21
      Hi Paul, with the correction in stocks financial conditions are tightening very rapidly and if the dollar kicks in then we could hit a tipping point. So at this exact time, I'd be more in Raoul's camp
  • KC
    Ken C.
    28 October 2018 @ 14:10
    Julian, I found your remark on Powell hilarious but so important, there will be a Powell put at some level of a decline in the stock market. Hopefully you will have some insight on that level for us to watch. "He will be feeling hot under the collar if a fall in equity prices is attributed to him going “loco”. "
    • JB
      Julian B. | Contributor
      29 October 2018 @ 16:18
      Hi Ken When it comes to the Fed “put” I'm watching two metrics. The first is the speed of any equity correction. They get very scared of rapid declines. For example, in October 2014 as the market was imploding they rolled out Bullard. At the time he was the biggest hawk and he did an impromptu guest appearance on CNBC suggesting “we could do more” (QE). Then there is the level. As you know, we have been writing that the economy needs tighter financial conditions. These can be delivered either via higher rates/yields, a strong dollar and weaker equities, which are currently taking the lead. My guess is that if the S&P drops 20% plus they will stop hiking after Dec.
  • DY
    Dmytro Y.
    28 October 2018 @ 08:10
    Comments to Raoul section : 1) some amazing charts! Please show to Mr Trump who thinks US economy is strongest in 300 years; yet it should not be a reason to stop hiking as debt grew due extremely low rates and this needs to be normalized ; 2) as I can find about 95 percent of mortgages in US are fixed interest rate. So Fed raising does not really matter to them? Only 5-6 percent of mortgages are adjusted rates and even they are usually fixed for 10-15 years (seeing some info on Forbes); hence I am not convinced Fed hikes are so impactful to mortgages? 3) Farms: Raoul truly doesn't understand commodities well! If crops are large it means supply exceeds demand and prices fall! It's not just about dollar! Agri prices only rising when there is huge drop in crops and with ever better technology, seeds, etc the crops are ever more resilient and ever better. 4) truly amazing how the official inflation is calculated when cost of healthcare and fuel and education has risen so much!? Thanks overal great charts!
  • WM
    Will M.
    27 October 2018 @ 15:54
    Simply excellent reading gentlemen. I become more nervous by the month although essentially I currently own no stocks nor any bonds, mostly sitting in cash and watching closely for the strong recommendations on investment action from you as time goes on (of course taking into account the usual investment advice disclaimers etc. etc.)