MAGGIE LAKE: Hi, everyone. Welcome to the Real Vision Daily Briefing. Once again live from the Macro Experience here in the Grand Fairmont Del Mar. Here with me today is none other than, I was going to try to embarrass Julian Brigden, MI2. Julian has the honor or the torture of going face-to-face with Raoul in Macro Insiders, not an easy job.
JULIAN BRIGDEN: Not an easy job.
MAGGIE LAKE: But it's somebody that's on the platform. We're so happy, he's been here and involved in a lot of great sessions. Julian, welcome to the Daily Briefing.
JULIAN BRIGDEN: Thank you very much, Maggie. Thank you for having me on.
MAGGIE LAKE: It's your first time.
JULIAN BRIGDEN: It is. Yes, it is. You popped the cherry so to speak.
MAGGIE LAKE: Well, we're so happy to have you. First of all, there's some stuff going on in the markets, but just give me a sense of how it's been for you. You've been presenting. You've been talking to a lot of people. You've been on panels. What stood out?
JULIAN BRIGDEN: It's a fantastic experience. It's been great. And mixing with really the glitterati of the macro space that you guys have managed to pull together, which is I don't quite know how I've ended up here. But thank you for having me. It's been a really great experience. I think a couple of the panels are really stood out where people have really been involved in interactions.
I think the first one yesterday morning was the one that struck me a lot. I wasn't involved in that Alison Dean, that was great. There are many things that people agree on, I think. It's always this question of timing. And this to me is always the big imponderable. Raoul, and I frequently sit on Macro Insiders. And we have the same view, we disagree on timing.
MAGGIE LAKE: But for some of us listening to it, it sounds like you have completely divergent views because of that. I've asked Raoul about that, too. You seem like you're talking about the same questions. I have completely different world of views, but we don't. Often it comes down to the timing.
JULIAN BRIGDEN: Yes. I think that was a very interesting conversation. I think people are still in this, is inflation will obviously not transient, to use the definition that the Fed did, but is this going to be a another one and done inflation pulse, whatever it ends? I think it ends not for a while yet. I think we've probably got another six months of it to go. And it's going to be a lot more severe than people think. After that, what happens there? Do we go straight to recession? Do we dip to ventral bank policymakers back off? Are they really going to is Jay Powell really going to be the next Paul Volcker, and really stick it to the economy?
MAGGIE LAKE: Paul Volcker raised rates aggressively. A lot of people would remember him. Because we haven't been in that situation a long time, but he raised rates aggressively to tame inflation. Game the Fed a lot of credibility by doing that.
JULIAN BRIGDEN: That caused a lot of pain to the [?].
MAGGIE LAKE: And you probably couldn't get away with it today. That's the question.
JULIAN BRIGDEN: And I think that's the issue. Do we get another one of these? The Fed tries to tighten. Things roll over, and then they back off immediately. To me, that would set the tone for that longer potential phase of inflationary cycle, particularly if we start to see some fiscal impulse again. It just seems to me that politicians, you look all over the place, are just fooling all over themselves to just give cash away. Give cash away.
I read that they're trying to give, even in California, which should be this most environmentally friendly. Plug your Evie in, they are proposing sending checks to people to pay for gas prices. This is lunacy, and then the economy is overheating.
MAGGIE LAKE: Would you consider yourself in the inflation camp if we're going to simplify it? Because we have-- It's interesting to hear you say people have agreed. I'm listening to the same panels, and I'm like, wow, there's a difference of opinion here. But again, we'll get back to that timing issue. Raoul and Alex and some people are talking about disinflation, even deflation, that trend still being in place. You see that--
JULIAN BRIGDEN: I think the stars are aligning. In my lifetime, I don't think we've seen a period where the possibility of a truly extended phase of inflation is really there. Now we should remember, and I did this in my talk, and people hopefully can it online. I talked about these Bank of England papers that talk about 450 years of declining inflation. Yet within these you have nine periods where you had, after a very long strong bull markets in fixed income, falling bond yields, you went into these bear markets, what characterize those.
I think if you look at the dots, we tick all those boxes, is to potentially have that extended period of rising inflation. Within that you'll have peaks and troughs like you always do in any market. That's actually typically where Raoul and I disagree. We might agree well to where we're going, but he might be doing this and I'm going I'm doing that. Right now, Maggie, you're too early. You're too early.
That's what I see. I see this idea. And that was my whole point. I want people to consider the possibility. That maybe this timing, it truly is quite different. If that is the case, then you get bond markets, which will be in a bear market for quite an extended period of time, and it will be an inflationary environment until we find a policymaker. Policymakers are willing to take that stance and accept the political fallout and the pain in the economy. And to your point, I don't think with that.
MAGGIE LAKE: Well, that's what we're wondering. Interestingly, news today, and it moved the markets. Stock equity certainly fell on this. The Fed coming out. We know they said they were going to be rapidly bringing down the balance sheet maybe as early as May. They said that yesterday. Today putting a bit more meat on that. I think 95 billion, 60 billion for Treasurys, the rest for [?] back. I'm guessing you think they're behind the curve, does it feel that they are taking this seriously enough that they might be able to do something about inflation?
JULIAN BRIGDEN: I think we've got half a long way to go. They are a long, long way behind the curve. Now, we think it's been quite interesting. The fixed income has priced in an incredibly rapid rise in rates. And I think rightly because we are so far behind. But they've forgotten, there's almost a big stake in the cupboard, and that is the balance sheet. I think it's very important development to see the balance sheets start to be reduced.
Everything I'm hearing is that the internal calculations is the Fed are working on the assumption is 300 billion equals 25 basis points. We're talking about another 100 basis points of hikes essentially over a 12 month period. Now, what I also hear which I laugh every time I hear is, they just going to set it and forget it. They're going to just set this thing running at 95 billion a month, and it's just going to just roll down. And somehow, they think they're going to take the balance sheet from 36% of GDP to 18. And it will be fine.
MAGGIE LAKE: Smoothly.
JULIAN BRIGDEN: Smoothly, Maggie. I think it will be a charred mess. I think it'd be like an, we use this expression, a napalm run, to describe when the dollar is rising in a risk off environment. And I think that's exactly what, you're setting up in terms of damage that you do. If you just set this thing and forget it, that will reach a point where assets will just implode. And they will be just left there with a bunch of charred bodies and [?] holes.
MAGGIE LAKE: So a couple different questions. First of all, let's hit the pause button a minute on the thesis. If the Fed is going to do this, and you think they have to keep responding to inflation, and they've got a lot of grounds up [?], where does that leave interest rates? Because interest rates are the thing that affects everything. First of all, for people watching, think about passion. Potentially, a little bit more yield and savings if you're of that age, but if you're buying a house or a car or anything, it's going to be a higher cost to you in terms of borrowing. Where do you see interest rates going?
JULIAN BRIGDEN: We've been very bearish, Raoul. And I disagreed on the last insider talk about the timing of buying things. I'm marginally more inclined to think about, and I haven't done it yet, buying bonds at these levels. If I need because I think that the rolling off the balance sheet will start to affect the equity market. To me, and it was actually underlined by Bill Dudley today who talked about financial conditions. This is how the Fed, if you haven't read that Bloomberg article, that I think is another big takeaway for today. Go please read that [?] on Bloomberg from Bill Dudley.
Financial conditions, people forget. This is how the Fed really truly influences the economy. And financial conditions are a broad metric of financial indicators. You have some short term interest rate component, let's say where you're financing your car to yields or something. 10 Year yields for your mortgage, equity market, credit spreads or where you can borrow money as a corporation, and then finally the dollar.
What you rely upon is as the Feds tightens rates, that that broader financial conditions should start to tighten too. It's been very unresponsive, because the equity market has been going like this, no, no, no, no, no, no, we don't care. The minute the equity market starts responding, which I think it will as QT starts to accelerate. That's when I think I be more inclined to look at buying fixed income.
I'm buying fixed income because I don't like the equity market. Not that I'm buying fixed income because I think there's a natural slowdown coming, and I think somehow equities will stay up here, and bonds will drop, and everything is [?]? No. You have to tighten financial conditions and [?] mix of how you do it.
MAGGIE LAKE: Right. Because rates should go up if the thing aggressive. So, really short term you presumably think they have hired to go, but you think by doing that, trying thing so much that they're going to risk assets. Then you become--
JULIAN BRIGDEN: More inclined to buy the bond markets.
MAGGIE LAKE: So you think rates might go down because the Feds going to have to stop or do something because equities have fallen [?].
JULIAN BRIGDEN: But you're talking about a pretty bearish equity scenario in that environment.
MAGGIE LAKE: What do you think-- because people have been saying, you may hear people talking about the Fed put, really what it means is that if equities fall enough, they'll stop potentially reverse what they're doing, because they don't want to see-- they're worried about either magnitude or speed of the fall. So, the put is that they'll come in and put a floor under equities, and stop what they're doing. People thought that was gone, are a lot lower than it was before. What kind of fall in equities from where we are now would make you worried or make you think that the Fed would?
JULIAN BRIGDEN: I think they won't be that concerned by 20%? I'd really don't think they'll be worried. 30%, maybe.
MAGGIE LAKE: Do stocks have to go down in this environment? Is it more a case of when they do, then if they do, if we know the Fed is going to try to embark on what we just talked about?
JULIAN BRIGDEN: They essentially. That was the point that Bill Duddy made. And this is what we've been talking about all day yesterday in my speech. You tighten, you influence the economy via financial conditions. Moving what the Fed does Fed funds has no relevance to anything that we do. It's just a signal. So it's that classic adage. If the tree fell in the woods, and no one heard it, did it fall? If the Fed is really raising Fed funds and nothing else, he's paying any attention, they're not having any impact or whatsoever.
MAGGIE LAKE: Do you think that's why they're being more aggressive with their language, because they think the yield is curving and turning and they just listen to us--
JULIAN BRIGDEN: Listen to what we are saying. We are slowing this economy down. People don't realize this is no longer about inflation per se. This is about an economy, which is growing well above trend in an inflationary environment. If you allow it to continue to do that, those inflation expectations will come embedded in the system. Then the pain that you will have to endure to wring those out, are going to be extraordinary.
MAGGIE LAKE: I think that a really important point, because people listening will say, why we wouldn't we want it? Is that what we want? A strong economy, a strong economy, good jobs, higher wages, we haven't had any of that. That's what you want. Except if you overextend, then you unleashed--
JULIAN BRIGDEN: It's the Goldilocks. This porridge is too hot. This porridge is too cold. This porridge is just right. What we need, unfortunately, is just right. We've had too cold in the past, where now it's too hot, and we have to try and slow it down. The difficulty is that some of these things are quite blunt instruments. It's very difficult. This is not might throw surgery--
MAGGIE LAKE: You can't hop on the brake, that's the problem.
JULIAN BRIGDEN: And particularly these brakes loss have long run top. So, whatever the Fed is doing today may not manifest itself for nine months, 12 months down the line. I think the balance sheet will manifest itself much more quickly than they think. But that's the point. These is not a fun instrument, trying to achieve, I was on TV the other day, and I said to someone, look, in statistically if you look back all the way to the 1970s, the odds of the Fed achieving an immaculate recession, I call it. The slowdown in the economy that doesn't do any damage, that doesn't drop the equity market much, is about one in four. And we've never achieved it.
Actually, like the volatility of the sponsors to equities to the Fed doing it, is actually increased through the years. And why is that? Because we've just got ever inflated higher and higher asset prices, which are more dependent on this. As I like to say, the Fed has created a crack addict to whom they've now become beholden. And immediately, they try and take those party favors away from the bathroom in the line. Everyone starts throw wobbler, and I think that's the risk. It's going to be very, very hard for them to achieve that immaculate [?].
MAGGIE LAKE: Should people not have exposure to equities right now, given that scenario that you're painting?
JULIAN BRIGDEN: I think Raoul and I were both in agreement. It started at the end of last year where we started to say, look, these are much more dangerous markets. This is a market where you start to look at your returns and go okay, well, I've made solid returns on this, okay, at a bare minimum let me move up my stop loss. The point where I just say I was right, but now this is something's changed. I now get to get out. You should look to raise a little bit of cash.
I'm very much in favor of certain asset classes. I think we're going into a decade where the asset classes that have outperformed. In other words, US equities, particularly US tech will underperform, or at least as a decent chance that they will underperform. Some of the things that we really don't own in the scheme of things. For example, commodities and energy overseas, some emerging markets are really, really don't own still, I think will outperform. The problem is--
MAGGIE LAKE: Emerging markets will outperform.
JULIAN BRIGDEN: I think some emerging markets will outperform.
MAGGIE LAKE: What about currency?
JULIAN BRIGDEN: I think some currencies as well. We've got a bit of a wobble today, but we've started to see some real strength in some of these commodity currencies. Brazil, South Africa, Australia, New Zealand, Canada.
MAGGIE LAKE: Emerging markets, sometimes people are afraid to go there, because the one there that's really attractive, but then there are risks that are hard to--
JULIAN BRIGDEN: You have to differentiate an emerging markets now. I think it's just not about--
MAGGIE LAKE: Commodity emerging market, you like.
JULIAN BRIGDEN: I like the commodity space. We've been pushing quite hard to [?] and meat trade, the mining and metal trade. The problem is, Maggie, let's say I'm long this. I really like this. This is something I own in my own portfolio. But I get worried about risk. I get worried that something's going to happen. The US economy is going to slow. Even if I think these are the best trades for the next decade. If the S&P drops 25% or 30%, these things are not going to rise. They're not even going to probably stay where they are. They're also going to come down. Are they're going to come down as much as I think the S&P is? No, I don't think so.
The problem is this, that's what I call a nasty correction in these divergences. What you really want is the nice one where everything goes up, but the US languishes, these other things just drift up for the next decade, and you'd like gray on the right things, it's really easy. This transition phase is never easy. Personally, I'm having to put on shorts against my longs. So, I'm trying to build up cash against my long so that if these things do sell off in some broader risk off move, because the Fed over does it, I can at least have the ammunition to walk in there and go, [?] symbol. I'll average it. That's how I think it's--
MAGGIE LAKE: I've been hearing people talk about barbell a lot. That's exactly what you're talking about. But it's like, I think this but I'm going to protect myself, especially if you're not somebody who's very comfortable in the options markets, or maybe you don't utilize all those instruments that can give that protection.
JULIAN BRIGDEN: [?] say today in a speech, they're really hard to make money [?].
MAGGIE LAKE: And I think it's an easy to lose money if you're not doing it right. If you can't use that, then maybe a way to protect yourself against the other side. If you think that's your narrative, but give yourself some protection and diversification somewhere else that should you be wrong, that will be okay or rise, is it being another way to--
JULIAN BRIGDEN: Look, people say, Julian, you're a bear. And I said, why? Because I don't want