ROGER HIRST: Welcome, everybody, to a special edition of Macro Insight as well where I'm going to be having a chat with Julain Brigden, who's the CEO and founder of MI2 Partners. And what I really wanted to get to today was some great calls that Julian's had over the last number of months, actually very consistent.
And I think there's four that I wanted to kick off with which I'm going to go into. And I think they really just sort of define where we are, and they were great calls that he's had. The first one was really on inflation and how it would blindside policymakers.
The second one is that the bond market was therefore wrongly priced. And this is many, many months ago. The growth stocks would therefore also come under a lot of pressure because they are very much connected to that yield and inflation story. And that within all of this, commodities would perform quite well.
So I really wanted to kick straight into it. Because I want to find out where your thinking is now. And policymakers were blindsided. Are they still going to be blindsided? And more importantly, not just blindsided by where inflation could go, but more importantly, I guess, where it may go from here, in terms of if it has peaked or when it peaks, how quickly will it subside? Where is your thoughts on that now?
JULIAN BRIGDEN: So are they blindsided? Well, I think look, we can see from the Fed that very unusual not so subtle nudge in The Wall Street Journal, that they're going to go 75 this week, the Fed. I think it's pretty clear that they are getting very concerned. It doesn't mean that all central banks a there yet. I mean, there's one, I think, glaring omission, possibly too.
But the biggest one, I think, is the ECB. I think that it's really, really dangerous for people who are tempted just to look at the US Treasury market, for example, and just ignore what's going on in Europe. Because as you know, Roger, for many years in the business, the most fungible outside FX of all global markets is the bond market. You could create one sovereign bond market out of another sovereign bond market with an FX swap.
So if we start to see-- and I thought the guards-- I mean, if you-- remember your old days going back to the Eurovision Song Contest, you would have given her null points, right, no points for her delivery. Because she delivered and we got a falling euro, sell-off in the bond market, and a collapse in the DAX. I mean, zero out of three. I mean, I just don't think there's any credibility there at this point. And I think that poses a huge threat to global bond markets if those German yields keep going.
Is this over? I mean, here's the thing. Our work has consistently shown-- and this is what we've said consistently, that the pressure just from a stimulus perspective in the United States continues into the end of Q3 beginning of Q4 so let's argue we've got another free for months. In that time period, those prices continue to rise.
It doesn't take account of what-- any snafus in the system that we might have seen from China shutdowns or from Ukraine. This is simply just excess demand created by a stimulus, which in historic terms is five times larger in monetary and fiscal terms according to our work than anything we've seen in the post-war period.
So that has to work its way through. Maybe I'm trying to be too cute and think it keeps going up there. But the point is, it isn't-- this stuff isn't going away quickly. You can look at it today-- I mean, you and I just as before we got on the air, we're chatting about the old series of PPI. So we got the final demand, final goods PPI this morning.
And at face value, you could argue it looks like it's beginning to top out. We've had a 9.8-- sorry a 10.9, now we've got a 10.8 on the year-on-year metrics. But if you go look at the old series that goes back to the late '40s, this is the second highest print. This thing went up 1.2% this month. I mean, this was just another explosive jump in prices. And it's now outside the oil shock of '74. This is the largest increase that we've seen.
And the real question-- and this is the thing that I've been-- why I've been so worried about the equity market-- is how do these prices get apportioned? Because I keep using a quote from the chairman of Restoration Hardware, which I think is incredibly apropos, which he made a few months ago. And he was talking about what happened-- where do we get it. Doo, doo, doo, doo, doo, doo. Yeah. He sounds-- sorry.
He said, I don't think anyone really understands what's coming from an inflation point of view. Because either businesses are going to make a lot less money or they're going to raise prices. And I don't think anyone really understands how prices-- how high those prices are going to go everywhere. So in other words, it was either when it comes to the apportionment of that PPI, it was either going to go into margin compression, because companies couldn't pass it on.
And we might have seen the beginning of that-- Target, Walmart, et cetera, et cetera. Or it was going to get passed through to end users, customers. And then you were going to see rampant inflation, which means that the bond market remains mispriced, which means that central banks have to tighten more. Neither of those outcomes I see is particularly positive for risk assets.
ROGER HIRST: Yeah. But I mean, within that, I suppose one of the other things as well with this inflation-- because there's a lot of chat at the moment going, as you just alluded to, with PPIs, has it peaked? And I guess, for policy makers and for just real people, I suppose, as well, is that it's not just whether they peak. But they need to come down damn fast to actually make us feel better.
JULIAN BRIGDEN: Yes.
ROGER HIRST: And what's more, it seems that this all started with durable goods. But it's now gone into essentials. It's now it's energy. So it's petrol prices, gasoline prices, it's food.
JULIAN BRIGDEN: It's services. I mean, services is horrible.
ROGER HIRST: The sticky stuff.
JULIAN BRIGDEN: Right.
ROGER HIRST: It's the stuff that really starts to hurt. So I didn't have to-- if wood went up, lumber went up in price, I didn't need to do in extension. But if food goes up in price, if petrol goes up in price.
JULIAN BRIGDEN: Yeah.
ROGER HIRST: So even if it doesn't roll over, it's embedded now in stuff that really kicks us in the wallet.
JULIAN BRIGDEN: Yeah.
ROGER HIRST: And at the moment, wages have gone up. But real wages have been collapsing.
JULIAN BRIGDEN: Yeah.
ROGER HIRST: So this is a serious problem. So in some ways, does that mean that, yes, we could peak? But a peak is irrelevant if it's just sticky within these very, very essential items?
JULIAN BRIGDEN: I think if you listen to what Green-- sorry, not Greenspan. If you listen to what Powell has said, this is a gentleman who, I'm told, is the most hawkish member of the FOMC at present. Remember, that's important. Because remember, it's not a democracy. So if Bostic doesn't like it and he wants to pause in September, then the guy can dissent.
But Powell has made it absolutely clear, and he said, we need to see clear and convincing evidence that inflation pressures are abating and inflation is coming down. And if we don't see that, then we will have to consider moving more aggressively.
Well, that's what you've just got, Roger. You need to see to get them to back off monthly-- month-on-month prints that are running, I mean, really ideally at 0.2. But let's say 0.3 month-on-month. And we're not even close to those type of numbers. Not even close. That's why that CPI was such a bloody train wreck last week. Because it increased at 0.7 month-on-month.
ROGER HIRST: Yeah. And then, I guess, what really matters for us all though, is that we can be right on inflation or wrong on inflation. But what's more important is being right on the risk asset. And you talked about that risk asset.
JULIAN BRIGDEN: Correct.
ROGER HIRST: So let's go with the bond market first. Because you said bonds were mispriced. And they were. And as we speak, yields are making new highs.
JULIAN BRIGDEN: Yeah.
ROGER HIRST: We've now had another reinvention of the twos tens yield curve. They are not showing signs of abating. And we have now created for the first time in this very, very long chart a new high that's higher than the previous low.
JULIAN BRIGDEN: Yeah.
ROGER HIRST: So where do you see these things going? Because when I talk to people out in the market, they range from we should still be topping somewhere around here to 8%. Where were you in that range?
JULIAN BRIGDEN: I mean, it can't be 8%, Roger. It just can't be 8%. I mean, why don't we just go and set a thermonuclear device off somewhere. I mean that's--
ROGER HIRST: Growth will have died before then. Growth would have been--
JULIAN BRIGDEN: Yeah. I mean, the world would be over in the-- it can't be 8%. I look at something like bonds, which I think to some extent are driving this now, because they're way behind. And we had an initial target, we flagged it in February to the MI2 client base, not really the macro insider client base, because it's not really something you can trade. We were very bearish on fixed income.
But it's a difficult one to trade. And we said 1.55. And then we came out and we said, kind of just slightly over two. We're heading in that direction now. I can see, if I look at rates of change in some of these futures contracts, another point and a half, two points from here and you would hope to see some sort of pause-- pause, bounce, slight correction.
But it really does depend. I mean, the problem that I've got, Roger, is when I look at long-term trends. And I think that when you're looking at very long-term trends, 40-year trends, for example. I think you need to look at a log chart. And when I look at that if I-- I think I can share a screen. Correct me if I am wrong. But OK? So can you see that?
ROGER HIRST: All right. Yep.
JULIAN BRIGDEN: So this is the log chart of the 10-year Treasury going back to 1982. And you can see numerous touch points, four very clear ones. We break it at the beginning of May. We come back down. And we test it. We're now at 3 and 1/2 basically. I mean, four? If that doesn't hold, upper fives?
I mean, I think one of the other things to bear in mind, Roger, is we're still actually giving the Fed the benefit of the doubt. Now, I think in fairness, recent action is commensurate with a tough Fed. So you don't have to be so worried, at least at the moment, that you think that the Fed isn't-- is going to whittle away the value of your money.
But if you go and look at the term risk premium, which you understand, but let's explain it to people. I mean, basically it's the-- think of it as like the insurance that you demand when you write-- if you're the insurance company and you're writing fire insurance, you demand a premium. You demand a premium for covering that risk.
Well, the term risk premium is the premium that the bond market demands for taking that duration risk, buying elongated bond. And it is essentially a proxy for Fed credibility. It is still negative. In other words, we're not we're not seeing any risk that the Fed would let this thing run away and erode the long-term value of our debt.
But if you look here in the '60s, which is the last time that we had such a low-term risk premium, we went pretty damn quickly from '65 to early '70s to 250 basis points. And then, ultimately as inflation really got out of hand in the '70s all the way up to almost 500 basis points.
So the point is, Roger, you start to see things like this. You start to see the Fed lose their credibility. And I'm not arguing that they are. I think their steps are really aggressive. I mean, I could see though the ECB starting to lose their credibility and that dragging up global bond yields.
So I think I struggle long-term to see any value in global bonds outside a trading tool for risk off and risk on at all. And I also think that it's important to bear in mind that the demographics are moving horribly against treasuries and fixed income in general. I mean, I think this is something that people get wrong.
So this hasn't been updated because we have to manually update it. But look, this is a demographics-based model. And basically what you're trying to do is you're trying to look at the sort of mix of how old the population is, is it working, is it saving, and whatever.
And I think one thing that people get wrong is that they say, OK, well, when we all retire, we'll be spending less money. Absolutely right. But that's why this curve is less pronounced in its rise than this decline. But the point is, it's not about spending money that determines the asset prices. It's actually saving that money.
So when you're at your peak of your earnings as the baby boomers were starting in the '80s, and you start to work very hard, actually your peak savings, you're taking those savings and you're investing them in something. You're investing them in stocks. You're investing them in bonds. And that's when those asset prices rise in value and yields, in the case of a bond, fall, like the inverse of the price.
And that's what happened. Now, they're actually flipping around. They're retiring. They are going to spend what they saved here. They are going to dis-save. When they do that, definitionally, unless you can find some other borrower or purchaser-- and we'll quick come to that in a second, Roger, we can explore that topic.
And bond yields are inexorably going to rise from here. I mean, trying to-- I mean, don't get me wrong. You could get big swings. I mean, this is point-- where are we now? You're here. This is 1/2 a percent this is 5.5% basically. So you got a 5% swing in yields, I mean, in aggregate. But the trend is up, mate, because this is-- and this is a demographic of all those countries that buy US treasuries.
So I struggle really to see any value yet in fixed income. So that's why I still remain horribly bearish. And I'm getting really worried how far this correction is going to go in some of these long duration NASDAQ kind of plays, US stocks in general, which I think are dominated by these players.
ROGER HIRST: That brings us on to-- because we're talking about these assets coming off a bit, or a lot, but it goes down to that thing, which is, OK, the Fed's got to fight this. And the Fed clearly went from growth to going to price. So rather than supporting growth the last 30 years, moderation et cetera--
JULIAN BRIGDEN: Yeah.
ROGER HIRST: --to now basically having to try and cap price, which needs a tightening of financial conditions, as you've talked about before. And you can do that through wider credit spreads, higher bond yields, stronger dollar, or lower equity markets.
JULIAN BRIGDEN: Right.
ROGER HIRST: Which of these do you think is the most likely way that the Fed is going to try and get control of this? Because in my view, this is a scenario where everyone's going, oh, 20% down, they're going to relent. But if they relent, inflation goes up, and inflation now is impinging on growth and will kill growth if it goes too high.
So you have to stop inflation first before you can ever start thinking about growth again. Hence, the equity market over there, forget about it. We're going to do this tightening of financial conditions. Which of those cogs do you think is the one that they're going to really aim at to try and get these financial conditions to a level where at the moment, that just where they've been for 20 years, bottom end, so to say.
JULIAN BRIGDEN: Yeah. Well, I think-- OK, so let me share another chart with you. Look, I think the Fed has acknowledged that they made a mistake. And I think now they're trying to address that mistake. But it isn't going to be easy at all, Roger.
And I think the problem is if you-- and I'm glad people are starting to understand this concept of financial conditions. Because it's something that they did. You constantly hear these cheerleaders that you get on financial TV, particularly the equity guys come on and say things like, well, we've priced in for hikes. It looks like the market can take it. Inference being, we could rally. And I'm an old git, and I'm entitled now to shout at the screen and throw my slippers at the screen.
And I would, because my retort to that was, well, if you can take it, then it isn't enough. Because the whole objective is to tighten financial conditions not just raise rates. It's like, if the tree falls in the wood and no one hears it, did it fall? If bond yields rise and nothing else takes-- reflects that, did they rise?
So when you look at the financial conditions index, roughly you can parse them into five things. So short-term interest rates, long-term interest rates, credit spreads, stocks, and the dollar. And what you can see here is our calculations, to be conservative, we need to get financial conditions to a point where growth is at least a trend. And Powell told us where that is. That's at 1.75% in real terms. And the last time we were there in a tightening cycle was early 2019.
So if you go through and you look at everything relative to where it was in early 2019, you can see up until yesterday bond yields were pretty fairly priced. Now, they've blown out of that range. Credit was pretty fairly priced. It's blown out of the top of that range. This is five-year CDX. So that would be HYG falling even further. The dollar is actually pretty strong.
But look at this baby. Now, I'm being generous. I'm taking the equally weighted S&P as opposed to the headline one, which tends to overweight the FAANGs, which were even more exaggerated. But this would tell you still that we need to see a 1,300 point conservatively-- a 1,300-point-- sorry, a 700-- where are we now-- a 1,000-point correction or 1,200-point correction in the SBW. So we've got to go from where we are now basically 5,500 to 4,300 conservatively. Conservatively.
And the point is that the longer that these things hang out and the longer