ASH BENNINGTON: Welcome. This is essentially Real Vision Ask Me Anything for the editorial team. I'm Ash Bennington here in New York. I'm joined by Ed Harrison, Roger Hirst, and Jack Farley. Welcome, everyone.
ROGER HIRST: Hi.
ED HARRISON: Hey.
JACK FARLEY: Good to be here.
ASH BENNINGTON: So let's go around the horn here. Where are we all coming from this morning? Geographically, not metaphysically.
ROGER HIRST: I'll go first. I'm doing this from the UK, from Aldeburgh. Not quite Ipswich, but Aldeburgh, up on the coast.
ED HARRISON: And I'm doing this from Bethesda, Maryland, not quite Washington, DC. But usually we call it DC because I live four blocks from the town
JACK FARLEY: And I'm reporting from New York City.
ASH BENNINGTON: Jack intentionally vague on the neighborhood. I like that. And I'm here in New York City, on the Upper East Side. And we're getting started now. You know, this is a really interesting time to be having this conversation, because we've obviously just finished up a significant three-week deep dive into the global recession, the potential for the global recession, risks of global recession. I think it's probably reasonable to say we are in a global recession. What are your opening thoughts, gentlemen, on where we are with that right now?
ED HARRISON: I feel like I could go first. Because I thought it was interesting-- I was looking at an Albert Edwards piece that came out-- I think it came out on Thursday. And the interesting bit was he was talking to Gerard Minack. He was using a Gerard Minack graph. And Gerard's going to be on the platform next week. And what Minack showed is that if you look at the performance of the S&P 500 versus the MSCI World Index, there's huge outperformance for the US. But if you look at the S&P 500, and you take out the top six companies-- that is the FANG companies plus Microsoft-- the outperformance of the top six is equally large to the performance of the S&P 500 over MSCI.
And so what that really tells you is that there's an incredibly narrow leadership that's going on right now in terms of what's driving the markets. So when we talk about the S&P 500, when we talk about markets and what's happening, really what we should be thinking about is liquidity. And I think this is something that Roger talks to all the time, that liquidity is driving people into those biggest six in the S&P 500. And it's not completely understandable whether or not there are any fundamentals behind that, or whether this is a completely liquidity-driven rally that we're having while we're at almost 20% unemployment in the United States.
ROGER HIRST: And I think also you think about what has this been. I mean, it's been the fastest and the deepest move in history. And that speed has both informed our ability to say we're in a recession-- because normally we sort of look back and we say it's a recession six to nine months after it's actually happened. Whereas this time we knew it was happening [AUDIO OUT] to inform the reaction function of central banks. But it still goes back to what we talked about before, which is, how deep is it? And even if we recover, how quickly do we recover? And what is the terminal point of that recovery?
And more importantly is, what were government corporate and household balance sheet like before February? And is there having to be an intense adjustment because of what has happened? And can central banks prevent that happening, which is all about how they direct this accommodation that they're providing.
So I think in terms of the size of the recession, the size of the event, it's huge, but it's the long-term fallout that matters now. Because this has impacted the consumer in a way that we haven't seen in the last two or three recessions, really going back to the '70s and the double dip of the early '80s.
ASH BENNINGTON: Yeah. Jack, any thoughts you'd like to add?
JACK FARLEY: Yeah. I think that the liquidity versus insolvency paradigm that Raoul talks about is so important here. Because we've seen the Fed being able to try and paper over the cracks. But it remains to be seen whether they'll be able to fill the holes-- and the deep financial holes-- that are left in the wake.
And I also think something that I know, Ash, you, and Roger, and Ed talk about all the time on the Real Vision daily briefing, because it just stares us in the face, is the bifurcation between the continued appreciation of capital markets in the face of truly a Depression-level era of pain on Main Street, the labor market, people, everyone, 40 million people initial payrolls. So I think that's really important.
And I actually think, you know, Ed, at the first week of our campaign, he did a great talk with the renowned economist Richard Koo talking about balance sheet recessions. And that referred to Japan, when there was a massive decrease in capital fleeing the capital markets, but at the same time, growth really steady, and actually going up. I think we're seeing the exact opposite right now.
ASH BENNINGTON: Yeah. Ed, anything to add to that?
ED HARRISON: Yeah, you know, actually I was talking to Jack literally right before we got on this about his pieces at the beginning, which I find very useful in terms of doing a deep dive into specific situations that we're trying to frame as important within the context of what's happening in the day.
And one thing-- and what I was talking to him about was Buffett. You know, he did this one on Buffett and the banks that I thought was really good in terms of thinking about how this is, going forward.
So why is Warren Buffett selling bank shares-- or in Jack's case, he was talking investment banks-- when, in the last recession, he was buying them? Is that a sign of what's happening going forward? Or do we not even care about Buffett? I mean, Bill Ackman was saying, actually, I'm selling out of Berkshire Hathaway. They're too big to actually be nimble in this environment. I mean, I thought that what Jack put forward in terms of what Buffett is doing is emblematic of the situation that we're in right now.
ROGER HIRST: I think also it goes back to, you know, what really matters here is understanding how the environment was before we got into this. Because what people have now realize in the last two months is that, for the prior five years, this was the framework. But we're still trying to apply fundamental analysis to a market which is being driven by something else, which is the shift towards rules-based funds, passive money over active money. And this is why Buffett is relevant.
But what's interesting is that Buffett has underperformed, not just now, but for an elongated period, as nearly every active manager has, in an environment where we've been trying to get our heads around what looks like a significant shift away from the old paradigm where valuation mattered, active managers, to something which is actually, oh my God, you know what, it has been liquidity, the Fed, and the drive that they've created into chasing yield, moving away from active into passive, and share buybacks, which has been the real driver particularly US outperformance, which informs everybody's view of the world equity market. But it stands out, US outperformance. And that US outperformance is not driven necessarily by fundamentals, although there are some utterly brilliant companies at the top end of the S&P.
ASH BENNINGTON: Yeah, really interesting points from both of you guys, and from Jack too. Just a question, as you mentioned it, Roger, to talk about the pivot from the strategic to the tactical-- we've done a lot of discussion about retracement levels, especially on the S&P 500. And when you look at where we are now-- it's fun to be able to do this live. We're trading about 3,003 on the S&P right now, which is-- well, let's take a look. It brings us to about the 67 and 1/2% retracement level, above the 61.8%, 2,933 level that you've been watching. What are your thoughts about that right now?
ROGER HIRST: So of all the big sellers that we've seen-- and we're talking about 10% to 20% over the last few years, and over the longer term-- this is an unusual one. Because 1929, 1989 Japan, 2000 to 2003 multiple times-- in fact, Japan multiple times in itself-- they never got beyond the 62%, apart from Volmageddon, which went up to the 76% retracement level, and then retested, but didn't break through the lows.
So this is unusual. I mean, obviously the NASDAQ, breaking back to the highs, maybe there's a similarity with what we saw in 2000, where the S&P did sell off and then rebounded back to the highs by September 2000, having initially sold off of the NASDAQ in early 2000.
So this is unusual on that sense. And now we've seen the Russell also get back to the 62% retracement after this enormous rally over the last couple weeks. Technically-wise, this is where things should already have rolled over. And the fact that they haven't tells us something again about fundamentals versus what the Fed can do, or what the Fed can drive in terms of sentiment. And we talked about the Robin Hood and real kind of retail investors coming back in.
The difficulty here is, do we look at the US for our driver, as our leadership in terms of how we should view markets? Or should we look everywhere else, which is struggling at 38%, 58% retracement? And I think that everyone else remains in this bear market. And why would I want to invest in Europe and sometimes the UK and Asia when the US-- and particularly five or six stocks in the US-- look good?
So these technical levels are key. And the whole point here is that having this as a totality, having the technicals, the short-term view, the trading view, and the long-term view, the totality of that is what we should be using. And some people prefer fundamentals versus technicals. It's fine. But together, you get a much more complete picture. And what this is telling us is there is a key driver that we historically have not been used to, which is the Fed and the Fed's influence.
So it doesn't tell me really where things are going to go. You got to put a finger in the air. But you know, strip out those top five or six, and obviously the stock market is close to 2,400 on the S&P, not 3,000.
ASH BENNINGTON: Yeah, those are such good points. And I think we try and take a look at it on Real Vision Daily Briefing, every day, from both of those perspectives. So incredibly valuable points from both of you.
I would also say, if you're interested in some of the deeper dive aspects on global liquidity and on market positioning, Mike Howell is a terrific resource who's been on the platform multiple times. He was last on in February of 2020, and talks about exactly these issues.
Roger, we have to get you on camera with him, because he does these expert views. And listening to the two of you talk about these issues is fantastic. We have to get you guys together in front of a camera at some point.
ROGER HIRST: Do an interview. I've done the expert view interviews off-camera before. So yeah, I'd love to get him as a full-sized interview. That'd be great fun.
ASH BENNINGTON: Yeah. You know, speaking of all of these issues, one of the things now that I think I've been most excited about over the last month at Real Vision is our "Global Recession" campaign. And the first question that I wanted to get to from the viewers-- because this is, after all, an Ask Me Anything-- comes from Josep. And he's spot on on these points. He wants to know, during the last three weeks, what are the key learnings that you guys have all taken away from the videos that we have been doing in this series? Let's start with Ed.
ED HARRISON: Yeah, good question. I think the key learnings-- actually, Roger, he sort of touched on what the key learning is for me, which is a finger in the air, right? That is that we're in an unprecedented situation.
I was just-- I don't know if you saw the numbers that came out today in the US. Personal consumption was down 13%, after being down 7% in March. So a massive reduction in US personal consumption. And one of the comments when I tweeted this out was, I expected it to be more. And when you look at the numbers, on a relative basis, this is just off the charts. And yet some people, the only comment that I got-- or the first comment that I got was about, I thought it would be more.
So we have no idea what the data look like. I mean, actually, maybe that number will be revised in a massive way going forward. And we have no idea what the data are going to look like going forward. So from a real economy perspective, which are the inputs into fundamentals, we have no idea.
So when you put your finger in the air, what you're definitely doing is you're doing it based upon a lot of liquidity. That is, liquidity is driving a lot of the market sentiment. And as a result of that, because of this great degree of uncertainty that we have at this particular period in time, we really have no idea what's going to happen to the markets over the next three months, over the next six months. Anything could happen. Because in the real economy, anything can happen. So that's my takeaway from all of the different things that we've seen on all of the different interviews.
ASH BENNINGTON: Jack, key learnings?
JACK FARLEY: Well, I have to say I agree with what Ed just said about liquidity. Getting involved in organizing the campaign and speaking with some of the guests, I don't think we really had a guest who said, liquidity doesn't matter. The central banks don't matter. I'm just a fundamentals person. Those are what I'm looking at.
In fact, later today, I'm speaking to Teddy Vallee. In our email exchange, he said that we're entering the new golden age of macro. And I think Russell Clark who did and interview with Raoul that came out today-- you should definitely check that out-- he anticipates the same thing, and that we're going to enter a new decade in which there's high growth, appreciating commodity prices, and a relatively weak US dollar. And I think it's-- so, going forward, macro is so important. I think that's what I've learned in this campaign.
ROGER HIRST: I mean, for me, it's something you just mentioned there. And this is something which is not just on our platform, but it's viscerally out there in the big guns in the hedge fund space. They are bifurcating into two camps. There is the deflation camp, and there's the inflation camp. People like Paul Tudor Jones talking about, when you've got global monetary inflation on this scale, you've always had inflation. Raoul and others saying, look, this is such a structure on demand in a world where demographics are against you, debt's against you. This is massively deflationary.
For me, the biggest takeaway is that people are on both sides of this argument. And these are people that I've respected all my life in this game. And you can just see the-- basically this is an unknown. And some people just say, well, it's a difference in differentiation of time. It's a timescale type of thing. But that's probably going to be the biggest argument or discussion for all of us for the next four or five years, is do we get off-the-charts inflation, or do we get "down in the depths" deflation?
I tend to move towards it's going to be deflation first. And I do think that the setup today is different from the '70s and the late '40s, where we got inflation. I do believe in the debt demographic story. But people infinitely better than me are saying, no, no, this is massively inflation. When you combine fiscal monetary on this scale with the idea you can do infinitely, that has to be inflation. So it's an incredible battle that's going on in that space.
ASH BENNINGTON: Yeah. And Raoul's had an interesting response to that, which is the question, inflation or deflation? Raoul's answer-- yes, all of the above. We're going to have price dislocations, we're going to have paradigms breaking, we're going to see potential cost-push inflation on things like food, and then generalized deflation representing an absence of aggregate demand.
ED HARRISON: --for a second and say, you know, going back to Jack and what precipitated what Roger was talking about, is that it is the greatest time for a macro if that's the dichotomy that you're facing. Really you could be on one side of the table and get your clock cleaned, or you could be on the other side and scoop up.
Or, as I was thinking in terms of the interview that Raoul with Hugh Hendry, where they were scoping out a trade in live time, trying to say, OK, I don't know what's going to happen. But how can I mitigate my downside, and make sure that I have a trade in this particular scenario that works in all scenarios, in all outcomes? How can I structure something?
So maybe you can actually have your cake and eat it too, even if you're wrong on the most fundamental level on a macro basis.
ROGER HIRST: I mean, there is one other argument as well, which it's the greatest world for macro, but what if central banks manage to put the lid back on volatility, manage to put the lid on global bond yields-- so the yield curve caps-- manage to support corporate bonds, but corporate bonds get issued at lower and lower yields, so everything converges towards zero again in the hunt for yield.
So what if we go into a world where you know that you're protected on the S&P, but the S&P kind of all just grind out. Corporate bonds will have low, tight yields. Bond volatility will be low. FX volatility is already falling back to the lows. VIX venture drops back below 20. You get the opportunity to sell vol, which you can do now, because the curve is back in your favor for selling vol forward, and not losing money because of the roll.
Maybe it kind of goes back to-- and my view is, if you want to play the macro, you maybe got to go into emerging markets. You got to go to places [INAUDIBLE] the central banks are not quite so powerful. And the macro story, is it the central bank story, or is it the central bank story will fail? And that creates two macro streams. If the central banks are still in power, you go to emerging markets. Central banks fail, we're going to get one almighty show of very, very interesting opportunities in Japan, in Europe, and in the US. And that could kick off any in the next few months.
ASH BENNINGTON: Yeah, Rog, you've been so eloquent on EMFX, especially on RVDB and elsewhere.
Yeah, and to pick up