Fed Trapped “Between the Devil and the Deep Blue Sea”

Published on
April 29th, 2019
30 minutes

Fed Trapped “Between the Devil and the Deep Blue Sea”

The Expert View ·
Featuring Julian Brigden

Published on: April 29th, 2019 • Duration: 30 minutes

Julian Brigden, co-founder and head of research at MI2 Partners, believes the U.S. economy is at a critical inflection point. In this episode, Brigden interrogates the economic expansion and asks the tough questions about the rally in stocks: Why have U.S. equities outperformed the rest of the world so late in the cycle? What are the key risks? And what will central banks do next? Filmed on April 19, 2019 in New York.



  • JR
    Jon R.
    6 May 2019 @ 16:14
    Smart guy. Unless I'm misinterpreting, for someone who is so skeptical, Julian comes off as bullish, even if he doesn't like why. Either we rip straight up from here and melt up, or we correct first, then get true central bank easing, leading to another round of asset price inflation.
  • ES
    Euan S.
    1 May 2019 @ 23:11
    Hi Julien - can you recommend any good books, papers, research etc on the most useful leading economic indicators? Thanks
    • JB
      Julian B. | Contributor
      5 May 2019 @ 20:50
      Hi Euan, there's nothing that I've seen. Honestly, twitter is the best source as people share a lot of charts.
  • AM
    A M.
    5 May 2019 @ 18:54
    Julian -What if the Fed just stays on pause for an extended period of time? Globally, CB's balance sheets shrinking now, BUT deficit spending is way up. Fiscal spending is now negating the effects of much of the tightening. USA ends QT in September. It could mean that the likelihood of a very long pause ignites stocks - the 2nd half of the 3rd Year of the Presidential term historically has given the best returns in the US stock market. This could also lead to the 3rd Psychological stage (the blow off) in this already over-extended cyclical bull market. We are already seeing crazy unicorn values that echo of late 1999.
    • JB
      Julian B. | Contributor
      5 May 2019 @ 20:49
      Hi AM Its possible that the Fed does pause. But they can only do so IF something else, for example, fiscal spending is driving stocks higher. Bottom line stocks need to move higher or there is no GDP growth
  • DS
    David S.
    1 May 2019 @ 18:29
    If US Congress spends $2 trillion dollars on infrastructure (MMT, printing press.) over the next five years, how does your outlook change. DLS
    • JB
      Julian B. | Contributor
      2 May 2019 @ 14:58
      David this video was all about tactics i.e. do stocks continue to move higher in a move that looks like 2016, or do we need to see a correction first. If its the latter especially if it comes along with very weak economic data as my work suggests, then I have no doubt that policy makers will offer fiscal spending as a solution. In that environment talk of infrastructure spending will accelerate and potentially a lot more than $2tln.
    • DS
      David S.
      3 May 2019 @ 08:36
      Julian B. Thanks. DLs
  • gg
    georgy g.
    30 April 2019 @ 22:28
    Great entertainment! Unclear as to why Fed is not going to let it run hotter. They said they would...
    • SP
      Sunil P.
      3 May 2019 @ 05:24
      Well they didnt really say that. In January, Powell made the policy U Turn and now he's using more nebulous language because you cant really justify rate cuts while at full employment and all time highs in the stock market. However if he doesnt let it run hot, then it would most likely fall off a cliff because the stock market is completely dependent on QE, so basically he's mincing words until the market tanks and then he'll act. I sort of agree with Julian, I think the FED has much less time remaining than they think they do.
  • SA
    Stephen A.
    29 April 2019 @ 19:41
    He can't credibly throw all this data out there that shows how 2019 is not like 2016 and then say "I don't know, we could have a 2016-like reflation meltup". Clearly highly knowledgeable but he can't argue for 30 minutes for a certain trade and then recommend the opposite trade against his own arguments. It makes no sense. If the US economy doesn't have slack/fiscal space (like it did in 2016), what does it matter if the FED cuts rates? Rate cuts have never bailed out an economy running at capacity. They have always spiked inflation which in turn has ended the expansion sooner (overheating). At this point the only hope for the FED is that a pause doesn't result in overheating.
    • JB
      Julian B. | Contributor
      2 May 2019 @ 15:25
      Stephen as I've said above I'm pretty clear that central bankers will ultimately reflate but right here and now I'm not convinced they have done enough. Hence some tactical concerns. PS at the moment there is no risk of overheating because the data is weakening. That risk only rises as and when they truly ease further
  • HM
    Harold M.
    29 April 2019 @ 22:35
    Really enjoyed Julien’s discussion. Understandably difficult to make any nearby moves with so many moving parts. If the wheels are going to fall off the bond market just wondering what Julian and Raul are thinking in terms of timing.
    • JB
      Julian B. | Contributor
      2 May 2019 @ 15:22
      Harold please see above
  • GH
    Garrett H.
    30 April 2019 @ 11:53
    Julian says the Fed needs to start easing by cutting rates (bullish for bonds) but then that the bond market gets thrown under the bus. Not sure what he means by these two seemingly contradicting statements. With all the junk corporate debt out there, it seems like the Fed may end up buying corporate bonds at the end of this credit cycle.
    • VP
      Vincent P.
      30 April 2019 @ 13:00
      I think JB believes a reflation trade includes rising inflation, implying higher bond yields and a steepening the curve. Makes sense to me because if FED does nothing, yields continue falling and the experiment fails. Hope this helps.
    • JB
      Julian B. | Contributor
      2 May 2019 @ 15:21
      Garrett the title of this piece is the "Devil or the Deep Blue Sea" i.e. the Fed has no good choices 1) They don't ease = strong dollar, recession/deflation 2) they do ease = dollar falls, which is eventually as we saw in 2016 inflationary but ultimately bad for bonds (yields doubled from mid 2016 until the end of 2018). There is no question they will pick option 2. Question is just how much pain we need to endure before they reach that conclusion.
  • CL
    Chris L.
    30 April 2019 @ 21:20
    Julian if very intelligent, however, I have tweet both him and Erik Townsend back in September and October that rates would collapse as inflation peaked. They thought the opposite. I believe Julian thought 10Y would hit 4%. This aint a knock on him or anything, but oh well.
    • JB
      Julian B. | Contributor
      2 May 2019 @ 15:17
      Chris that's why you need to become an MI client. We were structurally short Treasuries betting on higher yields from July 2016. We closed that trade on 14th November last year with 10yr yields at 3.15%. Then on 14th December, with 10yr Treasury yields at 2.9% we told clients buy bonds.
  • DS
    David S.
    30 April 2019 @ 21:48
    Excellent commentary. The deep blue see is about to get a lot deeper in the US. The only thing Congress and the president agree on is getting elected in 2020. The main question for me is how printing two trillion dollars for infrastructure, MMT, will affect the stock and bond markets. There are dollars to be made. Do not know what the will be worth. It will take a while to start, but the printing presses are being oiled as we speak. The question is not is it good or bad, infrastructure is just going to be approved by the Congress and signed by the president. DLS
    • JB
      Julian B. | Contributor
      2 May 2019 @ 15:00
      My big picture view, is that as fiscal spending accelerates that bond yields rise and that stocks perform ok but with a lot of internal volatility, which favours value vs growth.
  • CW
    C W.
    29 April 2019 @ 14:25
    Julian's macro talk is always something I look forward to. It would be perfect if I can get my hands on the slide deck used in the clip, to make it easier to follow.
    • CW
      C W.
      1 May 2019 @ 15:34
      Wait ... I found the transcript actually contains the charts. Well done, RV!
  • DF
    Dominic F.
    1 May 2019 @ 09:47
    Julian is one of my favourite RV guests. He explains things really well and is just smart :-)
  • gg
    georgy g.
    1 May 2019 @ 00:17
    Suggestion every guest and professional interviewer puts their 5yr records upfront.
  • CH
    Colin H.
    30 April 2019 @ 08:45
    I'm looking for something of a downturn on the major indexes mid May in any scenario. Having said that my models aren't always correct, nor do I trade them perfectly in every case.
  • AC
    Alessio C.
    29 April 2019 @ 22:07
    Julian, what the profile of $ corporate debt maturity wall? I'd graph YoY change instead of absolute $ value That may be the nail into the coffin that send $ higher
  • VP
    Vincent P.
    29 April 2019 @ 19:19
    Thoroughly enjoyed Julian's views and comments. Well done! With all these false breaks in FX, it's believable the USD has recently done same. So, it would appear the market truly expects reflation trade to extend and that Throne King Powell will not disappoint. To add, today's PCE makes for possible wait and see but it was mysteriously very weak. It also appears Gold is holding nicely vs it's peers like Palladium, Platinum and Silver which is another sign a RATE CUT is desperately needed.
  • MZ
    Matthew Z.
    29 April 2019 @ 18:14
    Julian is just straight up one of the best. Love his candor in this too - he there's just not enough info yet to make a call. Stay patient and see how the next 30 days plays out
  • DL
    David L.
    29 April 2019 @ 13:01
    How does 1Q U.S. GDP of 3.2% impact your view of the economy catching up to stock valuations? Seems an upside surprise, but is it just a fluke or is there real growth going on?
    • MK
      Michael K.
      29 April 2019 @ 13:19
      Check out hedgeye free post about gdp on their site
    • JB
      Julian B. | Contributor
      29 April 2019 @ 17:52
      My work suggested Q1 would be fine. The issue is Q2 https://twitter.com/JulianMI2/status/1121769115520159745
  • JA
    James A.
    29 April 2019 @ 15:25
    Geez, another bear on RV. Nothing against JB but when the consensus is so one sided it generally means one thing.
    • AP
      A P.
      29 April 2019 @ 17:41
      Exactly, it means take the other side. This was nuanced and he said: "wait for the economic data coming up soon before buying the reflations thesis 100%".
    • JB
      Julian B. | Contributor
      29 April 2019 @ 17:51
      James I'm not a bear. I'm pretty clear that the Fed and policy makers have shown their hand and intend to reflate. What I'm not certain about just yet is have they done enough.
  • AP
    A P.
    29 April 2019 @ 17:38
    Great presentation - and very nuanced as always with Julian - just a bit too promotional. We are ‘clients’ of RV, and most retail cannot afford any of the 2 services mentioned, so no need to remind us of your service so many times.
  • DH
    Daniel H.
    29 April 2019 @ 06:58
    On Twitter, Raoul says just own bonds and the dollar. To be fair, that is likely a continuation of his position from some months ago, and we might be at a change point. Secondly I am surprised that Julian believes the fed can stop a downturn. They certainly were unable to do so in the GFC. Still, great presentation.
    • JH
      Jonathon H.
      29 April 2019 @ 12:27
      He appears to hold great hopes of the Fed's powers. But the persective that this is a rerun of 2016 must be taken seriously though although I also doubt it and it is good to hear a sound reasoning supporting this
    • CW
      C W.
      29 April 2019 @ 14:30
      I don't know this for sure, but I've heard talk that the Fed had been too timid or conservative in its initial responses to the breakdown in the credit market. Had they immediately jumped into the abyss and threw in the kitchen sink, the GFC could have been avoided. But even if true, then what? Would we have seen a full recovery, or the start of Japanification right away? I certainly don't know
    • JM
      John M.
      29 April 2019 @ 16:52
      I think the title of the presentation says it all, "Fed trapped..." (and largely as a result of their pwn actions of course).
  • PD
    Paul D.
    29 April 2019 @ 15:59
    Splendid work again JB. Worth the entrance fee.
  • JS
    Jens S.
    29 April 2019 @ 14:55
    It's a pleasure to watch Julian talk and give his views on the market...need more Julian!
  • JS
    John S.
    29 April 2019 @ 12:24
    Julian is a realist ...good value interview from my perspective
  • JB
    Jack B.
    29 April 2019 @ 10:05
    Julian is always excellent. Certainly looks at the world differently to most