Comments
Transcript
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ggBearish arguments always sound so smart! This was a good change at RV
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MMSo what would be a way to trade volatility? Some pointers for novices would be nice now and then.
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ASIMHO CBs drive liquidity which in turn drives the markets. GDP and earnings driving the markets apparently does not apply in the current scenario.
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FMJust buy US equities;There’s a reason they’re nicknamed ‘Government Sachs.’
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MSThis interview is unique in that there is constructive debate between a relative bull vs a relative bear. It avoids the echo chamber dynamic that exists when you have a interviewer teeing up questions for an interviewee who agrees with him. I'd like to see more RealVision interviews structured this way. Thanks!
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AG"idiosyncratic opportunities" when Goldman starts spewing this garbage take cover.
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aaCouldn't watch it past the first 3 min. When unemployment is down and stops dropping for over a year and 4 month, and the yield curve inverts then starts to un-invert we go into a recession. Just punch it in the FED graphs. The unemployment rate stopped falling in April of 2018. Add a year and 4 months to that and then wait for interest rates to start to go back up. The inverted yield curve with the corresponding falling interest rates is acting as a temporary stimulus.
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wmAnother U$ centric view. We need to hear more inside from China/Asia.
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GSHe contradicted himself referencing Buffett saying is it better to be in or out of stocks. Well Buffett is majorly out sitting on tons of treasuries/cash because valuations are too high.
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JHVery good interview, and good to hear both sides of different issues. Raoul and fellow RVers - can you please explain to me how corporate buybacks are not essentially a not-so-subtle form of a Ponzi scheme? You are basically artificially goosing the stock price of your own company using cheap debt, taking shares effectively out of circulation...so EPS increases. How are market participants not seeing that this is a big accident waiting to happen? I.e. probably a big reason for Fed dovishness is that further increases in rates would have caused this problem to surface in a nontrivial way. Please explain - trying to understand exactly what is going on here.
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DCwhy oh why is the giant sized clock of time left in the interview to keep popping up in the middle of the screen? so distracting.
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ABRaul’s questions were good. His inputs challenging the guest were great ! Overall, a good balanced interview with lots of take home ideas ! I especially liked the ending where you could gain some insight into corporate buy backs by following the corporate credits.
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RKOne of the best interviews! Thank you.
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GGThank god finally a bull and not another brainless bear. Great conversation.
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JPThis interview really challenges my current bear bias. After getting burned pretty bad in Q418 I've largely soured on the endless growth theme, obviously missing the Q119 bull run, but perhaps deep OTM SPY calls may be worth a serious consideration but I don't think IV is as low as he claims. Great interview overall, this is the content I've come to expect and admire from RV. Keep it up!
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RSClassic 1st order thought process.....
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MZGreat interview. Raoul doesn't believe a dang thing coming out of this guys mouth. Awesome
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LJI think these guys who spend there time in the financial centers of New York, San Fran and London are completely out of touch with what is going on in the global economy. Europe, South America, Australia, the heartland of the USA are all economically weak and they act like ll is well. The point he makes about Europe adding one company to the 500 largest companies yet not selling MSFT because Germany had a bad manufacturing print is blows my mind...the global economy is completely linked together and you cant have the rest of the world sick and have USA stay healthy. I am sure Tony is a good guy but he does run Macro Sales at GS.
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JHVery engaging and interesting interview - great to get different views, and I like how Raoul really listens to Tony, and like Grant, keeps the focus on Tony's views, even though he almost certainly disagrees with many of them.
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NGSPX volatility in single digits? Hmmm. You have to go to September over 3,100 for it to drop pennies under 10. Otherwise agree with his views. Very sensible. New ATHs in stocks, bonds very much sideways, USD contained upside.
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MBI didn't get the point re the Candy Brothers and $ strength. Surely dollar strength helps the oil oligarchs afford London flats?
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BSAnother great interview! But I'd like to challenge Tony's and Raoul's take that "there's been cleaned out so much last February" so that there's unlikely to be another ghost around the corner. There's an interview with Chris Cole at Macro Voices (https://www.youtube.com/watch?v=Hnd7fCJLVb0) where he takes the exact opposite stance, and backs this up by numbers: If I remember correctly, he guesses (thinks/knows?) that before February last year there were 2 or 3 trillion in assets in the vol-trade, and only 5 billion of those were cleaned up in February 2018 - the rest, he expects, will unwind over a timeframe of another 1 to 2 years. Would love to have Real Vision interview Chris Cole, and maybe somebody who takes the other side of his argument.
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DSThe video is well worth watching a second time. Compared to Mr. Pasquariello, I am like Chance the gardener in the movie Being There. And yet, I am not as sanguine as he is about the near- or long-term stock markets. Maybe his long-term, family office perspective gives him a better view of the future than I have at 73. Today's announcement by Samsung of a 60% drop in 1Q2019 profits did not help. DLS
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LHVery good. Evidence to back up every point but still has good awareness of the bear side for stocks
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ggFinally, non bear!
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RMI am getting sick of being a cheerleader, but wow, being able to listen to these conversations is such a pleasure.
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JZTony was awesome...come back! Nice to hear a nuanced yet balanced look at where the opportunities are in global markets.
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DSSuggest RVTV presentations on the Tri-Polar World with Mr. Pelosky. DLS
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mwGreat interview. What was the chart he referred to, new cyclicals vs old cyclicals? Sox semiconductor index vs dow Jones transportation index ? Not at an ATH as he mentioned...
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TYExcellent! This is quintessential RV! Views from two incredibly knowledgable people that you wouldn't have access to otherwise. This interview is like Marco-Insiders-lite.
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DSOver the last 40 years in constant dollars, US wage purchasing power has not changed. To look at wage growth over last year does not tell the story. This is why the natives are restless. DLS
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DSIt is reasonable to say the 12/24/19 market sell off and recovery was Fed related. It does show the liquidity problem of everyone trying to exit the market at one time for any reason exacerbated by the holiday. There are always major market moving events. Each one will be a greater or lesser liquidity trap. Rather than be invested and trying to get out, I am out waiting to get in. The world’s smallest family office. DLS
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DSThe market consequence of massive corporate buybacks is another grey swan. Corporate buybacks are a strange use of corporate cash flow when P/Es are high. It seems even more foolish to borrow to buy back stock. Part of the buybacks are recovering stock option dilution for executive pay. Corporate buybacks at one time were considered stock manipulation. Now they support the markets. Mr. Pasquariello asked the question what happens when massive corporate buybacks stop? RVTV is the best place to do a research video on this. DLS
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JSStocks only go higher yet nobody’s bullish?
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AGVampire Squid now casting ... love it
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VPCut. Out of respect for Raoul, no further comment.
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MMAgree to disagree that US has more “scope to cut”. Deficits rising & size of treasury roll next 12 months is under appreciated factor here. Private money has been replacing sovereigns at treasury auctions. More price sensitive & fickle as buyers.
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SMVery interesting interview, great to see something non consensus, bullish and yet still actionable on RV
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NvCiti Economic Surprise Indices have changed quite a bit since this recording. US have tanked and EM and Europe is bouncing
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AMAt least on the Europe comment I don’t agree, even though “Europe” has not created any new companies, does not mean that the companies that ‘start’ in America do not have a massive European presence. Therefore a slowdown in the European market will absolutely have an impact on their revenue and theoretically share price.
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VHCurious and pleasant conversations, but with a few doubts ;)
TONY PASQUARIELLO: At this point in the cycle, it will pay up for very selective secular growth companies who have something special in their business. And I'm probably going to go after those who don't. The family office world, we estimate at somewhere between $3 trillion and $4 trillion. And again, very much growing most every day, all else equal. I think the dynamics in the game have changed a bit this year. It's going to be more a year that favors tactical investing. And you're going to need to fight some of that commitment bias.
RAOUL PAL: I'm really looking forward to sitting down with Tony Pasquariello and chatting about macro markets. See, Tony and I started our careers together at the same place. We we're both at Goldman Sachs. He was early into his career. I was kind in the middle of my career at that time. But we grew up with the same people, the macro legends.
See, what makes Tony really unique is 20 years of talking to hedge fund legends. It gives him that knowledge base and understanding and nuance of markets that very few people do. Certainly, very few people on the sell side have the kind of depth of experience and the relationships that Tony has. And I think that information from that is really, really valuable. It's going to be interesting. What I love about macro is we're all going to have different views. So let's see how Tony's views differ from my views. And let's see where he thinks the world is going. Tony, finally we get to catch up with each other. It's been a long time.
TONY PASQUARIELLO: It's been 17, 18 years.
RAOUL PAL: I know because we were at Goldman at about the same time.
TONY PASQUARIELLO: Correct.
RAOUL PAL: I think you joined-- what? '90?
TONY PASQUARIELLO: 1999.
RAOUL PAL: 1999, and left 2000, 2001. And we were both doing the same thing.
TONY PASQUARIELLO: Correct.
RAOUL PAL: We were in equity derivatives. And I think at that point, you'd been brushed by the macro stroke, and that was it.
TONY PASQUARIELLO: That's right.
RAOUL PAL: You were into macro as I was into macro. And then I moved to GLG, and then you were my salesman.
TONY PASQUARIELLO: That's right.
RAOUL PAL: And I was at the GLG, and then your career took off from there. What are you doing now?
TONY PASQUARIELLO: So it's been 20 years at Goldman Sachs. I started as a summer intern, started then in fixed income, spent most of my time in the seat you mentioned, which is covering the macro hedge funds, think Stan Druckenmiller, Paul Jones, Louis Bacon, for equity derivatives, our old space.
RAOUL PAL: Yeah.
TONY PASQUARIELLO: Ran equity sales, ran equity derivatives, and now I'm responsible for coverage of the firm's macro clients across equities and fixed income. That's the day job. The night job is, we're building out our family office business across asset management, investment banking, and the securities division.
RAOUL PAL: Wow. So I think you chose a really good time to get back to macro, because macro is really not a good game for the last three or four years.
TONY PASQUARIELLO: That's correct.
RAOUL PAL: Now, suddenly, macro is back.
TONY PASQUARIELLO: That's right.
RAOUL PAL: And the top down, what's your macro view right now?
TONY PASQUARIELLO: So I'd say the number one question, particularly through the lens of a macro equity investor is, should I be worried about the signaling from the bond market?
RAOUL PAL: You said I wasn't allowed to talk about the yield curve.
TONY PASQUARIELLO: We'll get to the yield curve, for a moment.
And so I think as we sit here today, take a quick step back, a bit of a rocky road and a wild six or seven months. The market made-- the stock market that is, US equities made an all-time high in September. Against all seasonal patterns, the fourth quarter was an utter disaster. So you had the worst December since the Great Depression.
We sit here today, best start to the year since 1991. And so, you know, really what characterized last year, what characterized 2018 in the end, was the absence of return in any asset class. So whether it was stocks, treasuries, commodities, the credit market, not that any of the downs were particularly bad, but there were no ups last year. This year has actually seen a fantastic start in virtually every asset class.
The other interesting thing about last year was it was a year where I think the real economy effectively outperformed the financial economy, which is very different from, say, kind of the QE years where the market is doing great and the economy is kind of struggling. That flipped last year. And now it feels like it flipped back again a bit again. The financial market is doing great, and a bit of a wobble in, call it US growth, US activity data.
And so I think we sit here today and say, OK, there's been a ferocious move in the bond market during the month of March. What is the story and is the equity market failing to look around the corner? I would say--
RAOUL PAL: Now, whose story is right?
TONY PASQUARIELLO: I'd say, I think they both can be right, frankly. I'd say the big dynamics in the game for US equities are still quite favorable. We're talking about a growth pace which, if we're right, as a house, if Jan Hatzius on our US economics team is right, we'll grow in the low 2% area this year and next year, which is kind of where we've lived most of the post-crisis period.
RAOUL PAL: So that would mean you've got maybe a slow Q1, which looks like it's going to be a disaster quarter, and then back to reasonable growth there.
TONY PASQUARIELLO: Bingo. Yeah, so the sequencing would actually be sub 1% growth in the first quarter.
RAOUL PAL: Yeah.
TONY PASQUARIELLO: I don't think that's probably breaking news for most market participants, 3% growth in Q2. So you have a very big swing for two reasons. One is the financial conditions, impulse gets much more favorable, i.e. markets have gone to much more accommodative levels for growth since the end of last year, the start of this year. But also the fiscal swing, right? So the government shutdown probably takes about 50 basis points of GDP out of Q1. You drop that into Q2.
So to your point, kind of a quick hook, and then a resumption to kind of the trend we were living with, which, again, durable, above trend, not too hot, not too cold, fairly equity friendly throughout the cycle. And then the other dimension of this would be positioning. And so I would argue that there is a very significant amount of deleveraging and derisking in the fourth quarter. You started the year with exposure levels-- be it net exposure, gross exposure, so either the length you carry or the total risk you carry-- at effectively rock bottom levels.
We've seen a very sober response by our investors since the start of the year. So as we sit here today, we're still talking about a backdrop of stable growth, very favorable financial conditions, largely as a function of the Fed's pivot and an investor base who probably are under-positioned, if anything, for further upside. So I think we can live in a world where stocks will accept the repricing of fixed income as a tailwind. And you remember this, the lower-for-longer dynamic has been very favorable for the multiple of secular growth companies, in particular. So I think if you have stable growth, if you have defendable margins, you don't borrow, what effectively has happened, again, is wildly stimulative, perhaps, for your P/E multiple.
RAOUL PAL: I think that's probably the core assumption. And it's the rates stay relatively low, as you say. And that's probably good for equity markets unless something else is going on. And there is a fear you've got to be cognizant of that, well, if we go back to 2000, we had a very similar environment where the market became increasingly volatile, basically thrashed around at the highs, really difficult, made new high, then fell back, almost made a new high, rallied and fell and rallied and fell.
TONY PASQUARIELLO: That's right.
RAOUL PAL: The fixed income rallied like a banshee. Because it was kind of looking forward and saying, OK, there is something going on here that maybe the economy's not as good. Could it not be that situation?
TONY PASQUARIELLO: So certainly things to worry about. Now, it's been a long expansion. This is now--
RAOUL PAL: Yes, the longest ever coming up, I think.
TONY PASQUARIELLO: This summer will be the best in 150 years. It's already the longest stock market rally, effectively, on record. Always depends how you want to slice these things. But a very long cycle, however you want to think about it. You're also talking about globally, very clear signs of a significant slowdown in the manufacturing sector. And you're talking about, globally, a policy apparatus which may not have a lot of room to react, should things get a lot worse. Obviously, in the US, we do have scope to cut, but if you're looking at Europe or Japan, a lot of the bullets have been expended already.
RAOUL PAL: Yeah.
TONY PASQUARIELLO: So I'm not dismissive of it. And just to spend a minute on the yield curve, that you do have to respect the history book, which is whatever it's been. The past seven or eight or nine recessions have all been preceded by an inverted curve. There's very few false positives. You want to resist the temptation to say it is different this time, and so very respectful of that.
What I would say, though, at the same time, is the history book would tell you, there's typically a year or two lag from inversion to recession. The prior two cycles, it's been a full two years. The trading handbook would also tell you from the point of first inversion to a year out, actually, equity returns tend to be quite favorable. So I don't want to get too cute with this, but I actually feel like even if recession ultimately is in the off, we still have a reasonable short-term runway for risk.
I also think bigger picture, Raoul, I'm not so sure the expansion needs to die of old age. And again, if you think about this low 2% GDP gradient we've lived with post crisis, you've never really had the boom. So I'm not so sure we need to have the bust.
RAOUL PAL: Well, people say the boom is maybe in asset prices. When I observe that, I'm kind of sanguine on equities right now, so I don't really know. But they've gone up a lot.
TONY PASQUARIELLO: Yes.
RAOUL PAL: So I mean, it's at it's longest run. So maybe that's the boom.
TONY PASQUARIELLO: Perhaps. Although, at current pricing on our estimates of S&P does $173 of EPS this year. You're talking about divided by 2810 or whatever is the piece. So you're talking about a 15, 16 multiple, which is effectively bang in line with the long run average. So again, it's been a long expansion. It's been a long cycle. But to my eye, particularly in the context of bond yields, if we think about equity risk premium, that old Fed model, I don't think stocks are wildly overvalued.
RAOUL PAL: Even though, you know, if you look at the longer run, you know, P/E ratio of the S&P, I mean, it's obviously the second highest in all history. So it's relatively high, right-- or extremely high by any other yardstick?
TONY PASQUARIELLO: Sure. I think the other dimension, though, to consider is inflation. . So weak growth or stagnant growth, low bond yields in the context of inflation, I think that's wildly concerning. In the absence of inflation, I think it's a very different story. And so as we sit here today, perhaps the fairy tale is the United States is at full employment.
We've actually seen quite healthy wage growth. For the first time in a long time, measures of wealth equality have actually, thankfully, improved. And yet core inflation is still running below trend. So I would argue there's elements of that that are dreamlike through the perspective of the equity market investor.
RAOUL PAL: Yeah. So what about fixed income, then? Because can fixed income remain at lower yields if you've got some sort of wage growth? Because that's the other argument. The bond bearers have been arguing that, well, wage growth is too hot. The economy is relatively too hot. And therefore, fixed incomes are at the wrong price. And everyone's just been stopped out, as we've seen this month.
TONY PASQUARIELLO: That's right. That's correct.
RAOUL PAL: All the bearers got stopped out. That was the move.
TONY PASQUARIELLO: That's right. I think that's certainly a risk scenario for both stocks and bonds, yes, that, ultimately, there is transmission and you start printing above target inflation. The interesting part about the current narrative, though, is it seems that this Federal Reserve, which is a very different Federal Reserve than the one we encountered at the end of last year, have opened their minds to the idea that one could perhaps let that inflation run above target, this notion of average inflation targeting.
And so you have a central bank, who, I think, have pivoted and who is rightfully dovish or is possibly dovish as they could be, again, at full employment given the wage trends we're talking about. So I still don't feel like you're encountering, as you've had in prior cycle, which oftentimes drove that yield curve inversion and subsequent economic bust, you're not encountering this very aggressive