Comments
Transcript
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CHAny suggestions on learning more about Global PMI Cycles?
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TSyou say retail sales looks bad, every chart I'm looking at looks pretty good and nothing far out of spec. https://www.macrotrends.net/1371/retail-sales-historical-chart
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ISCould anyone please tell me what indicator Teddy mentioned was the one he'd have top of the list right at the end of the interview? Something to do with China? Thanks
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TMgood chat. market idk, but socks have to be at an all time low - I'm going max long mens socks
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MS23> 15 - great view of the Platinum Daytona... ;)
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RESPX is up yoy agreed. However, if you look at the last 12 months, the SPX is up 6.5% and this is led my utilities up 15.5%, reit's up 13.75% and consumer staples up 13.3% The cyclical parts of the equity market like energy (negative 16% the last 12 months), materials (flat) and financials (up 1.6%) are agreeing with the PMI and the bond market. So it is the bond proxies in the stock market taking the SPX higher. There doesn't seem to be a disconnect to me.
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SvRaul is always the clearest speaker and best at the interview, thank you
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JSQuestion: Why do banks need higher rates to breathe? I would have thought with low rates, banks are borrowing at all-time record lows and lending them out (i.e. credit cards) at all time record highs; hence the spread is significant and favours the banks? Where am I going wrong?
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RMRidiculous to interpolate PMI from equity prices. Bond yields have come down due to slower growth and slower inflation expectations. It makes equities more attractive, hence pay a higher multiple. Totally agree with Chinese local government credit growth theory though. Only problem is that this is a different sort of stimulus than getting SMID enterprises to borrow, which they've had a tough time doing. Continual diminishing returns after having exhausted in '15-'16.
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KATeddy graduated from college in 2013. Clearly some one to watch. I see a great future ahead for him. I feel old.
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WCI watched each interview this week and came back to watch this a second time. This was the best.
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BMRaoul has no socks but hey - he's wearing jeans and an old T-Shirt...probably borrowed the jacket. But Teddy has a nice suit on + a tie so what's the deal with no socks? Maybe he just forgot to do the laundry? But what the hell - still a great interview...
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JFNot sure if he would be up for it or not but would like to see John Hussman on RV for an interview. Hussman Funds is definitely on recession watch these days as well.
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FKFirst time I've seen Teddy. Obviously a very smart guy. Enjoyed this very much, thank you.
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RLVery unclear presentation. Dude needs to take public speaking class. Swallowed his words. Didn't finish his thoughts.
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RIThe last question--trade recommendations--should be required of every video.
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YASo far you have spoken to people who mostly agree with you. Would be interested to see you spar with someone taking the other side of the trade.
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VSRaul on liquidity -US debt is financed buy the banks. They arb every purchase-(see the news rules) they can do an unlimited amount . In terms of raising money govt debt is unlimited .
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CHThat's a damn fine jacket Raoul has on
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LP"Itching to get back in the 2s . . . at about 2.10" Assume he means that when the yields on 2-Year Treasuries reach 2.10% that is his buy price? Can anyone confirm, please?
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JVBrilliant. I would throw silver miners into the mix due to the low silver price relative to gold. Vix is low again so I’m looking at equity puts, one year duration, maybe less. Financials in US will get killed if rates go to zero again, good point. If credit market slows/freezes then it exacerbates the fall.
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BMReally enjoyed this as they test the strength of each others theories. This young man (Teddy) seems to really know his stuff. And I appreciate you (Raoul) doing the interviewing here because it really helps frame the subject matter and puts things in clear terms. Very well done. P.S. Thanks for the gold miners commentary...I am staying long!
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AJI have listened to three commentators echo Raul's end-of-the world thesis and despite the neat logic of the ideas I feel there is a common assumption. All assume a one way directional relationship between economic indicators(PMI/LEI) and the market (Stocks/Bonds). The logic is that the us/world economy is slowing therefore it is bullish for bonds and gold and bearish for equity markets. Their indicators and markets differ but the conclusion is the same. What if the relationship goes in the opposite direction? Our research implies that the LEI / PMIs may be a lagged reflection of risk assets. Perhaps the purchasing managers are watching CNBC. It would look exactly the same on the charts but the macro implications would be radically different. Long bonds into a consensus bull market with the largest speculative long position in years may not be the no-brainer it is reported to be.
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JHI had a hard time getting through this...because like Ryan (below), it seems entirely inaccurate to me to even attempt to correlate PMI and equity prices. Perhaps I am missing something here from what Teddy said. The whole point of the last 10 years of free-money policy to me is that we have essentially divorced markets from the real (non-financial) economy, anyway; so these trends won't line up at all, necessarily, and you can likely not infer much about equities from looking at PMI, or vice versa. Again, in all humility, maybe I should have continued, but this analysis just struck me as too basic and not accounting for the fact that markets (and the economy more generally) are complex systems. Cheers guys.
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SGi liked the no socks thing.... maybe its one of the things that gets you into the macro inner circle. :D
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DHGreat interview. Recession watch has already turned out better than I had hoped for. Teddy is a great follow on twitter too.
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TRDunno if it's the right place, but can anybody explain the drop in volume here? https://twitter.com/RedRoosterM/status/1151573938025193472
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RHI now see that the main purpose of CryptoFortnight was to set-up the main event of RecessionWeek. RecessionWeek content has been excellent.
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MZI just wanted to say I love both of your footwear.
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SSCan you point us in the right "bond" direction to weather the recession storm? Not investment advice, just suggestions to look at. Mr. Vallee's look into the same setup's as Mr. Pal, gave me an additional way to think about these important indicators. My concern is that historical setups have been thrown out years ago and we're in a whole new world and time never seen before. But, I'll stick with Raoul Pal and the gang. Thx guys.
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RAThe nuance and contrast between the Raoul, ECRI and Teddee segments has been noteworthy and very informative.. So far these are accomplishing what Raoul set out to do. This series and it’s timing represents RV in all it’s glory. Maybe shoot a note over to the Fed to take a look at this series?
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AMTerrific content. Nice delivery.
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SVI agree the 18-month lag is correct, but the pain should extend much longer than most expect when the lags are applied to QT.
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NHexcellent interview. there is no one better to ask the questions of the day than Raoul. Looking forward to the rest of recession watch.
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GFI think July 9 was no socks day at RealVision.
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APRV is moving markets, look at what you did to GDX Teddy ;)
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MZAlso - when the fed says the consumer is fine, they mean the consumer is fine as long as the stock market is up.
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RBNice to see that EVERY interview so far this week has presented a well balance argument for a continued expansion vs a looming recession. #NoBiasRV
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JCAwesome. I am astounded that I've been an RV subscriber for 4+ years now and yet Raoul & Co still deliver the goods. I think I could listen to these sorts of back and forth conversations 24-7. Teddy is really great and a good Twitter follow as well. So much stuff here to digest.. Really feels like the 2-year is setting up very nicely + gold miners + shorting financials and semis as discussed in the video. I guess the big question is timing but 2Q and 3Q earnings have got to disappoint...
TEDDY VALLEE: If you look at Challenger and Gray job cuts, big upticks year over year, especially in the industrial sectors. In the US, the economic data is going to continue to deteriorate until roughly June of next year. There's never been a higher probability in this cycle for the US to go in recession.
RAOUL PAL: Next up in the recession watch, I really want to speak to Teddy Vallee. Teddy's somebody I've known for a while. And he's only appeared on Real Vision once. I think he's got an incredibly interesting perspective on global economics and macro. He's a business cycle guy like me. He looks at things in very similar ways. We approach things independently very similarly. And I want to see how he is constructing his forward looking stuff, and what he thinks is going on, because I think it's going to be super interesting to see whether his correlates with mine, and also with Lakshman's view about where we think the cycle's going.
Teddy, good to see you.
TEDDY VALLEE: Raoul, good to see you.
RAOUL PAL: I thought of you when I was thinking about this whole thing about I'm struggling with trying to decide, are we going to go into recession or not? My personal view is we probably are even in one right now. But I know that you look in the world in similar ways me, you look at the business cycle, you look at correlations of different parts of the business cycle. And I've been following you on Twitter and some of your stuff. And I know you've been on Real Vision as well. I just want to get your view, where do you think we are? Talk me through a bit of your top-down framework, and we'll dig in a bit and kick around some ideas.
TEDDY VALLEE: Yeah, exactly. So, a lot of what we do is focus on leading indicators. So, our leads typically range from 6 to 18 months, and a lot of the stuff was deteriorating in October of last year, which is why we were pretty optimistic on the bond trade as were you. And that is continuing to deteriorate. We don't see really a bottom until December of this year, potentially.
We have some upticks in some of our leading indicators. But we're not necessarily sure, as we talked about off- camera, if that's an uptick and going to trend lower or if that's going to be sustainable. So, one of the things we're really watching is what happens in China with the China credit data. So, that comes out this week. Our intuition is that the Chinese are in a lot of pain with the tariffs and also the domestic economy. Some of the most recent data points have been pretty poor, PMIs, et cetera.
So, we think that the Chinese are now going to really kick in some of these off balance sheet local government financing vehicles that they've deleveraged that will lead to growth in one which could potentially lead to a bottom in economic growth December of this year.
But that said, the market that's on the assumption that that happens, we haven't seen that yet. We'll find out this week if we do get a positive trend. But that said, the markets right now our pricing in, I've put this together this morning, it's absolutely amazing. The markets are pricing in a global PMI. So, if you take the global PMI flat or year on year, but primarily flat, and then you take the year on year rate of change of ACWIs or ACWI or US equities, global equities right now, prices held constant or pricing in a global PMI at the end of this year of 53. So, that's marginally off the high of the global synchronized recovery at the end of this year. And we're seeing nothing that will create this environment-
RAOUL PAL: So, there is a disconnect between the global PMI and the MSCI world index or something like that.
TEDDY VALLEE: Exactly. So, year on year, equities will be up in December, roughly call it 16%. And the global PMI, given the relationship, and I can put together a chart- should happen down 10% year on year. So, down 10% year on year was significant. In December, you remember what happened in December.
RAOUL PAL: That's right. And I'm looking at this year on year, as well. Because the S&P for the same reason is not a lot of people are thinking year on year terms, but once you do, you'll realize it has to be quite a lot lower.
TEDDY VALLEE: Exactly, exactly. So, that's just from a top down macro perspective, looking at year on year rate of change of equities, and also the global PMI. And we have a lead on where the global PMI is going. And we think it's lower. So, equities are thinking this monster cyclical rebound by the end of the year, we still see it lower.
RAOUL PAL: And do you get a sense of where that's coming from?
TEDDY VALLEE: I think there's a lot of optimism around China. So, beginning of the year, the China trade deal, the Fed pivot is also a very big one. And then likely just fiscal stimulus in Europe, and that's what-
RAOUL PAL: Because I've been looking at the Shanghai HS, it looks like they're breaking down again. And if that's the case, then people going to have to readjust the Chinese talk.
TEDDY VALLEE: So, it's really interesting, an analog that we've been tracking is the 2015, August to- I guess a little past August, call it September to actually be more December, Q4 2015, leading into the self that we had in 2016. That's the final leg lower. The global economic data is almost like identical and the markets are also trading identically to it. So, China PMI just started ticking up, call it September, Q4 of 2015. And as it was going higher, that's when equity sold off, which is basically similar to what we're seeing today.
So, an analog or an overlay of emerging markets with today's prices, I'd say I don't like to put correlations on stuff, but it'd probably be 80% to 90%. And the next move is a good amount lower.
RAOUL PAL: In emerging markets?
TEDDY VALLEE: Emerging markets, but it would also be applicable to equities in general.
RAOUL PAL: And my view on that emerging market thing- because I'm waiting for that. And the emerging markets may have been pausing for a while. But I look at the chart of the ADXY, the Asian currency, a monthly chart, is this enormous head and shoulders tops like the biggest chart pattern I have ever seen in foreign exchange, which is also if I look at the Fed trade weighted broad dollar index, or the RMB, they all look like, oh, my God, something could happen here. It's the dollar, I think.
So, if I'm thinking about your forward looking indicators. And I put similar things in mind. Some of them have stabilized. But I'm having a feeling if something's going to upset the applecart going forwards, it could be the dollar. And if the dollar starts to rise, then I think it could really change the situation.
TEDDY VALLEE: I agree. I agree. So, we have a similar view on the dollar into the end of the year. So, you've done much more work on the funding issues globally. But the way I've always looked at the dollar's growth differentials, and right now, the US still has the higher differential or higher rate of growth versus the rest of the world. And the rest of world is going to continue to deteriorate into the end of the year along with the US but probably the larger rate there for either the dollar stays flat or goes higher, which really could also weigh on emerging markets into the end of the year. And moving on to the rate picture right now, rates, huge move, some technical stuffs and weekly DeMark, daily DeMark.
RAOUL PAL: I have been looking at those stuff. So, I closed a whole bunch of my positions.
TEDDY VALLEE: Same, same. So pretty much out of 2s couple weeks ago, on the sidelines waiting for some either digestion or a move higher. And then what will be really interesting if it breaks, this initial breaks in the nine, the weekly nine, then the trend is just super strong. Right now, we're bouncing a little bit. So, given the bounce, I could also see that supporting the dollar, call it over the next two, three months, which has really gone away on the EM stuff, and then also a lot of the economic data.
RAOUL PAL: And I'm looking at those DeMark counts, and I'm thinking the same thing. And I'm thinking I'm also looking at the- I put 2s against 2s in 2000, and 10s over the same period. They're a fantastic fit. It's all identical. And you saw where the curve started steepening, because 10s are at a quite sharp correction, 2s just went sideways for a little bit. And then they both absolutely plummeted. And so, I keep thinking that's going to be two, three months. And then really, when you look at, it's usually after the first cut, because the first cut, the market digest it for a week, and then it's like, okay, what's next? Are they going to cut again? And then everyone pulled back into the bond market.
TEDDY VALLEE: So, there's couple of interesting points on that. As soon as unemployment claims tick higher, that's typically when the Fed really starts- this would be what they've done once before, once or twice, but they haven't really cut in terms of- I'm going to call with that unemployment claims rising. So, if we see an uptick in unemployment claims, that could be the catalyst to multiple cuts, and we're actually starting to see like- if you look at Challenger and Gray job cuts, big upticks year over year, especially in the industrial sectors.
And then also paychecks has a small business employment indicator that's basically just falling off the cliff. So, there are indications that makes sense because wages are rising. So, business is getting more squeezed so they're having to lay off employees for this part in the cycle. So we haven't seen it in the NFP numbers and Friday, we had a pretty big print and everyone's focusing on that. We were talking off-camera about all the economy's doing fine but that's the most lagging-
RAOUL PAL: And it was going from- it's 50 basis points, they don't need to raise rate, they don't need to cut rates at all?
TEDDY VALLEE: What are they doing? So, the Fed are idiots. So, that's the most lagging economic data there is. So, you can't focus on that if you want to trade, you have to look out like 12 to 14 months.
RAOUL PAL: I think most people don't understand that. It's so lagging.
TEDDY VALLEE: No, and I don't understand why more people don't focus on it. I don't know if that's just the nature of the business and a lot of people are just asset razors and constantly bullish, which works if you can make money for 10 years like that, and then you don't. But one interesting point on the 2s and why I think 2s are going to come lower, we've created this-
RAOUL PAL: You say 2s lower, yields lower?
TEDDY VALLEE: Yields lower. So, we created this global policy index for global central banks. So, basically takes the GDP weighted year on year change of policy rates, and then we've overlaid the global PMI to track each other perfectly. And what we've seen recently is that global PMI is really curated. But policy rates year on year are still significantly high. And if you were able to break out why it's so high or where it's coming from, it's all of the US.
So, the US right now needs the rates year on year need to come down significantly. So, if they're flat, that still is not enough to match the global PMI, which is down which is indicating global rates should be down pretty significantly, or policy rates.
RAOUL PAL: Because I've looked at- so how I looked at the same thing is I took Libor 2-year on 2-year, looked at the rate of change, and then put that against the ECRI or whichever PMI you want to use. And what it showed, it gave me a perfect forward indicator about how tight monetary policy was. At that point I realized, oh, my, God, they completely overtightened, and people don't realize, and it's just been following that cliff on its way down and that bought the trough sometime late next year based on the same idea that global policy rates have got to move a long way.
TEDDY VALLEE: Exactly. Then you get this cohort of people saying, how's that possible? Rates are so low. But there's that much more debt in the system. So, net-
RAOUL PAL: The corporate debt, so corporate debt was up a hundred percent since 2009. So, a couple years up, is the IMF think it's