Playing the Fed
Featuring Mark Yusko and Rick Bensignor
Published on: July 31st, 2019 • Duration: 21 minutesIn a special episode of “Trade Ideas,” Rick Bensignor sits down with Mark Yusko of Morgan Creek Capital Management to discuss how traders and investors should position for the upcoming FOMC decision. They debate the outlook for U.S. equities, and review why oil prices may remain lower for longer. Yusko also highlights a particular macro pairs trade he favors right now. Filmed on July 30, 2019.
JAKE MERL: So, today, we have a special episode of Trade Ideas. Ahead of the big Fed announcement, Rick Bensignor of the Bensignor Group is going to find out how Mark Yusko of Morgan Creek Capital is making sense of markets and how he's taking advantage of the current setup. Please enjoy.
RICK BENSIGNOR: Hi, everyone. I'm Rick Bensignor, CEO of Bensignor Investment Strategies. And today, we have the pleasure of talking to Mark Yusko of Morgan Creek Capital. So, Mark, thanks for coming with us today. And sharing thoughts. We're going to a really big Fed meeting tomorrow. The world is real, is waiting for this, markets have quieted down for the last two weeks. There's a ton of emphasis on what the Fed's going to do. What do you think Mr. Powell is going to send us a message to the US?
MARK YUSKO: Yes. Look, I think it's going to be one of those very anti-climactic events. I think he is going to cave to the political pressure to cut even though I think it's a huge mistake. I think it's been a mistake since day one to take interest rates down this low given all the positive- we're in the greatest economy ever according to our Twitter-in-chief. If that were true, then we clearly don't need an interest rate cut. 25 basis points does nothing. That doesn't change anything economically, you and I don't borrow at Fed funds.
So, it's a waste of people's time and energy. He's not going to cut 50 basis points. I don't think. And certainly not going to cut 100 basis points like our President would love him to. And low interest rates don't solve economic problems. If they did, then Japan would be rocking, Europe would be rocking, which they're not. So, I think it's all the kabuki theater.
RICK BENSIGNOR: Back in May, a couple months ago, you were on CNBC, and you said that we're already in a bear market. So, since the S&P is up almost close to 6% or so, which in the grand scheme is not a big move away from where you said there's a bear market. But we're virtually on all-time highs. We're not even 1% in the S&P terms, away from all-time highs. So, going into this Fed meeting, if the market comes out bullishly from here, at what point do you say- let me ask you this- why are we in a bear market?
Breadth shows that this is not a Fang-led rally. We have great participation across the universal investing space. Well, if you look based on breadth, you're virtually on all-time highs, it's very much tracking the S&P. So, there's nothing bad going on in the breadth sense. The only thing that's really lagging are small cap names. The S&P is a percent from all-time highs. Where's the bear market?
MARK YUSKO: This goes all the way back. It's not really to May. May, I reiterated what I said in September, and then what I said a year ago in January, and actually, what I wrote in November of the previous year, was that when Trump got elected, I called it Welcome to Hooverville. He's Herbert Hoover reborn, the only third president with no experience to get elected. And I thought the same thing would happen, we have this big rally to around 2800. That would be the peak. I thought it would happen in September of '17.
I was early euphemism for wrong. It really happened in in January '18. We got to 2850. And we're basically flat since then. We're up 6% since then. And that's three points of inflation and three points of basically dividends. And so, we're basically flat. So, I could say I'm wrong. Fine, if you want me to say I'm wrong, then fine, I'm wrong. But I'm going to say I'm early. We went basically flat for 18, coming up on 19 months, we're in second most overvalued in history of markets.
And so, if people get excited about the Fed cutting 25 basis points tomorrow, and they think that matters in the big scheme, and markets rally, I've to more. I'll get more short. I'll argue over the next decade from here, from this point, and actually, from 18 months ago, so I'll take credit for the full 18 months- from 18 months ago, for 10 years, you're going to have a negative return on the S&P. So, why would you want to own that? There are so many other things around the world that you can own that you're going to make far superior returns. Bitcoin's just one of them. Lots of things that you can own, they're going to do much better.
RICK BENSIGNOR: Such as? Besides cryptos, which you've had a really tough time. We've had a good rally this year. And recently, I think we got close to a 14,000 or so on Bitcoin.
MARK YUSKO: It's actually the best performing asset this year, over one year, over two years, over three years, over four years, over five years, over 10 years now. But other than that-
RICK BENSIGNOR: Better than gold?
MARK YUSKO: Oh, way better than gold.
RICK BENSIGNOR: Yes, yes, you're right. But it is very small participation and I am so far away from recommending to institutional clients to play crypto space.
MARK YUSKO: It's all coming, another topic for another day. What to buy today, I'll call it the hashtag China playing go trade. Everybody thinks we're winning the trade war. We are being crushed in the trade war. China is so far ahead of us. They're three moves ahead. They're playing a different game, they're playing go while team Trump argues about how set the checkerboard, they're not even playing the same game.
There was a deal, three or four months ago, that China would have signed. And then Trump at the last minute came in and said, no, you have to admit wrongdoing. They're like, go away, go away. So, there's not going to be a deal. There's no deal coming. He said this morning that everything's going well. No, it's not. There's no deal. There's not going to be a deal. China's killing us.
RICK BENSIGNOR: There's no incentive for either China or Trump to make a deal happen right now, so the meetings that are starting right now are really not going to progress and in fact, pulls up today another $7 because Trump's saying there really is no reason to rush through this. And it's certainly politicized. November starts his year into the next election. And if he wants a China deal to happen, it would certainly be more beneficial to him to have something happened during the election season to say, this is another thing we've accomplished. So, for months, and it could easily be six to 12 months. He doesn't need this deal to happen.
MARK YUSKO: We can't vanquish the enemy until it's important and makes a splash in the press. So, we always have a new enemy. He creates enemies to topple. There are enemies. There was no problem with North Korea, hasn't been a problem with North Korea for decades. But he creates a problem and then goes over and doesn't get a solution and then moves on to the next thing.
So, now it's Cold War 2.0 in Huawei. This whole thing about Huawei, 10 years ago, the US and China had to make a decision. What were they going to support technologically? We supported the Fangs. So, we are the world leader in social media. We're awesome. They decided to back AI and 5G. So, they're the world leaders in 5G. You get off the airport or get off the airplane in Mexico City, plastered billboards everywhere you can see, 5G from Huawei. Go to France, whole buildings draped in that fabric that says 5G from Huawei.
They're killing us in 5G rollout. And so, we had to demonize them and create this cold war, rasky enemy. The reality is China's just doing what they do. They're leading in technology. They're filing more patents. They're graduating more engineers. They're building better companies. And look at Tencent and Ali Baba. Again, eating our lunch. So, the great trade is long China, particularly the A shares and short the S&P.
RICK BENSIGNOR: That's interesting because I got clients back into China early this year. We had a big move, we actually sold out and came back in it June.
MARK YUSKO: Awesome, love it. Now, it's a better trade than my trade because I've been long all year, but you had better trade. You're a trader, I'm investor.
RICK BENSIGNOR: Yeah. So, I agree with you that China is a place now, would I buy China and be short the US? I don't know because the S&P is seemingly the only place to be that continuously makes money and again, it can really do with all-time highs.
MARK YUSKO: So, the Tina trade I think is so overdone and said, the S&P is basically flat for last 18 months after dividends and inflation. Earnings are collapsing, horrible earnings season, more horrible earnings this morning, bad earnings. So, we're going to have two consecutive down quarters of earnings. I believe we're actually going to be in recession sometime over the next four quarters. But when I say recession, I don't mean like a collapse like global financial crisis. I mean 2001, 1% average growth over four quarters. That's a recession. Shallow but still a recession.
And I think that the S&P is going to fall and look, I said last October, that the S&P would fall 40%, 4-0% to get the fair value. Well, I'm only wrong in the sense that it's not down 40%. Now, it went down 20% as it rallied back to even, back where it was last September, October. But we're not wrong until we're at the end of the period. Going to need a half year to be to be wrong.
RICK BENSIGNOR: December we got down, the S&P I think was 2350 give or take a couple points. We've rallied significantly from that. By early January, I told my institutional clients that that low was not only a good trading low, but the cyclical low. So, I've been in the camp and we will not go down to that level. Again, it will not be tested. What do you think?
MARK YUSKO: I don't want to debate right here. But we could. But I like your perspective. But I think we're going to go lower.
RICK BENSIGNOR: Lower than December's low.
MARK YUSKO: I do. I think that was halfway. I think we're going all the way to fair value. I think just like in 2000, 2001, 2002, and the way I thought about it was it would play out in exactly that way. From September of last year to September two years hence. So, September 2020. I thought we would have down single digit in 2018. Down double digit this year. And then down 20 plus percent when the credit crisis really hits in 2020, just like it did in 2002.
Because remember, in 2000, the market was really overvalued, but people didn't really get unhappy with the market until 9/11. It was really 2000 down 9%, 2001 was up for most of the year until 9/11. And it was only in 2002 when people realized that all this telecom companies were really fake, Enron, WorldCom, et cetera. And there are a whole bunch of companies that shouldn't exist. One-third of the Russell 2000 don't make any money. The only reason they exist is because of these artificially low interest rates.
If interest rates were where they should be, short interest rates for over 140 years have been equal to nominal GDP. Today, nominal GDP around 3.5%, that's where interest rates should be. But we're keeping them artificially low, because that enriches the people at the top of the pyramid. And if you believe, back to our original conversation, that's why the Fed exists, then good. That's what they're doing.
RICK BENSIGNOR: So, before I let you go, I want to talk to you about something that's near and dear to me, which is trading oil. And that's a market you have a lot of interest in. I trade it almost daily. And I will tell you that from somebody who's traded commodity markets almost 40 years, it has become one of the most difficult markets to trade. It moves a dollar like nothing, you hit a bid and the moment you hit the bid, it's 25 cents against you. The machines have taken over this-
MARK YUSKO: Look, I'm so glad to hear say that, because I probably haven't been this frustrated about a market in my whole career either, in the sense that we do a lot of work on the oil space, because we have a lot of private investments in the best basins around the world. And so, we have really good insight and good knowledge on what's happening. And the supply of oil is off the charts, particularly in the US, particularly in the Permian and so the price should not be strong this year.
And there's been this crazy rebound, very similar to 2016. Remember, 2016, we're down to $20 barrel, it was going down, Raoul was saying it was going to $10 a barrel, everybody was bearish. And literally, on a dime on February 11th, it turned to went up. And it was only a quarter later we found out why, was the Chinese were buying huge amounts of oil futures to basically be able to market. They pumped a trillion dollars, a trillion with a T, that's a dollar a second for 31,700 in 10 years, trillion's a big number.
But it pumped a trillion dollars to save the world in 2016. And you had small cap rally and then markets rally and everything was glorious and we solved the recession that we're in, the PMIs were all low. Oil prices were rallying straight, straight, straight, straight up and then boom, they fell off a cliff right before the midterm election. Shocking, I know, got low oil price, because there's this funny correlation between price of gasoline and presidential popularity. It's a perfect inverse correlation.
And so, what was interesting was that fall then went out of control, to your point about just being crazy, is it crashed right through 50. Right through $42, and like what's going on? And so, then this just, again, V-shape bounce. But when we looked at the supply, US production hit 12 million barrels a day, which five years ago, people said was impossible. And so, it just didn't make any sense to us. But then you start looking at the futures market again. And there was this money, some of it Chinese, but some of it comes places I don't understand, because I'm not in it day to day.
RICK BENSIGNOR: Last fall, oil peaked to just under $77 a barrel in the front month. And two weeks later, I was on Bloomberg TV being interviewed, and I said that high is not just the high near term. It's a cyclical, if not secular high. And the feedback I got was you're off the crazy to hundred dollars, what do you think? Are we going to revisit that? Is there a good likelihood because the bounce off of $42 got to $66 and change or sitting around $58 bucks today give or take.
MARK YUSKO: I think you're so wise on that. Because at that point, not only was everybody talking about triple digits, there are some people talking about $300. That there was this super spike, the Strait of Hormuz will shut down, which now we're talking about maybe happening. Now, if that were to happen, if there is a conflict which is being created, I think artificially, probably to prop up oil, look, there's one group in the world that needs triple digit oil prices, the Saudis, and we will do or say anything to help them as we've proven they can do anything they want, regardless of law or ethics, and we will support them.
So, they want to get Aramco public, they need higher oil prices to get a high price for Aramco. So, I wouldn't be surprised if suddenly, another drone get shot down or something happens. And I love the headline about the Iranian seizing a British tanker, know the British sees two Iranian tankers in the morning, and they just retaliated. So, let's get the whole story.
But I do think there's risk of a super spike. But I think the secular peak of '77, I'm right with you. We are awash in oil. It's not as bad as the '98 cover of the Economist magazine, where oil was going to go to $5. And the Economist actually said some day, it might be free. Okay, that was a little extreme. But we have so much production capacity in United States because of fracking technology. And this is a great thing example where technology has taken a commodity and made it ubiquitous.
We didn't think for years. In fact, they just tell the story that we had all this oil, Saudi Arabia, in Midland, Texas, or under Midland, Texas. We can see the airport, you got great oil, but you had to drill a mile deep, insert a tungsten steel rod and heat it to 700 degrees Celsius. I said that's just seems expensive. But then fracking came along. We didn't have to do that anymore. So, now, we can get this oil out of the ground. And that's pretty amazing.
So, supply, really negative for oil prices. Demand, now, we're not going to have everyone have