Insider talks – November 2017

Published on
November 7th, 2017
29 minutes

Insider talks – November 2017

Featuring Raoul Pal, Julian Brigden

Published on: November 7th, 2017 • Duration: 29 minutes

In November, Raoul and Julian focus on the US economy and what economic indicators are telling us at the moment about the state of the largest economy and its market. In times like these, when everything seems to be in balance, our contributors see several catalysts that could seriously affect the perceived equilibrium in equities, currencies and bonds.


  • ag
    anthony g.
    14 November 2017 @ 19:10
    good one - is RV going to do a summary at end of these at any time ?
  • MB
    Matthias B.
    7 November 2017 @ 15:20
    ..after all, Raoul is human - 10 bagger on bitcoin instead of a 35 bagger..; well done to both and I do concur with Jason, this direct discussion format is far more naturally flowing. May I please follow up with 2 Qs: 1) Raoul, you use the ISM as the guidepost for the business cycle, but out of history, is it that superior to PMIs and/or Industrial Production? 2) Julian, you expect an upward surprise in the CPI, a view I have sympathy for. but with US disposable income growth below consumer spending and the saving rate going down that much, at the same time robotics and AI potentially imposing a deflationary force while US debt keeps increasing from already high levels, how can inflation build up when all the above mentioned aspects may negatively impact GDP (unless AI / robotics lead to a massive productivity growth overcompensating for dismal demographics [US BLS exp labor force growth of only 0.2% over next 5Y]? Others please feel free to chip in as well. many thanks indeed! rgds, Matthias
    • JB
      Julian B. | Contributor
      10 November 2017 @ 09:28
      Hi Matthias first off I think we need to separate the next 6-9 months of inflation from the next 10 years. In the next 6-9 months, we see headline CPI moving towards 2.5-2.75% some of this is hurricane, oil related but predominantly its a function of firms finally buckling under the pressure of higher input costs that have been rising for two year and pushing through price increases. As the same time core CPI should move up above 2% and average hourly earnings to 3%. This is enough for the Fed to justify 3 hikes next year. Bigger picture, in the future you are correct robotics, AI etc are major headwinds. However, I think there is a danger of assuming that we are already living in that world. Yes in 5 years, driverless trucks could dominate but for the moment, I believe there is only one driverless truck in the whole country, which is being tested in CO. So right here right now, this technology is irrelevant. My immediate focus is what happens next year when we hit the economy with a fiscal stimulus? Do we get a break out in inflation that looks like the mid 60's when CPI went from 1.6% to 3.6% in 18 months? What happens if after the next big move up in the $, we enter another decade long decline, because that could be massively inflationary. Also what happens if I'm right and in the Europe, where we have the worlds biggest bond bubble inflation surges in the first half of next year? Bottom line, I would suggest keeping an open mind to the risks of inflation at least for the immediate future because it is the biggest risk to markets.
  • CR
    Corey R.
    7 November 2017 @ 15:45
    Great video. Julian, what happens to the euro after the drip to 1.12/1.13? Thanks guys
    • JB
      Julian B. | Contributor
      10 November 2017 @ 09:11
      Hi Corey. We see the move lower in the EURUSD as in part a technical/ positioning play looking to exploit the ECBs current dovishness, which has widened the interest differential in favour of the USD. But it is just that a trade. At some point early next year we should start to see Bund yields rise as the ECB tapers and core inflation/growth materially accelerate (my world suggests 1.8% core CPI by next summer and 3.5% GDP growth). As soon as Bund yields start to move higher and break the range that would be a clear sign to cut.
  • MB
    Martin B.
    7 November 2017 @ 13:47
    As a non-native english speaker it is very hard to follow a conversation which is recorded in such a bad audio quality. I'm very disappointed...
    • PS
      Patrick S.
      7 November 2017 @ 15:05
      For hard of hearing the same is true. I have to re-play a lot of parts. Any chance for an improvement in quality? The conversation is great. Thanks
    • BT
      Bryan T.
      7 November 2017 @ 17:57
      Guys this is but one more reason a transcript is sorely needed...hope to that added feature soon.
    • SB
      S. B.
      9 November 2017 @ 17:42
      I agree, it's sometimes hard to hear what it being said
  • AC
    Andrew C.
    9 November 2017 @ 08:47
    Raoul, Following up on Brent C below I commented on this rising VIX with a rising SP500 from the 1990s before (on one RVTV interview, which I can’t find now!) and would like to explore more. My feeling is that this would be one way for Mr Market to screw over the most people (all those people calling for a 10-20% correction, those buying SP500 puts and those selling VIX Vol). But I am not sure the exact trade (apart from the short EFTs) for selling VIX Vol so I am struggling researching further. Aren’t the forced buyers just buying back their sold Vol positions, which “shouldn’t” have an affect on the actual SP500 Index (apart from, perhaps, they have to get funds to repurchase?) Might you discuss this in more detail please?
    • BC
      Brent C.
      9 November 2017 @ 13:20
      Hi Coxey, You are right on regards to the short vol trade. But in Chris Cole's most recent article he notes the explicit short vol trade pales in comparison to the implicit short vol trade - of which volatility targeting and risk parity are two heavily used strategies. According to his number the explicit vol short is 60 billion vs the 1.4 trillion in implicit short vol. As a simple example, say you have a target vol on your equity sleeve of 10. As realized vol drifts lower and lower, you must increase your volatility sensitivity in the portfolio to reach your target. As this goes on and on, you continue to buy more and more. The flip side is that you will be a forced seller in a rising vol environment. This is way too oversimplified, but it's the general gist of how they work, and thus the reason for my question.
    • BC
      Brent C.
      9 November 2017 @ 13:22
      Here is a link to the paper. He references the amounts on page 3.
  • DG
    Don G.
    9 November 2017 @ 02:31
    Sorry, macro insidets. I thought I had TV open.
  • DG
    Don G.
    9 November 2017 @ 02:30
    I was going to complain about no specifics but after looking at the website I think there is plenty of information there. I can't tell if it's a British hedge fund or a mutual fund. I liked the program.
  • AM
    Alonso M.
    8 November 2017 @ 21:40
    This was a really good conversation, and I agree with others who suggest this flows better without a moderator. I noticed it had been recorded before the events currently taking place in Saudi Arabia. I am surprised financial markets haven't really reacted to these events. What's happening in Saudi Arabia reminds me of what was going on in Iran before their revolution in 1978. It all seems controlled until one day everything erupts as society (wrongly or rightly) decides it doesn't approve of the heavy handed changes being proposed.
  • EL
    Elizabeth L.
    7 November 2017 @ 17:49
    To Paul W. regarding the Fourth Turning. Neil Howe and William Strauss's book "The Fourth Turning" is based upon their thorough study of history. They found that in the four generations in a span of 80 some years that each generation is a product of the society in which their had their formative years. And these generational characteristics repeat every fourth generation. We are moving into the generation or turning in which many of our societal institutions are no longer serving us. What results is chaos as we change the institutions which are no longer working and develop new institutions which move us through to better times. You can also go to u-tube and search Neil Howe. There are several videos of him discussing these dynamics.
    • PW
      Paul W.
      8 November 2017 @ 09:43
      Thank you
  • M.
    Milton .. | Founder
    7 November 2017 @ 14:13
    Hello ladies and gentlemen, We have encountered issues with the audio recording and the end result is far from our high standards. That being said, this is addressed and the video next month will be back with top notch quality. As always, feel free ask me any questions by clicking the Milton HQ on the bottom right of your page. Lovely day to you all!
    • AT
      A T.
      7 November 2017 @ 14:40
      Any chance of a transcript ?
    • RA
      Robert A.
      7 November 2017 @ 20:31
      Glad you caught the Audio problem as I had a devil of a time hearing it and had my I pad up to my ear!
    • MB
      Marthinus B.
      8 November 2017 @ 00:39
      Agree on the free form conversation- just too bad it was only half an hour! Please get Julian a Rode mic like Raoul has!
  • KA
    Kelly A.
    7 November 2017 @ 23:51
    Cool stuff. Thanks. Do you take into consideration the total market cap of all US stocks relative to the country's GDP? At 80% or so it's go time. When it moves to 100% it's usually time to tap the brakes. It's at 139% or so right now. Record was 145% in bubble in 2000. Sometimes dubbed the "Buffett Metric." Thoughts?
  • BC
    Brent C.
    7 November 2017 @ 13:53
    Raoul/Julian Question regarding your market melt up comparison w/ the comeback of volatility similar to 99/00. Given the current amounts of money invested in target volatility strategies, risk parity strategies, volatility selling to capture premiums, and the sheer amount of margin debt overall, it seems unlikely to me that ever rising volatility would cause equities to burst higher. The scenario that seems more likely to me would be a quick break lower as all of these program trades become forced sellers. If we consider Julian's take on rate hikes, margin debt will become more costly as well, thus increasing the hurdle rate required for further use of it to make sense. I'm not sure if either of you have looked at Frank Brosen's presentation at Grant's Pub, however he makes the case that a 3% market decline will turn these programmed vol trades into net buyers of volatility, not sellers. In Chris Cole's latest, he also discusses current market structure at length, (another excellent read). And seemingly after making a similar case to Frank's on the fragility of the current environment, he concludes that it could end in a melt up scenario as well. Taking it all in, I'm having a hard time coming to the conclusion, that the initial volatility burst higher will lead to a blow-off in equities. It seems more likely to me that it will lead to an 87/98 type of snap back. I'd love to hear your thoughts as it relates to this, as well as any reader generous enough to lend theirs.
    • DW
      Daniel W.
      7 November 2017 @ 20:46
      Brent, I think they tried to get across a different message which basically is that it will NOT be a sell off in equities which causes higher volatility but rather it could be a blow off top with strongly rising equities which causes an increase in volatility.
    • BC
      Brent C.
      7 November 2017 @ 20:56
      Daniel, Thank you for the reply. I agree with your statement, I think that was the point they were trying to make. My question, however, focuses on the fact that regardless of the reason for the volatility spike, all of those program trades revolving around a vol targeting strategy in one way or another, will become net sellers. Adding in short rates will have the same affect on leveraged buyers in general. I'd assume that would cause them to lower notional exposure. And it will certainly make it more difficult for companies to justify share buybacks. Where is the marginal buyer coming from to create a blow off?
    • BC
      Brent C.
      7 November 2017 @ 20:58
      *Should say adding in "rising" short-term rates
  • EK
    Emil K.
    7 November 2017 @ 18:38
    Taking *nothing* away from Adam and Aaron, a direct conversation between Julian and Raoul is best.
  • SB
    Simon B.
    7 November 2017 @ 18:24
    Raoul, Can you give an update on oil and whether a new entry point on the short side still has value?
  • JV
    Jason V.
    7 November 2017 @ 11:13
    Excellent, gentlemen. Rather liked the direct conversation format. It allowed for a smooth flow of ideas and overall conveyed your current thoughts on macro and markets clearly and concisely. Gun powder at the ready. We await your call!
    • EL
      Elizabeth L.
      7 November 2017 @ 15:19
      I also agree with the comments regarding the direct conversation format. Both of you are able to freely express your thinking without interruption and redirection of the conversation by a moderator. This was the very best video to date, in my opinion, for that very reason. Also, I appreciate your interweaving into your discussion how macro investing works as this is new to me. Finally, this week seems to be bringing on upheavals in the middle east that may impact markets particularly oil. Will see how these external factors might become a component of macro moves. Good to have the two of you guiding us through this maze of Neil Howe's Fourth Turning rearrangement of societal institutions. Raoul it was good to hear you discuss the potential of governments purchasing the markets. I have been trying to think about how that would look.
    • PW
      Paul W.
      7 November 2017 @ 17:02
      Thank you Elizabeth, I knew nothing about Neil Howe's Fourth Turning rearrangement of societal institutions....
  • JG
    John G.
    7 November 2017 @ 16:05
    I agree with others who prefer Insider Talks to just be a conversation between Raoul and Julian with no moderator asking questions. The discussion flows much better and it is easier for Raoul and Julian to express their differences in views and question each others views and to stay on the subject until they want to move on.
  • AP
    Alfonso P.
    7 November 2017 @ 15:11
    this direct conversation format is fresher and allows the conversation to flow more natural
  • NO
    Neil O.
    7 November 2017 @ 11:27
    I agree with Jason - the conversation seemed to flow much more naturally without it being moderated. Thanks guys.
    • PW
      Paul W.
      7 November 2017 @ 12:41
  • PW
    Paul W.
    7 November 2017 @ 12:40
    Hi Raoul and Julian, That was pertinent, thank you. If I could ask Julian, could you do something about your audio feed? It may be the microphone...