Insider Talks – November 2018

Published on
November 7th, 2018
36 minutes

Insider Talks – November 2018

Featuring Raoul Pal, Julian Brigden

Published on: November 7th, 2018 • Duration: 36 minutes

Raoul and Julian ponder whether we've reached an inflection point in equities on the back of tightening financial conditions and higher rates. Filmed on 1st Nov.


  • AP
    Alfonso P.
    17 November 2018 @ 22:27
    Milton, will you please give me a reason to continue with this suscrption if we can have almost your same presentations at RV. Julien B ?
  • AM
    Alonso M.
    7 November 2018 @ 18:23
    This was really good. Lots of meat on the bones, and the disagreements on various cause and effect issues add value to the overall discussion. Regarding fiscal policy's ability to 'move the dial', most academics argue the impact of fiscal policy is weak when debt levels are already high (marginal productivity of debt is low and falling). I think this supports Raoul's view. Also, I heard Julian suggest 2800 for the S&P 500 as a potential resistance level, and I see today we are already there. There is a higher level of conviction being displayed in this piece that the top for the S&P 500 is already in place. Questions for both: what do you think is the probability of the top already being in place for the S&P 500? And how much has this probability increased from where you might have had it in September? Many thanks.
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:56
      Minum, its always very tough calling the top on stocks but your read is correct i.e. personally, I'm getting much more confident the top is in. Could we get a bounce if Trump negotiates a trade rapprochement or we get a bull trap rally in Amazon..yes! But in my mind those are selling opportunities. May I suggest keeping an eye on the simple, but effective 5, 20 and 50 week moving averages I discussed in October's Meeting of Minds. The recent sell-off suggests to me that we are for the first time since 2014, in danger of losing momentum and if we stay below 2820 ish its just a matter of time before we get a sell signal.
    • DB
      Daniel B.
      14 November 2018 @ 03:18
      Julian, does that 5/20/50 MA technique work with other indices? I’ve noticed ASX200 is probably a couple of weeks away from a 20/50 MA cross given today’s 100pt decline on poor China data
  • NH
    Neil H.
    7 November 2018 @ 18:49
    You both seem to be constructive on the dollar, however given that the US deficit continues to increase, shouldn't this be harmful for the dollar? Are the reasons why this should not be a concern?
    • GS
      Greg S.
      7 November 2018 @ 21:04
      Key was to focus on what Raoul said in reference to Druck interview. Tight monetary and loose fiscal leads to strong currency. Especially true if you have reserve currency. Fed is pulling liquidity out of market.
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:47
      Neil, as Greg suggests below, QT in the context of the $'s reserve status is very supportive for the currency. Ultimately, you are correct re the deficit, because we need a far weaker dollar to entice foreigners to buy our debt. However, before the $ decline,s we need the Fed to stop and ideally reverse QT ...we aren't there yet!
  • DB
    Daniel B.
    7 November 2018 @ 22:43
    Gents, firstly great update. RE Europe ratesw, do you have any expectations German yields/rates will increase in time? Does that make a suitable short trade for 2 years (Schatz) or 10 year (Bunds)? Or just stick to the simple 2 & 10 plays for US Treasuries?
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:44
      Daniel, my work suggests that Bund yields should be heading towards 80-90bps. But to be frank, its been a graveyard when it comes to trading. So I'm tempted to stay away. As for the Schatz, the latest talk I hear is that if and when the ECB starts to tighten (still a big IF), their initial preference is to shrink the balance sheet vs rate hikes. That doesn't suggest much room in Schatz. Better stick to the US.
  • MG
    Miguel G.
    8 November 2018 @ 14:25
    Raoul and Julian you both make great arguments as to why the dollar will explode higher from here in to next year. You both also seem to agree that the dollar peaks early next year when the fed pivots, but my question is what if the whole world pivots and re opens their respective spigots on the margin as well (EU and Japan)? Wont that mute some of the dollar weakness and instead of the dollar rolling over it leads to a choppy dollar?
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:40
      Miguel, first off as I'm always keen to stress when people use the DXY as the dollar metric, you need to be careful in talking generically about the $. In the scenario, you set out above, its quite possible that you don't get too much $ weakness vs Yen and Euro. Rather, I'd expect to see more $ weakness vs EM and pseudo currencies such as precious metals.
  • JM
    Joeri M.
    8 November 2018 @ 22:39
    Julian, you wrote last week the following: "Many commentators are convinced that whether or not the FOMC stops after one more hike in December, a top in the tightening cycle is in sight. We believe this couldn’t be further from the truth and displays a misunderstanding of both current circumstances and the nature of the policy that got us to this point." However, in this video you seem to agree with the clients you met in London that after december or march the fed will be done. Can you please clarify because I'm a bit confused on what your opinion is right now. Thank you very much.
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:36
      Joeri sorry for any confusion but essentially we are talking sequencing. The "many commentators" comment was related to the CNBC crowd, who are convinced that because stocks are off their highs the Fed must stop hiking NOW. As I've explained, what they are failing to appreciated is that UNTIL stocks correct and stay down it is almost impossible for the Fed to achieve the broad tightening of financial conditions that they believe is necessary to slow an overheating US economy. In that context, I believe the Fed hikes in Dec and probably in March. There after a lot will depend on whether stocks have corrected further and housing weakens in line with my models. If they have, then its possible the Fed could easily go on hold. But the point, is that until we see that weakness we can't expect the Fed to step off the brake.
  • HO
    H2 O.
    10 November 2018 @ 15:31
    Love these dialogues. One comment: key to fed balance sheet pause is effective fed funds versus interest on excess reserves. The former is getting harder to manage because smaller banks are running out of reserves, while big banks are flush, but don’t want to lend to smaller peers. Would rather lend to “sovereign” at 0 risk weight. Fed should stop with balance sheet shrinkage by the end of Q1. This changes the dollar shortage narrative, which is somewhat weak to begin with.
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:24
      H2...the issue of $ shortage/tight liquidity was the paramount concern of my clients on my recent trip to Europe. Unlike their US peers, they see first hand the damage being created by QT. Unfortunately, I will tell you what I told them. There are NO discussions I've heard within the Fed that suggest they are about to deviate from the current programme. Hence, my expectation is that until something breaks or the US domestic data really falters you should assume the balance sheet keeps falling.
  • JK
    Jim K.
    10 November 2018 @ 17:44
    As always guys, very thought provoking. A question for both of you. Bernanke and Yellen deferred to the stock market on monetary policy (Taper tantrum and Bernanke did not actually taper for 18 months; Yellen blinked in Feb. 2016 as part of the Shanghai Accord after the Dec 2015 DOT plot implied 4 hikes in 2016 and the Fed ended doing 1 in Dec 2016)- what are your thoughts on Chairman Powell attempting to wrest control of monetary policy from the stock market as the boom bust liquidity/ credit playbook has proven to a) not benefit economic growth b) just creates asset inflation which leads to asset bubbles c) widens income and wealth inequality thereby leading to populism from both the left and the right; etc and do more harm than good. We know that the strike price on the Fed put is much lower than Bernanke/ Yellen/ Greenspan , but could Powell be to asset inflation what Volcker was to price inflation or is it too late for him or any Fed chair for that matter to get us off having to put Humpty Dumpty back together again and again because of Fed induced asset bubbles. Thanks again guys for great discussions.
    • JB
      Julian B. | Contributor
      13 November 2018 @ 16:19
      Hi Jim You are correct. Recent history has shown us time and time again that the tail wags the dog. As for Powell, I think your gut is correct i.e. he'd like to try and wrestle back control of the economy from markets and at least for now, I think he'll try. Hence, he will stand tough in the face of equity weakness, especially as our work suggests that well into Q1 he faces both higher input cost core inflation and wages. That said at the end of the day, there is NO way he will be a Volcker. Part of the issue, is that the economy and the market have become inexorably linked i.e. at some point market weakness feedback into the real economy via confidence, investment spending etc. Hence, my base case is that some time next Summer faced with faltering equities and weak housing, he will stop hiking.
  • MG
    Miguel G.
    8 November 2018 @ 11:41
    You guys compliment each other nicely I mean the debate you guys have with one another is next level stuff. You really push each other to get better which in turn helps your subs get better. This insider talks imo challenges many themes and I think forces us subs to really think our own opinions through. What makes a great investor isn't to worry about how hes right but also be open minded in to thinking about ways he may be wrong. Well done guys you have my wheels spinning. Awesome debate.
    • PC
      Paul C.
      12 November 2018 @ 17:24
      Agreed... I'm really enjoying this product & look forward to each release. It's effectively a macro mentoring programme from two of the best. Great work.
  • JQ
    JACK Q.
    7 November 2018 @ 14:06
    Hey Raoul - question do you think we’ll eventually see 2s10s curve steepen first or outright 10s to rally first? Thought about putting in both, but effectively the 10s cancel each other out and your left with long 2 year outright. What’s a more effective position in bonds you’d say?
    • RP
      Raoul P. | Founder
      7 November 2018 @ 18:41
      Good question... I think do both. If we get a bullish steepening, you'll make out like a bandit. I think the downside of the curve is limited so the risk reward over 12 months is very high.