Insider Talks – September 2018

Published on
September 7th, 2018
Duration
29 minutes

Insider Talks – September 2018

Featuring Raoul Pal, Julian Brigden

Published on: September 7th, 2018 • Duration: 29 minutes

Summer is over and everyone's focus is back on markets and the global economy. Raoul and Julian look beneath the surface of current market conditions and highlight some of the key themes across economies, sectors and asset classes. Filmed on 5 Sep.

Comments

  • SR
    Steve R.
    9 September 2018 @ 07:03
    Ok, so I get your USD thesis....... BUT, what if the US markets crack much sooner than you expect, which at these levels wouldn't be a surprise? In that case, because so much of the US domestic economy is tied to the US market, this would have a major impact on consumer spending, almost immediately, especially on big ticket items. The retiring baby-boomers would just want to get out in a rush of panic?. US companies would put hiring plans on hold in an instant. (I also note many companies are actually getting their current employees to work longer hours rather than hire more employees - this makes perfect sense this late in the business cycle). If the market drop is big enough the FED would likely stop or put on hold QT and/or the next rate rise. This is turn would crush the USD (and Trump wants a lower USD). Under this scenario EM would rally strongly, along with commodities and the DM/EM divergence mean revert. This I know is a contrary view to your base case, but IMHO, it's just as likely? I'm open to constructive critique.
    • lD
      lance D.
      9 September 2018 @ 15:30
      Not sure about anybody else but i think its a real good idea to have a plan for a weak $ as well as strong $ . i could be wrong though
    • HO
      H2 O.
      9 September 2018 @ 19:07
      Yes, an important scenario. Any more comments on the stagflationary bust scenario? When the dollar cycle does crash out, US rates are going to jump amid very toppy markets and an already stretched fiscal deficit. Trump wants a lower dollar, but appears to have little if any appreciation for how that might occur and the second order effects if it does.
    • JB
      Julian B. | Contributor
      25 September 2018 @ 20:04
      Steve its an issue of sequencing. If we get a US market drop my bet is that it will trigger a global risk off move. The US market is simply too large to allow the US to implode without broader implications. At least initially, that should be $ positive as US investors bring money back home (we have discussed how in the face of a lower US current account its been US capital outflows that have kept the global $ supply stable). Yes eventually at some point, the pain will be so great the Fed will ease and the $ will weaken but not initially.
  • JJ
    Josh J.
    9 September 2018 @ 10:31
    Hi Raoul and Julian, Are there any instruments for retail to watch the CDS for US, Europe, and EMs? Thx, Namit.
    • lD
      lance D.
      9 September 2018 @ 15:32
      Good question Namit
    • JJ
      Josh J.
      10 September 2018 @ 19:46
      I read about WYDE and TYTE ETFs. Raoul & Julain : any take on this?
    • JB
      Julian B. | Contributor
      25 September 2018 @ 19:55
      Gents I haven't seen any retail ETFs ...part of the issue is that post the GFC you can't trade naked underlying sovereign CDS. You must own the underlying bond.
  • JK
    James K.
    22 September 2018 @ 04:12
    Just read an article in the WSJ on the rate of repatriating profits. Seems a bit tepid in Q2. In the event of a downturn in the US could corporate cash needs be enough to exacerbate the rise in the USD? Or would tax consequences prevent this from happening in mass? Thoughts anyone?
  • MN
    Michael N. | Contributor
    19 September 2018 @ 10:15
    great discussion. very helpful.
  • JK
    James K.
    18 September 2018 @ 22:28
    Curious to get your reaction to today’s events. Specifically tariffs announced and none of the expected movements. Was this priced in already? Other factors? Love to get your take.
  • RS
    Rajesh S.
    9 September 2018 @ 22:28
    Does anybody know the video that Raul refers to on Rules based .., Also the date of Julien’s video on road map. Thanks.
    • DD
      Donal D.
      10 September 2018 @ 09:20
      I think Julien's video on the road map is Aug 9th
  • NI
    Noah I.
    9 September 2018 @ 16:35
    Raoul and Julian, Speaking of a Cold War-esque escalation with China I thought you and some of the other readers (particularly anyone holding BABA) might find this to be an interesting read: https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html Everyone knows about the accounting discrepancies at BABA but let’s be honest, I’m sure none of us here have actively taken the time to read through BABA’s absurdly convoluted filings and reconcile the disparities. Well, this wonderful man, Bob Wittbrot — currently the owner of an insurance agency but formerly a CPA, auditor and CFO — has taken the time out of his life to do so since its IPO. He makes some assertions that may be a bit sensationalist (strong CCP involvement), however his dissection of some of the absurdities within their 20-F filings is on point. It’s hard to believe a company with a market cap as large as BABA could potentially be goosing their filings and getting away with it. Then you take a look at the 20-F and it makes Amazon’s filings look like Dollar General. Personally I think Chanos was onto something but his timing was wrong, fighting the momentum in Chinese tech names had been a losing proposition for the past few years. It will be interesting to see how this all unfolds in the next crisis. Is BABA a house of cards or do their 900 subsidiaries actually do something besides funnel money out of US investors pockets? Are the numbers entirely fabricated, are they simply goosed a bit, or are they genuine? I’d bet everything I have against the latter. The question is what is the extent of the fraud and can their organic growth allow them to sweep this under the rug for the foreseeable future, or will the trade war and potential ensuing crisis cause cracks in the shaky foundation? Also, thanks for another great video!
    • NI
      Noah I.
      9 September 2018 @ 22:31
      I swear the above post had line breaks on mobile. Looks abysmal on the desktop site! Sorry to anyone that sees it as a brick of text. I'm going to copy and paste a quick excerpt from the blog so everyone can decide if they're interested in reading it or not. It really is a fun read. And if this post shows up as a brick of text someone please, for the love of God, tell me how to manually add line breaks for all of our sakes! (Going to try   and see if it adds a line break below so ignore that if you see it)   Alibaba Pictures - Page. 162 After years of delay they've finally written down (and consolidated) Alibaba Pictures, taking an impairment charge of RMB18.116 Billion (US$2.888 Billion). They were also careful to mention on page 162: "Nonetheless, the market value of our investment in Alibaba Pictures as of March 31, 2018 remains well above our original investment amount that we paid in June 2014." This Alibaba Pictures write down was coincidentally offset by a consolidation gain for the write up of Cainiao, here's the note buried on page 129. "In October 2017, as a further step to implement our New Retail strategy, we completed a subscription for newly issued ordinary shares of Cainiao Network for a cash consideration of US$803 million. Following the completion of the transaction, our equity interest in Cainiao Network increased from an approximately 47% to an approximately 51% and Cainiao Network became our consolidated subsidiary. We expect that Cainiao Network will help enhance the overall logistics experience for consumers and merchants across our ecosystem, and enable greater efficiencies and lower costs in the logistics sector in China." The amount of the gain is buried on page 145. "The increase was primarily due to a non-cash gain of RMB22,442 million (US$3,578 million) arising from the revaluation of our previously held equity interest in Cainiao Network when we acquired control over Cainiao Network in mid-October 2017." It is indeed fortuitous that wonderful write-up opportunities like Cainiao pop up just when a businesses like Alibaba Pictures begin to falter. Alibaba management is truly blessed. The obvious question I have is, the total gain booked is US$4.137 Billion (Pg. 4) and that includes the Cainiao gain of US$3.578 Billion that would indicate that there's another US$559 Million in write ups that are not described anywhere else. In a mainland investment environment where equities are down substantially in the last six months, could it be that these write ups might be illusory and there are more write-downs/offs on the horizon?
  • ML
    M L.
    8 September 2018 @ 21:42
    A USD shortage of the sort we had before in the '82 with the Latam debt crisis and in the 97/98 with the Asian financial crisis is less likely now as EMs on the whole have much more USD reserves, they have fewer structural imbalances (exceptions being Argie and Turkey), fewer currency pegs and more FX hedging. ST external debt is also mostly covered on aggregate by reserves, so implies no rush to secure USDs. On the other hand, some EM imbalances have worsened in some cases, debt/leverage has increased (mostly China) and this means more USD debt exposure. Yet, cross-currency swaps markets are not showing any unease. Nor is LOIS. Perhaps these could spike suddenly later and the USD does get out of control, but the big spanner in the works is US trade tensions. The escalation will hit the US consumer, and this is bad for stocks (camouflaged by BBs) and this could in fact be the trigger. So, not from a weaker China and weaker Europe, but a sell off in overvalued US equities that causes the Fed to ease off, arresting and reversing the USD's ascent. The USD smile is therefore a lot wider now than it has been in the past (due to QE and fiscal stimulus globally) and this means there is more space between good and bad USD rally, which means more time for the US growth narrative to deteriorate and send the USD lower.
  • MC
    Minum C.
    8 September 2018 @ 16:06
    Have European banks "hedged" some of their credit risk through credit default swaps? If yes, who are the counter parties?
  • MW
    Marco W.
    8 September 2018 @ 13:10
    Just one possibility I think of in such an uncertain and volatile world. The LTCM of now could just be the passive investing ETF owning internet and technology stocks, like FANG. When these stocks reach a reversal point like Bitcoin in Dec 2017, the stampede could be in similar scale as LTCM. Just look at the damage Tencent (700 HK) did to HOng Kong market. Another point is that foreigners have been pouring money into internet and tech stocks in US market as a carry trade, which indirectly benefited USD. If the carry trade reverse, USD will be sold.