Episode 189

full
Published on:

26th Jan 2024

Julian Brigden - A Massively, Massively, Massively Overvalued Market

In this episode, we delve into a comprehensive discussion with Julian Brigden, a

renowned global macro strategist. Brigden shares his insights on the current

state of the US equity market, the economic implications of the Goldilocks

narrative, the potential risks of the bond market, and the future of global

economies like the UK, Europe, and Japan. This episode offers a deep-dive into

the complexities of global economics and financial markets.


Topics Discussed

• Brigden's perspective on the US equity market being massively overvalued

compared to the rest of the world

• Discussion on the dominant narrative of the Goldilocks soft landing and its

statistical rarity

• Insights into the potential risks and consequences of the Fed's rate cuts

• Analysis of the resilience of countries like Australia, Canada, and the UK in

the face of high rates

• Brigden's views on the structural bear market in fixed income and its

implications

• Discussion on the potential for growth and inflation to run hotter than

consensus

• Insights into the political and economic state of Japan and the potential for

autonomous growth

• Discussion on the potential trades and market trends to watch out for


This episode provides an in-depth analysis of the current state of global economies and financial markets. Brigden's insights offer valuable perspectives for anyone interested in understanding the intricacies of global macroeconomics and financial strategies. The audience will gain a deeper understanding of the complexities of global markets and potential future trends.



This is "ReSolve Riffs" – published on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by  Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global* and Richard Laterman of ReSolve Asset Management.


*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.

Transcript
Julian Brigden:

And the reality of the situation is this is just

2

:

a hyper bubble, but there are some

obviously good companies still left.

3

:

You're paying an awful lot for them.

4

:

And the reality of the situation

is when I look at the U S equity

5

:

market, I think this is a massively,

massively, massively overvalued market

6

:

versus the rest of the world, right?

7

:

Like four standard deviations

overvalued versus the rest of the world.

8

:

But those dynamics are unlikely to

change until either the dollar declines

9

:

And that hurts foreign investors

who've got their money in the U.

10

:

S.

11

:

And or the bubble bursts because it

just runs out of puff, let's say.

12

:

Doesn't look like that's the case.

13

:

Or we go into recession and that

doesn't look like the case either.

14

:

And so for me, you've got this sort

of ongoing, self reinforcing, truly

15

:

reflective type cycle going on in the

US equity market where the purchase

16

:

of the asset, In this case, stocks

underpins wealth, underpins employment,

17

:

underpins Fed rate hike, underpins the

dollar, underpins the valuation of U.

18

:

S.

19

:

stocks for foreigners.

20

:

You know, it's a very self reinforcing,

literally reflective in the true

21

:

Soros esque sense of the world.

22

:

Adam Butler: Julian Brigden,

welcome to Resolve RIFS.

23

:

How you doing today, man?

24

:

Julian Brigden: Doing well.

25

:

Doing well.

26

:

I'm in I'm in Colorado again.

27

:

So, we actually had some snow.

28

:

So I'm, you know, happy camper.

29

:

Adam Butler: Excellent.

30

:

Let's just you and me today with the

other DGENs who sometimes join us are

31

:

often various productive activities.

32

:

So, we get to have all the fun.

33

:

Julian Brigden: There you go.

34

:

Perfect.

35

:

Adam Butler: yeah.

36

:

So what what has been on your mind?

37

:

What are you focused on at the moment?

38

:

Um,

39

:

Julian Brigden: So, know, the thing that's

really been occupying our thoughts is this

40

:

sort of dominant, let's put it like that,

narrative of this Goldilocks soft landing.

41

:

And I think the thing that I struggle

with is that, first off, statistically,

42

:

that's a very odd unusual event.

43

:

It's not the norm.

44

:

The norm is we've had 12

tightening cycles since the 60s.

45

:

We've had eight recessions.

46

:

We've had four arguable soft landings.

47

:

The problem that I have, and

obviously the one that everyone

48

:

quotes is this 95 sort of one.

49

:

Onwards.

50

:

Now, it's fair, I think, to

assume that the Fed is pursuing

51

:

the same sort of policy framework

that it did in the late:

52

:

But and we refer to it,

this is opportunistic

53

:

disinflationary policy framework.

54

:

And I think, this is one of the

ones that we discussed with you

55

:

guys when we were last on the show.

56

:

And this idea of you, that when you have

inflation of this sort of magnitude, there

57

:

are truly two approaches you can take.

58

:

The first one is you do what Volcker did.

59

:

And you create deliberate disinflation.

60

:

So you kind of kill the economy.

61

:

And the second one is you choke the

economy, but not to the point of death.

62

:

Just enough that over time

you can grind inflation lower.

63

:

Now the issue with that

is it did work in:

64

:

That's true.

65

:

And that's certainly what, They

are trying to pursue, but there's

66

:

a couple of problems with what's

priced into markets based upon that.

67

:

The first one is if you never

killed the economy, if you didn't

68

:

strangle, if you didn't deliberately

annihilate it and Waller actually

69

:

referred to this in his recent

speech, if you don't break anything.

70

:

There's no need for you to immediately

start to hack rates, right?

71

:

Which is what we're

pricing in markets, right?

72

:

You can fine tune them so that real

rates don't get too constrictive,

73

:

but you don't need to slash them.

74

:

And that's why, interestingly, the set

forecast, so the Fed's central forecasts

75

:

are Pricing in 75 basis points of cuts.

76

:

And that's exactly what Greenspan

did between the beginning of:

77

:

the end of and the beginning of 1996.

78

:

And these were kind of then fine tuning.

79

:

And then, what's remarkable is

then he left rates unchanged

80

:

for the best part of 30 months.

81

:

I mean really, 30 months.

82

:

Nowhere.

83

:

Now, he also got extraordinarily lucky,

and I'm not saying this couldn't happen.

84

:

And he got the building

productivity that we saw as we ran

85

:

up into the dot com revolution.

86

:

And maybe, over time,

we can get that from AI.

87

:

But the question is, is it this year?

88

:

Right?

89

:

Is it next year, is it year after?

90

:

Because if it isn't this coming year,

then this idea that the Fed is going

91

:

to be able to, slash rates aggressively

because inflation is falling and give

92

:

you kind of the Goldilocks and the

Goldilocks is accelerated or high, let's

93

:

say high levels of real growth, lower

inflation and high levels of employment.

94

:

And And the other problem that we have

is that In every other one of those

95

:

quote unquote soft landings, or at

least let's say in three of those quote

96

:

unquote four soft landings, right, out

of the 12 tightening cycles every single

97

:

one started with higher unemployment.

98

:

And this is the problem that we see.

99

:

If you try and accelerate growth from

here, right, if you go from, you know,

100

:

earnings growth being down 3 percent to up

11 or 12 next year, which has to be driven

101

:

by higher real growth in the economy.

102

:

The problem is, is where are you going to

find the bloody workers to do that with 3.

103

:

7 percent unemployment, unless you're

willing to take the risk of higher

104

:

wage growth, which typically feeds

straight into core service inflation.

105

:

Now, there is one exception.

106

:

One of those four soft landings,

which I think is where we're

107

:

running and looks most likely.

108

:

And it looked like a soft landing.

109

:

I don't classify it as a soft landing.

110

:

It looked like a soft landing

because for at least nine months,

111

:

things went according to plan.

112

:

And that was the only other time in

history where we tried to accelerate

113

:

growth or in post war history,

we tried to accelerate growth

114

:

from this level of unemployment.

115

:

And that was the late 1960s.

116

:

And what happened is, Inflation came down.

117

:

The Fed had a little, they'd been

tightening quite aggressively in

118

:

66 because inflation had broken

out of a well established range.

119

:

They then had a little mini credit

crisis which was somewhat idiosyncratic

120

:

in nature related to RedQ, but it

caused a big slowdown in housing

121

:

and then they prematurely eased

and they eased into ongoing fiscal

122

:

spending and unemployment never rose.

123

:

It kind of flatlined for nine months

and then it started to go back

124

:

down again as growth picked up.

125

:

And what you ran into straight

away was average early earnings

126

:

took off, core inflation went,

and the bond market went again.

127

:

And When I look at the world,

that I think is the real danger.

128

:

I think the growth is just too robust.

129

:

And I look at where rates are and

they don't appear to be sufficiently

130

:

tied to restrain GDP growth and

to bring about that broad slowdown

131

:

that the Fed is talking about.

132

:

Because while the market is just

singularly focused on headline inflation

133

:

or core inflation or inflation in general,

the Fed keeps talking about Wanting to

134

:

see growth slow down, wanting to see

the labour market slow down, right?

135

:

And these are much broader issues.

136

:

So even if you get goldilocks, the

question is goldilocks in what?

137

:

Do you just get goldilocks in inflation

for nine months and then it re

138

:

accelerates as real growth accepts, right?

139

:

It picks up.

140

:

Or do you need to see slower growth?

141

:

Because as I look at things, and I know

that we've been, more and more people

142

:

are jumping on this bandwagon, but we

were pushing it at the end of last year,

143

:

it looks to us that cyclical growth

is actually re accelerating and I sit

144

:

here and I go, I'm struggling with the

justification for the Fed to do 75, right?

145

:

Let alone the double that, that

the market's got priced it.

146

:

So I think that's what's

really grabbing my attention.

147

:

And how does that pan out in market?

148

:

Adam Butler: Yeah, so really the

templates are the McChesney Martin

149

:

1966 pivot into the 1970s stagflation.

150

:

the Greenspan pivot in.

151

:

In 95, remind me, I don't like, so

the nine, the 89 to 94 scenario was

152

:

major run up and over leveraging of

the commercial real estate market.

153

:

They set up a bad bank.

154

:

They put

155

:

hundreds of banks in receivership, right?

156

:

Walk me through what happened

there from sort of 89.

157

:

To 94 and let's see if we can tease out

the dimensions of that that are similar

158

:

today and what might be different.

159

:

Like I remember there was a

bond massacre in 94, right?

160

:

Julian Brigden: Correct.

161

:

Correct.

162

:

And that was, you know, that was

another classic example where the bond

163

:

market got ahead of itself and on these

assumptions and then got proved utterly

164

:

wrong by a Fed that flipped on them.

165

:

And, you know, this is the sort of risk

I think that we run because we'd had a,

166

:

we'd had a big slowdown in 1990, right?

167

:

We had a recession in 1990

and growth kind of picked up.

168

:

And then CPI had been.

169

:

Reasonably well behaved and

was actually, but was still by

170

:

Fed standards a little high.

171

:

And this is the point, right?

172

:

I mean, they were dealing with

inflation that was stuck, basically.

173

:

It had come off the highs of around

6%, but it kind of got stuck.

174

:

In 94 into 95 at around this sort

of 3%, and so Greenspan came along

175

:

and he decided that what he was

going to try and do was grind this

176

:

out and he did have the foresight

to believe that productivity could

177

:

allow this to happen and, productivity

is the get out of jail free card.

178

:

Adam Butler: Economic

179

:

Julian Brigden: so productivity

starts to pick up very rapidly as

180

:

we're moving into the dot com period.

181

:

And what that enables you to do is

kind of get the best of all worlds.

182

:

You get falling inflation, right?

183

:

inflation, falls, from those three

levels that down to below two in 99.

184

:

And it's great for the bond market.

185

:

It also enables you to have great

nominal GDP growth, kind of around

186

:

the levels that we are now, around

six, which is fantastic for corporate

187

:

earnings because that's what they do.

188

:

And unemployment as well, also continued

to fall because we come from this,

189

:

relatively high level in the early 90s

when we were, you know, we got to 7.

190

:

6 percent.

191

:

So that was the big, and unemployment

starting when he moved into this

192

:

opportunistic disinflation, he started

at five and three quarters and you got

193

:

all the way down to the current level 3.

194

:

7.

195

:

So that's, you were coming out of

this recessionary kind of backdrop

196

:

and inflation just proved a little too

stubborn and so the Fed kind of sat there

197

:

and allowed them, you know, played this

game where they ground the thing out.

198

:

And I said, the big difference is In

three of those four soft landings that

199

:

you look at since the 1960s is that we

always started with higher unemployment.

200

:

Adam Butler: Well, was there a material

fiscal impulse then coming out of that?

201

:

So they absorbed all these banks,

they went into receivership.

202

:

What caused that impulse coming

out of the:

203

:

sort of real estate based recession

that drove inflation higher?

204

:

Was there anything structural about it?

205

:

Julian Brigden: no, it was, it was sticky.

206

:

Inflation wasn't significantly higher.

207

:

I mean, if you look at where, CPI did

come down, I'm just looking at it now

208

:

and still get the right numbers, right?

209

:

So if you look, inflation

had hit in:

210

:

2%, just over six,

211

:

Adam Butler: and then

212

:

Julian Brigden: and then it dropped.

213

:

Adam Butler: did Greenspan insist on

raising rates in big surprise raise in 94?

214

:

Julian Brigden: mean, in a way,

it was proving sticky, right?

215

:

Because it was stuck between 92

and 90, and the 96, at kind of 3%.

216

:

And so he came up with this idea

that what you need to do is you

217

:

just nudge rates up a little bit,

to just kind of grind it out.

218

:

And that's what they did.

219

:

They cut them in, in, as we move

into recession in the early 90s,

220

:

they cut rates from eight and a

quarter, basically down to three.

221

:

Adam Butler: Yeah.

222

:

Julian Brigden: And then in late 94,

when the inflation proves resilient.

223

:

In late 93 and into early 94,

they then raise them back up again

224

:

Adam Butler: Right.

225

:

Julian Brigden: to, basically six.

226

:

So they double them

227

:

Adam Butler: Right.

228

:

And we'll

229

:

Julian Brigden: and it's

just to grind it out,

230

:

Adam Butler: okay.

231

:

So the economy was humming at that point.

232

:

It was back on its own two feet

because they've absorbed all those

233

:

bad debts that written it down.

234

:

so the government

235

:

Julian Brigden: the balance sheet

up, essentially allowed everything

236

:

to sort of function properly again.

237

:

And I think you could,

you know, you can see it.

238

:

I find it quite intriguing this

morning to see the story that we

239

:

got on Bloomberg about, I don't

know if you saw it about the banks.

240

:

Starting to duke it out with private

credit to fund all this leveraged

241

:

buyout debt that's coming due.

242

:

So the banks had all been squeezed out of

this space last year and the year before.

243

:

And private equity basically

funded all these deals.

244

:

And now the banks are trying

to get back into that space.

245

:

Now that, rates are lower

and so on and so forth.

246

:

And to me, this is indicative of.

247

:

This easing of financial

conditions that we've seen, the

248

:

question is, is that justified?

249

:

And I question that, I, unless I, you

know, I'm very much of the opinion that

250

:

the labor market in broad aggregate terms,

so how much people earn, how many people

251

:

are working, that sort of thing, in, in

totality, if you look at the labor market,

252

:

basically dictates, nominal GDP because

it's, consumption 60 percent of GDP.

253

:

And if you look at it, It suggests

nominal GDP is still around six.

254

:

And so, this is where I have this

problem of, you know, how do we

255

:

sustain 6 percent nominal GDP with 3.

256

:

7 percent unemployment?

257

:

And the risks are, as I think, see

things at the moment, if you go

258

:

back to that Goldilocks analogy,

the porridge is too hot still.

259

:

It isn't just right.

260

:

And the risk is, for whatever reason,

the Fed seems to be happy with that,

261

:

which I think is a long term threat

to the long end of the bull market.

262

:

But let's assume that They get it wrong.

263

:

The data that they think is softening,

which they do, doesn't soften, as my model

264

:

suggests is not going to be the case.

265

:

And then they turn around to us

in March and they go, no rate cut.

266

:

And then they turn around to

us in June and go, no rate cut.

267

:

And they turn around to us in

September and go, no rate cut.

268

:

Then the risk is then that at some point

by holding rates here, you'll actually

269

:

will do more damage because as the refires

come up and we know the commercial real

270

:

estate problems, et cetera, et cetera.

271

:

And then the risk is that you'll

actually tip over the employment market

272

:

and the thing will become too cold.

273

:

Cause it's the bottom line, I

think, I mean, bottom line I've

274

:

been pushing to my clients is look,

Goldilocks is not the base case.

275

:

Statistically, it's at best.

276

:

one in three and given the three of those

four occasions when we did end up with it

277

:

started with much higher unemployment and

the one where the unemployment started at

278

:

the current levels and it wasn't really a

sustainable Goldilocks scenario as I said

279

:

it lasted for nine months and then went

horribly wrong again as inflation soared.

280

:

I think the true odds of Goldilocks

are far lower than one in three.

281

:

Adam Butler: Yeah, Julian.

282

:

What's not really talked about so much

is the fact that we've got unemployment.

283

:

That's so low.

284

:

We've got inflation that seems

to be have almost troughed and.

285

:

You know, it looks like maybe moving

higher again, and we've got a, we've

286

:

got fiscal deficits in the 6, 7, 8

percent range, as far as the eye can see.

287

:

Julian Brigden: Correct, correct, correct.

288

:

Adam Butler: I don't understand

is why everyone thinks that the

289

:

economy is going to be so weak

as to prompt any cuts at all.

290

:

To me, the risk is on the

right tail, not the left.

291

:

Julian Brigden: Now, I mean,

that's, look, that, that's my view.

292

:

I think from an economic perspective,

I don't see how the Fed can justify

293

:

really any cuts even what I would

call the sort of fine tuning cuts

294

:

that they are foreseeing, right?

295

:

Remember, they have

unemployment rising to 4.

296

:

1 percent in the SEPs.

297

:

And they have growth falling to 1.

298

:

4 percent this year.

299

:

And that's the reason to

justify, and inflation falling.

300

:

And that's the reason to

justify 75 basis points.

301

:

But as I think, see things setting up.

302

:

None of those are happening, right?

303

:

I see unemployment that the

labor metrics, which are anything

304

:

you're at risk of reaccelerating.

305

:

And a lot has that has to

do with this effect that we

306

:

call hyper financialization.

307

:

So this relationship between basically

equity markets and the real economy,

308

:

whereby the equity market in this bizarre.

309

:

Tucked up US world that we live in

actually leads because the only thing

310

:

that CEOs care about is their stock price.

311

:

So the ditty that we have is

one is very simple, you know,

312

:

equities rise, they fire equities.

313

:

So equities fall, they fire.

314

:

Equities rise, they hire.

315

:

And equities have been rising again.

316

:

So You know, all that weakness that you

saw in:

317

:

market metrics, so things like the

challenger layoff numbers, the claims

318

:

numbers that were all going, looking

like recession, recession, recession.

319

:

Last year, as stocks recovered

those things, all that

320

:

weakness is just reversed.

321

:

Adam Butler: In this economy, companies

do not lay off staff when the stock price

322

:

is, at these kind of multiples, right?

323

:

They lay off when the market is

telling them that the economy is weak.

324

:

They're taking their cues from the market.

325

:

If the market's telling them the

economy is strong and earnings

326

:

are going to be strong, they're

not going to lay off workers.

327

:

If they're not laying off workers, how

are we slowing demand again with fiscal

328

:

deficits in the six, seven percent

329

:

Julian Brigden: Correct.

330

:

Correct.

331

:

I, it's I love listening to the

calls from the PMI guys, right?

332

:

And there's a couple of the,

there's a couple of places

333

:

you can follow them online.

334

:

And Tim Fiore, who's the current

chairman of the ISM manufacturing survey,

335

:

they did their sort of semi annual

outlook and it was, reasonably upbeat.

336

:

But what was interesting, it

was done before the pivot.

337

:

Yeah.

338

:

Yeah.

339

:

And Tim is very good

at calling the economy.

340

:

I really do put a lot of

weight on what the guy said.

341

:

In fairness to him, you know, back in last

summer, when everyone was really bearish,

342

:

he was going, I don't think it's gonna, I

think this thing is okay, actually, right?

343

:

Looks actually okay.

344

:

He just came out and he went right

I mean this wasn't a bad survey even

345

:

before they pivoted now They've just

given us the green light to just go

346

:

for it And I think we're gonna have

ISM back at you know:

347

:

what's actually interesting about that?

348

:

You've got to go back 30 years to

find an occasion where the Fed cut

349

:

when ISM came back up above 50.

350

:

Adam Butler: Yeah.

351

:

Julian Brigden: they stop

cutting or they hike.

352

:

Adam Butler: Right.

353

:

Julian Brigden: So it's going to get,

I think, really, really interesting.

354

:

And the question is having

arguably screwed it up again.

355

:

In terms of their economic

forecasting, do they have the, are

356

:

they willing to pursue the cuts anyway?

357

:

Because I think there are, there is

some rationale to say that there's

358

:

something else going on here.

359

:

There is another driving

force behind some of the cuts.

360

:

I don't know the answer if

they do it, but if they do.

361

:

Then there's, look, they can

do what the hell they like.

362

:

But as I always say, this,

I don't judge people.

363

:

I just like to figure out what the

consequences are of their action.

364

:

So, I could see them still in an

environment where growth is still

365

:

relatively robust, still trying to

justify, you know, 50, but if they

366

:

do, and my models are right and the

equity market holds up, which is

367

:

another thing we need to discuss.

368

:

Then I think it doesn't bode

well for the long end of the bond

369

:

market in an environment where I

fundamentally believe we're in a

370

:

structural bear market in fixed income.

371

:

And if it hadn't been for

COVID, that started in:

372

:

Adam Butler: Yeah, so if

the trajectory of rates.

373

:

Ends up being less dovish so

let's first of all, let's explore.

374

:

We've explored some of the reasons

why that might be the case already.

375

:

I think there's a very strong case for

why growth and inflation are both going

376

:

to be run considerably hotter than.

377

:

Consensus

378

:

Julian Brigden: And you look fiscal

is a huge part of this, right?

379

:

It's just huge.

380

:

You go, you want to go back to

that late 60s analogy when we

381

:

were fighting the Vietnam War,

which was a big driver of that.

382

:

We're arguably fighting

three wars now, right?

383

:

If not four,

384

:

Adam Butler: yeah,

385

:

Julian Brigden: right?

386

:

We've got two kinetic wars, Russia

and Ukraine and the Middle East.

387

:

We've got a climate change war,

and we're in a cold war with China.

388

:

It's hugely bloody expensive, all

of those things, hugely expensive.

389

:

So I struggle to see how fiscal

390

:

Adam Butler: well, the other,

391

:

Julian Brigden: continue to

expand, let alone gets addressed,

392

:

Adam Butler: well, that, that

actually might be a bit of a clue.

393

:

Right?

394

:

I mean, it could be that the Fed

is sort of seeing the writing on

395

:

the wall that deficits are going

to continue at this pace, even in

396

:

the event of a Trump presidency,

that he may ratchet back on direct

397

:

investment, but preserve the tax cuts.

398

:

Whether you got supply side or

demand side, the fiscal situation

399

:

is unlikely to change dramatically.

400

:

The other thing that I think it's

been a really interesting surprise

401

:

this cycle is how the interest

sensitives haven't responded at all.

402

:

We've gone from basically zero

rates to 5 percent and homebuilders

403

:

are, are on fire, right?

404

:

Like, um, auto manufacturing on fire,

like which area of the economy is

405

:

going to respond to higher rates.

406

:

That would prompt the kind of

cuts that the Fed is suggesting.

407

:

Julian Brigden: Well, I think in

fairness to the Fed, they're not, right?

408

:

I'll read you a quote from Chris

Waller, which I thought was quite

409

:

interesting, from last week.

410

:

so he said, in many previous cycles,

there which began after shocks

411

:

to the economy, either threatened

or caused causing a recession.

412

:

The FOMC cut rates reactively and did

so quickly and often by large amounts.

413

:

This cycle, however, with economic

activity and labor markets in good shape

414

:

and inflation coming down gradually to 2

percent I see no reason to move quickly

415

:

as quickly or cut as rapidly in the past.

416

:

So I think this goes back to a

large extent what they are trying

417

:

to do this opportunistic policy.

418

:

Disinflationary policy framework, which

is what Greenspan did, but they've done

419

:

an absolute appalling job at explaining

this to the markets for whatever reason.

420

:

So we, they keep saying things, well, you

know, the market can do what the market

421

:

wants and we'll see which one's right.

422

:

We're right or they're right, and.

423

:

I just think it's so self defeating

and so I don't understand why they

424

:

don't have, and we discussed this on

a policy call this morning internally,

425

:

where they don't have the balls

basically to come out and say the

426

:

sort of things that you see from other

central bankers, where the other central

427

:

bankers just go, no, it's too early.

428

:

One thing I think has been quite

interesting is something that's

429

:

got me thinking a lot is, comments

from the bank of England who have

430

:

highlighted the fact that sure, goods

inflation is zero or negative, right?

431

:

But goods inflation is

always zero or negative.

432

:

And what's more important

is service inflation.

433

:

And the bank of England said, you can

just forget it because service inflation

434

:

is still Miles above where it should be.

435

:

And, you know, when we look at it, I

know everyone gets their knickers in

436

:

a twist about, Oh, owner's equivalent

REN and it's going to come down.

437

:

Sure.

438

:

It's probably going to come down.

439

:

But as a fact, when you look at

the dynamics versus the overall

440

:

service thing, it could still come

down and overall service inflation

441

:

could remain relatively high.

442

:

I'm not saying it's, it's

not going to come down a bit.

443

:

Could it, but it could

remain uncomfortably high.

444

:

Adam Butler: yeah.

445

:

And we haven't even really seen

any kind of self reinforcing

446

:

labor cost spiral, right?

447

:

I mean, it's been miraculous how labor has

been completely neutered in this cycle.

448

:

They haven't had any

negotiating power at all.

449

:

They're, you know, a

450

:

Julian Brigden: mean, you still, but

you have got Atlanta wages, which I

451

:

like, still running above five and

that's still pretty bloody brisk, right?

452

:

Adam Butler: Sure.

453

:

I mean, but they're still far behind.

454

:

Julian Brigden: yeah, no, no, no,

no, but I think they, yes, exactly.

455

:

They're still far behind, but I

think they're going to, I see no

456

:

reason why they don't catch up.

457

:

Adam Butler: Which would be

another inflation impulse, right?

458

:

Julian Brigden: I just can't see

politically how wages don't, over time,

459

:

and this is the big political problem

that Biden faces he's, the economy's

460

:

in great shape he's just getting the

blame for that 20 percent haircut.

461

:

you took in the real disposable income

essentially as the US corporate sector

462

:

ripped your bloody heart out in terms

of price increases because we live

463

:

in this highly uncompetitive economy.

464

:

And so what has to happen now

is over time, wages need to

465

:

play catch up to rebuild that.

466

:

20 percent or you're going to a shit load

of political turmoil in this country,

467

:

which I think you're going to have anyway.

468

:

I don't see wage.

469

:

I don't, none of our models are suggesting

wage pressure really drops all that much.

470

:

It still looks to me like it's stuck

at five and change well into:

471

:

which that's why I struggle to find.

472

:

Any rationale for the Fed to really

cut at all, and certainly to go beyond,

473

:

a couple of 25s, which have either

justified because, they've cocked it

474

:

up and they don't want to ride it back

and say, oh no, we were wrong again.

475

:

Or, and I do believe this is the

case, and I hear this from policy

476

:

friends, out of fear of Trump, right?

477

:

There is a large institutional fear

in the Fed, and you can see it.

478

:

In all the global elite, I mean,

just look at what Christine

479

:

Lagarde said about Trump.

480

:

I mean, she broke every single protocol

to come out and criticize Trump.

481

:

A central bank governor should not under

any circumstances, certainly a foreign

482

:

one, say anything about a US president.

483

:

And yet she did.

484

:

And I think that to me is

just indicative of the angst.

485

:

In those policy circles

and all that global elite.

486

:

Adam Butler: So how do you think of Trump?

487

:

Julian Brigden: go 25 50 on the back

of that to ensure there is no slowdown

488

:

and that we'd run this economy Hot into

the election because Janet Yellen sure

489

:

as hell her behavior is she's doing

everything to frustrate the Fed's Attempt

490

:

to slow this economy down by the equity

market, I don't know but as I said,

491

:

you can do what you like, but it just

has consequences in that environment I

492

:

don't want to be long the bond market

493

:

Adam Butler: Yeah.

494

:

How does a Trump presidency

change things, if at all?

495

:

Julian Brigden: So it's something that,

I've been reaching out and starting

496

:

to examine with policy friends.

497

:

I mean, I'm very worried in this world.

498

:

Not, doesn't impact markets immediately,

but it will impact us on an ongoing basis.

499

:

I'm very worried about it, what

it does to the geopolitical side.

500

:

Look, I think he, to your

point, he rolls over his tax

501

:

cuts, he won't increase taxes.

502

:

So you don't address the fiscal problems.

503

:

I mean, they could even get worse.

504

:

I do think there is a risk that

he entrenches US isolationism.

505

:

Which is exactly what we saw in the

:

506

:

acceleration in global conflict that

we got that we're going back to a world

507

:

that looks more like the 1970s, right?

508

:

When I grew up as a kid.

509

:

You know, there were

wars all over the shop.

510

:

There was conflict and coups and

every other week in Latin America,

511

:

there was proxy wars being fought

in, Latin America between Cuba, there

512

:

was a proxy for Russia and, funding,

various rebel groups in Latin America

513

:

and the U S on the other side, right?

514

:

You had the same going on in Africa.

515

:

And I look at this thing

and it looks like that.

516

:

And one of the reasons it ends up

looking like that is because no one's

517

:

afraid of the bloody global policeman

anymore because he has proved to be

518

:

either incompetent or unwilling to

take the steps to actually enforce law.

519

:

And, partly that's because we live in a

much more, connected world and it's no

520

:

longer possible to do what the English

did and roll up the battleship into

521

:

the port and blast, the capitals a bit,

or to shoot rioters, in the streets.

522

:

You know, that, that's a problem.

523

:

When it comes to imposing that, and we've

just seen, the difficulties of the British

524

:

and the Americans have found taking

on these who to who to rebels, right?

525

:

Your modern weaponry at two million

bucks a missile against some bloody

526

:

drone and a bunch of camels, right?

527

:

And guys with AK 47s.

528

:

These are some of the longer

term inflation trends, which

529

:

really, really do worry me.

530

:

And it's one of the, one of the

reasons, not the main reason, but one

531

:

of the reasons why, I am a structural

bond bearer and I just don't.

532

:

I think it's very, very difficult to

address these problems in the West.

533

:

Adam Butler: Have we seen the trough

in rates for this year, do you think?

534

:

Julian Brigden: I, I think at least for

the next three to six months, I think,

535

:

yes, we're short, we got shorted around 3.

536

:

92 in 10 year treasuries, a

kind of target probably 4.

537

:

25 first off, and then 4.

538

:

40, 4.

539

:

50.

540

:

And it's, it's part of this sort of reset.

541

:

And this tightening, this offsetting,

moving, tightening financial

542

:

conditions that if the equity

market will not give up the ghost,

543

:

And as I said, I don't think Janet Yellen

has any, she understands this type of

544

:

financialization, this relationship

between stocks and employment, right?

545

:

She's not willing to let this thing go.

546

:

And she's got some pretty big

tools that she can deploy, right?

547

:

She's done a great job

at basically pushing.

548

:

Refunding into the front end

of the curve and then draining

549

:

liquidity from the reverse repo.

550

:

Adam Butler: What an unbelievable

hit to taxpayers this is to

551

:

continue to front load funding.

552

:

Like, honestly,

553

:

Julian Brigden: Yeah, but come on,

we've got to win the election, right?

554

:

We've got to fight, the fear of

the orange man is much greater than

555

:

the fiscal, survivability of the U.

556

:

S.

557

:

long term.

558

:

This is all just fiddling while

Rome burns type shit, right?

559

:

That's where it becomes scary when

you look at this and go, really?

560

:

Is that what our

politicians have really got?

561

:

Come down to, and I think the answer

is, I hate to say it, I think yes.

562

:

Adam Butler: so why isn't gold

running in this environment?

563

:

Julian Brigden: But I think part

of the problem I think gold has

564

:

performed quite well, right?

565

:

If you look at it against the

S& P, it's actually held its own

566

:

for quite, quite a long time.

567

:

But I think, the big disappointment

is when you look further down the kind

568

:

of Periodic cable, and sort of peer

periodic cable, and you look at things

569

:

like silver which doesn't look good

and it really shouldn't, you break much

570

:

lower than this, and it could start to

get look quite ugly, and I think the big

571

:

problem there is that we built in, you

know, lots of rate cuts into the dollar.

572

:

Right.

573

:

And the dollar is now starting to

look a little better as we price

574

:

out some of these rate cuts, right?

575

:

Such an aggressive stance on rates.

576

:

And I do think, when you look at the

data, even though I don't think the

577

:

ECB will cut anywhere close to what's

also priced into their curve, I do

578

:

think there's much more justification

for, and in the UK, for some rate cut.

579

:

Versus arguably, I don't think any rate

cut in the US, as I said, depending

580

:

on exactly how the Fed plays it, we

will see, and that will determine

581

:

exactly how strong this dollar gets.

582

:

But it looks, I think

that's the immediate.

583

:

The immediate thing that's weighing

that and the higher rates is

584

:

weighing on gold at the moment.

585

:

Adam Butler: And internationally, so

you're just talking about Europe and the

586

:

UK how is the European economy looking?

587

:

How's the UK economy looking?

588

:

Is it gaining strength in the same way as

589

:

Julian Brigden: No, I mean, I think

the UK looks quite vulnerable.

590

:

It's really, you know, Brexit

was an enormous own goal.

591

:

It's been, it's a structural headwind

for the UK and it's something.

592

:

That we talked about for the next

decade, basically the consumer is

593

:

very vulnerable given the mortgage

structure and the lack of fixed rate

594

:

mortgages is going to become increasingly

vulnerable to these high rates.

595

:

She's got a structural

problem to some degree.

596

:

Because we lost a lot of skilled

craftsmen post Brexit, you know, they

597

:

went back to Eastern Europe and they were

keeping a lid on some of these costs.

598

:

Some of it's being offset by short

term visa issues, but, we have, there

599

:

just aren't enough workers there.

600

:

The same problem is the US,

the same problem is Australia.

601

:

A very large Australian bank They're

treasury team the other day and talking

602

:

about, how do we grow again with 3.

603

:

7%, unemployment in the U S and they said,

it's exactly the same in Australia, right?

604

:

They just, there aren't

enough workers, right?

605

:

And so this idea that everything

just picks up again, unless you get

606

:

that productivity burst is going to

be, it's going to be problematic.

607

:

So I think for the UK that gives

us sort of a stagflationary

608

:

esque kind of overtone.

609

:

Continental Europe is a little

more interesting actually.

610

:

I think When I look at my models,

they've done a much better

611

:

job at dropping inflation.

612

:

And I think the primary reason for that,

and it's something that we talked about

613

:

or hinted, touched on a few minutes

ago, and that was continental Europe

614

:

is a much more competitive economy So

the ability of corporates in Europe to

615

:

price gouge to the same degree that US

corporates have done is just not there.

616

:

There are many practices which in the

United States are deemed legal, which are

617

:

really price collusion that in Europe

would end you up in jail, I don't know

618

:

when last time you did your kitchen up.

619

:

But I'm sure when you did, your wife

said, right, there's three appliance

620

:

makers we're going to buy, darling.

621

:

You know, one of them is going to be Wolf.

622

:

One of them is going to, and SubZero,

the other one is going to be Miele.

623

:

And you go to the dealer and you

go, well, I want the dishwasher and

624

:

the oven and the cooktop and the

extraction fan and the blah, blah, blah.

625

:

And the guy goes, yeah, 20,

000 bucks, probably 30 now.

626

:

And you say, yeah, but I'm buying all

of them from the same manufacturer.

627

:

So what's the deal and which

one's going to be better?

628

:

Can I get a better deal in the

wolf or the sub zero or whatever?

629

:

And he goes, no, they're

50 bucks difference.

630

:

And I can't negotiate because if

I do, I'd lose my license, right?

631

:

I mean that price collusion.

632

:

I mean, that's price fixing, right?

633

:

In Europe, you go to jail for that

shit, and you can go and buy your

634

:

melee online, basically, and haggle

between about five different providers.

635

:

So, it's, when I look at inflation

in Europe, it really looks to

636

:

me like they've vanquished it.

637

:

Now, don't get me wrong,

they've also got some labour

638

:

problems, wages have been sticky.

639

:

And high by European standards,

four and a half percent, so not as

640

:

high as the US, but pretty high.

641

:

But it does look to me that those

have started to show signs of peaking.

642

:

When you look at growth levels relative

to inflation, I'm sorry, relative to rate,

643

:

relative to rates, growth levels relative

to rates, you could argue the case that

644

:

if you rank Those three economies that

the ECB has the tightest policy to the

645

:

tune of about, by our calculations,

about a hundred basis points.

646

:

So they could ease to,

a hundred basis points.

647

:

The Bank of England is easy by

about a hundred basis points and

648

:

the Fed is easy by 200 basis points.

649

:

So the economy that is growing

the most has the easiest policy.

650

:

So I think they can tweak a little bit.

651

:

The encouraging signs that I see.

652

:

in Europe.

653

:

And I think this could become

a surprise, not immediately.

654

:

And there are still steps

that I need to be completed.

655

:

Europe is a very heavily focused,

particularly the Germany, which tends

656

:

to drive a lot of our sentiment around

Europe to obviously the manufacturing

657

:

cycle and the manufacturing cycle

is itself very sensitive to the

658

:

inventory cycle and the CapEx cycle.

659

:

And there is absolutely no doubt

whatsoever that as we've seen in the U.

660

:

S.

661

:

with, the weakness that we've seen in U.

662

:

S.

663

:

manufacturing that could be

coming to an end that they got

664

:

themselves caught up with this

bloody great big inventory overhang.

665

:

And so we've written, 18 months ago,

we'd said, this manufacturing sector is

666

:

going to go from inventory shortage to

from famine to feast to hangover, right?

667

:

So we're dealing with the hangover now.

668

:

Right.

669

:

In the U.

670

:

S.

671

:

I think that hangover looks

like it's partly addressed.

672

:

Europe, it's, Germany, it's

certainly got more to do.

673

:

But when we look at one of our favorite

kind of canaries in the coal mine,

674

:

Sweden, it looks like she has totally

got on top of our inventory overhang.

675

:

And now her inventories are

running under her orders.

676

:

And so that suggests to me that as we

move into Beginning of Q2, even in Europe,

677

:

you could start to see the manufacturing

cycle start to pick up again.

678

:

And

679

:

Adam Butler: dependent is

that on Chinese growth?

680

:

Europe has migrated most of Yeah.

681

:

Julian Brigden: But remember

and yes, that will be important.

682

:

And I think China does look is a wild

card and does look kind of messy.

683

:

But you're actually what China, I

think is going to try and do and

684

:

you can see already, she's going

to try and export her way out.

685

:

of, part of the problems

that she's facing.

686

:

And certainly when you look at the

Chinese equity market, I've tweeted

687

:

this, it's like a bloody train wreck.

688

:

There's a, you know, we just

broke a trend, a multi month, a

689

:

multi year trend line on a monthly

basis that goes back to like:

690

:

In the Shanghai Composite, and

it looks like that thing could

691

:

drop another 30%, 25, 30%.

692

:

So, yeah, it's a risk, but it's, as

I said, I think growth certainly from

693

:

just from an inventory restocking

perspective could push us cyclically

694

:

in some of these manufacturing PMIs

back into expansion territory in Q2.

695

:

And that I think is going to

come as a bit of a problem for

696

:

some of these central banks.

697

:

Adam Butler: Are you surprised at how

resilient countries like Australia,

698

:

Canada, and the UK have been in the face

of these high rates, given the high level

699

:

of mortgage debt on household balance

sheets and the fact that those mortgages

700

:

reset on average every two or three years?

701

:

Julian Brigden: Yes, I am.

702

:

I am.

703

:

And I think it's, and as I said, I think

in the UK it's going to start to bite.

704

:

And I think, in some of these other

countries it's going to start to bite.

705

:

The US is in that sense a

little bit of a special case.

706

:

But even when you look at some of these

markets, I think we have to remember

707

:

there's a lot of accumulated wealth,

even in, they're less equity focused

708

:

than some of these other markets, but

people have got a lot of money, right?

709

:

There's a lot of money that you can

use to cushion some of this blow.

710

:

And

711

:

Adam Butler: I think so much of

it is in houses though, right?

712

:

There's a lot

713

:

of

714

:

Julian Brigden: a lot of, yes,

for the vast majority of people,

715

:

right, it's in housing, right?

716

:

That's your biggest asset.

717

:

But there's shortages of houses, right?

718

:

They're everywhere.

719

:

Everywhere there's shortages of houses.

720

:

You can see every single government

looking at, and they just did it in I

721

:

think it was in Canada, where they just

imposed this thing on on all the the

722

:

guys doing short term rentals, right?

723

:

They were like, Oh, we're

going to tax you higher.

724

:

Every single country is trying to

loosen up its housing market because

725

:

they just aren't enough homes.

726

:

So I think that the resilience of the

house price thing, and it goes back

727

:

to your homebuilders comments, right?

728

:

No one's moving in the U.

729

:

S.

730

:

Existing home sales have dried up.

731

:

So by default, the homebuilders have to

do well in a very, very unusual move.

732

:

I mean, one that, to be

honest, we got wrong.

733

:

Didn't cost as much because you

run, that's what stops are for.

734

:

And they did move in our

favor, at least initially.

735

:

But there's a lot of

things that are resilient.

736

:

And if you look at some of the economic

papers that people are writing, some

737

:

of these effects start to kind of wane.

738

:

It's quite possible a lot of two

thirds of the rate increases that

739

:

we've seen have essentially already

worked their way through the economy.

740

:

And I think the other thing that

people need to bear in mind, and

741

:

this is, it's going to sound un

PC, but I don't mean it like this.

742

:

The vast majority of

consumers don't count.

743

:

Adam Butler: right.

744

:

Julian Brigden: The vast majority

of consumers spend every red cent

745

:

that they have from their income.

746

:

And it doesn't matter whether

they spend it on all on food or

747

:

on all on medical costs, right?

748

:

It does if you're trying to pick

which ones are the winning sectors

749

:

within the equity market, right?

750

:

Is it the food companies or is

it the insurance companies, the

751

:

health insurance companies, right?

752

:

But it doesn't matter

from a GDP perspective.

753

:

Adam Butler: Yeah.

754

:

No, it's more from a marginal

spending by the middle class who

755

:

in Australia, UK and Canada have,

been bolstered so substantially

756

:

by paper housing wealth, right?

757

:

And, if your house appreciates

at a multiple of the rate of your

758

:

labor income savings every year,

then, you just, you feel like you

759

:

have a lot more money to spend.

760

:

If you believe that that trend is

going to continue and any sign of that

761

:

cracking, it also, this has to come

out from a mathematical standpoint.

762

:

Sure, people need to buy homes and

form families and there's a shortage of

763

:

homes and so home prices stay higher.

764

:

That means that a much larger portion

of people's income is going to mortgage

765

:

payments that's not going to other

purchases of goods and services, right?

766

:

So

767

:

Julian Brigden: So that, yeah, so

768

:

Adam Butler: valve has

to come from somewhere.

769

:

Julian Brigden: yes, so that, that

has an impact as I said on, when you

770

:

look at consumer discretionary stocks,

right, you would expect they're not

771

:

going to buy, oh Christ, what's that

bloody brand they all buy up near

772

:

me, I live in Boston, Aloe, right?

773

:

They all walk around with Aloe, it's one

of these millennial brands and they all,

774

:

and you go in there and you're like,

150 bucks for a pair of, sweatpants.

775

:

Are you bloody insane?

776

:

But these kids all seem to wear it and

yes, as they get squeezed out because they

777

:

have to pay their student loans back or

their rent goes, up or they're trying to

778

:

buy a house and all that sort of thing.

779

:

But from abroad, cause they've got no,

they don't have that many stocks, but

780

:

from a broad consumption expenditure

from a GDP perspective, it doesn't

781

:

make any difference, what really makes

the difference is how the wealthy

782

:

spend, and the wealthy are locked in.

783

:

They've locked in their mortgage and their

stock portfolio keeps going up, right?

784

:

The amount of wealth,

785

:

Adam Butler: Canada and Australia, right?

786

:

I mean, they're

787

:

Julian Brigden: less so, less so.

788

:

Adam Butler: you know, the wealthy have

already paid off, such a substantial

789

:

portion of their mortgage, right?

790

:

Julian Brigden: Right.

791

:

And the same here in the US, right?

792

:

I mean, a third of homes

being bought with cash,

793

:

Adam Butler: Well, the U S is a

totally different case because.

794

:

Only abandoningly small fraction

of the mortgages reset, right?

795

:

Cause everything's at

20, 30 year fixed terms.

796

:

So

797

:

Julian Brigden: Yeah, correct.

798

:

So look, I think it all comes down to

this, whether we see, it all comes down

799

:

to me, to this labor market, right?

800

:

That's what will dictate Goldilocks.

801

:

And I, and it's also why

I think Goldilocks is so

802

:

insanely difficult to achieve,

803

:

Adam Butler: yeah, I'm just wondering,

I'm more talking about Canada, UK.

804

:

And because

805

:

Julian Brigden: And as I

806

:

Adam Butler: I wonder if they're

with their good currency shorts,

807

:

I wonder if, like, I think

808

:

Julian Brigden: I do.

809

:

Yeah, I

810

:

Adam Butler: they, might be forced to cut.

811

:

Julian Brigden: they are.

812

:

I do think they will be forced to cut.

813

:

Will they cut?

814

:

And as I said, look, if you rank them,

and I, you know, Australia, I haven't

815

:

done this but if I rank the big three

currency pairs yen doesn't really come

816

:

into play because the BOJ's on a, still

on its different planet kind of thing.

817

:

But if I would look at, Relative

growth relative to rates, right?

818

:

And say, who's running the tightest,

where, and given that growth

819

:

is picking up, who's, where the

biggest surprise is going to be.

820

:

The biggest surprise would be in the US,

where rates should not get cut, and if

821

:

anything, do need to go up arguably more.

822

:

So that's dollar supportive.

823

:

Then the next one is sterling.

824

:

And then the worst one should be Europe.

825

:

And I think there's a case to be

saying that you could end up with

826

:

quite a weak.Euro I don't think it's

as weak as, necessarily some people

827

:

think because I do think growth is,

will pick up a little bit, but the

828

:

ECB can easily justify cutting rates.

829

:

And then you put a Canada and Australia

in there, they're in somewhat similar

830

:

circumstances, I think, to the UK.

831

:

Adam Butler: Yeah.

832

:

Okay.

833

:

Equities leave the best to last.

834

:

What are you seeing on

the equity front here?

835

:

Julian Brigden: I mean, look, if

you, Broadly look at the S& P.

836

:

It's gone nowhere for two years, right?

837

:

Last year it was down

until the fourth quarter.

838

:

Then Janet Yellen rather deftly slewed

all the issuance to the front end of

839

:

the curve, drew liquidity back into the

system as a result out of the reverse

840

:

repo into The liquidity metrics, which

set the level of the equity market.

841

:

And we got this everything rally, right?

842

:

We've got an everything rally.

843

:

And I think this is an important

thing that people need to bear in

844

:

mind if we are in a structurally

inflationary, higher inflationary

845

:

environment, which I believe is the case.

846

:

You are back into an environment

at basically existed prior to:

847

:

1998 was a year in which Alan Greenspan

for the first time shifted from focusing

848

:

on inflation to focusing on deflation.

849

:

Cause even in 1998, he was beginning

to talk about the risk of the zero

850

:

bounce at this point in which, the

central banks would lose out of ammo.

851

:

And so they became much more

focused on preventing deflation.

852

:

And that did something really.

853

:

very dramatic and unprecedented.

854

:

It slewed the correlation

between bond and equity prices.

855

:

So prior to 1998, and there's a

Bank of England study that goes

856

:

back and looks at 250 years of bond

pricing, bond and equity pricing.

857

:

So prior to that period, you'd never

ever, ever seen negative correlation

858

:

between bond and equity prices.

859

:

So both assets either went up or down.

860

:

together.

861

:

So bonds rallied, yields fell

and stocks rallied or vice versa.

862

:

And from 1998 onwards,

that relationship changes.

863

:

You move to focus on deflation.

864

:

I think we're moving back into that

positive correlation environment.

865

:

It's certainly been the case since 2020.

866

:

We're about where we've gone back

into negative correlation, but Q4

867

:

was all about a positive correlation.

868

:

Rally, right?

869

:

And everything rally now that

got people quite excited by this

870

:

idea of the reflationary cycle.

871

:

So we had people thinking

about, do I buy the Russell?

872

:

Do I buy the blah, blah, blah?

873

:

Do I buy the blah, blah, blah?

874

:

Do I buy cheap things?

875

:

Are we going to rotate into stuff?

876

:

But the reality of the situation

is I struggle with that thesis.

877

:

I think it could pick

up a little bit in Q2

878

:

is if we start to see these PMIs

come back, but if, but then, from.

879

:

you look at the growth value metric which

is we've gone back to right to growth

880

:

picked up in Q4 and into the beginning of

of this year for the first week at least.

881

:

Uh, sorry value did, value outperformed

and then growth kind of underperformed.

882

:

Now growth is coming back and providing

all of that you know the big mega caps

883

:

are providing all of that, that thing.

884

:

Now we were talking before this

about some of those names like

885

:

Tesla, I think is a classic bubble.

886

:

I, just tweeted out and I

know, well, I will tweet out.

887

:

I know I'm going to get shit From

the apostles of Tesla, which is

888

:

I think the fundamental problem.

889

:

There are investors, they are believers.

890

:

But to me, Tesla is a narrative that's

been fit to a price action and a

891

:

price action that was created by QE.

892

:

And you can see the domes when

Tesla started to perform, and it was

893

:

exactly when the Fed did in 2019,

not QE if we remember that, and then

894

:

we had the COVID QE, and it peaked

exactly at peak Fed liquidity.

895

:

And since then it has not managed

to recoup its thing and people are

896

:

like, Oh, but you know, it'll come

back, it'll come back and he'll

897

:

build a bloody robot and he'll decide

the truck and all this bullshit.

898

:

And the reality of the situation is this

is just a hyper bubble, but there are

899

:

some obviously good companies still left.

900

:

You're paying an awful lot for them.

901

:

And the reality of the situation

is, is when I look at the U S equity

902

:

market, I think this is a massively,

massively, massively overvalued market

903

:

versus the rest of the world, right?

904

:

Like four standard deviations

overvalued versus the rest of the world.

905

:

But those dynamics are unlikely to

change until either the dollar declines

906

:

And that hurts foreign investors

who've got their money in the U.

907

:

S.

908

:

And or the bubble bursts because it

just runs out of puff, let's say.

909

:

Doesn't look like that's the case.

910

:

Or we go into recession and that

doesn't look like the case either.

911

:

And so for me, you've got this sort

of ongoing, self reinforcing, truly

912

:

reflective type cycle going on in the

US equity market where the purchase

913

:

of the asset, In this case, stocks

underpins wealth, underpins employment,

914

:

underpins Fed rate hike, underpins the

dollar, underpins the valuation of U.

915

:

S.

916

:

stocks for foreigners.

917

:

It's a very self reinforcing,

literally reflective in the true

918

:

Soros esque sense of the world.

919

:

Adam Butler: Mm hmm.

920

:

Julian Brigden: And I struggle to

see that ending and I particularly

921

:

struggle to see the ending because

I said, I think Janet Yellen since

922

:

the, really since Q3 of last year.

923

:

has understood that she can't,

she's only got any one job, right?

924

:

And it's radically different

from the job that she used to do.

925

:

Her job these days is to

just get our boss reelected.

926

:

And if as I think she understands

this stocks determine what goes on

927

:

in terms of employment, then you

have to keep this equity market.

928

:

Boyd up and she has between her

ability to slew issuance and control

929

:

the reverse repo and this other

big pot of cash that she hasn't

930

:

tapped the treasury general account.

931

:

If she sees stocks wobble at all, she

could just pump liquidity into the system.

932

:

And that's just another reason.

933

:

So I struggle with seeing

a big bearish bearish move.

934

:

I mean, could you get a 10%?

935

:

Sure.

936

:

You can get one of those

any day of the week.

937

:

But a big bear market between

now and the election, it doesn't

938

:

look, it doesn't feel that way.

939

:

It doesn't feel that way.

940

:

Adam Butler: Um,

941

:

Julian Brigden: That's why another

reason to be bearish bonds, right?

942

:

Cause if stocks aren't going to do any

of the heavy lifting to try and tighten

943

:

financial conditions has to be bonds.

944

:

Maybe the dollar plays a bit of

a role going forward, in the next

945

:

couple of months, that would help

a bit, but it's going to have to be

946

:

it's going to have to be bonds a lot.

947

:

Adam Butler: So is there a sleeper trade

besides being, net short fixed income?

948

:

Are you interested in, are you

looking at Japan here, Japanese

949

:

Julian Brigden: look, I

like, I do love Japan.

950

:

I do love Japan.

951

:

But there's a couple of

concerns I have about Japan.

952

:

So the first one is, is the

politics is a bloody mess, right?

953

:

And so I think, a real

mess, a real, real mess.

954

:

We write about this a lot with clients.

955

:

We're one of the few shops, I think,

that have anyone who really has

956

:

experience in Japan and follows Japan.

957

:

And Jeff is being very good on this one.

958

:

And the politics are real mess.

959

:

It could end up over the next couple

of years, really destroying the LDPs.

960

:

Iron grip over Japanese politics.

961

:

So that could get really

quite interesting.

962

:

But the impact of that for markets

is it probably delays the the BOJ's

963

:

normalance normalization of, or

the end of negative interest rates.

964

:

We don't think they can really

probably move until July.

965

:

So some of the euphoria that you see

around some of the banks, which have been

966

:

great trades, brilliant, brilliant trades.

967

:

And really one of the driving forces

behind the Nikkei, that kind of, may

968

:

retest that, but I would buy on any day.

969

:

The other thing that I'm a little

concerned about in Japan is if you

970

:

go back and you look at history and

you go and look at back like:

971

:

and the dot com bubble, you get

this interesting factor before the

972

:

whole global equity market goes.

973

:

And that is, it seems that

equity investors go, Oh yeah,

974

:

the US is a bit expensive.

975

:

Bloody hell, have you

seen how cheap Japan is?

976

:

I'll have me some of this.

977

:

And you get this major final like, woohoo!

978

:

Japan is the final like, hurrah!

979

:

Where you pile into this thing.

980

:

Now, that said, I have a line, I have

a little chart that I'm watching.

981

:

We're not there yet.

982

:

I'm looking at the Japanese

banks in dollar terms.

983

:

I think it's the best piece

of chart porn that I've got.

984

:

And you can draw a multi-year

line that comes in at $2 for

985

:

the Japanese banking index.

986

:

And if we can crack above that

and we haven't, then I think it

987

:

can double or triple from there.

988

:

But until it does, I'm not playing.

989

:

Adam Butler: you be would you be a buyer

of Japanese equities hedged or unhedged?

990

:

Julian Brigden: I would be inclined

to do them unhedged when I buy

991

:

it, I want to buy it unhedged.

992

:

And that's another reason why, look,

we're still in this game where, you

993

:

know, Oh, you buy Japanese equities

because the yen is weaker and they

994

:

really just a yen play at the moment.

995

:

And that is in itself is

just a treasury trade.

996

:

And, it's all, when you start running

the correlations across the book, you

997

:

find out that by being short treasuries,

you've got a lot of the same trades on.

998

:

And as I said, I think Japan

is an interesting story.

999

:

is it there yet to have autonomous growth?

:

00:54:27,813 --> 00:54:28,523

Eh, I don't know.

:

00:54:28,793 --> 00:54:31,253

And as I said, the problem

is, is that as long as the U.

:

00:54:31,253 --> 00:54:31,413

S.

:

00:54:31,413 --> 00:54:34,663

is growing so rapidly and

that means running a very

:

00:54:34,663 --> 00:54:35,983

large current account deficit.

:

00:54:36,339 --> 00:54:38,798

We need all the world's cash to fund it.

:

00:54:38,828 --> 00:54:43,335

And so until those dynamics change,

it's kind of tough to buy other things.

:

00:54:43,335 --> 00:54:47,615

I'd love to, I'd love to, but you

need either the dollar to break down.

:

00:54:47,965 --> 00:54:49,155

And that's makes, Mr.

:

00:54:49,155 --> 00:54:49,515

And Mrs.

:

00:54:49,515 --> 00:54:50,725

Watanabe go.What?

:

00:54:51,555 --> 00:54:54,025

Why am I not making money on my U.

:

00:54:54,025 --> 00:54:54,155

S.

:

00:54:54,155 --> 00:54:54,525

stocks?

:

00:54:54,545 --> 00:54:55,915

Oh, because the yen is going up.

:

00:54:56,265 --> 00:54:56,855

Okay.

:

00:54:57,145 --> 00:54:58,915

Or you need to go into recession in the U.

:

00:54:58,915 --> 00:54:59,265

S.

:

00:54:59,535 --> 00:55:01,765

That current account deficit

shrink and the money go home.

:

00:55:02,225 --> 00:55:03,925

Or we just need to burst the bubble in U.

:

00:55:03,925 --> 00:55:04,055

S.

:

00:55:04,055 --> 00:55:04,955

stocks in one day.

:

00:55:05,285 --> 00:55:09,005

You know, we just find out NVIDIA

can't grow at 25 percent per annum

:

00:55:09,005 --> 00:55:12,008

or 100 percent per annum, or whatever

the hell, the equity analysts have

:

00:55:12,088 --> 00:55:13,518

penciled in for this week, right?

:

00:55:13,798 --> 00:55:14,378

Adam Butler: Yeah.

:

00:55:14,551 --> 00:55:18,341

Is there any trade, no matter

how niche that we didn't touch

:

00:55:18,341 --> 00:55:19,841

on that is worth mentioning?

:

00:55:20,471 --> 00:55:23,201

Julian Brigden: you know, we don't really

get involved in very niche y stuff.

:

00:55:23,201 --> 00:55:25,311

We're pretty plain vanilla macro.

:

00:55:25,761 --> 00:55:29,441

And we, we're looking at some stuff,

the oil markets this morning we

:

00:55:29,441 --> 00:55:32,491

were discussing, you know, crude

kind of looks quite interesting.

:

00:55:32,931 --> 00:55:36,481

Potentially for a move to the top side,

which would get a little interesting,

:

00:55:36,841 --> 00:55:42,161

but not, there's nothing much really

compelling outside, all our CTO

:

00:55:42,211 --> 00:55:46,031

models, are long now, pretty much

every stock market with the exception

:

00:55:46,031 --> 00:55:52,175

of FTSE and we're short, most bond

markets and the dollar looks quite

:

00:55:52,205 --> 00:55:54,125

interesting for further strength.

:

00:55:54,175 --> 00:55:56,855

One of the ones that's had

a big run, is dollar max.

:

00:55:57,125 --> 00:56:01,005

We've come down to multi, multi year

trend lines on the dollar against

:

00:56:01,005 --> 00:56:04,125

Mexican peso and down here, if

anything, you're probably supposed

:

00:56:04,125 --> 00:56:05,145

to be a bit, a little bit long,

:

00:56:05,305 --> 00:56:08,605

but It's not like, you know, it was

easy in 21, you just shorted bonds

:

00:56:08,635 --> 00:56:10,335

because inflation was going way up.

:

00:56:10,575 --> 00:56:12,395

Last year was a toppy macro year.

:

00:56:12,595 --> 00:56:16,365

I think this will show us its hand

but it doesn't look like this is

:

00:56:16,365 --> 00:56:19,268

a market where you're supposed

to be betting big yet on macro.

:

00:56:19,485 --> 00:56:21,621

Outside, probably fixed income.

:

00:56:22,186 --> 00:56:22,596

Adam Butler: Right.

:

00:56:22,947 --> 00:56:23,557

Awesome.

:

00:56:23,607 --> 00:56:25,997

Julian, before we go,

where can people find you?

:

00:56:26,527 --> 00:56:29,117

Julian Brigden: So, you can find

us if you're interested in the

:

00:56:29,117 --> 00:56:33,357

institutional product, reach

out to support at MI2partners.

:

00:56:33,397 --> 00:56:33,667

com.

:

00:56:34,427 --> 00:56:38,107

And if you want to and it also, if

you want to follow what Raoul and I

:

00:56:38,207 --> 00:56:41,497

both do on Real Vision, because we

obviously produce a joint product there,

:

00:56:41,797 --> 00:56:44,067

you can use the same email address.

:

00:56:44,394 --> 00:56:47,914

And if you just want to follow

me on Twitter at JulianMI2.

:

00:56:47,914 --> 00:56:49,364

Thanks

:

00:56:50,284 --> 00:56:50,824

Adam Butler: All right.

:

00:56:50,824 --> 00:56:53,084

Well, thank you so much again.

:

00:56:53,294 --> 00:56:56,304

Always a powerhouse of a guest

and an awesome conversation.

:

00:56:56,434 --> 00:56:57,724

So, until next time.

:

00:56:58,784 --> 00:56:59,334

Julian Brigden: Thanks very much indeed.

Next Episode All Episodes Previous Episode

Listen for free

Show artwork for Resolve Riffs Investment Podcast

About the Podcast

Resolve Riffs Investment Podcast
Welcome to ReSolve Riffs Investment Podcast, hosted by the team at ReSolve Global*, where evidence inspires confidence.
These podcasts will dig deep to uncover investment truths and life hacks you won’t find in the mainstream media, covering topics that appeal to left-brained robots, right-brained poets and everyone in between. In this show we interview deep thinkers in the world of quantitative finance such as Larry Swedroe, Meb Faber and many more, all with the goal of helping you reach excellence. Welcome to the journey.

*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.