So today I'm gonna talk to you as Ralph's pal from global macro investor not real vision because real vision doesn't have a view of our markets and a view about economies But I do have a view I've got a strong view that's been developing for a while Now as most of you know, I'm a student of the business cycle I look at the ups and downs the undulations of GDP and you realize that Things aren't linear and most economists. Don't put some sort of cycle into their forecasts once I realized how cyclical things were I realized there is an element of predictability Now obviously sometimes with the cycle things don't work out exactly as you imagine. The timing doesn't work For example, I did think we were going to get a full recession in 2015 didn't quite happen That way we came very close to at a manufacturing recession around the world We had a few emerging market crises, but it didn't quite get to full recession, but it came incredibly close but now we've got to a point where I've been monitoring how the cycle is developing and I've come on to real vision a couple of times to talk about the bond trade because I said look the cycles turning the best Thing to do is be long bonds and that's been a spectacular trade So particularly the short end in the euro dollar market and even in the long end whether it's TLT or bond futures There's been a huge amount of money to be made in that But now we're getting to the point where the Fed looked like they're about to start to ease and we need to decide Okay, how far are they going to go and are we going to go into a recession? this is probably the only Call that matters, and I've talked before there's the only asset class that matters right now is the dollar which is range-bound So it's currently not the predominant factor Outside of that it's chand aside is the world gonna go into recession and is the u.s. Going to go in recession? My hypothesis is it looks like that is the case Now one of the things anybody who knows me knows that I don't talk in certainties So I'm not saying look it's definitely a recession. We're all screwed whatever it is I don't even know how severe it can be but what I'm interested in is the probabilities and the Probability that we're going into recession or even in recession now are very high so having realized this I thought you know, I'm Not the only person who thinks this but there is a whole group of people who think the opposite And it's one of those turning points where I fell insecure to know am I right or not? I Think I'm right and I think that people I advise They think I'm right but there's a whole group that doesn't and I thought it would be really Interesting to explore this thing fully on real vision for me to essentially take over the platform for two weeks To really dig in and interview all of the best people I can find in the world People have really respect people who doesn't don't have the same view as me whom may happen to have the same view or just different Perspectives to find out really what's going on and it's going to help me and all of you go on a voyage of discovery To really figure out are we going to recession or not? And then we'll try and figure over the course of these two weeks as well The opportunities and the trades that we can make to protect ourselves or to make money whichever way this goes So let's start at the beginning the Fed started raising rates a while ago back in 2016 and it was really incremental and that incremental rate rise really didn't Mean a lot to most people we kind of brushed it off because rates were going from a very low level to another low level But they kept going up. There were rate rise off the rate rises off the rate rises, but all very incremental and small Then the Fed started cutie quantitative tightening They started shrinking some of their balance sheet as well And again, it didn't look a lot compared to how much the balance sheet had grown over the previous decade But that our continued for a while and nobody was that concerned about it. I started getting a different perspective From about August of last year and it really came to the fore in September October, November and December where I suddenly thought the Fed of over-tightened and That nuanced shift happens incredibly quickly because everybody at the time was saying the Fed aren't tightening enough and oh my god The economy's heating up and if you remember everyone was arguing about labor inflation wage inflation The Fed are behind the curve and from everything I looked at the Fed had gone too far already and they pretty much baked a recession into the cake So what was I looking at? The first thing I looked at is it's the rate of change of interest rates that count and I think I I showed this on my last presentation on real aversion back in I think it was October last year the rate of change of LIBOR so that's just interest rates They had gone up enough over 2-year rates of change basis that it was the largest percentage increase in rates in all history and Again, many of us a year, but the rates are so low. Why does it matter but the point being is in fact almost everybody Refinanced at the lows. So everybody with the house everybody with the business every corporate balance sheet every Bank Everybody took out more debt at low rates and debt exploded So even my mortgage had gone up 40% And I was a little bit sure. I hadn't realized and it was only what I suddenly got this statement through her Wow Forty percent and then I got I wrote about a global macro investor and there was a large family office And the principal the family office called me up and said We financed all of our debts For the family office all the leverage that they used and all the other bits and pieces in their businesses and all of that stuff He said I refinance in 2015. He said it's gone up 80% I'm like wow and how much leverage if you got I said well reasonable because money's been free So we took reasonable answer leverage, but it's gone up and it's meaningful. So I started think they really have over tightened So if you look at this chart of the two yawns here year LIBOR and I put it against the business cycle So I use a Curie you can see it suggests that the business cycle should fall Significantly from here now. That's one thing. The other thing is The Fed are still tightening by the balance sheet that's not stopped yet We don't know whether it's in the July meeting the September meeting When are they going to stop doing that but really there's a mass tightening going on and if you can see that keeps going on month after month there is another nuance about to hit us and that is the debt ceiling at some point They're gonna have to agree a new debt ceiling. It's most likely to be this summer and That will also mean that the Treasury who have been funding the government in the meantime Are going to start withdrawing the funding by issuing bonds So there could be a huge tightening to come in the August September October time period of this year So there's some further tightening to come even if the Fed end up cutting interest rates The other thing that most people don't realize is even with these ultra low rates People have been really penalized and if you talk about what upsets people about the kind of 1% and the 99% one of the simple things where this shows up is credit cards if you look at interest rates on credit cards there in fact at all-time highs High and they were we interest rates were much higher in the 90s the early 90s 2000s. It's extraordinary how much people are being penalized to borrow money while and that's at a household level while at The corporate level there's many corporates around the world not yet in the u.s Who are borrowing at negative rates and I'll come on to a whole lot about the corporates in a bit later in this whole thesis So you can see we've got the set up where it feels like Rates may have gone too far And I've come a lot more on to the rates market later in the yield curve and some of the signals there but you see what turns a Slowdown and we started to see the slowdown happening in December We saw the volatility rising again in the equity markets and we started to see the bond market rallying like crazy the yield curve inverting super fast all across the curve is What then happened is what you normally need to turn what looks like something about 2015 Into a much harder bility of being a recession is the extraneous event and that was trade wars So you trade wars are not what everybody thinks there was a lot of noise about them and at first People weren't sure what Trump was going to do, but he first went after the Chinese anyone after the Europeans and then he's been going around off the Canadians and the Mexicans and then he's done the deal with the Mexicans and he's done a deal with the Canadians But trade wars are happening and China. The Chinese situation is very very complicated And with Europe - we haven't got anywhere in the Europe negotiations yet. You see the problem is is his aggressive Negotiating tactics have created a knock-on effect that most people don't understand If you are a corporate and you have this game of cat-and-mouse with China in the u.s about not only normal trade, but also about technology and the banning of Technology to stop technology spreading there is a definite move within the US administration To really isolate China in numerous ways, but particularly economically But don't forget we've come from the most globalized world. We've probably ever had so if we back up maybe six years with the epicenter of globalization and Everybody has decided that China is the future All the big corporations around the world whether it's BMW of General Electric have all moved to China. They're building factories They're outsourcing and they have supply chains Suddenly, they're being told. Well, you don't know whether those supply chains are going to stay you Don't know whether you can actually stay in China, or maybe even the Chinese end up booting you out You don't know whether you can produce cars in Mexico or not It's really confusing because it's Trump gonna go back against what he's just done with the Mexicans what happens with the Canadians? How does that work? Is there any labor arbitrage anymore in a world where he's even going after Vietnam a country so small to be irrelevant to? Stop the Chinese Circumventing trade tariffs. He's also manipulating OPEC and you don't really know where this world is and you know No doubt, there'll be a timer and start picking on India as well So he's picking on all of the countries in the world And that's all well and good and I've talked about this on television before is a shift away from globalization It's not the end of the world It is the shift itself that rates have changed that matters that rate of change is incredibly unsettling for corporate America particularly and the global corporations the multinationals almost in cross every boardroom around the world right now as a conversation is can we outlast Trump and that's a bet if we don't we've got hell to pay with our shareholders if Something happens and we don't have an answer. We're in trouble Well, okay, we'll build some inventory So everybody's built inventory just to give them some sort of buffer and now they need to make the decision Do we pull the plug now or do we wait wait and see whether Trump goes wait and see whether there's any option So those two outcomes are really interesting to me Because if you pull the plug now you break the global supply chains that's happening everywhere We've seen the announcement from Apple this week alone that they're doing it the others decide Well, we'll wait and see so what does that really mean? That means corporate expenditures stops? They tend to then spend a fortune on something like McKinsey or KPMG or somebody else Who's going to give them the advice on building new global supply chains bringing their business back to the US? it's a two three or four year projects before they make the choice of where they're going to spend and Rebuild their their supply their factories and all of this stuff. So That generally means it's a big crimp on borrow on spending that comes from corporations Particularly in FDI. So that's going to hurt several countries around the world particularly China but there's a lot of countries and a lot of companies who are going to see this spending freeze and Have to wait and sit it out So that is going to have the effect of lowering growth and I think that is what tipped this Situation from a merely a slowdown that was looking nasty Into it for me an almost certain recession. So the question is is where are we now? Many of you will remember I used to use the is M. It's my main way of looking at the business cycle I don't use it much morning more because It kind of got a bit broken and the reason got a bit broken was not because of fed manipulation or anything else It's because the oil sector became so large that the oil price became the largest influence of the I am itself particularly the refinery cycle every year So I shifted away to the egg cream and that's the economic economic cycles Research Institute Measure and it's a weekly Indicator and I use the urine year return of the weekly indicator to give me the business cycle It works very much like the is M and it correlates with everything like GDP. So you see the chart here of At Crete with quarterly GDP and you can see how well correlated it is. It's indicating that we've got some weakness to come Okay So that's the first interesting point Then I'd like to put the ikura against a number of other indicators that may be forward-looking and this is where it gets interesting I'm going to show you a whole series of charts now for you to look at So this chart is the cash freight shipments index You can see how dramatically freight shipments have fallen and how much they're suggesting that the could fall from here and therefore the GDP as well Car loadings a similar way of looking at transportation. It's collapsing capsule goods orders These are the big-ticket items the things that a lot of times you use financing for or are involved in the global supply chains You can see how they are rolling over as well and following eccrine lower If you believe in this supply chain story and it seems to be bearing itself out in the press almost daily Then you've got to imagine the capital goods orders are going to come lower but households are also struggling with the with the rates So you've seen that and how much car sales are fallen, so calf sales have languished and they're expected to go further Clothing sales have collapsed in recent months as well, which has been an extraordinary move and restaurant sales as well have been extremely weak So your sons are seen not only as shipping and moving Goods around week, but you're also seeing a weakness in The consumer and a weakness in business expenditure another great global indicator. I've looked at is semiconductor sales semiconductor sales are Extraordinarily weak right now and eight who are suggesting the global business cycle has a lot further to fall back in the US We've also got the housing cycle It looks like that the the Case Shiller house index is starting to weaken significantly And is now at the weakest level since before the previous recession And we also have weakness in house prices overall and construction so I'm concerned that all Parts of the economy are showing evidence of weakness And I know many people say well unemployment's not unemployment strong Unemployment interestingly enough is the most lacking of all indicators and just remember that every time the Fed cut rates and unemployment Was below 4% We went to a recession almost immediately afterwards They're all lagging So don't get trapped in the in the unemployment look at the forward-looking indicators and they're looking problematic So those are just some of the u.s. Indicators that I'm finding concerning There is a general theme of weakness that lies ahead and if you go back to that first chart I showed you of the two-year on 2-year rate of change of LIBOR of interest rates Then you're going to expect to see a creek come down further and all of these things that are correlated come down further Also, don't forget the equity correlates perfectly to asset prices if you look at the year on your SMP It basically is the business cycle now I understand that equity prices as part of the equity calculation But I can use hard data and a bunch of other variations of the business cycle and they all show the same thing the equity Market is cyclical right now just because of the construction of what he was doing last year. It's at all-time highs It should actually significantly weaken in october/november if the equity stays where it is the other thing to bear in mind is that looks like there is in marginal pause in the data and you'll see that in the global data in a second so that's one of the things I'm waiting for over the Summer is let's wait and see how this plays out and whether we get some weakness further on again, which is my expectation but it's really want to pick people's minds about I Look at the world PMI, you can see the world PMI is just heading into recession territory. So it's weak It's telling us that there is a definite susceptibility to anything else going wrong, and I'll come to some of the banana skins later But anything going wrong is going to turn this from a slowdown into something much uglier I think the tum the Trump trade situation. Is that very thing? We're starting to see many central banks around the world expressing concern and thinking about cutting rates In response to this kind of very weak economy that's starting to develop The other thing is is that trade tariffs are showing up in the data when we look at world trade volumes Well trade volumes have started to come off sharply and I think that's really important We also have a GMI indicator for world trade and it is also coming off very dramatically So it's something we need to be very careful of to see how this develops and again the one thing and I'll talk about it Later that we really need to be worried about is if the dollar goes higher than here another concern for me is the European economy the European economy was really led by Germany, which is different this time around it's not the the peripheral European economies It was Germany that started first firstly a relatively strong euro and secondly trade disputes. So trade issues those two things suddenly started to mark a turn in Germany and Germany has gone pretty much to recession GDP is not negative yet but all of the forward-looking indicate are showing that Germany is going towards recession if you look at for example industrial production or if we look at Exports, we can see that there's some concerning signs in Germany And if we look at the zoo survey, which is their forward-looking PMI, it suggested that GDP is going to go negative 2 percent That's quite a big move for one of the largest economies in the world and the largest economy in Europe But you see it's not just at Germany level We've got Italy that is actually in recession again a mild recession right now and we have France that is starting to weaken And is only just growing so we've got the three largest economies in Europe. Not in great shape Spain is the only one that looks ok right now when we get to pour chill again, it's getting weak and Holland doesn't look great so Europe is looking a bit of a mixed bag and we'll come back to Europe later because it's one of the weak points and I think it's one of the places that we all need to understand in this globalized slowdown We can also get a bit granular with China China struggled from load of monetary tightening if a couple of years ago and the government trying to rein in the speculative excess of A cheap money boom that came out of the back end of the global recession So China's been tight and it kind of broke the financial system doesn't function Properly in China any longer and the government is involved frequently trying to keep some sort of liquidity They're not interested in bailing out the rest of the world by another liquidity event. It's just not in China's interest They just don't have the ability to do so and why should they why should they when the rest of the world's being so antagonistic? So the point being is China's very domestically focus They're trying to unwind their bubble They're trying to stimulate enough just to flatten it out trying the Japan way of doing things But that means that China which was the marginal rate of change of growth of the global economy. They're just not players right now They are negative in terms of imports for most of most of the raw Materials so then they're not going to be driving other countries GDP growth and I think that's a really important matter We've talked about the u.s. There's no real growth there. We've talked about China There's no real growth there and we've talked about Europe and there's no real growth there. So where is the growth engine? There isn't one and then when he broaden out to the rest of Southeast Asia You can see that South Korea is also starting to slow down Exports there a week and the same in Taiwan and we can assume the same as across Asia Overall, Australia far too small the economy to matter in the globalized context but as we know Australia and has we feature on real vision has a problem with its own domestic economy with its massive house price broom and the Overhang from the mining boom as well. So the Australia's are cutting rates. They've got a slowdown going on they're trying to manage it the best they can without it turning to ugly and without it turning and Rotting the banks at the core. We have to wait how that plays out but again It just tells you the number of countries who are in a similar situation And the same can be true and said of Canada - which is one of the larger countries in the world But again, they've had some problems. They've got the back end of a commodity boom plus they've got an excessive leverage in the Housing industry and that all needs to unwind and they too are going to be cutting rates so I don't see a situation where anybody Can save this and we've got I think the tipping point with tariffs that over overrides all of this So this is why I'm really start to get concerned But you see I may be picking this up, but the bond markets always smarter than everybody and I always incredibly amazed how right the bond market gets these things Everybody argued when the yield curve was flattening the bond markets wrong. It's just the Fed Everyone says it doesn't mean anything the yield curve. It's just a different world right now The yield curve started flattening then they started inverting and they started inverting all the way across the curve We got the twos tens US Swaps curve which is the main one every time it gets to zero we go to recession Shortly after we've hit that we had the ones twos curve going to the second most inverted in history So that means two-year rates were trading below one-year rates suggesting that the easing that was necessary was large They were screaming the Fed had gone too far And then we had two year rates versus Fed Funds the magnitude I think 70 odd bate 75 basis points so the magnitude of that was also extraordinary and was telling you the Fed had gone too far and things had to change quickly the Fed suddenly started realizing this by December January February, they started changing their tune Now we are here with the market saying well We had a good employment data the Fed know that they've cut 25 or not to talk. They don't need to do this. It's ridiculous these Bond market indicators have never been at these levels without the Fed cutting 50 basis points immediately and 50 again soon after so my core view is if this continues in any way unless We see some sort of trough in the very near future in the forward-looking data Then the Fed are going to cut 50 and 50 again. I don't see the point of the Fed trying to cut 25 and disappointing the bond market I Think if they have to play a very very careful game here and what they need to do is at least try to be in front of the curve That to your auntie row year rate of change tells you they can't be ahead of the curve the curves well ahead of them But the market needs some sort of perception, but I do think there's a backup coming in the bond market we'll talk about this in a bit in a bit as people are trying to readjust the probabilities to do zero did the 25 to 350 I think in a completely reverse is this a bump up? Meltdown coming, you know, I see all this noise on Twitter all day and we'll address some of that in a bit See the other thing The Fed have got is the Fed of got a problem because they still tightening the balance sheet as I talked before But when they look at what they're trying to do they have that dual mandate that you're - employment Well employment looks fine right now and it always does at the peak of the cycle and they always cut one employee when unemployment is Almost at the all-time lows But the key is inflation expectations. They're collapsing. They're collapsing all across the world But if you look at the ten-year break-even rate It's breaking this big Head and Shoulders pattern and it looks like we're going down to 1% or so That's enough to be a 50% miss on the 2% implicit target that feds got on inflation. And this is 10 years out So it's telling you that the rates are so tight because there's so much leverage within the akan me that they can't raise rates without Collapsing future inflation expectations and future demand. So I think that's a really Important indicator we could also you see the five year on five year inflation expectations That again is breaking towards all-time lows There is a complete collapse in inflation expectations regardless of the narrative that we heard Only up until November December of wage inflation. It's all going to come back that was my if you remember my premise for the bond market rally was that narrative was wrong that appears to be playing out but Not only does it appear to be playing out. It appears to be going from benign to Nasty, so I think it's something we need to watch but inflation is not just collapsing in the u.s. It's collapsing around the world So the rest of the world is also seeing an inflationary Deflationary or disinflationary issue. I think the most extreme is Europe if we look at the five-year five-year breakevens in Europe We see this enormous collapse in in inflation expectations and that's with an economy with negative interest rates I mean what the hell do you do about that? Europe is going to become a big issue again Something will come on through in a second But that is a real warning of how to generate inflation in a world straddled by debt. It becomes really complex And how do you stop the downside? Becoming a much larger event that it ordinarily would be when I look at these kind of theses I like to cross-check against asset classes I like to look across the world and see okay, how asset class is trading and the first one I look at copper I look at the chart of copper and it's a clear head and shoulders top and to me that's telling me That the economy is slowing down What's also interesting if I put the copper chart against the ten-year break-even? You can see it's the same chart So copper basically is a real-time example of future inflation expectations And they look like they're going to break down together. If I look at the CRB industrial metals index You can see that this big uptrend and this major Topping pan a huge topping pattern is forming and I think that it's likely to break that And why I think it's likely to break is one of the I think it's probably the second ugliest chart pattern in the world Which is the CRB commodities index if you look at this chart? It looks like we're going to go into a secular bust income Due any day now and to last into the next few years as we reach for that final bottom And I think that bottom could be uglier than many of us are expecting a because of the size of the boom that we had the amount of capital that flowed into it and particularly in the oil space and other some of the mining space as well and also because what I think is going to happen to the dollar So these charts are really ugly charts to mean it makes me very concerned that there is a broader Disinflation or deflationary world out there that's developing and it's something I talked about in the last video. I did for real vision That's subsequently now develop further So, let's talk a bit about the risks So I think I've established a case why it looks like there's a possible recession coming. My probabilities are higher They may be higher than yours. You may think I'm wrong That's okay. But you have to works you have to understand that the likelihood of something happening here is reasonable so you're gonna have to factor this into your investments or your working lives or all the things that a recession can affect and I think that's really important. Your business is - so let's think about the risk now. One of the risks is China I Don't think an implosion of the Chinese economy is much of a risk because the US are basically forcing everybody out of China anyway So it's happening in slow motion We're also finding there's a trade ban going on with many other issues with a try at China So that's not great. The Chinese themselves going to be propping up their economy. They're trying to stop their banking system falling over Okay, so that's relatively stable because it's a closed system. They're gonna have some inflows from MSCI And that was the inclusion of China both debt and equity is in the indices Although I think the US are going to try and overturn that by putting political pressure on MSCI themselves We'll wait and see about that But I know it's just it's a way for China to get capital and that's what China needs its dollar starved and the u.s Knows it so if China's dollar starved well the best weapon you've got is the dollar and if you look at the chart of the Chinese RMB It has been pressing its nose against that seven ceiling for a while forming What is one of the largest cup and handle? Mason's I've ever seen if that does go and seven breaks Then we're going to see an almighty move in the dollar against the RMB now, it doesn't necessarily mean there's a catastrophic Devaluation coming out of China but a shift in the terms of trade which has massive global ramifications And we'll obviously knock on all the way through and I think you can see also if I look at the ADX Y Which is the Asian currency index if I look at the big monthly chart? There's an enormous head and shoulders top that's looking to break this is the largest chart pattern I've ever seen in any currency market, but that is a incredible chart pattern that tells me there's a potential currency crisis in the making and it's to do with a strong dollar the other one that's affected by the strong dollar and the weakness in global trade and Particularly interest rates is Europe So the European banks something I've talked about Extensively for many years on real vision as the European banks have gone lower and lower and lower and I said there's a big problem Here and I know many bank analysts will say well, you know, there's not solvency problem here. There's you know, it's different They've got the right capital resources. Well, I look at the share price I just look at the share price and it looks like the share prices want to go to zero So the worst chart in the world I've got a label at the GMI worst chart in the world is the European banks Index charts. It is a truly terrifying chart because this is all of the banks in Europe and it looks like if They break that key support then we're going into a full banking crisis in Europe. And I think that's a reasonable probability and Here's why you see the European banks are international in nature Deutsche Bank even the Swiss banks credit Swiss UBS Societe Generale in France Santander BBVA All of these banks are international funded banks Yes, they get their funding and the collateral with the ECB but the reality is the day to day funding is the dollar euro dollar market and They don't get access to all the capital they need there's a shortage of dollars out there, which is a problem I think the dollar goes higher which creates a problem for these banks If you look at that European banks index and look at it compared to the 10-year bond yield you can see the highly core So as bund yields go down the banks go down, but you see the problem here is the ECB has one mandate alone They've got the mandate of inflation and we showed you before the inflation expectations in Europe are collapsing So it's a one-trick pony the ECB can only do one thing cut rates I talked to the ECB recently at a Goldman Sachs event that I was hosting in London, and I asked them Okay. What are you gonna do? what are you gonna do with the next recession comes and they're like Well, we can cut rates a bit more and we can do a bit more QE but you can see there's a general understanding that they can't go that much further and that's a problem for the banks because how do you stimulate so the banks are falling because these yields are really bad negative yields are bad for Banks, the flattening yield curves not good for banks. The whole situation is a bad setup for the banking system and The Europeans can only deal with it by cutting rates, which is bad for the banks So you've created a bit of a Doom loop there. So there's a bit of a cycle. That's not good. So the question is is how do you stop it and my idea is Christine Lagarde was brought in specifically for this Why would you want her as a central banker? Why would you want her as the head of the ECB? The ECB was a very technical Bank It's always very good with technical monetary policy because it was it was very policy driven He was less kind of broad-based macro driven than the Fed. He was really in the weeds But Lagarde is not that She is the head of the IMF. She's a politician and she's a lawyer and what does she do she negotiates and If you put something like that in control of the ECB It tells you that there is going to be a shift or from in the ECB which is moving towards Probably Negotiation for this banking settlement somewhere. Everybody has to get together and do something. It's not just Germany here. It's not just Deutsche Bank That's the you know, the poisonous one. There's not one poisonous Apple here. It's a whole system that's in a mess There's still too much debt in that European banking system. That's not been written off properly so if these banks are probably going to have to go in the hands of the Governments, they're going to probably have to wipe out the equity holders somehow and the bondholders will become the government So that's the way you stop a systemic crisis But somebody's gonna have to pay for all of that and that's gonna be a ton of issuance of debt So if somebody has to negotiate new treaties to allow all these companies to exceed their deficits and to increase their funding and the ECB to buy more of this funding and there's A whole load of stuff that needs to get done. There's much more political and legal than it is Than it is monetary policy. So I think that's why Lagarde is there if you want somebody for the next recession Clearly the person who ran the IMF that deals in Bailouts is the right person so I get that and I think it makes sense. But Europe, that's a tricky mess This is not a quick fix overnight and it makes me concerned that this can go from not very good to very ugly very quickly And I have a feeling if I look at the share price of the banks that by the end of the summer We could be there already where we're starting to see some of the real strains and where the Deutsche Bank ever gets to its full Restructuring before they have to do something about it My guess is hearing the story of Renaissance capital pulling its prime broking lines from Deutsche Bank means that we're potentially in the death spiral where it goes from not being a Solvency problem to potentially being a solvency problem. Who knows wait and see You know getting in the weeds of the banks is not my thing But looking at the macro setup, I can see that this is a problem waiting to happen or is happening right now The other thing I think is further to develop is the tech market I think there is a complete Euphoria that has taken place in the private sector Particularly within the private investment sphere. So it's private equity and VC. I think too much money has been allocated without the thought of getting the money back and I think no better example than the poster child of soft bank and how they put a hundred billion to work plus added leverage in and just basically completely rewrote the rules of valuation of any firm out there with no clear sight of how to get out of I Think there's some huge problems with what he is signaling Mercy Sun is signaling by trying to IPO the whole of the vision fund to start another fund if you'll try IPO Kind of a VC fund on this scale Without actually the companies themselves going public It's telling you he doesn't think the future IPO value is the same as the current Private value and we've seen that with some of the recent tech issues They traded higher as private companies than as it as public companies that there is a different dichotomy between this and that's telling me that things got to effervescence in the private sector and it's starting to come off and it will knock on through as People realize that that the future of tech is not yet not quite as bright as people thought it was and there are some really system merit Systemic problems because the owner over ownership of this sector and the expected returns that's embedded within it I'm really worried about Softbank I'm really worried about what it says for the world So we'll wait and see how that develops but I think there's a tech problem I also think as I've mentioned many times before I think there's a tech problem coming as I mentioned before there's a problem coming with Google and Facebook and their battle with the DOJ and various other parts of the US government I think they're going to be treated as monopolies. I think they're going to have shown to to have abused their monopolistic power I think they are also Using data in ways that people Don't want and I think their power is going to be curtailed and I'll be broken up in various ways So I think that's coming and I think it will come over all through this next recession So there is another Delta on the bad news something that can drive a little bit further That worries me and I'm monitoring all of these themes as they all kind of come together And it makes me worried but there's two really big ones left That I haven't yet talked about on real vision Some of you will have read it in global macro investor for those year of subscribers And then recently I published much less than a publishing global macro investor. I published it in macro insiders and in think-tank Wide Doom loop article and if any of you are interested in this piece I think you should go back and have a look at that article If you're not subscribers sign up for a free trial and go and have a look through This article and this goes through all of what I'm talking about in great length I think there is something really interesting in macro insiders Julian Britton and myself debated at length about what this really means and whether or accession is coming and I think will probably show that later on this week as well because somebody from macro insiders I think will really add value to you much like this Doom loop article, but the issue is corporate debt And this is when it gets really big So bear with me and maybe get stiff drink while I sit down and talk to you about the Doom loop You see every recession needs a poster child there's always one there's always the thing you pin it on Back in 1990 is the savings and loan crisis Back in 2000. It was the tech wreck And then back in 2008. It was the housing market and This time I think there's an even bigger and more concerning one. I think it's the corporate debt sector I think this is the poster child of the next recession and let me explain why firstly you've got to realize that Debt is basically a function of the business cycle and you have is most cycles You have a super cycle and you have the normal cycle So the normal credit cycle is very clear If I look at the Aerie against the let's say the hyg ETF. You can see how highly correlated they are And also if you look at the area's Moody's be double-a to triple-a credit spreads You can see it's basically a function of the business cycle so the business cycle drives credit spreads and it drives the availability of credit and it drives the excess use of credit and all of the issues that come along with it and obviously the Fed Drive, the credit cycle by raising interest rates or lowering interest rates also the behavior of credit Availability which is the credit managers and how they give out credit again is really cyclical so we can look at the index against the area and we can figure out that if at Kri the business cycle turns Then we're going to see some problems emerging in all of the debt market now. Here's an interesting chart for you. Talk about recession I find hilarious that the New York Fed publishes a recession probability index The recession probability index is in the 30s now 30% chance of recession It's ridiculous because if you look back at every single time has ever been at this level It's been a recession. So when it gets to about 20 something it's a hundred percent chance of recession So the Fed New York Fed is basically telling you were going into recession So if we're going to recession, which is my core hypothesis, then we're going to see credit spreads widening ordinarily. That's not a big problem Because that's what happens and we had it in 2008 and you know corporate spreads widened out and they narrowed Yes the banks that was a whole different issue the bank debt and household debt. We've had that as well But this time around it's somewhat different see this time since that previous recession the size of the global corporate debt market has Exploded and in particular in the u.s US corporate debt as a percentage of GDP is the highest in all recorded history by using the fed data we get about 47 percent of GDP in debt, but if I use other data, particularly the IMF we're getting numbers of about 75% the Fed data's on taking account off balance sheet So if it's off balance sheet derivatives and all the other debts that's on corporate balance sheets Which we know are all over the place then we get to about 76 percent of GDP in debt That's a really really high number. So in nominal terms Debt is now 10 Trillion dollars and it's just gone up in a straight line as I said doubling in size since the last recession and this is extraordinary Amount of debt don't forget. This is the same time. The households have been gently easing out of debt The financial system has been easing out of debt and the government has not but the government's been kind of relatively flat But the corporate sector went on a massive debt orgy it was one of the largest increases of debt we've ever seen in history in 10 years a Truly monumental debt buildup. What do they do with this debt? Well, this debt has been Basically used for one thing. That's equity buybacks They bought back more equity than any other time in history. In fact They've been pretty much the only buyer of the equity market if we look at all forms of other equity market ownership They've been all in decline for the last five years while buybacks have been stepping up stepping up taking into account All of the net sellers and pushing the market higher and there's less liquidity Around because you're taking more shares out of the market by buying them back so the less liquidity the more your shares go up and then when you add in passive indexation It's been pushing the markets higher from this enormous debt issuance. That's all well and good but once you start flooding the market with debt you create dynamic which is little understood and That's the lowering of overall credit quality of the entire market and this is not a u.s. Penomet It's a global phenomena, but in the u.s. Now over 50% of the entire bond market this triple be Trouble B is essentially one large notch above junk bonds It used to be a world where there's a lot of triple-a credit double-a credit They're all falling by the wayside What you're getting is? everybody taking so much debt that they're becoming triple B and all of the main bulk of American large cap firms are now triple B debt and then beneath that you've got a trillion dollar so you got four trillion dollars of of triple B and you've got a trillion dollars of junk that junk alone is the largest the junk bond markets ever been but the real growth in this whole thing has been The triple B sector, you can see from this chart that if we put all the different types of bonds in a nice stack next to each other the size of the triple B market is absolutely Enormous and when you break down the u.s. Triple B debt market you can also say it's pretty lumpy there are five large beer moths that account for seven hundred and seventy billion dollars of debt And if you add in the US shale industry you're talking about a trillion dollars of debt. Those companies are General Electric General Motors AT&T forward and Dell they account for everything here. It's huge You're obviously there's a massive tier of corporations behind it that triple-b But really the risk comes down to five big firms just to understand how leveraged these companies are. Here's the chart of debt-to-equity General Electric is over 200% debt-to-equity General Motors 250 AT&T about a hundred percent Ford about four hundred and fifty percent and Dell about one hundred and twenty five percent of AT&T is the largest the most indebted Company the world has ever seen it is a hundred and seventy billion dollars in debt and Is over a hundred percent of market cap in debt that dynamic can change? Dramatically if the share price Falls it's digested an enormous acquisition in Time Warner And if you remember a o L Time Warner was ringing the bell of the top of the last cycle It kind of feels like AT&T Time Warner may be ringing the bell for this cycle - and it was a debt owed you'd allowed To do it because AT&T thought fine, you know, we're a phone company we get plenty of cash The problem is is corporate cash flow is correlated to the business cycle If you look at the Eckrich and look at S&P cash flow, you see they're highly correlated So what looks affordable acquisition now suddenly becomes unaffordable later if that starts to happen Then you've got a problem and you've got a problem because look AT&T is not going bust Well, at least I don't think so, but it's gonna get downgraded to junk There is no way on earth the junk bond market can take a downgrade like AT&T Realistically if you start to get in a recession You should see I don't know 10 20 % of these triple B's get downgraded. So we're talking huge numbers that have to get absorbed into that junk space But there's only a trillion dollars there and the buyers are different and this is a crucial thing here the buyers of Junk bonds are not the same buyers as the buyers of investment a great credit Those bars invest in great credit will have to sell if it gets downgraded So that means that there is a huge amount of selling But the people in the junk bond market don't have 30% more 40% more cash suddenly to buy this stuff so the only way of doing it is by obliterating the junk bond mark So these get downgraded in any way shape or form you want to find that out the junk bond market? becomes completely insolvent, but what's worse here is if you look at the Debt that's coming up It's a complete wall of the stuff that needs to be renewed over what looks like it's going to be the next recession That's going to be a huge problem to try and roll all this financing that all comes to you at the same time When the banks aren't gonna be particularly keen on Letting this financing out and the companies are going to be desperate to get it but their cash flows are gonna be going down So the affordability becomes a little more problematic even with rates being cut This is why the Fed need to cut rates and need to cut rates fast because this corporate thing is an avalanche Waiting to happen and the butterflies flapped its wings and the avalanche is starting to crumble But you see this issues not just the US as I mentioned a couple of times it's global When we look at the global corporate debt-to-gdp we're at 95% This is the same color of la-la-land levels that we had on household debt back in 2008 There is an extraordinary amount of corporate debt. And the worst thing about it. Almost all of it is in US dollars globally It's in u.s Dollars except in Europe and that's all trading at negative yields now because it's European debt that could be used as collateral That has a huge value for the system. That's slightly insolvent so we've got a huge problem because if you think about that, it's globalized and it's in dollar funding and There's not enough dollars around certainly not to roll all of this debt Particularly if the banking system in Europe is going to desperately be sucking for these dollars We've got a big funding issue to come And again if the dollar starts going higher It becomes a much bigger problem For all of these corporates to deal with and a big big problem for the junk bond market to deal with overall and the investment-grade Market, see I'm not the only one talking about this Stan Druckenmiller has been talking about it there's a number of people who talked about it and The BIS and the IMF have both warned about it much like they did ahead of the 2008 recession They're saying there is a huge problem with corporate indebtedness. There's a huge problem with the buybacks There's a huge problem with the dynamics that it's creating And this is the thing. It's the knock-on effects that I'm really worried about in this whole equation a credit event Okay, a secondly credit event really nasty but with a couple of other things thrown in like a retirement crisis Then we've got something really really concerning that we have to avoid the Fed have to be Really aggressive in this or we've got a much bigger problem than we realized. You see the bond market is supporting equity markets I talked about before it's all the book buyback. So here's the graph of the buybacks that I talked about before They're basically supporting the whole market So if the corporate bond market gets a little bit tighter and cash flows go all of the corporates gonna stop by equity the largest Bar will have left the room very quickly. So let's go through the causation here ari widens. It starts falling south for the reasons I've talked about it starts widening out the spreads as soon as the spread starts widening out corporate cash flow start going with Acree and Corporate start going. Okay. I need to be careful here. So what they do is they stop buying back shares So that's the largest equity market buyer who's left the room. So that's a really big deal So let's go back to the area chart with the year on your S&P The equity falls and this credit cycle Falls then the SMP is gonna fall with it in the year-on-year terms and also an outright terms So we're setting ourselves up for something that could be quite interesting. Now. We know that Consumer confidence is pretty much tied to the equity market right now and so if the equity market starts falling because the buybacks have gone then it's gonna build on itself and then it's gonna build itself in a way that's going to bring Out the baby boomers and I'll come on to that in a sec. So there's another issue here We had a guest on real vision who talked about the corporate bond market and the pension system You see I've talked about the pension system a lot and I'll come on to that in a sec again but the pension system has been a bar of equity but increasing bar of corporate bonds because there's been some yield there and Also as you get an aging population and people are getting closer to retirement you need more bonds But they need you to take as much risk as possible So they've bought a ton of junk and a ton of this triple B stuff. So they've been the big buyers Now what's been really interesting is they've been in a loop like the buyback loop which has been drift by tax receipts you see place like, Illinois who have bankrupt pension systems Have been raising taxes and with that tax receipts they have been Then putting it into the pension system to fill the gap the pension funds have been buying bonds So you've got this cycle with tax receipts coming in and you're buying bonds You just create this loop the problem is is tax receipts are also cyclical So once that happens and the tax receipts start falling because level of business activity is falling well Then guess what the corporate debt bar goes away, too So you're creating a market where there's no equity buyer a no corporate debt buyer because of how the pension funds operate That's a real problem. And then if anything gets downgraded to junk who's the bar of that junk that doesn't really exist Either you can see the chart here of US state and local current tax receipts Year on year and it's basically the same as the business cycle No surprise and it's gone negative as tax receipts have been lower than expected Recently and again, that should stop pushing the credit spreads wider and that brings us back to the baby boomers These are the guys who all these assets are the equity investments and the bond investments They're the they're the owner of all of this stuff and they need to sell them to And they need to sell them because they're going to retirement and if there is a risk in the system They cannot take the risk of losing their money Because that is their pile that they retire with and I talked about this at length in the retirement crisis video so the chances are there's a behavioral adjustment of which they become net sellers in two rallies and Sellers in two dips as opposed to buyers in two dips And that's because they don't have work or the amount of work needed or income needed to sustain an investment portfolio It's more about living expenditure. And those that retire they don't have more money to put back into the market. That is their pool They're done. So they need to reduce risk fast. So when you've got a situation where Everybody is a net seller. You've got a problem that happened in Europe and it happened in Japan We've seen what it does it basically lowers for decades the price of equities and Changes the structure of markets for a long period of time and I think that is one of the potential outcomes again I'm not saying it's necessarily going to happen, but there's a potential outcome here. So you start to see the various knock-on effects I'll put them on the screen here and then I'm going to go through a bit again. Later Because there was a lot of points to get across so as the triple B credits get downgraded to junk and the debt markets freeze Pensions will be forced sellers and take enormous losses and were switched to Treasuries at 1% yields or less This will essentially bankrupt the defined benefit pension system It has to default on its promises when you throw in the net divesting of assets The baby boomers will do in the next recession. You have the perfect storm. There'll be no buyers of equity There'll be no bars of debt corporations will not be able to service the debts or roll them The pension system will break then throw in the EU banking system, which is fragile and needs dollars and the entire Bloody system will freeze all over again. This is why I called the Doom loop and it's small incremental steps that create something quite quick Can the Fed get in the way of it? Can they stop this Doom loop because there is a cycle here because the moment you start widening credit spreads You start creating selling you start creating less buybacks the equity market Falls if the equity market Falls then AT&T share price Falls Then they stop and pricing default wrist or downgrade return to AT&T And then what you know is the junk bond spreads widen the whole thing works in this endless cycle So let me go through the points of the cycle again as well just to clarify Phase 1 the business cycle weakens credit begins to widen corporate cash flow worsens our tad and shares fall and volatility increases I think that's where we've got to now I think phase 1 we accomplished and it started really in about October Phase 2 the business cycle weakens again credit widens more cash flow gets worse as do profits tax receipts fall and state pension funds Stop buying debt big triple B stocks fall and bonds fall even more sharply equities fall hard So I think this is the next phase and I think it's coming after the summer. We'll wait and see my forward-looking indicators suggest that The Europe has a sesee up cycle right now. There's a bit of stabilization of data I have a feeling that if I'm right about the debt ceiling or the dollar breaks higher Then I think we're going to start to see phase 2 come in when we start seeing phase 2 we know where this is going because then the story becomes very Their face one was the alarm bells face - they strap yourselves in. Okay, let's go into Phase three This is when things get ugly the baby-boomers starts a panic to get out of equities permanently. There's down grades of triple beads Junk the EU banks can't take the funding stress and the ECB and the government step in credit spreads explode credit seizes up entire list Pension funds are forced sellers on downgrades equities going to tailspin There are no natural buyers credit widens dramatically offered only no bids junk bond market Overwhelmed pension funds get to trouble defaulting on obligations big famous companies are being forced towards bankruptcy Unnecessarily, that's the really ugly face and that's the one Where I think many of us have got a sense that there was an end game That's at the end of all of this if there is one it lies in the heart of that whether we get there or not It's going to be a function of what the Fed does and what the central banks do and how they deal with this And there's many outcomes for that and it is not going to be a straight battle But all I do know is these things tend to accelerate much faster. I'm very cognizant of what happened in the UK with with Woodford's fund and Neil Woodford's fund and also with HC o new Texas, these are these are liquidity problems and we've talked a lot on real vision about liquidity in the lack of liquidity and markets and if you put in a Bad event with low liquidity you've got a problem and I think we're starting to see alarm bells coming so as I said We phase one let's see what happens with phase two. The end of it is the Fed are gonna have to buy credit They're gonna have to stop this they have to stop the Doom loop And the other thing they will do is underwrite the pension system and this is part of the MMT and also part of the way that you get rid of the quantitative easing giving money to the rich or the people who need it the least the people who can borrow and This way you give it to people who have a pension and there also happened to be voters huge numbers of baby Boom voters you'll be bringing back into the system So it's actually a very attractive thing for both the Federal Reserve and the government to push to do So I think that's what comes of it You're gonna have to do something about this pension plan black hole and this is probably the way to do it You see Europe in the UK dealt with a lot of this in the past because they started to put restrictions on what pension funds could do and the kind of risks that they could take but they've still got a Problem with with credit for sure and I think the Europeans will be involved in having to support their own pension system as well. So Where does this all leave us? Well, that's what this week's gonna be about you can see how important this all is and this is not just Doom mongering. This is the reality of the probabilities. You cannot deny that the business cycle is weakening You can deny that it's going to a recession, but we need to find out more. We need to find out from other people I really want to find out I want to have that debate with people because I Really want to know and assess the probabilities and figure out whether my probabilities are right. So I'm gonna leave you with a few things the things that really matter to me I've given you a bunch of chance to look at that You can follow I would use that your stocks banking index has one very important chart You can use maybe FedEx for world trade tariffs and stuff like that. FedEx looks pretty bad But I think the primary chart is the chart of truth that I've always called it which is the bond market the Thirty-year Channel and how it perfectly kind of POTUS head at the top of the channel and then reversed. It's telling us that bond yields are gonna go probably down to zero that's ten-year bond yields if I show you the chart here of the Long-term pattern of two-year bond yields. It's very clear that they're going to go negative and this chart suggests They're going to go to negative two percent now For somebody in America that might sound outrageous To anybody else in the world. It's normal, right Europe's had negative rates now for a long time as of Japan You know all across the place we've seen negative rates. So get used to it. It's the mindset of what's coming I don't think you're gonna be able to avoid it because of the confluence of events that we've got coming with the excessive debt that Massively built up over the short period of time and then with the wave of retirees coming and the Fed having over tightened I think the dollar chart is extremely important. I think use the broad trade-weighted dollar index it is a Huge cup and handle formation as well. And if it breaks this 130 level then we're going to see the final Catastrophic large rise in the dollar that could break the rest of the system. I've been warning of this for some time The dollar has been range-bound. It keeps looking like it's going to break down then suddenly break up and then break down I don't know, but I do know it's gonna break and it'll be the last of the asset classes To make its move if it breaks down Okay, we've got to give ourselves some breathing space. We're going to save emerging markets We're gonna save some of this debt situation for another day and we'll extend. What is the longest business cycle in all history? but if not Then we're going to start to accelerate all of these events and a global recession with some really nasty outcomes It's becoming more and more likely and also the Abxy, the Asian dollar currency index. I think that's an important chart to keep on your screens and maybe keep your focus on the EEM the equity market the emerging market ETF These things are all within this basket what we need to be looking at and in the end What do I think the trade is my personal view? And again, I'm gonna talk to other people about this I think It is bonds if I'm right and we're gonna get worse. We may see about a bounce in bonds now I've just taken profits and a whole bunch of my bond positions, but I'm looking to aggressively add now. This is one of the biggest Highest conviction trades I've ever had and I think that the bond market particularly the short end the Eurodollar futures in the two year futures You need to leverage up and buy as much as you can of these into any bands I think we're hopefully getting a short bounce now But I think once we get through and we start to see the economic data weakening once more You won't be able to buy bonds. I think I'm really interested in buying dollars. I'd like him to break Once they break higher then I want to add all sorts of dollars. I Don't want to short the equity market. It's too dangerous. It's too difficult And I think it's a balance ii trade versus the bond market trade Obviously I will be get drawn into it again But every time I try get my ass handed to me, so I'm gonna try and avoid doing that one the last two I'm pretty obvious one is gold because gold is an option on the end So if we are going to go to extreme monetary policy, which looks like I've walked you through a set of pretty easy Probabilities that that could happen in the next 18 months. Well, then gold has to go higher now It's sure if the dollar goes higher Gold's gonna come back a bit but over time I think the dollar on gold go higher and gold goes a lot higher over the longer run and it's now acting as that probability on this endgame and the final one is Bitcoin bitcoin is Again, a probability on the ability to build a different financial future. We're seeing noise coming out of China about building a cryptocurrency We've seen the very interesting thing that Facebook's done It's another thing that I will do for real vision at some point is talk about that more debt Not that I think the Facebook cryptocurrency is the answer but the globalized currency and what they were doing with the globalized currency I think really is very interesting some that talks about on real vision from the very beginning maybe in the first ever interview They were all talking towards coming towards this moment now This is why we started real vision and also this is why I do global macro investor. We're in a very macro environment It's super interesting, but it's also super dangerous. So me publishing global macro investor. I thought had to get this across to you So everybody understands the risk ahead and can do their own work on it So I'm really looking forward to taking you with me on this journey There's going to be a lot of learning. There's gonna be a lot of debate and I'm going to bring different angles I'm gonna bring people from the oil market the retail market the car market the VC market I'm doing macro experts Bitcoin experts gold experts I'm gonna bring everybody to the table and we're gonna talk it all out and figure out ok What the hell is going on and what the real probabilities are. Guess what we're doing a sweepstake You can get a chance to win a premium subscription to real vision, but we're not just giving away one But 10 subscriptions. All you have to do is subscribe to our real vision youtube channel like this video and comment down below on August 31st will contact the ten winners. So subscribe now for your chance to gain access to our critical series on Recession as well as other series on tap about gold Retirement crisis and many of the aspects of economic and investing life that will affect you and your savings
