Hike and Pause: What the Fed Decision Means for You

foreign [Music] what can the FED do when there are no good choices hi everyone welcome to this extended version of the real Vision Daily Briefing we're coming to you early and for an hour so we can break down the FED meeting and the presser that is just wrapping up and joining me a couple of familiar faces we have Mike Cuba who is founder and CIO of strong Capital Management and Andreas steno Larson who is the founder of steno research and a little bit later at the top of the hour we're going to be joined by Darius Dell of 42 macro hi fellas great to see you hi Becky hey Maggie how's it going it's going well I'm just listening to Jay pal I think we all were so as expected 25 basis points um a little bit of change in the language of the statement what what did you make of it I mean it was expected but did he say anything that stood out to you uh Mike let's start with you uh you know so I was telling Andreas before we jumped on live here that to me I thought the biggest thing was just this felt like a very sloppy press conference for Powell um you know usually even though he makes some contradictory statements it just seemed like he realized that they were kind of in a really no no win situation um and he just made some real head scratcher type statements to me that you know I mean we can get into in a little bit but I just yeah I mean I don't know it was it was not one of his best performances in my opinion yeah maybe maybe because of what we started out with the options are tough um Andreas what did you think I mean I I thought it was I thought his comments around banking were you know it's kind of kind of tough I mean obviously it doesn't want to panic people but it didn't sound like he was willing to say too much what stood out to you well I found it interesting that he basically started off the presser with a comment on the situation in banking and he told us that the conditions had broadly improved since the last meeting in March which I firmly disagree with um and I also expect the market to disagree with that view when we see the ultimate reaction to this press conference maybe tomorrow later this week because I mean I think three banks are out since the last press conference in March so obviously conditions haven't improved and um it's kind of a hawkish signal to me that they're not willing to or explicitly accept that banking is vulnerable here yeah is is it do you feel that way Mike I mean that's a great Point Andreas you know if we don't admit it's happening and and they did once again really stress the fight against inflation I mean they have been saying that it's an echo of what we heard before but they're continuing on that on that path with the rhetoric at least yeah you know I I completely agree with Andreas that you know to me the statement certainly seem to be more hawkish um especially his comments because you know he talked about Labor demand still being significantly outstripping Supply talked about inflation still being far too high and you know I just found some of his comments you know about you know it almost seemed like he was kind of aloof to the situation with the banking I mean obviously he's not he's aware of what's going on but it just kind of seemed like a real lack of concern and I get he doesn't want to kind of scare the the public with with being overly uh sensitive but you know talking about how monetary policy and disability tools you know are working together and they're not working in contradiction which I thought was a bit baffling um you know considering that a lot of this has come about due to Rising rates um you know and then he made some statements that you know they do think that inflation will take a long while to come back down um you know and they're debating on kind of what that sufficiently restrictive level is and then in the very next breath he said that he actually thinks that we could be at that sufficiently restrictive stand so it like I said I mean it just seemed like he was kind of all over the place I mean he even had sort of a little foot in the mouth where they were talking about wage pressures and how that could you know fuel inflation and he he felt the need to kind of go back and clarify something that was unsaid so so yeah I mean to me it was a little concerning sort of the lackadaisical attitude he had towards the banking situation yeah I mean he's an impossible punctuation though but I just want to mention you know ADP payrolls came out today right stronger than expected we're going to get that job uh number the monthly government number tomorrow the data is not working in his favor it didn't it didn't help very much at all but Andres when you're talking about uh the banking situation uh hard to think of what he could say especially now that and I think he touched on this for a moment now that we saw the speed with which things move when you're talking about people jumping on their phone I mean if he said anything indicating they were concerned doesn't that doesn't that always mean well if they're a little bit concerned then we should be freaking out because there's no way they're going to touch I mean how could he possibly say anything that was going to be well received whether it's concern or not I mean it was a no win wasn't it yeah it's it is impossible for him to say something clever about the banking situation so he basically accepted the fact that he couldn't say much but just yesterday one of the members of The Economic Council advising the White House on economic matters explicitly said that raising interest rates at this juncture would probably call small stress in the banking system uh I think uh she's right that member of The Economic Council and ultimately I guess Jay Paul could have said that given that the White House White House basically accepted that notion yesterday explicitly so that could have been an option uh it would have been a very dovish option um but in in case he wanted to say something explicit he could have mirrored that statement yeah uh did you find it interesting that there were no dissents guys because I mean if if everyone is saying this and and some of them had gone on the record also expressing concern about this but no one dissented what do you think that's about well I if if you look at it I think the consensus was was made uh between doves and Hawks by accepting a hike today but also more or less explicitly accepting a pause communicated in the statement uh the doves wanted that pulse in the statement so they have no explicit tightening bias left meaning that um it is basically the central Banker's way of communicating that the base case is now that we shouldn't expect any more um interest rate hikes from here the base case is a pause that is essentially what they write in the statement so I think that was the Compromise made between Hawks and doves yeah and Mike I think he I think he's trying to kick it over to the supervisors right he was talking about Barr and not wanting to interfere and that it's in his hands but as you pointed out completely sidestepping the issue of the fed you know what impact fed policy is having yeah you know and so I thought Steve leesman from CNBC there had a great question sort of kind of putting the onus on Powell you know looking at sort of the review that had come out I think they talked about back in February and Paul said he was aware of it he remembers it um and said that there was really nothing of concern you know and Steve Lee's been kind of put him on the spot and said well you know not to be too argumentative but you know it did raise the issues at svb and so you know I think for me that was just sort of I get that he doesn't want to really scare the public but it was just you know I thought that exchange was really kind of to me that was like hard part of that like concerning that you know are they truly listening do they really fully grasp what's going on with the banking sector and the potential ramifications or did they just kind of view it as a one-off I mean Paul made the statement um you know that with First Republic that was kind of the lion the sand you know that that line was drawn under that episode and I mean two days later after first Republic you sort of fell apart there and JP Morgan bought them I mean we saw what happened with Pac West Bank Corp and Western Alliance and so I mean do they have their heads in the sand I mean I don't it doesn't seem like they're they're fully in tune to what's going on I think you just said something really really important Mike that they don't want to scare the public I don't think Jay Powell was talking to the markets today I think he was talking to the American people um and the markets were looking for a lot more clarification a lot uh you know an understanding that the FED I control over this I'm not sure that was his constituency today which may explain what was going on uh Andreas how worried are you about the banking system well I expect another couple of regional Banks to fold within say seven to ten days from here I think that's a very very likely scenario um the issue is that the deal that was struck between the FDIC and JB Morgan did uh no good in terms of comforting markets on the value of the collateral underlying the loan book of First Republic Bank remember that um the FDIC ultimately offered JB Morgan an 80 20 split in the Lost share agreement meaning that the FDIC will take 80 of the hit if something happens to the loan book to me it is a stronger signal as you can get that collateral underlying that loan book commercial with the state in California also to a certain extent residential real estate in California is deeply underwater relative to what we know as of now so every single bank with a loan book with a large exposure to Californian real estate real estate should be scared of the market right now you know uh Chris Whalen was on Twitter I think it was earlier today uh saying Regional banks are basically meme stocks and that shorts are going to make their way down the list that's a kind of a frightening statement Chris knows his way in and out of the banking system though so when he says something like that it gives me pause and cause for concern Mike are the shorts just lining up now is this inevitable that they're just going to try to keep picking off these Banks until somehow there is some Authority something changes yeah I mean that certainly seems to be the way the Market's operating is there they're sort of picking up on the similarities between you know Common Equity to assets and the different relationship that the banks have and just sort of going down the line you know after SBB you know and then it kind of made its way to First Republic and after first Republic they kind of looked at the next you know names that were similar and you know kind of gutting for that and so I mean not like I don't know if it's necessarily short sellers per se I I never like to blame short sellers on the collapse of something um you know because certainly there's I mean look we saw with the initial mini crisis if that's what you want to call it there was a an article that was out that talked about how there was one of the largest inflows into call option activity on the regional banking ETFs and various Regional Banks and so you know you have to remember that still I mean people are still so conditioned that the fed's not going to let anything happen I mean and we saw this all throughout 2022 and people are still operating under that same sort of framework where you know fine I'm just going to buy something that gets bombed out because it's going to snap back the fed's going to stop in the fed's going to save it and I mean so yes absolutely I'm sure there's short sellers targeting it um you know but there's probably plenty of long money that's that's trapped in trying to buy the dips on on these as well yeah that's a good point yeah Becky let me add a piece of anecdotal evidence from my neck of the woods um the biggest private pension fund in Sweden Electa laid off their CEO just a few weeks ago because of positions in Signature Bank and Silicon Valley Bank it is one of the biggest private Pension funds in Europe at all and I can guarantee you if um I was the CEO of another pension fund after that happening I would call portfolio manager straight away to tell them to get rid of any position at all in any single names in U.S Regional stocks so I guess the spillovers uh from the Silicon Valley Bank case are also very very clear and long only managers across the globe yeah absolutely uh great anecdote uh Andres because I think it shows like this is global it's very hard to Rin fence these things when they start happening um and and I've got a an important point on that some great comments coming in there seems to be a lot of concern George is saying the fomc FED has raised rates now we're waiting and watching to see what will break strap in uh someone else talking I think it was Jared dillian uh saying this is going to be a terrible night and it does seem that people are getting more concerned but is that are people talking about that or is that reflected in the Market at all Mike and Andreas do you see any gauge of that it's been hard to watch the vix because people are thinking maybe that's not picking up stuff um as much as maybe it would be are you looking at anything or do you see any concerns or strains in the market Mike so I mean the one thing that I wrote to clients um I think it was just the end of last week was you know is calm as high yield credit spreads have been we do see a very interesting Divergence building there between say that and the vix you know some other sort of type of fear gauge and so you know with the with the vix I mean certainly there's there's a lot that goes into that I mean there is an argument to be made you know if you look at an implied to realize ratio implied with so extremely elevated to say the realized levels that we've been seeing and so there's some you know sort of I guess selling off in the implied so kind of come back more in line where you really start to get to concern is when you see sort of a discount in terms of implied to realize so realize they're starting to pick up realize volatility while implied is kind of still asleep at the wheel and that's not where we were right we were at these sort of persistently higher vix readings that we had seen over you know the past several years and so that's sort of just sort of reverting back but if you look at sort of I would say the last two weeks high yield spreads aren't coming back down right they're not doing what the vix is doing high yield spreads are still way off so they're October lows whereas like the vix is piercing through the October lows from the upper um so I mean I'm sorry the January lows and so if you look at something like that I would definitely say that's that's worth the concern um you know and coming back to today I mean I think the biggest looming risk out there is the dollar um you know I personally am you know starting to position the portfolio a little bit more along the dollar um you know I look at sort of you know a situation say over in Europe um you know if there's a situation like I'm not a banking expert but I look at something like an inverted yield curve is the same in Europe as it is here in the US you look at sort of if you look at the damage that's been done to Banks here in the U.S from rising rates I mean Europe is in a very similar situation right they were at negative rates um and so you know I look at all the influx and kind of consensus that Europe is going to be this major winner from China reopening you see Speculator positioning in the Euro at near record highs and I just become very concerned because I think everyone is just so much that the FED is done the FED is going to Pivot towards rate cuts and they just just think the dollar is dead and for me I think that could sort of be a major risk that people are on if we get sort of a credit liquidity sort of major risk-off event the dollar picks up steam as these things are Unwound um and so yeah I mean I certainly see several like breadcrumbs laying around out there that that could could lead to something Andreas what do you what are you paying attention to what are you watching thanks to what Mike said before I'll talk about what I find to be a very clear signal from Equity markets that we're actually starting to price in a recession now but one thing that strikes me is that if you ask Global Investors for their uh positions in equity space um on a geographical uh layer then uh the most clear overweight right now is France while the US is at the Rock Bottom as an underweight for most uh Global portfolio managers and I can guarantee you even though France is a lovely country to visit that it will not be the epicenter of an extreme growth rebound I mean I mean it's not going to happen so I I consider this consensus story uh to be too extreme now that Europe will outperform right about everything in this cycle I I don't believe that it will be the case in six months from now so I tend to agree with with Mike's assessments um when it comes to the equity market right now uh I see the early signs of a very classic recessionary sector rotation meaning that we see Consumer Staples utilities outperforming hydration stocks such as consumer discretionary technology stocks Etc over the most recent uh trading period and that is really interesting because that's typically what you see into a recession um when the recession hits when the consumer is hit you should expect equities with products in the very lowest years of Maslow's hierarchy to perform relative to for example luxury goods and stuff like that and that is happening now I think that is about as firm a signal as you can get from Equity markets that the recession is slowly but surely being priced in hmm I I want to Play a clip for both of you when we're talking about uh the worries and the concerns and the risks that might not be priced in uh Jeff Snyder was on yesterday um and he was talking about commercial real estate we get a lot of questions about it it comes up a lot you were just mentioning it um when we were talking about California and his concern is that the the situation of commercial real estate May snake its way into the system in a more systemic way um through derivative products it's it's a little bit of a long clip people heard it yesterday if you tuned in but I want to play it again because I think it's really really important not a lot of people are talking about it and I want to get your thoughts on it so let's hear what he had to say well because securitized structures we structure we started structuring illiquid loans so that they could be packaged as liquid collateral to be used in collateralized transactions whether repo or derivatives wherever the case may be it was a good idea way back in the 70s and 80s when it really started we took off in the in the late 80s but there's a downside to that too because you could be packaging loans that on the surface seem like they're they're worth putting it together in a pool you can slice and dice them up as as you need to you can create the specific economic or financial parameters for each each structure as they roll off the assembly line but as we saw in 2008 again I hesitate to make the comparison subprime mortgage structures mortgage bonds and things like that cdos that were packaged together with certain illiquid loans that we didn't really understand how they behaved under stress conditions what you end up with is a bunch of ostensibly illiquid unknowable products put together in a pool that are then it's at one point they're valued in a way that there probably should never be valued and then the liquidity characteristics of those products of the Clo's or whatever the case may be whatever security structure it is they tend to behave very differently than how they're modeled when they're put together because they're modeled under a certain set of tolerances and history has shown that it's quite easy to violate those tolerances so in in the case where anybody has been using Clo's as collateral either directly in in funding transactions or as a three-legged transaction with um you know transforming putting up cloateral in exchange for say a U.S treasury and then using the U.S treasury Securities transformation it it allows these risky assets to essentially impact and affect the collateral the the systemic uh position of collateral all across the entire monetary system right they snake into the system I I really wanted to play that again because I think it's such an important Point um and I'm wondering what both of you think about it and I think Jeff took great pains to say I'm not saying it's going to happen I'm just concerned I'm concerned that we could see and it's so opaque it's so hard to know what's happening in those markets you know how can we assess that and if it's even remote are people focused on it enough and are the authorities focused on it enough um Mike I know you I know you yeah have a lot of experience in Insurance uh as well what do you think I mean is that should this be something that we're we should be concerned about we should be talking about more yeah I mean I think this goes back to something that Maggie you and I have talked about on a number of occasions and that's sort of how a lot of the risk was offloaded from bank balance sheets following 2008 and where that sits now and so that's where I think a lot of these issues could pop could pop up as Jeff said I mean we don't know if it's going to happen and you know we don't think that's Baseline necessarily but that's where you could start to see these things and sort of the um you know private Market whether it's private Equity whether it's real estate direct types of products with like a black rock or Blackstone or whatever it might be and so I think that's where the issues could pop up because falling 2008 Banks offloaded it while investors somewhere need to hold that right I mean the projects are still getting financed these different products are still being packaged up and sold off and so that's sitting somewhere and so I would argue that you know that could be even scarier if it were to actually unfold because you know is opaque is things were with 2008 and what the banks were holding what they were doing I mean now that's like I said it's a cross private asset managers where arguably Regulators have even less insight into what's going on and what's on their balance sheets yeah Andre is maybe uh maybe a stupid question but does it make it less risky if it's in across the private Market because it's not a big regulated bank or is it is it still we're talking about Pension funds and and there's tons of exposure there and do you think that this issue of commercial real estate I think the focus is there because of what's gone on what's happening with interest rates and also the change right the change in Office Buildings these big um shifts in work that draw out the timeline of what a cycle might look like a down cycle might look like how are you thinking about all this I mean if if we look at the price development of office space for example in San Francisco the most recent prize Dynamic is outright um disastrous so obviously this will show up um in the value of collateral underlying both on and off balance sheet that both in the banking sector but also in in the insurance sector and in the pension fund sector Etc I actually consider it an issue that um the Federal Reserve does not have a direct line to those in trouble in case that we shoot spillovers to insurance companies and Pension funds it makes it a whole lot more difficult to throw money at the problem and the only solution should push come to shop is basically to just add a lot of liquidity to the market and hope for the best exactly as Bank of England did once the um the pension fund sector um started struggling back in November last year so ultimately we know what happens should the insurance sector and the pension fund sector get into trouble as a consequence of this QE will arrive again yeah QE and speaking of uh they're an awful lot of Great Cuts priced into the market and Jay Powell didn't give any indication they were leaning that way I think people think he's beating but Mike is the market mispricing or misjudging the Fed so what I thought was interesting is as soon as Powell started to speak right I mean you basically saw the initial dovish reaction to the announcement get Unwound so you know initially the dollar sold off Bonds were holding firm gold sort of went on a run and as Paul spoke basically all that reversed oil gasoline none of those things really budge they actually resume their sell-offs on the day copper didn't really budge gold sort of gave up some of his gains and then the front end of the of the curve I mean started to sell off and then after Powell stopped talking the press conference ended it's like we immediately started pricing all that back in so you know you look at like sofa Futures and in December of this year and they were almost back flat on the day and then after Paul stopped speaking it finished up around 14 basis points so I mean it had a pretty sizable rally in the last you know say half hour of the day and so you know yeah I mean Powell made a few statements in his comments where he you know I thought the statement where they basically said you know determining if more tight tightening is necessary and they didn't say anything about whether rate Cuts would be necessary and he even said you know if their forecasts are correct then rate cuts are not appropriate so he certainly you know as much as people want to read that into dovish I thought that was more of the hawkish aspect um but yeah I mean it seems like the market just kind of once he got done talking just went right back on their way to starting to try to price in some rate Cuts because you saw a slight steeping in the curve at the end of the day as well yeah they're just convinced that he's not either doesn't know or isn't saying um uh Andreas on this point John asking uh can you ask the guys to comment on the fact that he Jay Palisades moderate growth or small recession very contrary to the market yeah it is uh I mean the market consensus is a recession commencing in the third quarter uh and ultimately that procession needs to arrive rather sooner than later to confirm the market pricing of rate Cuts otherwise we obviously won't get those rate Cuts so me it's a matter of um when not if we will see the First Rate cut um now uh I I ran the um press release through a uh word matching model and compared it to the January 2019 um statement from the film reserve and it it felt very similar when I read the two and when I um ran the word matching Machinery it also confirmed by Vibes uh January 2019 was the first meeting um with the pause after the hiking cycle hiking cycle um concluding in in December 2018 due to the Mayhem in equity markets and the statement is very very similar in 2019 it took roughly six months before the cutting cycle commenced something similar to that would actually lead to a very hawkish repricing of the current Outlook so it's a matter of when not if and I'm not sure that the market will get the rain Cuts as early as they expect them to yeah yeah that seems what it says we've got Darius in the house hey Darren hey Maggie how's it going we're just talking about the fact that Jay Powell sort of sticking to his hawkish tone and at odds with the market whether you're looking at him talking about moderate growth very small recession no need for easing and then kind of completely skirting around the bank issue just saying the banking system sound in solid and not really giving it much more steam what'd you make of the whole uh presser and statement uh so a couple of uh key takeaways and welcome guys how's it going Andreas Michael it's good to be back with you guys uh so I'd say three key things just to answer your question specifically I don't know that he said anything that changes you know market pricing on the market Outlook in a material way I think the pause was pretty much well telegraphed the continuation of balance she runoff was pretty well telegraphed and let's be honest here you know this is a j Powell LED fomc that has been getting walked around like a dog by the data for you know the better part of two years now you know what I mean so I don't know that he's going to say anything for looking that's going to be especially revealing to asset markets on a day like today so that's kind of our general takeaway and then kind of second there and secondarily you know it's kind of what wasn't said and what was it really focused on because I think the whole kind of discussion around the policy rate kind of misses the broader point in terms of the go forward outlook for fed policy which is something we wrote about in our later party note this morning which is the balance sheet is going to be back in focus and that because of QT just remaining ongoing you know these folks would like you to believe that it's like watching paint dry or like watching grass grow and for the most part it has been you know going back to kind of um late 2024 you know this is a Federal Reserve that you know that's basically been doing toothless QT um and the reason I say that is because on a net basis the U.S treasury hasn't really issued any debt you know since going back to November December of last year because they've been kind of bumping up you know against the statutory debt limit which is obviously you know front and center for a lot of investors attention so you know when we get past June D-Day in terms of debt selling QT is going to get his teeth back and that's something that in our opinion I don't think was discussed enough it obviously won't be discussed in that form but this is what we're here for yeah Andres I see you nodding your head yes well I I perfectly agree um if we look at the upcoming liquidity outlook for May and June um it actually looks outright disastrous um if you add a debt ceiling deal on top of QT on top of liquidity withdrawals now that the FDIC has started paying back emergency lending on behalf of some of the banks that have folded uh you probably get an aggregate removal of dollar liquidity to an extent of 500 maybe 600 billion in a matter of quarter we can get to to such levels and let me remind you that the exact peak in equity markets back in November 2021 and into a year and coincided with that rebuilding of the treasury general account after the debt ceiling yield was signed late 21 as well so this is so what's that mean for markets what's going to what it and and then talk about that time frame so is that liquidity are you going to see it come back is that a short-term situation or is that could that last I I guess if if you listen to uh some of the members of the committee uh who actually care uh care about this balance sheet issue for example Chris Waller they expect to be able to bring liquidity levels down to roughly 10 of the size of the US economy that means 2.5 2.6 trillion they are roughly 7 800 billion away from that Target as of today um meaning that they have a lot of work to do to bring liquidity levels down to what they consider adequate levels uh if they're able to bring them uh to such levels I I guess we should expect some pain inequities um on the way there uh I'm not sure they are able to get all the way to what they consider to be equilibrium levels but they will certainly give it a try uh and that means you should start to position in a defensive way in my opinion uh Mike I'm as we're you know Mark U.S markets closing here and by the looks of it the 10-year now 3.358 do you think I think it was Andreas before was saying listen even if there are Cuts if the timing is off there's going to have to be a repricing going on in markets do you see that happening yeah well that's sort of you know that goes into sort of the thesis that I have right now that I talked about a little bit before with respect to Europe and specifically the Euro with positioning so we we set we see the positioning we see the sort of consensus thinking in terms of Europe being this winner from China reopening and you know the ECB is going to continue to jack up rates after the FED pauses the fed's going to Pivot um and so I think that's the major major risk and why sort of a railing the dollar could spell trouble for risk assets you know because you you look at those different factors right you have sort of QT is going to be ongoing whether or not the FED pauses QT is going to keep going then you have sort of this rebuilding of the treasury general account so that's a massive issuance of that that's coming into the system suck liquidity out of the system um and so yeah I mean I think and then the last aspect is sort of If the Fed just pauses right and they don't immediately start going to cuts and say September um or if they don't get I mean I think we're looking at 4.25 so almost you know 75 100 basis points of cuts by December of this year if we don't get that right away like the Market's expecting then that is where you could really sort of see this really sharp unwind of this consensus narrative that the fed's going to Pivot they're going to cut rates a dollar is going to weaken that's going to be a major tell when for for risk assets um and so yeah I mean I see a lot of risk building in terms of the US dollar and sort of an upside surprise given that everyone that seems to be so bearish on the dollar um and then just to andreas's point I mean I just think that the market recently has been trading recessionary we're starting to see days where bond yields are falling and equities are ripping higher right I mean that everyone got so in tune to sort of that relationship between Tech and yields last year and that seems to be sort of reversing a little bit where where yields are falling and equities are falling on bad data you know you see things like oil and gasoline and cop are really starting to soften and so yeah I mean I think that I think there is a very strong risk that the FED doesn't move as fast to sort of react to a potential recession which is the way the Market's trading and that could cause a severe repricing and risk assets and in rates Diaries we have jobs number coming out how are you thinking about the US economy here ah no change to where we've been since last summer the US economy has been in a very resilient State there have been a variety of reasons um whether you look at the private sector balance sheet you know the composition of the economy or you know just kind of the general growth and private sector leverage or last in the data we're lagging a little bit on Darius you're seeing the data and so we go up to this let me go let me let me hop back on I'll hop back on I think he said he's gonna hop back until okay he I think he's gonna exit and hop back on uh are we um Andreas when I when I when we talk about the dead zone get a lot of questions about it from viewers when we talk about it and we ask anyone who's a Trader especially they're like it's not event they're gonna it's gonna be horrible it's gonna be ugly politics uh you know a dog and pony show but at the end of the day they'll do it um and so they kind of treat it like that um should we be more concerned is there more risk around that um someone asking about the fact that Powell was like Hey listen that's not our problem to solve well I I mean ultimately they will sign a deal to lift the debt ceiling again I I simply um like I was wondering if there's any other consequences I think people are looking at some of the newer people in the caucus kind of scorched Earth policy gonna test gonna you know test the waters in a way they haven't and is there an unintended mistake I think that's what people worry about yeah I mean first what will happen if we um breach the crossover date so the date where the U.S treasury note is no longer able to fund the operations of the federal government is that we will enter a partial shot down and we've been in that scenario for a couple of times and typically that is a pretty decent uh trigger event for politicians to actually sign a deal uh should we get past that stage then it is obviously full Mayhem uh I would consider such a scenario very very unlikely but it still matters a lot um whether the U.S treasury will be allowed to refill its liquidity buffer at the reserve or not and if they sign a solid debt ceiling deal uh lifting the debt ceiling by um a load of of billions the U.S treasury actually told us this week that they plan on refilling this war chest very fast after the um that seedling deal is in place and that is something that is irrelevance to all of us because it means that we will see a lot of issuance of U.S treasuries it means that the market will have to swallow all of these bonds again uh it will have to swallow duration risk again meaning that markets will mechanically have to take less risk elsewhere um and that typically makes Equity markets suffer hmm Darius uh we heard how as they always do say we're data dependent we're going to be watching the data um which of course leads everybody to say okay what data what do you think is is key here for the FED as they figure out whether they are going to pause or what would make them nervous is it still inflation is it employment is is it really just what's happening in the banks and the reports they get from the loan supervisors as they come in through the regulatory side what do you think is key I don't think he's just thinking folks I don't think my question was that hard I think he's I think he's having some connectivity problems uh Mike why don't you take that one um what do you think is is going to be the determining fact it has been pretty much inflation what do you think it is now I think it continues to be inflation unless we see a material deterioration and say the labor market or you know I mean I I would like to say more stress in the banking system um but I think they've kind of showed that you know with First Republic after Seb and signature I mean if andreas's prediction comes out that several more fell you know within the next couple of weeks I mean is that enough to get them to sort of start paying attention I mean I don't know I mean like I said my feeling from today is it's kind of a head in the sand type of mentality um and so I think at the end of the day it still comes down to inflation unless we see a major sort of resurgence in in unemployment um but yeah I mean for now it's still the inflation game Andreas are the lags still in effect I mean how much is in the pipeline and how much has already hit the economy and now you're going to have potentially credit contraction because of the banking situation on top of that how much wouldn't we have seen it or is it just working through all of that amount of stimulus that was put into the economy and that equilibrium's still there when does when do we start to see the economy turn I I think we've added a news a new set of lacks to the equation now given that the liquidity crisis that we've seen through March and into early April in the banking system is likely to spill over to a conservative decision-making among loan officers right and that's another lack to introduce to an already very complex set of lacks from interest rate hikes last year um and my base case is essentially that we will see the ramifications during the second half of the year but not before um since an interest rate high typically takes between 14 and 19 months to filter through the system while a liquidity crisis roughly takes two quarters to show its ugly face and credit uh and we know that the Federal Reserve already knew the results of the loan officer survey out on Monday next week and I actually noted a few interesting remarks from Powell in regards to that survey because he said that it was broadly in line with their expectations and in the statement they Twisted the language around credit standards so that they now write that it is likely that credit transcendants will tighten meaning that the survey released on Monday will showcase Title Lending status and if you look at lending standards versus actual bank lending it typically takes roughly six months from tighter standards are being implemented at Banks until you actually see the credit contraction and on typical correlations as of what we know today we should expect a credit contraction uh in between five and ten percent of the total balance sheet side size of the US banking system which is quite a lot let me remind you of that it sounds like it's it's kind of peanuts given that we've had accredited expenses of say 20 or so of the balance sheet size but every single credit contraction in history has led to a recession um it's very very uh clear that in this hyper financialized system uh credit contraction will lead to lower economic activity uh Andres we have the ECB meeting this week as well yeah right don't we have that tomorrow what what are you expecting there well I think they will deliver a hike of 25 basis points even though a hike of 50 basis points has been discussed um but as Michael has also alluded to that I think they're pretty scared of the um banking stress spilling over to Europe um so in a sense they've had a bit of time to prepare for this scenario right uh given that it started uh in the US and still mainly centers around the U.S financial system obviously we've had the issue of credit swiss but that's still outside of the Euro Zone um so I think they will play safe and and deliver a small hike even though the inflation picture basically tells them to hike by 50 or 75 basis points it's still very very elevated relative to the inflation momentum in the U.S Mike if if the Europe over performing has been played out or over exaggerated or you think that's that's extreme sounds like you're both saying that and uh the U.S is facing these headwinds what does outperform here what looks good uh I mean it's tough I mean I you know when I think through sort of the setup for both risk assets as well as fixed income I mean I struggle to get a really clear picture because while on the one hand you know I I do think that the FED is going to be forced to cut sooner than they want to now I don't know if that comes in September or December um the timing of that is really difficult now yes there's a nice yield aspect to that that you can sort of get you know carry and and sitting in whether it's short duration fixed income um but I think the timing of that is really difficult especially because if they just sit and don't cut rates I mean there is a very real risk of a material repricing hiring yields that could deal you some pain um you know and risk assets to say I mean valuations are still extremely elevated and so I struggle to see a lot of opportunity in those two asset classes I personally been spending a lot more time looking at things like you know we have a global liquidity dashboard that we're looking at that kind of just looks at policy rates versus uh inflation rates and and money supply and sort of the trend and policy rates and their their last changes and I just think we're setting up for some real serious Divergence in monetary policy you know one of the things I wrote about this week was you know if you look at Brazil I mean yes Lula has been making comments about how he feels that rates are too high um you know but if you look at sort of where their rates are and I think it's like 13.75 percent versus inflation um I mean that's a massive I mean it's almost 10 percent real rate over inflation um so whether it's you know playing sort of fixed income in say like a Brazil or even the FX Market to me I think that's where a lot of the opportunities and where we've been spending a lot of our time is much more on where sort of these Divergent monetary policy decisions can come out and what that might mean for you know especially something like the Euro where you know where positioning has been extremely lopsided and could spark a really nasty reversal if position starts to get unwind yeah and George is saying oh don't leave out the boj as well Darius uh we have also I mean this is a busy week we've also got Apple coming out after the Bell we saw some of the big you know a big Mega cap Tech names I saw a stat somewhere and I don't have it in front of me that I think it was 2.5 billion dollars flowed into QQQ last week or you know what happens with all the money that's been chasing technology how how does that fit into the Outlook based on what we just heard from the Fed yeah so I mean medium term it's you know say medium term over the next let's call it three to six months I you know I don't know that anyone has a real foundational basis because on one hand a foundational basis to make a strong conviction call because on one hand you're going to likely see the economy at least for Mega cap Tech continue to be relatively resilient you know recessions don't really start for every consumer every business at the same time so those kinds of companies are going to likely continue to outperform from a from a fundamental standpoint on the flip side you know we do have you know pretty severe inflection in global liquidity obviously Andreas uh Michael and I were discussing earlier that hey you're going to have this pretty sizable inflection um with respect to U.S liquidity vis-a-vis of the TGA and then these would be the GGA and quantitative tightening actually getting its teeth back uh Brian you could throw that slide four up there or where we show kind of the components of our uh just another liquidity model fed balance sheet emergency lending on the feds balance sheet reverse Ebro and the treasury General compounds I will caveat that by saying we do have almost 250 billion dollars in the TA right now and that then that thing's got to go to zero before we start bouncing up so I think over the very near term it's going to be hard for asset markets to crack particularly on that factor alone but I think we're kind of missing the point right now and I do want to kind of broaden out the discussion to talk about global liquidity as Michael was trying to do here because I think Global liquidities kind of become the dry in the driver's seat particularly because we've seen such large Deltas emanating from Global central banks and Global economies so uh Brian if you can throw up chart one I will show our Global liquidity proxy there and how we get to our Global liquidity proxy what we're trying to do is amalgamate the sort of you know the influence upon liquidity you know again it's a squishy concept but the influence upon liquidity from both the private sector and the public sector and we do this by amalgamating global central bank balance sheets we do this plus global narrow money Supply Plus World FX reserves and that number's right around 94.4 trillion it's up right around 2.3 trillion from a roboticed in October so that's positive on the negative side it's actually Delta negative on a trend basis so if you look at the trailing three months through April that's that third panel in this chart here on chart one uh it's minus six point five percent on a three-month annualized basis and when you look at it you start to deconstruct the components this is where I'm actually getting more worried just in looking at the actual overall trade in the time series and so when we look at slide 2 here we actually deconstruct the time series into the central bank balance sheet in the global narrow money supply and into World FX reserves and what we can see is you know we have a basically a plus 3.5 trillion dollar impulse in the global central bank balance sheet that's now minus you know 700 billion dollars on a totally come out basis that impulse Peak to January we had a plus 4.9 trillion dollar impulse in global narrow money supply um that peaked in in January and that's now almost minus one trillion on a trillion three month basis through April and then with respect to World FX reserves we had a trolling through month impulse of a ride around you know kind of 850 billion dollars that peaked uh kind of in February and that number's already uh has declined all the way to just plus 60. so we got a pretty significant kind of removal in global liquidity and I think that's kind of coming at the same time you have this kind of you know we're running out of scope to have positive that liquidity Dynamics here in the US as a Visa be the debt selling and Visa V2 plus QT so it could be quite a rocky summer um uh Andreas I know that you have been looking at liquidity as well you did your Steno signals on that very issue uh and if you don't have access to that if you're not a member you can scan the QR code so you can see that um Andreas drops them every week what are you looking at um and do you also see this sort of lining up as problematic sounds like for the global economy yeah I I tend to agree with the assessment of Darius and I think the interesting thing here is that we have a Divergence between the East and the West when it comes to liquidity Trends China clearly added liquidity into the first quarter Bank of Japan added liquidity to an extent that almost matched the pace of the Federal Reserve in March 2020 earlier this year it was an extreme liquidity Edition from Bank of Japan when they defended their yield curve control after lifting the cap by 25 basis points late last year so what I'm trying to say here is that if you want to follow liquidity trends it may be a good idea to add some Equity exposure in Asia um I'm not saying that you should act direct Equity exposure to Mainland China I get the reasons why you don't want to do so but maybe Japan is a decent option if you want some um some Equity exposure with less tricky liquidity developments Andres do you think that I know we're going to start watching closely in June do you think that boj is going to try to raise are they going to are they going to change their yield yield curve control levels are they going to try to raise that band again I I mean they they actually did quite a few uh changes to their communication uh at the meeting last week uh that in my opinion paved the way for a policy action in June um but if they decide to increase the cap by 25 basis points again they will also met they have to defend the new cap I guess as they did in January when they um lifted the yield curve control cap back in December so what I'm saying here is that even in a scenario where they hike the yield curve control cap they may have to um to print more against to defend it anyway yeah that's why I'm asking um everyone pretty much assumes that the Market's going to test their resolve if that happens we're we're almost out of time but Mike if you're looking if you think the Dollar Tree it sounds like that's the one you're the most interested in um are you waiting and watching for something are you starting to do anything now how are you thinking about expressing that so I mean it's a little bit of sort of Dipping my toe in on a couple of different trades um you know I'm I you know I have a sort of toolbox if you will of different technical signals that I use to sort of help me with my trades you know I have my sort of broader thesis um and I sort of wait for my signals to start to fire so you know yes I did step into the Euro today on the short side just a little bit um you know sort of in that post release statement um where the Euro kind of shot up to the upside and it gave up a decent amount of that in the afternoon um at the same time I don't want to add a ton of rest in case you get any sudden surprises from the ECB tomorrow so um you know for me it's sort of Dipping my toe in um because I do think that you know what a technicals aside you know whether it's the FED pivoting to rate cuts um or it's you know everyone believes that once the debt ceiling impasse is resolved that's naturally going to be a dollar not negative because of sort of the upheaval and um and you know what not people are going to be upset with the US and lose faith in the U.S because of everything that's going on that's just become such an overwhelming narrative um while there's very real fundamental liquidity things going on that um you know yeah I'm comfortable stepping in from more of a fundamental and Catalyst type um situation and then I'll wait for the technicals to start to turn more to to add to those which makes sense in this environment uh Darius I want to give you the last word but I got to tell you as usual we're getting a lot of love for your shirts and Johnny airport believes you should come out with a line of your own so uh just a little entrepreneurial idea for you as we navigate these this tough macro environment but what do you want to leave people with what what what's going to be on your radar what are you looking at and where do you um where's the risk that you want to keep an eye on yes I'll end with three things number one don't think me think Tommy Bahama um number two number two uh just remember that the FED is a reactive government agency and they're not going to spray you know the liquidity hose get in the fire truck and spray that liquidity hose without you know a burning house to put out and we have to ultimately have to get to that burning house process which in our opinion it's not been priced in the equity and credit markets and quite frankly it hasn't really been pricing the fixed income markets as well if you look at the amount of rate Cuts or the lack thereof that are actually priced in from a terminal fed funds rate floor perspective and then lastly zooming back out to this concept of global liquidity um it's definitely no longer improving um it's not sort of Contracting the way it was throughout 2022 but you can make the case that it might actually start to contract the way it was throughout 2022 and I'll just leave you with two final thoughts on that which is the Chinese economy is the the you know part of the reason we saw such a significant uptick in global liquidity last year is we saw all the Chinese economy kind of really struggling late in the year and the pboc was very keen to give the Chinese economy a kind of a fundamental boost in the absence of meaningful fiscal stimulus well China's economy is now standing on its own two feet we can clearly see that in the data you know GDP and q1 is 4.5 it's well on its way to meeting that government Target of five percent for 2023 so it's very unlikely that pbocs you know in the game are going to have skin in the game the same degree and then I have a varying perception with Andreas with respect to the doj for two reasons one you know part of what we saw about the part of what we saw investors in terms of attacking The OJ's yoga or control framework and kind of forcing that speculation upon uh the policy there is part of the reason for that was we saw you know Global bond market volatility as high as it had you know pretty much ever been at least in recorded history on that time period and now that bond market volatility is much lower it's very unlikely we see you know kind of the attacks we see on the boj policy but uh secondarily on u8 has been pretty clear that he's not necessarily in favor of piecemeal changes to the policy you know so that might that may kind of delay any big changes in policy you know kind of until next year so in our view this concept of global liquidity at the bare minimum is no longer improving and it's probably going to get a lot worse vis-a-vis the U.S economy and U.S liquidity Dynamics over the next let's call it six months fantastic Darius Mike Andreas so appreciate all of you coming on and helping us not only break down what happened but really give us a lot of information and and things that we really need to keep our eye on as we move forward so appreciate all of you appreciate you Megan thanks we're going to be back on with jaw George's zombies tomorrow George Gonzalez is on with us tomorrow and we'll talk about ECB and look ahead to Fed so we'll see you all then in the meantime take care and good luck out there foreign [Music]

Channel: Real Vision

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Keywords: real vision finance, real vision tv, chinese, stocks, bitcoin, equity, equities, nasdaq, consumer sentiment, consumer prices, inflation, chinese tech, chinese tech stocks, china's tech crackdown, fed, federal reserve, the fed, taper, fed tapering, fed hikes, rate hikes, interest rates, bonds, treasuries, investing in bonds, raoul pal, 2023 markets, 2023 recession, 2023 inflation, realvision, ral pal, raoulpal, portfolio management, gold, tony greer, tg macro, beer with tony greer

Id: RUAX-veNx9o

Length: 60min 32sec (3632 seconds)

Published: Wed May 03 2023