Real Conversations: Raoul Pal & Neil Howe → Troubling Cyclical & Secular Trends

[Music] [Music] good afternoon welcome back to real conversations i'm neil howe guest hosting for keith mccullough we've got a wonderful show today i'm joined by the one and only raoul paul as many of you know Ravel is the CEO and co-founder of real vision he's a goldman sachs alumnus and a former hedge fund manager and as you probably also know he's a much sought after market strategist raoul thank you for being on our show it's great to be in there we finally get to meet you've been on real vision a few times I had I've never got to meet you I've been jealous of grunt yeah well grants a great guy your neck of the woods or I say your neck of the islands so yeah grants on a plane more than I am but yeah we both live in the Cayman Islands which is not a bad place to live particularly this time of year yes grant lives out of a suitcase I'm sure I mean he travels about 250 days a year this is really exciting I was thinking about what were you going to do this when we kind of first planned it and we have so much to cover I know that you've done some recent shows on the retirement crisis I've talked about some of the same things on on my shows one thing raveled what I'd like to do is to go through this maybe in the following order one is to look at long term fundamentals in population employment productivity you know sort of the long term constraints on where the economy is going kind of all and and and all of those things constrained by sort of the political economy in the world and then we could move from there to the business cycle where are we shorter term when's it gonna break what does it mean to be light-cycle or worried I don't know if you believe Fed Chairman Powell we're still making mid-cycle adjustments but anyway we can talk about the timing the business cycle then we could move on to the financial cycle if there is such a thing and talk about how markets are going to impact how things are gonna break and then finally and this is going to be my favorite topic is to talk about the political cycle and I know you talked a little bit about it on your on your recent shows and that is this whole new mood toward authoritarian populism both on the right and the left and not just in America but around the world and how that is going to make its entrance and what's going on so do you there's a lot to talk about and and just your thoughts I guess to start this rolling yes so look to frame my long term because I look at things in in the long term the secular trends and then I look at the cyclical as you rightly point out and then down to what its impacts are and then what it's knock on effects are going forward so it's kind of very much within the framework that you've set so long term as I laid out in that retirement crisis video is we're at the end of somewhere close to the end of a secular cycle in debt equity ownership and a number of key things and I think most of those in my mind where I differ for many is and probably not from you is I think much of where we are today the secular imbalance or even a bubble in many respects has been driven by this baby boomer population all acting within rational thought so most of these people this largest generation of all time at the time had no offsetting generation because of the war so as they walked into their first job and their first house and their first car their incremental consumption was you know similar to what we saw today when China came onto the scene in the early 2000s late 90s it dislocated prices and I think that caused the large part of the core of the inflation that happened in the early late 70s early 80s was these people coming of age and just starting to incrementally buy and that hadn't happened before there was no offsetting generation now that's all that's all fine but then what happened was after that is once they got into their 30s and again this is very much influenced by your thinking is they gone to death there but their 30s do they start saving for a rainy day or retirement or whatever because they start to earn income and that was the advent of the 401k the the start of the decline of the defined benefit pension contribution system and so it became an onus was on the individual to make their savings so money piled into the stock market at an unprecedented rate because again there was no offsetting generation that was selling stocks to them this was basically all new purchases and they accelerated in about 95 onwards as the advent of the index fund took hold and money poured into that as well so we saw this and leading into 2000 we now saw these baby boomers at the age of 45 years old with a huge speculative equity portfolio and unprepared for a recession and as ever the recession comes along and it wipes 50 percent off the stock market that hurt people but there were young enough to buy the dip but their mentality had been changed from thinking okay the equity market is now not the safe bet that I basically had from 1982 to 2000 with 1987 in the middle and and a small pullback in 1990 they now thought okay this is something different so the Fed had cut rate so they did the rational thing which was okay how do I save for retirement now or properties relatively cheap for me and it was relatively cheap and interest rates were so low that they piled into that to again all making rational choices but the madness of crowds meant that it made things untenable and household debt exploded the next wave of that was obviously that bubble bursting and an unwinding of the household debt bubble to some extent now now I left of the situation where most of them don't invest in the stock market directly but their pension man and they're driving the last part of I think of this demographic bubble and that the last world probably the part before last which is the credit bubble in the US as corporations buy back their own shares and issued debt to pension buttons who are giving it to this also these these same people their pension fund managers are taking excessive risk to close the funding hole left by those two recessions where they never made it enough returns and interest rates keep falling so that's the other key part of the equation that I look at is the the falling of long-term interest rates driven by demographics in the increase in debt right and all of those things come together and the last part of the big secular cycle is this dollar issue where the dollar will not go down because there's too much borrowing so all of these have come together at a big point and that's kind of how I see it yeah that's it's it's interesting you know I look at very carefully at how all of these generations are doing by cohort and the the generation that made at best the the what's been called the lucky generation is the Silent Generation it came right before the baby boom they were relatively small in numbers so there was a great deal of demand for their labor back in the 50s and early 60s they were all veterans because of Korea so they all today have veterans benefits and you just kind of go down the to go down the list they bought their first homes just before the 70s kicked in with stagflation so they all paid negative interest rates and then when they began to move into midlife in the early 1980s that's when the valuation of the stock market reached its all-time low back in August of 1982 interest rates were at all-time highs and they were the ones who started saving they rode this incredible boom for three decades and guess what the last court of that generation born in 1942 reached age 65 and nine in 2007 2007 said that's timing right that's priming my parents with that cohort and so here we go my dad retired at 60 in 2000 and then what happened was obviously the equity mark the equity market collapsed and he lost a lot of his retirement savings then it got to 2007 luckily I'd managed to get him into buns at four point six five percent which was great but by the time they came to roll over in 2010 puddin yields were a zero right so even for him and he was part about lucky generation but the tail end it kind of killed him twice so you'd still some impacts a thing well there is and obviously it's gonna get worse I mean obviously obviously to low interest rates after the GFC and and quantitative easing was very good to this generation because then they were all in these assets particularly fixed income which just kept on going up and up anyway that generation has done very well I've done many presentations on the graying of wealth on just how incredibly affluent today's today's seniors are here's a quick he's a quick point to that is I spoke to one of the guys at the colored UBS ultra high-net-worth management groups the average age of an ultra high-net-worth at UBS I believe is 80 Wow you see there you are and and that's my point that's my point and you look actually in the the SCB you know fed data on you know they do every three years on asset holdings and 75 plus americans still have the largest per capita holdings of equities I'm not just talking I'm noting about fixed income anyway equities they're still holding that stuff so this is what you know and late wave boomers and Xers like to think of this great generational transfer but as you have pointed out and and I have as well there's a tremendous inequality to this generational Tran I mean if you look at you know the the various kinds of inequality right the inequality of consumption is probably the least kind of inequality even poor people have to eat and even you know rich people can only spend so much inequality of income is steeper inequality of wealth is much much steeper but the one thing that's the most unequal of all is inequality of bequest and there it's incredible the difference between the median and the average bequest is a couple of light-years wide so for example the median the mean bequest the average bequest from the Silent Generation early wave boomers to their kids is get is over a million dollars the median bequest is something like thirty thousand dollars right and that's the difference and I think when everyone talks about this great wealth transfer yeah but it's all going to Muffy and Duffy you know what I mean right and and that's the problem it and actually this whole issue of whether or not interest rates will come back up again now that the boomers are beginning to retire you know this is the whole phase of life bulge it that effect is going to be tempered by the fact that increasingly much of the savings no longer has any phase of life dimension because it's Warren Buffett money I mean you know what I mean it's very wealthy people and they're investing in the next five generations of their family right so there is no perceptible diss saving for this group yes there's dis saving for the middle classes dis saving for the upper in middle class when they actually start retiring but that's no longer as dominant as it used to be as back in the 1970s when we were somewhat more equal society the Gini coefficient at least on assets and income was less yeah I agree I think it's a bit of a red herring to look at that generational wealth transfer we had similar in Japan and we never really saw the great impact of that gel wealth well just don't die so it keeps going on and on now on and they overtime deplete some of their savings assets but you know I think the point being is when you actually break it out by median versus average in both the older generation the Silent Generation and the baby boom it is so skewed to this ultra rich when in fact the average baby boomer has like a hundred ninety thousand to his name into total assets to retire on they basically got about ten years worth of income that's it there's no interest rates for them to deal with and people haven't come to terms with the fact that they're going to have to accept a different standard living or dramatically affect what they do there's no amount of the stock market going up in the next three or four years is going to help these people yes well let's take a look at some of the big demographic constraints on the long term that I sometimes talk about Josephine I don't know if you could pull up that chart three here this is what I call the generation long slowdown in in the working age population and you can see how we're on this incredible decline right we're reaching almost absolute zero by the year 2021 this again is the consequence of boomers retiring Rowell is sort of the flipside of what you're talking about and also a very small generation kind of late wave Millennials and kind of the post Millennials coming into the workforce and you can see on the next chart Josephine if you want to look here this is without historical precedent and for everyone who likes to think that you know when Trump came into office that he was going to sort of redo the the 1980s in the early 1980s with Reagan you can see that Reagan benefited from one of the most incredible growth rates of working age population right that was the Boomers coming of age they're coming into the workforce so when Reagan was was president he was enjoying a 1.6 percent GDP win that is back just from more warm bodies in the in the working-age population look where we're going today we're going into this decade long what I call a super trough and in fact looking ahead the next 50 years and we're never gonna see labor for its growth like we saw in this in this in this last in this last in this in 20 30 years ago this next chart and I just have a couple more charts on this this simply looks around the world and you can just see the sea change right I take a look at these differences wherever you look in the world and notice that the United States is not particularly bad we're still growing but how about Russia how about Europe how about Japan how about China which shows the biggest Delta if you want to look at the difference between 1970 to 2017 and then take a look at the next 30 years there is no Delta on demographic change more rapid than China that Redguard generation is all retiring and those one family children with those you know 4 to 1 families is is coming of age today and lastly if you want to know what's driving it it's actually not lined jeopardy it's falling fertility that is what's driving this we're not having kids as much and I have the purely demographic constraints on this I'll just close this with my last chart here and this is at a presentation I did a while ago and just asking the question are we actually relatively favorably situated in what I might call a demographic quad - meaning that if you look at population the compounded annual growth rate in the working age population by affluence it's a negative correlation for the obvious reason it's rich people that stop having kids right but in that spectrum the United States and the other anglo-saxon economies which tend to have higher fertility rates and also tend to have higher immigration rates we're looking at United Kingdom Canada Australia the United States obviously Israel for cultural reasons is a huge outlier here is generally relatively favorably situated but if you want to look at East Asia the the more advanced economic Tigers or look at Europe you're looking in a much more depressing scenario so rel I want to pass it back to you for your comments yeah look I'm gonna I've been following this whole wave through Japan through Europe look there's no surprise the Japanese stock market topped out in 1990 and then Europe topped out in 2000 and look the only surprise was the US didn't top out in 2007 I would imagine but now coming to the average baby boomer retiring I think that's significant we've also known over time that as the population ages we've seen that the growth rate of GDP is fallen along with exactly those charts and that we see the same with bond deals as well across the world it basically follows that demographic I think China is the very interesting one and we can impute you know much worse trends ahead I think that's super interesting I also asked myself the question about ten years ago I said okay we know this is all screwed so what is the answer and the answer somewhere on the top left quadrant is there are many countries that are growing in economic power over time that are have young populations and an age but average population age below thirty with very little debt and very high savings rates I call those them generally the monsoon countries they tend to be all around the Indian Ocean they tend to be mainly Islamic countries with India Singapore South Africa being the key except action than that and those countries look the complete 180 degree opposite so as from a demographics perspective you know if I were to say ok what does this mean for the west over the next twenty or thirty years I think your chart shows very clearly that the ability to generate economic growth within that is going to be very difficult and particularly return on asset prices considering there are all time record valuations both in credit markets and equity markets but then I look at a country like India and sure India has its ups and downs but what is the probability of having a secular wave behind you as Indians start to save and invest and there they're piling money into the stock market over time and it feels like the u.s. in 1982 and so I very much use these as part part of my core secular framework I think it's incredibly important most people that really understand the power of the demographics has on everything from GDP growth to asset prices I agree with you I you know India is that juggernaut that everyone keeps waiting to happen right it's soon gonna be my the most populous country in the world it was soon surpassed China it's still growing it still remains desperately poor and it still has a pretty tiny middle class but but that could change and those who believe in democracy those who believe in a kind of a pluralistic society they they speak English they have a lot of human capital you you would think that that that they would turn up that is a great long-term expectation along with much of what you pointed out in Southeast Asia the Philippines is another country you could add to that list and yeah Indonesia the Philippines Malaysia yes super interesting yeah but but they have to turn the corner on the whole productivity dimension and it's interesting that not too many countries have repeated the example of the Asian Tigers you know we waited for Latin America to do it and the economic to the demographic dividend you know they they to experience lower fertility but they never caught on the greater productivity wave the question is nail is we shouldn't expect the past so whatever's coming is the future so whatever was the productivity you know the globalization that was best to clear the Asian Tigers wave right as capital from the west flu float into the East was a huge driver of that but that's in Reverse right now and in addition I think that as it reverses it's going to be it's it's going to be a more complicated world to project forwards because there has to be something different to come by I agree with that in history always moves in unexpected ways and I do think that the complaint is you know it is something like the robot ization of the Japanese workforce is that a productivity miracle that we are waiting to happen we don't really know but I know it's not going to be from labor arbitrage Ram which is what it was yeah yeah I know I agree with that I agree with that let me let me turn to another long term constraint there's been much talked about obviously if you don't have employment growth you can still have higher GDP and obviously higher affluence with productivity growth so we could show a Turk 8 here this is the this is the current trend and this frankly has been a huge disappointment right and this is as important as as employment growth in determining that real GDP and as you can see we had a period in the late Clinton years and the early you know lows the GW Bush years of higher productivity largely attributed to the introduction of computers and laptops in the internet into businesses but it's been very disappointing since then and this too is a real constraint on all GDP productions on budget productions fiscal projections a standard of living projections one of the reasons why people don't think that their kids are going to experience higher living standards and and the the reasons for this are varied I mean I have I have a list of these things I don't know if you want to show the next chart but this has to do with with everything from inadequate investment infrastructure to the sectoral failure of success I mean increasingly this is Bal malls cause disease those sectors which experience the fastest productivity growth are destined to become the smaller sectors over time and those that experience zero or or negative productivity growth are destined to have evermore gave her greater share of the of employment over time and this is something that you know William Baumol pointed out many years ago and I think we experience it if you look at education healthcare real estate and construction social services of all kinds you look at this enormous area and growing area of our economy which arguably I would say particularly for healthcare probably has negative productivity growth over time you ever you have a real problem and and one of the areas that to me is most to blame for this or at least as complicit is a growing theme that no one really talked about back in the 1990's or even in the early ooohs and that is declining business dynamism we have a decline in startups we have a decline in job churn we have a huge a catastrophic decline in Geographic mobility people aren't moving anymore particularly young adults Millennials declining rates of companies startups firm term over declining number of total firms you you look at it we've I actually have a whole hour show on this but but the a lot of it comes to to to its to its apex in this whole problem of growing market concentration and the fact that increasingly businesses are favored I'd like your reaction to this Rowell businesses that are favored I mean if you if you talk to Warren Buffett he says he likes companies with moats you know moats around them to protect them from competition you look at Peter Till's new book you know zero to one he says he's looking any any entrepreneur he looks for monopolies nothing no one looks for a competitive business everyone wants a monopoly and and you look at Jack Welch he used to say that you know he wants he wants businesses that can be absolutely dominant that can be in a permanent incumbent in an industry and right now at the same time that you see this low and declining real rate of risk-free interest you see the rates of return on these incumbent businesses remains very high and I fear and this this is something that can actually feed and it's this this whole populace thing that we could talk about later but there is a disjuncture in our economy that is to say it's hard now to break into new industries you're either surrounded by well patent thickets or you know you know what I mean there's something in the way well I I would step back even at a higher level and say okay what's driving that productivity issue and if I look through your list I could answer des to many of them and the more debt there is the harder it is to become productive you've got the productivity miracle out of debt growth and we've seen that with the Chinese economy too that's kind of gone ex debt growth and we see that in GDP each dollar of debt added to GDP produces less or less GDP over time so I think that's part of the productivity issue also obviously companies because of the tax issues in the US and low interest rates the US corporations are choosing to buy back their own shares as opposed to invest so that drives down productivity over time as well and that's not going to go away until it gets changed and I think that would be one of the changes that comes with a swing in populism because I think it's something that has to happen but the other thing is it's crucial it's related to the same thing which is access to capital so what you were hearing from Warren Buffett and Peter Thiel and all of these guys is only certain people can get the capital so you can try as hard as you want to go and open a cafe which was the old style of setting up a business you can't get any money nobody will lend you money banks do not lend money for small businesses right so how do you get money well you now have to have that gazillion dollar idea that has a moat around it and you have to have been connected with in the industry after no the players are to access the capital so what we're seeing is a narrowing of capital availability to more people and I think so we're seeing capital going into buying back shares and less capital being allocated to a broader range of opportunities which means it's harder for most people to get it makes the economy less productive over time because everybody's looking at the same opportunity I agree I mean you can't even break into politics without a few billion dollars isn't that right I think that's what we're now beginning to see I mean that's true though right even within the hedge fund industry industry I was in when I was first in that industry so I've been around in about industry since 1990 but but um I was running a hedge fund you could still get capital and so the insurance companies and pension funds and endowments would allocate to a broad range of managers some of which may have had a hundred million under management which was deemed to be relatively small at the time then a huge explosion came from the pensions industry again as ever driven by the same demographics which was they wanted hedge funds to look like bonds they wanted a low volatility but slightly high return they wants it looked like a junk bond but with less catastrophe risk in it so they forced all the returns down and everyone became an asset gatherer so all the asset gatherers grew in size so people had bridgewater and a bunch of others accumulated huge amounts of assets and it meant that nobody else got capital and it's getting worse and worse to this day so even people who are fantastic traders and great investors can't get any capital because they're not big so investors will only follow where other capital is just becoming even though we talk about this massive washing around of liquidity from the Federal Reserve but we we have to talk about the same issue of the elites versus the non elites within access to capital as well as it is for all the other I agree but I think I think a regulatory capture I think the the increasing is of what I talked about patent law which I think increasingly hinders rather than helps competition I think these the growth of the so-called natural monopolies you know that's kind of your Facebook Google phenomenon I think all of this is just accentuating there don't thing you're talking about so here's a thought that I've been toying with and a few people have talked about look I think Facebook and Google should be broken up and will be broken up and I think that much like breaking up AT&T or Marbella at the time what you did was unleash a whole bunch of smaller companies break apart monopolies and allow more people access to that locked in capital from the larger corporation and it tends to offer great opportunities I mean out of the split up of the of the big phone company came all the mobile phones yeah huge business I totally agree well you know you kind of mentioned debt and particularly corporate debt and the rise of you know leverage the lending and all of that and the you know covenant light loans and and the and the huge run-up basically of corporate debt and the lowering of quality of debt over this over this entire business cycle so that's a good segue to talk now about the the business cycle right where are we in the business cycle and what are you looking for i I did a piece this was probably about two months ago on recession indicators and I went down I don't know I must have done 120 of them you know but I had my 15 favorites but I'd like to I'd like to start that a little bit and and get you to talk about favorite recession indicators Adam I can go down through some of mine that give us a good place of where I think we are in the business cycle but I maybe I could you know yeah I mean I spend most of my time looking at this because the secular framework doesn't change almost from decade to decade so when you look at the business cycle it's the key driver of asset prices so if I look at the year-on-year rate of change of oil copper equities bond yields the Korean stock markets emerging markets in general anything they're all basically driven by the business cycle so where are we in the business cycle now well this is the longest business cycle in all recorded US history we've seen a couple of outliers in the last twenty twenty or thirty years what one in the UK one in Australia which both skipped a recession at some point I think if I look at the indicators that I look at i used the basic one it's the is m you can use that and the is M is around fifty which says we should be growing at about one percent GDP growth but when I look at forward-looking indicators of many things stuff like the jolt survey the yield curve is the classic example of the business cycle there are so many indicators that suggest we are at the point of recession or very close to it and my point has always been about this is that recessions come from a slowdown in the business cycle but they actually crystallized by a larger event now I think the tariffs were the thing that actually did it we broke supply chains around the world and we're still recovering but now there's a corona virus on top really doesn't help so any chance we have of of some sort of midterm bounces is about zero now I think so my view is we're going into recession now I think it's this year and next year they'll probably be some sort of euphoria around the election because both parties whoever gets in is gonna spend a lot of money on fiscal stimulus and I think the Europeans will too so and the Chinese probably will as well so there's going to be some euphoria in the middle of the cycle much like there was in the 2000 cycle and so that's what I think is happening now what it means is we can really see it playing out in bond yields bond yields are falling almost on a day daily basis and I've been part of that trade for a long time with the ethos of buy bonds where Dan's I spoke to Keith about it many times I've also been very interested in the dollar because as the world slows down and world trade slows down what you find is the dollar there was a global shortage of dollars I think the the BIS put it thirteen trillion dollars the world is short of so if the oil price Falls has less dollars in circulation if world trade which is currently negative Falls there's less dollars in circulation keeps driving the dollar higher and even today when the dollar almost breaking back over a hundred so we've got on the DXY so we have this issue that the is driving up because of the debt dynamics and some of the regulatory issues that was caused by the banking system that in itself flows global growth that in itself is lowering bond yields it's inverting the yield curves and the Fed have had to start cutting already everybody else has start to think about stimulating more and the reality is is at some point the equity markets probably the final leg of this and this unfortunately dovetails exactly when the bulk of the baby boomers hits retirement age you know that the issue that we talked about is if you want to white 50% or for retirees savings this is the time you're gonna do it yeah I agree and and the the frightening thing that you pointed out in your your kind of retirement crisis video which I liked very much is reminding people that the equity markets don't always back bounce back right look at Tokyo look at look at Germany in France now the United States is the only one that's always bounce back bounce back strongly but that's you look around the world that doesn't always hurt so so Neil this is a key thing so why did the u.s. bounce and others didn't when 2008 should have killed off the cult of equity well the cultivate quilty is dead because if you look at individual households they don't own equities yes there have it in their pension plans but as you said the super-rich do the reality of the situation is the entirety of all the equity purchases that have gone on have gone on by the corporates themselves but chairs right everything else a net negative yeah your switch between yeah and there's the switch between active to passive so indexation has created a forced you know because you're corralling more assets into a smaller number of companies so that's created those two things alone everybody else has been a net seller in credit including foreigners so you're killing the cult of equity off if you change the so what is it that allows corporates to buy their debt it's pretty simple its cash flow cash flows are also correlated to the business cycle so when the business cycle goes negative cash flow goes negative and we're seeing that in many companies already so that means they stop buying back their show the other side of the equation is who's the buyer of all that debt well guess what it's the same baby boomer pension and the issue is is they're being driven at state level by corporate tax receipts and they are also driven by the business cycle so as tag receipt tax receipts go negative the buying of corporate bonds stops by the pension system and also corporations stop buying back their shares so you end up with a situation where the two most widely held assets by the entire pension system come to a halt as soon as the business cycle goes negative that's really really key I totally agree the buybacks and the borrowing for the buybacks is really generating you know the the the push up in equities and people don't understand that and it's not it's not the growth in borrowing that you have to worry about it's when the growth stops and that's actually happening now I mean if you look now you find that it's kind of peaked out it's kind of plateauing right now and that's when you really have to worry I I totally agree to that it's a very dangerous sign when you have a high end rising dollar falling commodity prices a slowing global economy aside from the United States and a Fed which keeps talking about we're fine for now right so yeah you're not going to get a mid-term bounce again Jerome Powell claims we're kind of a midterm correction you know so that's the word he would use let me let me just give a couple of slides here and show some of my favorite light cycle indicators does Ben you might show at chart 22 this is this is basically showing how what happens when an economy runs out of workers this is our age adjusted employment to population ratio we are now above where we were in 2007 and we're about either at or above where we were at every any previous business cycle peak people don't realize that because you have to adjust the employment population ratio to account for the fact that this huge group of baby boomers are now mostly or increasingly past age 65 and only a very small generation is now in midlife when you correct for the change in the distribution of the population and look at each individual age bracket we're now above where we were in 2007 so I don't think we have a lot of a lot of workers left if you want to go ahead another one of my favorites Rowell and this is just your point about the the term spreads this is chart 26 and this simply makes the point that if you want to look at a long-term recession indicator it's been correct in 10 out of the 11 recessions right that's the term spread we went into a inverted yield curve back in April and I look at this rule and I basically say six to 16 months after an initial inversion it usually goes into and out of inversion several times and as you can see if you want to look ahead one chart here you can see that it's kind of going into and out of it so we're gonna see it skip into and out and typically what happens is it'll go into inversion the Fed will cut it will come out an inversion until the long end slowly sinks again and then the Fed will cut again so I think that were avoiding is for the Fed to cut it's going to go out of inversion that will come back it it's like a stone that skipped several times on the water before the recession hits and and maybe well my my favorite one to look at this in the next chart this is a 28 you're talking about all-time favorites this is the fundamental disjunction between what the economy looks like near term versus long term and so you see an eerie parallel between the consumer confidence spread then that's basically the consumers of view of what the economy looks like near term versus long term and the actual ten years - three month term spread they actually track eerily and incredibly closely over a business cycle and they basically show you where you are in the business cycle I would add and this unequivocally would indicate that we are indeed late cycle yeah I agree and I think the yield curve is telling you the Fed needs to cut rights totally yeah and so I you know I think this coronavirus I think will force their hand I think they can use is an excuse to do it as well because they need to steep in the curve because this is terrible for the banking system as well so the chances are I think that they may well cut 50 and 50 again over the next six months as they try and deal at the global slowdown and I think that is what steepens the yield curve and obviously it goes along with the recession because that's why the Fed of cutting rates so I think you're dead right this is all to play for and this is what's going on right well you know it's Jerome Powell I think as kind of ease the way on that you know he's talked about how he's he doesn't even consider raising and you know inflation is so subdued and he's made remarks I think he's pretty savvy and I think that both both Powell and and John Williams have sort of you know that I think they're waiting for a chance actually to do this I'm gonna move if you don't mind to some Q&A I want to get some okay some let's see if I can I can read this here I'm going to just start from the top we got wow we got a lot of questions I'm just I'm just gonna start from the top here and you can you know we can both comment on this row so I'm going to I just start from the top here is the is the corona virus pandemic the Black Swan event that will put the u.s. into recession and how might it impact the u.s. fall elections you actually actually commented on that briefly when you when you talk to yes it's coming after the terrorism the thing about Black Swan events we don't know what the actual outcomes are that's what's happening we don't know what the outcome is we don't know the magnitude right if we knew the magnitude we I think it falls into the category of the potential I think the economic impact is enormous much bigger than the markets yet understanding and I think the you know without going into you know how the virus is spreading of which none of us know anything in reality but the probability is this sticks around for another two or three months globally at best so at best we've got another three months of this that makes it a five or six month economic event well that's a global recession I mean it's almost impossible for it not to be so I think it is very real hence why I think the Fed will cut maybe 50 and 50 again to get rates back down to essentially zero yeah I totally agree I I i did a note recently on the corona virus and what's behind it I think it's actually extremely transmissible it's very different from SARS in that respect I don't think quarantine is good do anything to spread to to thwart its spread it's it's not all that deadly but if it's only 1/2 or 1% and half of China gets it and ultimately half of much of the world gets it that's still an enormous death toll well you know so Neil I looked at just a simple thing is the current growth rate of the virus outside of China is roughly what it was in the beginning of the Wuhan an incident when it first started it's basically doubling every seven days right now the numbers are small now but in eight weeks time that would be a million people affected worldwide right so you know people have to understand compounding and how fast that that works so the point I've always raised with this is I don't know the answer but I know how to trade it and you have to trade the panic you trade ahead of the fear because nobody knows anything and though he's gonna know anything probably until April May so in which case the market is gonna have to trade on blind panic and headlines so that makes it a very and I think the Fed will have to do the same and so that makes it a relatively easy trade for fixed income because it's has to price in the potentials for something bad for the time being and so that's how I've looked at it also as well trade drops further and simple things like for example China under the trade agreements was post buy more u.s. goods it needs the dollars its buying less goods from let's say a country like Brazil where ports oi beans from Brazil needs dollars it's now dollar starve because China's taking the dollars from elsewhere and world trade has fallen so the whole thing is creating a setup that I think is a little more toxic than people understand I think the dollar may be the thing that breaks it all sell on the rumor and buy on the news right so and you're right it's all rumor I often remind people that if it's it if it's only killing 100 people a day just to keep you know I'm a demographer right so I have to keep things in perspective in China they're approximately 50,000 or 60,000 people who die every day anyway right I mean you've got a population that large so if it were only a hundred a day this wouldn't even be noise you wouldn't even be able to see it it would be a no invisible stochastic pattern I actually don't think it's just a hundred a day I'll just tell you I don't think it's that and I think it's spread much more widely but yeah and I think the other key thing here is I think the point you've raised right and I keep telling people forget that's what you're saying is dead right this is why people talk about the flu and all this other stuff the reality is is China's outsized response shows how scared they are of something like this exactly so that's doing well it prompts an outside response from every other country because the political fallout from not doing this is even worse yes so behaviorally none of us are going to get them as planes as much at the marty-mar all gonna change our behavior even though the death rates are super low for people who aren't old and aren't male so the reality is it doesn't really affect anybody and unless it turns into the Spanish flu and it's still possible we don't know but the but the behavioral outcome is everybody is going to be affected by it because nations are I I agree with that and I don't think I will turn into this Spanish flu but but anyway I agree this last question last part of the question was how is going to influence the elections we haven't talked much about the elections what you see coming up but the timing is interesting right I mean if something if we are reaching a turning point in the business cycle you go ahead another six months right and and and people are look so I think what very much resonated about your work is is here we go and I realize it was after 2007 that I thought well the next cycle may well be it because we've talked about in this conversation that the debt cycle is probably the last bit the corporate debt is the big issue here central bank bubble well that's about to finish as well and you've got the business cycle finishing and you've got this shift of a population from productive workers to net dive esters so you've got this enormous structural shift with a new population coming in I mean you couldn't ask for a better Niel how tick list of opportunities to create a fourth turning yeah so and you've had exactly as I think you talked about several other people have talked about as a great guide Dee Smith is a good friend of mine his DS always talked about well first what they do is look backwards so look at the the Trump strategy and the Boris Johnson strategy they're basically looking back to the past we can go back to that and that's appealing to the older voter is there's a rate of change going on of which you don't understand you're not comfortable with but we can turn back the clock of which obviously we can't so we can't throw all the immigrants we can't go back to 1950s England and watch the crickets on the green and drink pints of warm beer it's gone forever and the whole world is up for change so when you have an election you now have a mighty polarized country especially in the US and you have a potential for an upset again I think and I think the upset within your framework could be Sanders and Sanders and teaming up with somebody like Elizabeth Warren and AOC and the whole progressive movement together well that would change almost everything that we know today as creating some of the big structural problems that we have today as well or at least it's a solution I don't know what the outcomes are yeah I remind Republicans of how delighted Hillary Clinton and the top Democratic leaders were back in 2016 when Trump was nominated do you remember that oh my god they're gonna win in a cakewalk do you remember that hey man here's a guy who believes in protectionism and isolationism in these words that couldn't possibly win in a modern day and age and ID all these Republicans saying Oh socialist no one's gonna vote for it so he's beating Trump and a lot of these head-to-head polls I don't know if you'd go on a real politics take a look at head-to-head polls and I think he's a lock up for the election I think he's a lock up for the nomination I should say well and I think I think it's gonna be a fascinating contest and I'll tell you something from everything that I monitor I Trump himself he's the one he want most the does not want to run against he would much rather run against Bloomberg and he says it all the time says Bloomberg just bought himself into the election Bernie Sanders has real supporters and that's the world Trump knows right a polarized nation with real supporters it's a problem is the problem is is for him to attack Bloomberg is relatively straightforward cuz Bloomberg's are centrist run an East Coast billionaire and all of the things that the design Christ is against Sanders looks more like Trump in many respects yes exactly he is the postmodern candidate for the left Trump is already the postmodern candidate for the right let me get to a couple of other these questions because I you know yeah my gosh okay we have another one for younger investors in their in their 20s and 30s who are worried about the potential crisis looming on the horizon demographics in pension shortfall assets at all-time highs coronavirus etc how would you recommend approaching asset allocation for a long term growth okay here we're asking you I will an asset strategist right what do you say about asset allocation for someone in their 20s and 30s okay so I'm have a different view to many my first view is you are your best asset how you leverage that in an entrepreneurial world can make or break everything for you so if you have abilities to leverage your own abilities for income that can last your lifetime whether it's because you happen to be a good chef or whether it's because you have the brain that allows you to create a business and run it use that first the biggest investment you can make is that then secondly okay at some point this dollar is not going to keep going up it may in fact be broken up in some way shape or form with some sort of a chord or the rising of digital currencies and a number of things that will mean that emerging markets at the end of this cycle are going to be almost historically cheap this is the second largest underperformance of emerging markets in history and it's getting very close to being the largest by the time the dollars finished its move emerging markets gonna be cheapest chip so you can buy markets with great demographics great tailwind high savings all the things you've ever wanted ever dreamed of the same that the Silent Generation got you're gonna get them all over again they're just not in America so that is the great alloc allocation for me and the other thing so that's why I talk about countries like India or Indonesia or Malaysia or there's a bunch of these Philippines all of these I also like countries like Iran and Morocco and you know there's so many countries that really are interesting to me so you're gonna get your frizz bergen's a bride before you get them here at home yeah that's probably right because you know we think I think you will agree that the likelihood of develop markets recovering until this baby boom generation is through the hosepipe it's not is not high so in which case you end up with these low markets that trade up and down with the business cycle but don't go anywhere and I think that is where would you two go for the US but the emerging markets do the opposite they'll just take off and then finally I you know I'm a big believer in in the future financial system being built because I also do think it's built around the both turning narrow which is that whole digitization of assets the tokenization Bitcoin and the whole thing that's going on there I think that is a once-in-a-generation opportunity to invest in an entirely new system not one that we've seen since I guess the rules-based global order system was put together and globalization took off allowing people to manufacture goods in different countries around the world and trade easily so I think this this is a really big opportunity can I ask you another thing where well if if we do ever if we do ever in a recession scenario what's likely to happen to the long bond here at home so I think bond I think bond yields go to zero what so I think yeah so that's an opportunity as well in terms of just the business cycle yeah for the business like a shorter term opportunity I've been banging the drum about this forever and I've come on and spoken to Keith about it numerous times is you know just buy bonds buy bonds because the capital gains opportunity is huge let alone the protection here's another question just to follow up on that what do you think about real estate and precious metals gold and silver risk metal gold and silver I think if we're moving into a situation where we're gonna have much more monetary largesse when we run out of interest rates I think gold and silver do well I think that's a known narrative now and think people understand it real estate I think is a very complicated narrative and I think you've touched on this a lot I think it's a bifurcated market for a long time I think the stuff that the baby boomers want to sell nobody wants to buy because they want to live there and the stuff that Millennials want to buy just keeps going up in price and they can't get hold of it so it makes it a very very difficult mark okay and there's no market clear for six paper houses in rural New Jersey because Millennials don't live there so what you've got is this holding out of the baby boom places and we saw this in Japan all over Japan is the whole town's we sit in Spain we've seen Italy sit in Greece this whole town's just completely devoid of anybody under the age of 70 or 80 right well poverty so you got a bifurcated property market I guess yeah the only exception of course are all the millenials living at home because you know that's the that's the co housing and the shirring narrative you see that particularly in southern Europe I mean you just look at Italy in Spain where you've got just incredible ratios of homes with adult children living in them the reason they do that there is that you know 15 16 17 % of the budgets of those countries are going into pensions which are going into these households with older workers or retirees the kids have to go home to get a piece of that you know sort of like pilots just come you know not from that angle it's just look if you look at the combined issues that the family faced the kids can't buy the houses they both have to work they can't afford the babysitter or the nanny it's difficult to afford the cleaner and they're working 24 hours a day their parents have an asset which is a big house or a bigger house they have some retirement savings and they have an ability to a alleviate the workloads which cost money to hire third people 230 people to do and additionally they have the ability to work part-time which is what we've seen of that of the older cohort so net net it's a huge beneficiary for everybody if people would move into multi-generational households particularly people with young kids it's a game changer it changes the entire retirement demographics of the parents and the entire future opportunity set of the of the millennial kids it and it's a no-brainer hey I've told everyone that you know don't be disappointed or don't be disgruntled by this this is probably the best news for the long term political economy the United States because it allows us to maybe pare back on all these third party transfer payments between young and old if they just simply live together this there is there is nothing could be better news for our long-term you know just just liability situation in our economy I have one other I'll just answer it I have another question here someone said what book would you recommend is a follow-up to the fourth turning I say I get calls every couple of weeks from my agent he wants me to come out with a new book and I will just say it's it's questions like that that will speed me up right now I'm very busy at it hedge I but I absolutely do want to write this next book where I go ahead another you know ten or another ten or twenty years kind of into the into demography and into the generational cycle Raul this has been great I don't know if there's any last message you want to add about you know what you're doing or how you're feeling up yeah just just a quick thing it's a shameless plug for real vision I think many had joy people know about it but we've got currently a two-week special and very passionate about as you can tell which is about the retirement crisis and what people can do about it but real vision you know has some of the well it has the world's best financial video-content bar none we have an extraordinary roster of great people and right now we've got a special offer that runs till this weekend which is you pay a dollar you get three months three months access to real vision and the price is about to actually go up in March and you lock in the old price as well so if you've ever thought about signing up for real vision now is the time to do it it's just one dollar so just go to real vision com will find us on Twitter and get hold of that yeah and AJ we we love real vision so I visited often so thank you so much Raul it was it was a pleasure speaking with you after all this time reading about your work and listening to you so I'm glad we finally have the time to do this yeah I'm be pleased as well I've been desperate and sit down with you so at least over Skype but one day we'll have a glass of wine and chat properly alright roll thanks so much okay you you

Channel: Hedgeye

Views: 96,237

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day

Id: 5-6adETiqTM

Length: 61min 55sec (3715 seconds)

Published: Tue Mar 03 2020