Speaker 1: Hello, Odd Lots listeners. It's Joe Wisenthal, and I just
Speaker 1: wanted to make a special programming note before you listen
Speaker 1: to today's episode. We recorded this episode on Wednesday, June,
Speaker 1: so several weeks ago, and because this discussion is related
Speaker 1: to specific events coming up, specific forecast of the world economy,
Speaker 1: the world markets, we wanted you to be aware of
Speaker 1: when it was recorded, so that anything that's happened subsequently
Speaker 1: you can put in context in case things have changed
Speaker 1: a little bit. It's still an interesting, timely and relevant
Speaker 1: discussion in the grand scheme of things, but we just
Speaker 1: wanted you to be aware of exactly when we had
Speaker 1: this chat. Hello, and welcome to another episode of the
Speaker 1: Odd Lots podcast. I'm Joe Wisenthal, and I'm Tracy Alloway. Tracy,
Speaker 1: something I've been thinking about lately is that we're in
Speaker 1: a pretty interesting time for financial markets. And I should
Speaker 1: start by noting that today we're actually going to have
Speaker 1: a conversation about markets themselves rather than some esoteric topic
Speaker 1: tangentially related to markets. But it feels like we're I
Speaker 1: don't know if crossroads is the right word, but lots
Speaker 1: of interesting things are just happening right now. Well, I'll
Speaker 1: take the bait. I can think of a few interesting
Speaker 1: things that have happened recently. For a start, as we're
Speaker 1: recording this, we're coming up to the G twenty meeting.
Speaker 1: There's a bunch of expectations around Chi shin Ping meeting
Speaker 1: Donald Trump, whether or not they'll agree some sort of
Speaker 1: trade deal or a trade truces. And we also have
Speaker 1: the tenure US Treasury back below two percent, that was
Speaker 1: after another devish pivot from Jerome Pale at the Fed.
Speaker 1: And we have a whole lot of negative yielding debt.
Speaker 1: We also have earning season coming up. So yeah, there's
Speaker 1: a lot going on. But the one thing you didn't say,
Speaker 1: and what makes it really weird, is that with all
Speaker 1: this tension out there, whether it's trade, the Fed feeling
Speaker 1: that it needs to pivot do a more dovish stands
Speaker 1: to signal possible rate cuts, all this debt falling deeper
Speaker 1: into negative territory in many instances, the stock market is
Speaker 1: more or less right now and all time high. So
Speaker 1: despite all these concerns out there and interesting stresses showing
Speaker 1: up in the market, the one market that's sort of
Speaker 1: the purest proxy for risk sentiment is basically as good
Speaker 1: as it's ever been. Yeah, so we have this big
Speaker 1: divergence between bonds and stocks. But if I could just
Speaker 1: say one thing, it's interesting because we talk a lot
Speaker 1: about the bond market pricing in a potential recession, but
Speaker 1: it of course depends on what bond market you're talking
Speaker 1: about government, mint bonds. Sure, but if you look at
Speaker 1: corporate bonds, other types of credit risk, those are also
Speaker 1: doing amazingly well. So again, the riskier parts of the market, equities,
Speaker 1: credit all doing really well, while other parts are sort
Speaker 1: of screaming that a slowdown is about to hit exactly right.
Speaker 1: And then the one thing that I think also sort
Speaker 1: of makes even the stock market interesting is if you
Speaker 1: look at various survey measures, there's not a ton of
Speaker 1: bullishness out there, you know, various surveys of say, fund managers,
Speaker 1: lots of anxiety, lots of evidence that people are engaging
Speaker 1: in a high level of hedging defensive stocks leading the
Speaker 1: rally higher. So even within the internals, not many signs
Speaker 1: of euphora. It's just kind of a it's kind of
Speaker 1: a weird time. Yeah, it feels like a lot of
Speaker 1: people are in wait and see mode, but I'm not
Speaker 1: sure what we're waiting for at this point. I I
Speaker 1: don't know what we're waiting for either anyway, So I
Speaker 1: mentioned the top we're gonna be talking about actual markets today,
Speaker 1: and I'm very excited about our current guest. He flew
Speaker 1: all the way from Singapore for this podcast. No, it's
Speaker 1: not totally true, but of course he's one of our
Speaker 1: colleagues here at Bloomberg. But and I'm all, I always
Speaker 1: loved talking to him because he's based in Singapore and
Speaker 1: every once in a while he comes to New York
Speaker 1: and he's our he's he's our macro strategist, or he's
Speaker 1: one of our macro strategists here at Bloomberg. He puts
Speaker 1: out views, he's a former trader. He has very strong
Speaker 1: opinions about the market. And what I think makes them
Speaker 1: really notable right now, among other things, is that he's
Speaker 1: been a long time bowl who suddenly flipped bearish, and
Speaker 1: that's not very common, but someone, uh, you know, there
Speaker 1: are a lot of people out there who are bearished,
Speaker 1: but they're always bearish. It's refreshing and different to hear
Speaker 1: from someone who may have flipped or who has flipped.
Speaker 1: You forgot the most important part, which is he's also
Speaker 1: a previous All Thoughts guest. That's true, and I think
Speaker 1: he's probably significantly more bullish on the market, uh the
Speaker 1: last time, which is probably I don't know, maybe a
Speaker 1: year and a half ago or two years ago that
Speaker 1: he appeared on the show. So anyway, without further ado,
Speaker 1: I want to bring in Mark Huddmore. He's a Bloomberg
Speaker 1: macro strategist. He's also the editor of the m Live blog,
Speaker 1: which you you have a terminal you have to check out.
Speaker 1: And as I mentioned, he's a long time ball going
Speaker 1: back to at least twenty eleven. He's been optimistic about
Speaker 1: the market in the economy, and for the first time
Speaker 1: in years, he's warning about significant market sell offs in
Speaker 1: a possible US recession. So Mark, thank you very much
Speaker 1: for joining us. Yeah. Absolutely, Joe, I'm really excited to
Speaker 1: be here. And as you say, all of the previous
Speaker 1: times i've spoken to you on TV or on odd lots,
Speaker 1: it's I've always been bullish. I've always been kind of
Speaker 1: a permable as what I've been kind of laughed up
Speaker 1: on my colleagues here, and I think that's I've had
Speaker 1: periods of tactical barraishness, like oh, this will hurt the
Speaker 1: market for five ten percent. But I've always been very
Speaker 1: much in the camp that, you know what, we're gonna
Speaker 1: go back to record high soon. There was these three
Speaker 1: pillars driving the rally, and that was growth, earnings, in liquidity.
Speaker 1: And I'll kind of come into that later why some
Speaker 1: of those pillars are disappearing, just for the kind of
Speaker 1: the context in the history. I was someone who I
Speaker 1: was working in Leaving Brothers before the last crisis, and
Speaker 1: I did turn bearish, like I think many people the
Speaker 1: forefront of the financial crisis in two as and seven.
Speaker 1: I was, you know, not particularly a stutor smart, but
Speaker 1: along with the people in the financial industry, I became
Speaker 1: negative in kind of sometimes late tess and seven can't remember,
Speaker 1: and I stayed too bearish too long, right. I stayed
Speaker 1: bearish until definitely through Chasen in late two nine, in
Speaker 1: tens and ten, in turns and eleven when the Euro
Speaker 1: crisis kind of flared up and I was like, this
Speaker 1: is it. It's the next kind of sell off again.
Speaker 1: And then I kind of learned from when we got
Speaker 1: through that. I was like, hey, no way to sect
Speaker 1: the game has changed too much. Liquidity is coming. So
Speaker 1: since then I've been basically you always buy the dip,
Speaker 1: and the difference is now I think in the US
Speaker 1: equity market in particular, it's we've now changed to sell
Speaker 1: the rallies and it's I think we're gonna get a
Speaker 1: proper bear market is in a plus decline over the
Speaker 1: next kind of year. Well, you mentioned your three pillars
Speaker 1: of bearishness, then walk us through your thesis. Mark, Yeah,
Speaker 1: absolutely so. I think that two of those pillars are
Speaker 1: about to be taken out completely and the other one
Speaker 1: has lost a little bit of impacts. I don't think
Speaker 1: liquidity is disappearing anytime soon, but I think the amount
Speaker 1: of the love leverage in the system can be harmed
Speaker 1: pretty quickly. So what we've actually seen in economic forecasts
Speaker 1: over the last two months is that they've not been changed,
Speaker 1: or in fact, they are actually raised about a months
Speaker 1: ago for the three largest economies in the world US, China,
Speaker 1: UH and the Eurozone. But overall all economists aren't yet
Speaker 1: factoring in all the tariffs because they want to believe
Speaker 1: they're temporary, because they don't want to suddenly slash all
Speaker 1: their forecasts and then suddenly find that Trump signs a deal,
Speaker 1: and because he's been shown to kind of change tack
Speaker 1: quite quickly in the past, it means that economistsern hold.
Speaker 1: So what happens is you've still got US economists. The
Speaker 1: consensus forecast is still for two and a half percent
Speaker 1: growth in the US, even though all high frequency indicators
Speaker 1: show that's quite clearly just not going to happen. So
Speaker 1: it will take not just a truce in trade world,
Speaker 1: take removal of all tariffs and some extra positivity that
Speaker 1: removal of tariffs and the rate cuts to come through
Speaker 1: for US to get that kind of growth rate. So
Speaker 1: we're seeing global manufacturing p m I has fallen for
Speaker 1: thirteen straight months, is now contraction territory. The preliminary p ms,
Speaker 1: which we get for about fift the readings that we've
Speaker 1: already got this month, that for the next reading next Monday,
Speaker 1: show that will probably fall again again in contraction. And
Speaker 1: that's been that's been a pretty good guide for growth.
Speaker 1: And that's more of the global indicator, but with very
Speaker 1: much in the US we're seeing that as well. You
Speaker 1: talked about you know, stocks are a record highs, but
Speaker 1: stocks haven't always been a good indicator. We look back
Speaker 1: in the last crisis Chess and seven, so the market
Speaker 1: knew there was a real problem in the economy suddenly flaring.
Speaker 1: From about August, we suddenly started seeing that step in
Speaker 1: the curve was was we start the easing cycle. So
Speaker 1: what happens is the Fed actually started their five out
Speaker 1: basis points rate cutting cycle in September two and seven.
Speaker 1: The stock market made its record high in October two seven.
Speaker 1: The recession came in December two seven. I would not
Speaker 1: be surprised if you get a roughly similar timeline. Then
Speaker 1: we had the same thing back in tess and one.
Speaker 1: I can't remember the exact months, but the five and
Speaker 1: fifty basis points rate cycle rate cutting cycle I think
Speaker 1: started in January three. The recessions still came in March one,
Speaker 1: so two months after the rate cutting cycle started. So
Speaker 1: it just to back up your three pillars. One is
Speaker 1: liquidity and that's the one you're not particularly concerned about
Speaker 1: right now. The other one is growth and obviously and
Speaker 1: then what's the middle earnings? Okay, so I think one
Speaker 1: of the problems with earnings is again earning strategists also
Speaker 1: are starting to ash forecast, but not too aggressively, yet
Speaker 1: because they use as their macro inputs what their economists say.
Speaker 1: This works for most banks. Some banks they are actually
Speaker 1: not allowed to have different inputs than their official economists.
Speaker 1: Other ones they are. But overall they're still going, Hey,
Speaker 1: all the experts are saying growth isn't gonna slow, it's
Speaker 1: not going to be impacted by the trade war, even
Speaker 1: though we know it's definitely gonna be impacted, and even
Speaker 1: though all the surprise indexes have been missing anyway, So
Speaker 1: even if during the trade war, the datas of saying
Speaker 1: that the economic growth is going to slow down drastically,
Speaker 1: Now we've had fresh tariffs in May, which will feed
Speaker 1: through the economy, and about August that's when we'll get
Speaker 1: those indicators come down. So growth about to drop like
Speaker 1: massively in from about August September onwards, even without an
Speaker 1: escalation the trade wars. We actually need removal of tariffs
Speaker 1: to change that. Now, once we get past you twenty
Speaker 1: and once economist starts slashing their forecast, that will start
Speaker 1: feeding through the earning strategist, the equity strategist, and they'll
Speaker 1: start slashing equities. We do have a pretty good correlation
Speaker 1: between the direction of kind of earnings and whether we're
Speaker 1: getting earnings growth or earnings recession and equity markets, and
Speaker 1: I think we're about to see quite a drastic kind
Speaker 1: of earning slash, you know, earning deep earning recession, partially
Speaker 1: because we had such a high peak from the tax
Speaker 1: stiminus before. So both earnings and growth are about to
Speaker 1: be completely taken out. But Mark, I guess the response
Speaker 1: to all of that, and you know you've laid out
Speaker 1: a very clear list of worries there. But the response
Speaker 1: that any bull would tell you would be, well, we
Speaker 1: have the Federal Reserve which is now back in easing mode.
Speaker 1: Won't they be able to offset a lot of this?
Speaker 1: My simple answer is no. The Federal Reserve has got
Speaker 1: a very poor track record of preventing recessions. And I said,
Speaker 1: refer to the last two recessions, the only two recessions
Speaker 1: we've had in this century, um, and both times the
Speaker 1: easing cycle started aggressively before the recession came. The recession
Speaker 1: still came. And both those times the Fed five basis
Speaker 1: points to cut SOS seven they did actually cut by
Speaker 1: exactly five in our basis points. And I said, the
Speaker 1: easing cycles started in September Tessman's seven. They'd cut I
Speaker 1: think a hundred and twenty five basis points before the
Speaker 1: recession came, but I'm not sure exactly that, but basically
Speaker 1: they're already cutting aggressively. In Urson In one, we've I
Speaker 1: think it started with a fifty basis point cut and
Speaker 1: we still got the recessions starting a couple of months later.
Speaker 1: It didn't stop it. Ultimately, monetary policy is not the
Speaker 1: best tool for changing the economic cycle, and that's become
Speaker 1: even more constrained given the amount of QUEI we've seen
Speaker 1: in the system. So that's the transmission has been broken.
Speaker 1: So I don't think the FED can stop the economic
Speaker 1: cycle when it's this drastic. I think they can slightly
Speaker 1: massage it. But we've now reached breaking point. Talk to
Speaker 1: us about this divergence that we're seeing in the stock
Speaker 1: market and the bond market, because everyone knows there's all
Speaker 1: this negative yielding dead curve and versions you name it. Meanwhile,
Speaker 1: as you pointed out, stocks are they may be at
Speaker 1: all time highs, but historically they don't often call the turn,
Speaker 1: and uh, they can be slow to the game. Is
Speaker 1: it a matter of bond investors knowing more, because that's
Speaker 1: often the sort of naive like, oh, the smart market
Speaker 1: versus the dumb market. But how do you think about
Speaker 1: that divergence. I think that, first of all, as you
Speaker 1: kind of pointed out, this is not so anomalous in
Speaker 1: history as people think, so quite often normally goes this
Speaker 1: way towards the end of the economic So you pointed out,
Speaker 1: You're that's very fly doing that, you said, I point
Speaker 1: out what you're the one you point out. But normally
Speaker 1: we do see that equities kind of top out just
Speaker 1: kind of just as recession is basically guaranteed, whereas bond
Speaker 1: markets turn much quicker. And I think that a lot
Speaker 1: of people got very panicked about the bond curve flattening
Speaker 1: over the last year or two, and and like since
Speaker 1: turs and sixteen, I've been writing macroview articles in my
Speaker 1: bull guys as like, stop this panic margermongering over the
Speaker 1: flattening yield curve. It's not a good indicator, blah bah blah.
Speaker 1: It's about the steepening after the flattening. We're now getting
Speaker 1: that steepening. We're now getting the bond market is now saying, hey,
Speaker 1: the recession is probably coming in the next kind of
Speaker 1: six months or close enough to recession. So we're we're
Speaker 1: kind of following the historical path of where equities markets
Speaker 1: keep on going to record highs because we get that
Speaker 1: kind of bond market react first, which provides extra liquidity,
Speaker 1: lowers the discount rate for earnings and for stock prices,
Speaker 1: which makes them seem even more attractive as an asset.
Speaker 1: And that is basically what we get in these economic cycles.
Speaker 1: And normally there's a little bit of the same sentiment
Speaker 1: story as well, where we've gone through the economic cycle
Speaker 1: long enough that stock investors have learned, you know what,
Speaker 1: you buy the dip, you ignore the scares. I don't
Speaker 1: want to miss out in the rally. And so when
Speaker 1: they see this bond market signal, they go, great, that's
Speaker 1: extra easing, that's extra liquidity, that's a lower discount rate.
Speaker 1: This means I buy that dip. I do not get
Speaker 1: scared by it. So I think that's what we're seeing there.
Speaker 1: So you mentioned economic cycles, and this is something that
Speaker 1: I've been wondering about in in recent months. We're pinning
Speaker 1: a lot of the economic concerns that we've seen on
Speaker 1: the trade dispute, and you mentioned that economists hadn't really
Speaker 1: yet been ratcheting down their forecasts due to the tariffs,
Speaker 1: because they're sort of waiting to see how it comes out.
Speaker 1: But I'm wondering, is it possible that what we're seeing
Speaker 1: is actually just the end of the economic cycle, a
Speaker 1: sort of natural end, versus anything that's been spurred on
Speaker 1: by the trade war. I think that's a really valid question,
Speaker 1: and probably are not the the best person to answer
Speaker 1: that deeply. I'll give you my impression of it, and
Speaker 1: my impression is, yes, we have We've had already a
Speaker 1: very long economic cycle, and there's been a sign of
Speaker 1: a kind of a change in some of those indicators
Speaker 1: for some times. And like even as I said, in
Speaker 1: the equity market that's reaching record highs, we've now suddenly
Speaker 1: seeing weakness seen transport stocks and small caps, in home builders,
Speaker 1: we're seeing that kind of change. We're also seeing jobs
Speaker 1: that you know, at a low and now we've just
Speaker 1: seen some bad jobs prints and jobs is actually a
Speaker 1: lagging indicator, so people you should't watch it too closely.
Speaker 1: But nfp A and ADP last month both showed that
Speaker 1: there is kind of a turn in the job cycle.
Speaker 1: So I think that already we're reaching the end of
Speaker 1: the economic cycle. And I think that's part of the
Speaker 1: reason why I suddenly become structurally bearished in the last
Speaker 1: month and into this kind of sell the rallies mode.
Speaker 1: And that's because even without the tariffs in May, we're
Speaker 1: looking like we were getting to a kind of a
Speaker 1: difficult place in the economy. I thought, if we got
Speaker 1: some wonderful deal, all went well, So I actually turned
Speaker 1: bearish on April thirty. But when I turned bearish, it
Speaker 1: was my usual just to sell off for a few weeks,
Speaker 1: don't worry, and I was in the mindset, will be
Speaker 1: back at record highs again. It was a tactical bearishness,
Speaker 1: but it was the change in the trade war that said,
Speaker 1: oh wait a second, we've got a really tough economic situation.
Speaker 1: And since that April thirtie date, all the data that
Speaker 1: from before when the trade were flared up again has
Speaker 1: disappointed again. It's coming even worse. So the economic cycle
Speaker 1: was looking really, really drastic, and now we've had a
Speaker 1: tariffs on top. So this is a really really bad story.
Speaker 1: And it's not only without a taris, but there seems
Speaker 1: to have been a complete breakdown in the relationship between
Speaker 1: China and US and May and I think that's really
Speaker 1: the key, key point that I now no longer see
Speaker 1: a solution on the horizon. Expand on that. And I'm
Speaker 1: curious how your perception or how the perception of the
Speaker 1: trade situation is different here when you come to New
Speaker 1: York for a couple of weeks versus when you talk
Speaker 1: to people in your home base of Singapore. Yeah. Sure,
Speaker 1: I mean, I'm going to give a views here, and
Speaker 1: I'd love it if Tracy kind of either contradicts me
Speaker 1: and tells me she sees a different or validates this,
Speaker 1: given that she's in Hong Kong. But I feel that
Speaker 1: the trade war is viewed completely differently on the either
Speaker 1: side of the globe. And I think that in the US,
Speaker 1: everyone's very much believes that the trade war comes down
Speaker 1: to Trump's decision. It's unilanderal decision. He's going to want
Speaker 1: to deal before the election, is how the narrative goes,
Speaker 1: and therefore he'll get a deal at some point. It
Speaker 1: might not be to next year, it might be a
Speaker 1: little bit difficult, it might be noisy, but ultimately Trump
Speaker 1: wants a deal, and there if he'll get a deal,
Speaker 1: I think that that narrative in Asia has completely shifted.
Speaker 1: I think in China, China also wanted a deal, and
Speaker 1: they did want to deal, but there is a real
Speaker 1: change in me and the reason the talks breakdown. We heard,
Speaker 1: I think with the Wall Street Journal that broke that
Speaker 1: story saying the idea that the Politt bureau Baski told
Speaker 1: Chgemping you can sign something to change laws, and that
Speaker 1: does go back to their long history the opium wars.
Speaker 1: They still regret that. So what's happened is that in China,
Speaker 1: the idea of a trade war wasn't mentioned in the
Speaker 1: mainland press before May, and suddenly now it's not only mentioned,
Speaker 1: it's been really hyped up that they, you know, they're
Speaker 1: going to stand up to imperial aggression from the US.
Speaker 1: They're going to go through the Long March again to
Speaker 1: get their kind of independence and prove China's you know,
Speaker 1: authority on the world stage. They're demanding an equal footing.
Speaker 1: So I think the whole narrative has changed that China
Speaker 1: can no longer agree to any deal without US essentially
Speaker 1: making all the initial concessions. So US will have to
Speaker 1: remove all tariffs first before China will get to some
Speaker 1: kind of trade deal. I don't see Trump going that
Speaker 1: way soon. So suddenly I think the narrative has changed
Speaker 1: that I think there's no chance of trade. I think
Speaker 1: optimistically we don't get more tariffs, and I think that's
Speaker 1: an optimistic case. But I just don't see how you
Speaker 1: get a resolution given that China can no longer They've
Speaker 1: talked themselves into the mainland audience that they no longer
Speaker 1: can agree to a deal without being seen to win,
Speaker 1: and Trump count afford to be seen to concede to China,
Speaker 1: and he's built it up so much out of the election.
Speaker 1: So that's what I see it. How do you hear?
Speaker 1: Do you see it? Tracy from Age the age perpective
Speaker 1: as well. Yeah, I would broadly agree with that. So
Speaker 1: I think partially because of the type of people who
Speaker 1: tend to work in markets and finance and investing, uh,
Speaker 1: they have a high tendency, let's say, to ascribe rationality
Speaker 1: onto other actors. And I'm not entirely sure at this
Speaker 1: point in time that the major actors in the trade
Speaker 1: war are actually acting that rationally. And I think you're
Speaker 1: absolutely right that both China and the US at this
Speaker 1: point have boxed themselves in a bit when it comes
Speaker 1: to satisfying domestic public opinion in very different ways. But
Speaker 1: it's particularly acute in China, where you're right, we didn't
Speaker 1: see the polite Burero's sort of ramping up the trade
Speaker 1: tensions talk and talking about imperialist aggression up until very recently,
Speaker 1: and you can imagine it's going to be very, very
Speaker 1: difficult for them to roll that back in any significant way.
Speaker 1: And the same and goes for the Trump administration to
Speaker 1: some extent as well. If you think about, for instance,
Speaker 1: what they've done when it comes to Huawei, how in
Speaker 1: the world are they going to start rolling that back?
Speaker 1: That feels really really difficult to sort of undoe to me,
Speaker 1: So that I think you're absolutely right. I mean, it's
Speaker 1: got bipartisan support in the U. S. Here, So I
Speaker 1: think that's why the Trump count back down. Both sides
Speaker 1: do actually want Trump to kind of get some win
Speaker 1: against China, even if not the exact manner of how
Speaker 1: it's doing it. So I'm pretty negative on the trade deal,
Speaker 1: and I think that's why we're going to start seeing
Speaker 1: Capex slump a lot. We're gonna see Earning slash and
Speaker 1: this goes back to the core point. Why am I
Speaker 1: so worried about the stock market, Well, it was expensive
Speaker 1: already with an economy that was turning, as Tracy kind
Speaker 1: of applied. Maybe it's just even the economic cycles already turning,
Speaker 1: and now we're suddenly adding a complete, completely disastrous scenario
Speaker 1: for both private companies that rely on these these big
Speaker 1: US mountinnationals rely on the consumer base in Asia. I
Speaker 1: think they'll forget that, you know, suddenly Asia is the
Speaker 1: rising rampant middle class consumer and middle class. I think
Speaker 1: people have this idea that there's much especially in the US,
Speaker 1: build this idea that much of Asia is still poor
Speaker 1: and not buying you know, apple goods. That's just not true.
Speaker 1: So I think that this is a really really bad
Speaker 1: situation of both growth and earning slash at a time
Speaker 1: with stocks are expensive and a Ford looking basis. The
Speaker 1: sp trading around sixteen point eight versus the tenure average
Speaker 1: of fifteen. So it's expensive already, but that P four
Speaker 1: looking P will look completely different once that the denominator,
Speaker 1: the earning side of that gets slashed. So, Mark, You've
Speaker 1: been talking a lot about equities being overvalued, but I'm
Speaker 1: wondering how you feel about credit, because when it comes
Speaker 1: to a lot of finance professionals, overheated credit markets has
Speaker 1: really been the sort of bug bear that people have
Speaker 1: been worried about for a long long time. Is it
Speaker 1: as simple as when the economic cycle turns, the credit
Speaker 1: market is going in to be in for a world
Speaker 1: of pain? Is it that simple in the sense that
Speaker 1: what everyone has feared and expected for such a long
Speaker 1: time now is just going to happen. I think it
Speaker 1: is that simple. I'm really glad you brought this up,
Speaker 1: because I think that it's hard to get plus sell
Speaker 1: off in the SMP five hundred without some kind of
Speaker 1: financial pain. And I should be clear that even though
Speaker 1: I've turned structurally barished the first time since the last crisis,
Speaker 1: I don't think we're having a repeat of tersm Nate.
Speaker 1: I don't think the global financial systems at risk. I
Speaker 1: don't think it's quite as scary as that. But I
Speaker 1: do think that we're going to have some severest financial
Speaker 1: market pain, and that will come in credit markets. And
Speaker 1: we've heard a lot of warnings from the big credit names.
Speaker 1: You know, whether I think leverage finance of the area
Speaker 1: that people are most worried about. But I think that
Speaker 1: it's the structural problem For me that most worries the
Speaker 1: lack of liquidity and credit markets. So when the credit
Speaker 1: market turns, there's just no ability because the regulation we've
Speaker 1: put in since the crisis for the banks as middlemen
Speaker 1: to stop step in and kind of control the sell off.
Speaker 1: So I think the credit cycle can turn much more
Speaker 1: painfully and much more rapidly than previous crisis. Is the
Speaker 1: recent stress that we've seen in various funds in London,
Speaker 1: the Natixus funds Woodford. Is there an early indicator of anything?
Speaker 1: Is that a like, I don't know, some sort of
Speaker 1: prestige of trouble when the when the tide goes out,
Speaker 1: you see something naked type of thing. If you're in
Speaker 1: my point of view, it's very easy to see it
Speaker 1: like that way. I'm sure that many people can kind
Speaker 1: of pick these kind of anecdotes if you want. It's
Speaker 1: it's the same with suddenly this year we've seen all
Speaker 1: those kind of massive unicorn I p o s and
Speaker 1: again people would say that's a sign that we're reaching
Speaker 1: near the peak. I think if you're looking for these signals,
Speaker 1: you can definitely see them and I do think some
Speaker 1: of these funds things are worrying. And one of the
Speaker 1: things that it's interesting is that while I've turned structurally barrish,
Speaker 1: I have no particular strong view and we're we're going
Speaker 1: to trade in the next couple of weeks because we
Speaker 1: might convert twenty some platitudes positive platitudes. But I think
Speaker 1: the point is that professional investors have started trading more
Speaker 1: defensively in terms of their stock rotation, and they started
Speaker 1: being a little bit more bearish. But if you looked
Speaker 1: at this week, we saw that the hedge fund leverage
Speaker 1: is actually reaching back to kind of pre crisis highs again.
Speaker 1: So that's the idea that people are actually taking on
Speaker 1: more risk, and I think there's that leverage in the
Speaker 1: system there that will get squeezed very quickly because the
Speaker 1: lack of liquidity in the credit system. So you mentioned
Speaker 1: lack of liquidity in credit, and you know, this is
Speaker 1: something that lots of people have talked about for a
Speaker 1: long time, and I certainly have written my share of
Speaker 1: articles on this and also overheating in that market. And
Speaker 1: one thing that has given me pause at various points
Speaker 1: of time is the notion that when the big sell
Speaker 1: off comes. You sell what you can, essentially, So I
Speaker 1: just wonder, if we do get a big rupture in
Speaker 1: financial markets, is there a chance that, instead of people,
Speaker 1: you know, rushing to sell off corporate credit and leverage loans,
Speaker 1: that because of the very fact that these things are
Speaker 1: extremely a liquid and it's going to be tough to
Speaker 1: find buyers for them, that they actually don't move that much,
Speaker 1: and instead we see people selling off much more liquid
Speaker 1: items like stocks or government bonds. That's a that's a
Speaker 1: great question, and I'm trying to, you know, remember the
Speaker 1: playbook from how I was trading to the last crisis.
Speaker 1: And I have to say that the last time I,
Speaker 1: you know, I was trading GFC, it was my first
Speaker 1: crisis to be in a trading seat, and therefore I
Speaker 1: was learning and making the mistakes back then, and some
Speaker 1: of the mistakes I learned quite painfully, and I remember
Speaker 1: quite vividly. Another ones, you know, I'm not sure if
Speaker 1: I fully learned them, but I'm trying to remember then,
Speaker 1: and I think one of my my big takeaways then
Speaker 1: is that it was very clear from late two thousand
Speaker 1: and seven that there was an incredibly big problem brewing
Speaker 1: in the financial system, and I have emails that I
Speaker 1: wrote on my Gmail account to all my friends back
Speaker 1: in Ireland saying, look, I think you know all the
Speaker 1: banks are going to fall. I did naively think that
Speaker 1: Lehman Brothers was one of the safest, I will confess,
Speaker 1: which is a little bit embarrassing, but that was I
Speaker 1: think a bit of hometown naive. But certainly so. I
Speaker 1: thought Line Brothers be fine, but I thought that most
Speaker 1: of the banks would. We were vulnerable. I was telling
Speaker 1: friends from November twosman seven that I thought there was
Speaker 1: going to be a massive systemic financial crisis and you know,
Speaker 1: cash machines might not work and stuff. I was a
Speaker 1: little bit in a Doumonger phase, but then I was
Speaker 1: an emerging market trader. Emerging market effects reached a record
Speaker 1: high in August two thousand and eight. Now, as I said,
Speaker 1: the stock market actually topped out in October two and seven.
Speaker 1: It was you know, we had bear Stearns in March
Speaker 1: ts and seven. I mean Lehman Brothers stock probably where
Speaker 1: I was working, was plumbing throughout that summer, and yet
Speaker 1: emerging market currencies reached an all time high. Enogs as
Speaker 1: a Nate, and I think that was an important message.
Speaker 1: I'm very indirectly answering your question, Tracy, but to kind
Speaker 1: of affirm that, yes, how these kind of sell us
Speaker 1: go when we do get a negative cycle, they're very
Speaker 1: difficult to trade. Is not necessarily you find that the
Speaker 1: most overpriced thing and you sell it, or you find
Speaker 1: the most vulnerable thing you sell it. You've got to
Speaker 1: really care about the timing of when things go. And
Speaker 1: I think you're right that sometimes actually assets which aren't
Speaker 1: particularly expensive but are more liquid gets sold first, and
Speaker 1: then you suddenly see these massive step moves later on.
Speaker 1: But I guess one of my main takeaways in the
Speaker 1: last crisis is that for those slightly harder assets that
Speaker 1: are a little bit less liquid, they are a little
Speaker 1: bit step moves. You can probably wait till your shure
Speaker 1: the cyclist turning. You know, get in the trade a
Speaker 1: slightly more expensive price, but you know it's going to
Speaker 1: make the jump move at some point, rather than trying
Speaker 1: to be clever, basically, don't try to be clever through
Speaker 1: the liquid interestments. If you're trying to be clever in time,
Speaker 1: perfectly do it through the liquid stuff, where you can
Speaker 1: keep on chopping and change your mind through the liquid stuff.
Speaker 1: Wait till it's certain, Wait till maybe we see how
Speaker 1: the G twenty trades and plays out, and then you
Speaker 1: can kind of go, yeah, it's interesting. I hadn't remember
Speaker 1: that or realized that exactly how well emerging market currencies
Speaker 1: did throughout two eight. But it's interesting because we just
Speaker 1: recorded an episode with the human Suction of the b
Speaker 1: I S talking about the dollar, and we're talking about
Speaker 1: that sort of relentless dollar pessimism that pervaded markets really
Speaker 1: in the years preceding, uh, the Great Financial Crisis, but
Speaker 1: really two thousand six through two thousand and eight, so
Speaker 1: much negativity on the dollar, and that seemed to be
Speaker 1: a major source of concern, a major difference in the
Speaker 1: post crisis era or the dollar has just been phenomenal.
Speaker 1: I think that's gonna be denomic scene again. I guess
Speaker 1: part of that is because what happens is bone markets start.
Speaker 1: Bond markets do react to click in the stock markets
Speaker 1: because they have to react to date to their macro instruments,
Speaker 1: whereas equities traders rely on their micro strategists to provide
Speaker 1: those macro inputs. Um So bond markets basically forced the
Speaker 1: FED Act, and we've seem to seem to see that
Speaker 1: even more than normal this time where the FED is
Speaker 1: being pressed act. So the easing cycles start, that weakens
Speaker 1: one of the dollar supports. The dollar starts weakening, and
Speaker 1: then what you see is that because the dollar's weakening,
Speaker 1: that eases the liquidity situation. E M S. E M
Speaker 1: actually does a little bit okay in that initial circumstance,
Speaker 1: and you want to start seeing commodities do well. I mean,
Speaker 1: pe'll forget where oil went to a hundred and fifty
Speaker 1: dollars a barrel, you know, just going into the crisis.
Speaker 1: And I think that's because we were seeing this kind
Speaker 1: of dollar barish and it's just before the crisis. And
Speaker 1: then obviously once the crisis hit properly, even though as
Speaker 1: US centric dollar absolutely roared and and I I think
Speaker 1: that we're going to see that playbook this time. We're
Speaker 1: gonna see the dollar weakened quite a bit. It's going
Speaker 1: to support assets that you would think would be really
Speaker 1: vulnerable to a global financial crisis, like emerging markets, like commodities,
Speaker 1: but it's going to support them until quite far in,
Speaker 1: until it's clear that this is a much bigger problem.
Speaker 1: When that happens, I don't know. Maybe that's early next year.
Speaker 1: It's hard to know the exact time span. The one
Speaker 1: difference I would say this time is I do not
Speaker 1: think the dollar gets the subsequent massive boost it did.
Speaker 1: You mentioned hedge fund leverage, and I'm always curious. I
Speaker 1: enjoy asking people this question, but where do you see
Speaker 1: the leverage in the system. Now you already mentioned that
Speaker 1: you don't see it on a scale of of sort
Speaker 1: of pre two thousand eight levels, but I'm sure you
Speaker 1: have some idea of where there might be sort of
Speaker 1: hidden pockets of leverage in the system. I'm not best
Speaker 1: place to answer that question. I mean, part of the
Speaker 1: reason I kind of set the hedge fund leverage this
Speaker 1: week is that, you know, I saw the actually article
Speaker 1: on Bloomberg Actually, and I want I will say that
Speaker 1: you know, um, I didn't remember the exact details from it,
Speaker 1: but they were saying that leverages back to the pre
Speaker 1: crisis high. It's kind of jumping up again on the
Speaker 1: hedge fund leverage system. I think what you do see
Speaker 1: is how certain assets trade, and I think that it's
Speaker 1: more in the certain sectors of the credit market where
Speaker 1: we are seeing that in the leverage finance and the
Speaker 1: clos and you're seeing those kind of those permanent buyers.
Speaker 1: I mean those stories again. You know drast earlier about
Speaker 1: whether you see these kind of signals from certain equity stories,
Speaker 1: and I think it's again in credit market, it's very
Speaker 1: easy to see the warning signs if you're looking for them.
Speaker 1: Warning signs I might have ignored even only six months ago.
Speaker 1: But when you find that like there's just you know,
Speaker 1: one Japanese asset manager that is the main buyer of
Speaker 1: some certain type of credit product, you know, and they're
Speaker 1: lapping it up for like massive credit product back in Europe,
Speaker 1: that seems like a warning sign. Now that I'm more
Speaker 1: worried about the market, so I think that we are
Speaker 1: saying that leverage in the credit system. I have a
Speaker 1: sort of meta question about this call of yours and
Speaker 1: your shift to bearishness, because now you're you know, you
Speaker 1: fully identify yourself as a bear and you say, you know,
Speaker 1: in April it was sort of tactical, but now you're
Speaker 1: like full on with the thesis. Do you find that
Speaker 1: um stating that makes it harder to be nimble and
Speaker 1: that if data, you know, like let's say the trade
Speaker 1: Day dispute doesn't get as bad as you expect, and
Speaker 1: maybe the data starts to rebound a little bit that
Speaker 1: having publicly sort of come out as a bear maybe
Speaker 1: you know what if, like, do you feel comfortable in
Speaker 1: October or November saying you know what, I was wrong?
Speaker 1: Or is it harder to do that once you've sort
Speaker 1: of identified as such. It's definitely harder, And I can't
Speaker 1: to know. It's something I'm very conscious of, and I'm like,
Speaker 1: as I said in the last crisis, I was pleased
Speaker 1: that I felt that I was aware of it early,
Speaker 1: and then I stayed bearished for too long and it
Speaker 1: was horrendously unprofitable as a traitor. I think, you know,
Speaker 1: I try to learn my lesson that I will turn
Speaker 1: when I think the facts change. And I guess one
Speaker 1: of the reasons I'm trying to I like it, you know,
Speaker 1: being able to express this view is because I want
Speaker 1: to know what the loopholes are. I'm hoping, you know,
Speaker 1: listeners will kind of message me after this is going
Speaker 1: to go and you're completely missing this element and that's
Speaker 1: the point that kind of change the game. But having
Speaker 1: analyzed that lots and kind of expressed this view very publicly,
Speaker 1: in writings on TV and radio for the last kind
Speaker 1: of month or so, I've not found the big loophole
Speaker 1: apart from if there is a really grand trade deal
Speaker 1: bets and trying to remove all tariffs and they're suddenly
Speaker 1: in some wonderful happy world of trading, then clearly we're
Speaker 1: not at the top now that will provide a sustainable
Speaker 1: boost markets. But I will say that that it needs
Speaker 1: to be removal of the tariff that are already in place,
Speaker 1: not just a truce. Um. I I have. What I've
Speaker 1: been trying to analyze is if we get a truce
Speaker 1: now escalation from here, are we in the barrass scenario?
Speaker 1: And I think yes, but it'll just come through a
Speaker 1: little bit more slowly, a little more less drastically. But yes,
Speaker 1: we are in the barrastionary. So but yeah, I'm going
Speaker 1: to be alert to that. Will we see a change,
Speaker 1: But I think it will take that massive trade deal
Speaker 1: to change my mind. Mark Cutmore always a pleasure to
Speaker 1: talk to. Thank you very much for joining us, and
Speaker 1: uh I wish you were here more often. Thank you. So, Tracy,
Speaker 1: are you convinced are you going to uh put all
Speaker 1: your money in gold and silver and under your mattress.
Speaker 1: I think I told you this before, but I do
Speaker 1: have a sizeable stash of silver coins that have been
Speaker 1: bequeathed to me by my dad. No. Look, on a
Speaker 1: serious note, I don't think I needed a lot of
Speaker 1: convincing that we are late cycle. But again, as someone
Speaker 1: who has written about overheated credit markets and and leverage
Speaker 1: and the possibility of a you know, liquidity driven sell
Speaker 1: off in credit markets for many, many years now, the
Speaker 1: question is always timing. And so yes, we have the
Speaker 1: trade war, but I'm still a little bit uncertain exactly
Speaker 1: what the catalyst is going to be for the end
Speaker 1: of the cycle. And sorry, just one more thing, but
Speaker 1: it seems to me like the FED is also acutely
Speaker 1: aware to some extent of problems in credit and whenever
Speaker 1: we do see cracks in the credit markets start to develop,
Speaker 1: like we did earlier in the year, the FED usually responds, yeah, no, absolutely.
Speaker 1: I mean, I don't know whether I'm completely convinced or not.
Speaker 1: Something does feel a little bit different now, And I've
Speaker 1: been thinking about that for a few weeks really since
Speaker 1: really since the start of May, because people have been
Speaker 1: getting very the the observers of the U S China
Speaker 1: relationship have been very dire, and they're saying this is
Speaker 1: very serious, and you see very sober minded analysts talking
Speaker 1: about a new Cold War is emerging between the U.
Speaker 1: S and China and so forth. And yet even in
Speaker 1: the stocks sell off in May, it never felt disorderly
Speaker 1: at any time. It never felt panic, and it started
Speaker 1: to feel like right then that some sort of gap
Speaker 1: was starting to open up between the sort of calmness
Speaker 1: of the market, and you know, obviously the markets bounced
Speaker 1: back versus the alarmed rhetoric of a lot of observers,
Speaker 1: and ever since then it started to feel a little different.
Speaker 1: And even the fact that the FED is now shifted
Speaker 1: into easing mode with stocks not having sold off very much,
Speaker 1: it feels a little bit different than past periods of
Speaker 1: tension throughout this essentially decade long bull market. Yeah, I
Speaker 1: suppose at a minimum, you would ask, okay, even if
Speaker 1: the FED isn't cutting rates into a recession, if what
Speaker 1: it's trying to do is to extend the expansion, well
Speaker 1: then realistically, how long are they actually going to be
Speaker 1: able to do it? Given that we've had what more
Speaker 1: than a decade now, I think of expansion or exactly
Speaker 1: a decade. Uh, it's sort of like pushing on a
Speaker 1: string at this point. And the other argument, and again
Speaker 1: I'm I'm getting sort of deja vu because this is
Speaker 1: something we used to talk about a couple of years ago.
Speaker 1: But there's this notion of bang for buck. It comes
Speaker 1: to the FED easing. At what point is the market
Speaker 1: no longer impressed by the FED stubbishness or you know,
Speaker 1: easing or policy measures. And it does, especially when you
Speaker 1: look at the bond market. Right the bond market is
Speaker 1: now basically demanding three rates into the rest of the year,
Speaker 1: which seems really really extreme, and it seems hard to
Speaker 1: believe that the FED is going to be able to
Speaker 1: deliver on that. And it just to Mark's point, you know,
Speaker 1: the soft landing is kind of a myth, the idea
Speaker 1: that the FED has really particularly any ability to engineer
Speaker 1: one as evident by what we saw with the raid
Speaker 1: cuts that started in two thousand seven and two thousand one.
Speaker 1: So even a FED that that is well attuned to
Speaker 1: the risks and observing all them, a credit markets and
Speaker 1: so forth, and what the bond market is saying, it
Speaker 1: might just be that you know, they really it just
Speaker 1: doesn't matter basically to your point as well, right, And
Speaker 1: one thing is for sure this time next year, we
Speaker 1: can have Mark Cudmore back on and he will either
Speaker 1: be a mass of hero within Bloomberg or we can
Speaker 1: vilify him and make fun of him for missing out
Speaker 1: on whatever epic Bowl rally there's been. I thought you
Speaker 1: were going to say either he'll be a massive hero
Speaker 1: inside Bloomberg or he won't be inside Bloomberg anymore. That
Speaker 1: would be too harsh. But either way, I loved talking
Speaker 1: to Mark, and I'm looking forward to having him on
Speaker 1: again a year from now. Uh So looking forward to
Speaker 1: that absolutely. This has been another episode of the Ad
Speaker 1: Thoughts Podcast. I'm Tracy Alloway. You can follow me on
Speaker 1: Twitter at Tracy Alloway. I'm Joe Wisntdal. You could follow
Speaker 1: me on Twitter at The Stalwart. Our guest Mark Cudmore
Speaker 1: is not on Twitter, but I really think he should be.
Speaker 1: Maybe people can email him and harass him to get
Speaker 1: on because he would be a great Uh he would
Speaker 1: be great on there, but he's not on Twitter. But
Speaker 1: you should follow our producer Laura Carlson on Twitter at
Speaker 1: Laura M. Carlson. You should follow the Bloomberg Head of Podcasts,
Speaker 1: Francesca Levie at Francesca Today, as well as the new
Speaker 1: home of Bloomberg Podcast on Twitter at the handle at podcast.
Speaker 1: Thanks for listening.