WEBVTT - Liz Truss's Ronald Reagan Moment 0:00:13.880 --> 0:00:17.759 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.880 --> 0:00:20.079 My name is Mike Reagan. I'm a senior editor at 0:00:20.120 --> 0:00:23.680 Bloomberg and I'm Aldanna hik Across Acid reporter with Bloomberg. 0:00:24.720 --> 0:00:30.680 And this week on the show, well, stocks, bonds, crypto, commodities, whatever, 0:00:31.000 --> 0:00:34.760 Just about every asset class is suffering right now. And 0:00:34.920 --> 0:00:38.000 to add salt to the wounds, chaos and British markets 0:00:38.120 --> 0:00:42.040 is reverberating around the world. Many strategists are cutting their 0:00:42.120 --> 0:00:44.519 year ends targets for the SMP five hundred as the 0:00:44.560 --> 0:00:50.479 Federal Reserve doubles down on its inflation fighting strategy. Plus 0:00:50.520 --> 0:00:53.040 the U s midterms are coming up, which could cause 0:00:53.080 --> 0:00:56.200 even more market turbulence. What's it all mean for the 0:00:56.240 --> 0:00:58.360 rest of the year. We will get into it with 0:00:58.480 --> 0:01:03.520 a veteran Wall Street strategist, but first, vil Donna, it's 0:01:03.560 --> 0:01:07.280 exciting news. This week we have finally gotten more than 0:01:07.400 --> 0:01:11.720 three hundred ratings on Apple podcast. And you know what 0:01:11.760 --> 0:01:14.920 that means. That means, I believe the deal was you 0:01:14.959 --> 0:01:18.479 now have to accept me in your professional network on LinkedIn. 0:01:18.720 --> 0:01:21.640 That was not the deal. That was not the deal. 0:01:22.080 --> 0:01:26.600 You are still pending approval on LinkedIn. Still on read 0:01:26.720 --> 0:01:30.600 There you know, Emily Grafao co hosted one podcast with 0:01:30.600 --> 0:01:33.120 Me and your Friends on LinkedIn, and then she invited 0:01:33.120 --> 0:01:36.040 me to join her professional network on LinkedIn. And nice 0:01:36.120 --> 0:01:39.640 of her. It's and you nothing nothing, I'm just the deal. 0:01:40.080 --> 0:01:42.840 The deal was that I revealed my high school nickname. 0:01:43.240 --> 0:01:45.759 I think. Okay, so you're ready to reveal your high 0:01:45.760 --> 0:01:48.080 school nickame. Well, first I have to congratulate you, because 0:01:48.080 --> 0:01:49.680 this is a pretty good ploy to get people to 0:01:49.720 --> 0:01:53.480 write reviews. It was. It was a smart idea. Some 0:01:53.680 --> 0:01:56.960 may called a gimmick. Gimick, and I'm fine with that. Actually, 0:01:57.000 --> 0:01:59.400 if if you want to call it's fun and the 0:01:59.440 --> 0:02:02.080 reviews are on. Remember somebody asked me if I would 0:02:02.120 --> 0:02:05.320 marry them. Yeah, in one of the reviews I accepted. 0:02:05.840 --> 0:02:11.760 I did. We're happily married. Now. Love is love. Love 0:02:11.880 --> 0:02:15.160 is love. But so, okay, to reveal my high school nickname, 0:02:15.160 --> 0:02:17.040 I think we'll just we'll have to wait until we 0:02:17.120 --> 0:02:20.079 do craziest things in markets and then maybe I'll reveal 0:02:20.120 --> 0:02:24.160 it there. All right, sounds good deal. Deal Okay, but 0:02:24.280 --> 0:02:26.720 you I think you heard our guests this week laughing 0:02:26.720 --> 0:02:28.760 in the background, and I do want to bring him 0:02:28.760 --> 0:02:30.320 and I'm so happy to have him on the show. 0:02:30.520 --> 0:02:33.239 Julian Emmanuel ever Core i s S chief Equity and 0:02:33.320 --> 0:02:35.800 quantitative Strategists, and I've been trying to get him on 0:02:35.880 --> 0:02:38.360 for so long and I'm so happy he's here. Great 0:02:38.400 --> 0:02:40.239 to be here. You know, the problem was a little 0:02:40.320 --> 0:02:42.720 pandemic got in the way, But here we are a 0:02:42.760 --> 0:02:47.440 little pandemic, just a minor pandemic, a minor hiccup. But 0:02:47.560 --> 0:02:50.680 Julian um so Mike already mentioned what's been happening in 0:02:50.720 --> 0:02:52.880 the UK over the past couple of days. So maybe 0:02:53.040 --> 0:02:55.359 just to start, you can tell us how important what's 0:02:55.400 --> 0:02:57.840 going on in the UK right now is for global markets. 0:02:58.200 --> 0:03:01.359 So I think the backdrop here is just to understand 0:03:01.400 --> 0:03:07.079 that for investors, the storm that has been two thus far, 0:03:07.680 --> 0:03:13.480 the you know, dominance of macro imperatives across all assets 0:03:13.680 --> 0:03:16.600 has really been unprecedented. And it really goes back to 0:03:16.720 --> 0:03:21.320 this idea that after twenty five years of quiescent inflation, 0:03:21.600 --> 0:03:24.600 we had a breakout in the readings that's now been 0:03:24.639 --> 0:03:27.799 over a year and and obviously you know, really feeding 0:03:27.880 --> 0:03:34.840 into the FEDS imperative to get inflation under control by 0:03:34.920 --> 0:03:39.680 going on this and you know, unprecedented degree of hiking. Uh. 0:03:39.760 --> 0:03:42.400 You know, we we think about the current status as 0:03:42.720 --> 0:03:46.280 something from that movie Supersize Me. You've done three seventy 0:03:46.320 --> 0:03:50.400 five Supersized, you might do a fourth in November. But 0:03:50.800 --> 0:03:54.400 what's happening is that this is the kind of you know, 0:03:54.880 --> 0:04:00.720 rapid acceleration and tightening that reverberates across the globe. Obviously, 0:04:00.840 --> 0:04:03.440 the conduit has really been the strength and the dollar 0:04:04.080 --> 0:04:07.800 feeding into the UK. You've had a leadership change, the 0:04:07.880 --> 0:04:11.560 Queen's passing, a new prime minister, a new government, just 0:04:11.800 --> 0:04:15.640 total huge challenges in a market that had already been 0:04:15.680 --> 0:04:20.760 showing strains frankly since the Brexit vote in So really, 0:04:21.080 --> 0:04:26.760 you know, testing the outer bands of volatility across every 0:04:26.800 --> 0:04:30.719 asset that's in the UK. You know what I find 0:04:30.760 --> 0:04:34.800 fascinating about it, Julian, is this volatility we've seen in 0:04:34.839 --> 0:04:38.039 the bond market globally, but especially this week. You know. 0:04:38.080 --> 0:04:40.479 And and for listeners who are are listening to this 0:04:40.600 --> 0:04:43.840 later we're recording here. It's Wednesday afternoon. So the big 0:04:43.839 --> 0:04:47.520 news today was um, the Back of England came out 0:04:47.600 --> 0:04:50.360 and said, you know, they will basically buy all of 0:04:50.440 --> 0:04:53.200 the British bonds. They need to to to sort of 0:04:53.279 --> 0:04:55.839 tame the bond market. So I'm looking at the ten 0:04:55.920 --> 0:05:00.560 year guilt British guilt yield dawn fifty basis points in 0:05:00.600 --> 0:05:03.960 a single day, uh U s yields as a result, 0:05:04.040 --> 0:05:07.320 Canadian yields everything is down like twenty some basis points. 0:05:07.880 --> 0:05:10.520 I mean, for one thing, these are just I think 0:05:11.120 --> 0:05:14.320 nightmarish moves from sort of a a you know, how 0:05:14.360 --> 0:05:17.760 do you price the risk free rate when it's jumping 0:05:17.800 --> 0:05:21.039 around like this? But I wonder, in particular, what do 0:05:21.080 --> 0:05:24.600 you make of how UK is kind of leading the 0:05:24.640 --> 0:05:26.919 bond market globally? Now? Is it, you know, is it 0:05:27.000 --> 0:05:30.640 just sort of a relative value or correlation that should 0:05:30.640 --> 0:05:35.200 cause US yields to to revert back when UK yields do, 0:05:35.480 --> 0:05:37.640 or is it you know, is there sort of an 0:05:37.640 --> 0:05:40.359 assumption going on that the b o E is is 0:05:40.520 --> 0:05:43.120 foreshadowing what's to come from other central banks, you know? 0:05:43.480 --> 0:05:46.080 Or eventually is the FED and the ECB gonna have 0:05:46.160 --> 0:05:47.960 to come out and say, yeah, well we'll do whatever 0:05:48.000 --> 0:05:50.880 it takes to to keep on markets in check. What 0:05:50.880 --> 0:05:53.640 what exactly is the relationship there? Do you think, Well, 0:05:54.120 --> 0:05:56.080 if you go back to the end of last week, 0:05:56.120 --> 0:05:58.800 it really all started with a point in time, call 0:05:58.880 --> 0:06:02.280 it Friday morning, where one looked up on one screen 0:06:02.480 --> 0:06:07.800 and every single indicator, every single asset, every single market 0:06:08.320 --> 0:06:13.679 was completely read. Okay, you know whatever was indiscriminate selling 0:06:13.960 --> 0:06:16.520 that to us was the start of this emotional phase 0:06:16.800 --> 0:06:21.880 that because it was clear the policy mitch mismatch between 0:06:22.200 --> 0:06:25.400 the new trust government and and Quartet the Chancellor of 0:06:25.440 --> 0:06:31.520 the Exchequer UH, and where the Bank of England felt 0:06:31.720 --> 0:06:35.000 it needs to go, need needed to go, needs to go, 0:06:35.080 --> 0:06:37.480 and that's an open concept, which is why I keep 0:06:37.600 --> 0:06:41.960 changing tenses. UH is is that is that it's really 0:06:42.720 --> 0:06:48.560 caused this instability that got some feeling as if there 0:06:48.680 --> 0:06:51.760 was this idea that the UK was about to become 0:06:51.800 --> 0:06:54.919 an emerging market and seeing the kind of volatility in 0:06:54.960 --> 0:06:59.000 the bond markets there that one had seen throughout time 0:06:59.040 --> 0:07:03.359 and places like Mexico during crisis, or Brazil or you know, 0:07:03.440 --> 0:07:08.919 going back to the Asian UH Tiger crisis, that type 0:07:08.920 --> 0:07:13.960 of volatility, and frankly, because so much of UK debt 0:07:14.080 --> 0:07:18.440 is denominated in sterling, that wasn't necessarily going to be 0:07:19.240 --> 0:07:22.280 uh the way it would play out. But nevertheless, the 0:07:22.400 --> 0:07:27.080 markets have become just very, very liquid, and people got 0:07:27.200 --> 0:07:32.559 very very afraid of buying bonds in an environment where 0:07:33.000 --> 0:07:38.640 there's still no concrete evidence that inflation, particularly in Europe, 0:07:39.400 --> 0:07:42.920 is shown signs of topping, although that evidence is starting 0:07:42.920 --> 0:07:46.960 to build quite rapidly in the US. And Julian, how 0:07:47.040 --> 0:07:50.200 much would you say, how much of what's going on 0:07:50.240 --> 0:07:53.280 in the UK would you ascribe to the choppiness that 0:07:53.320 --> 0:07:55.760 we've seen in US markets or is it more the 0:07:55.760 --> 0:07:58.560 case that what's happening with our stock market for instance 0:07:58.560 --> 0:08:03.040 the last couple of days we can more ascribe, you know, 0:08:04.280 --> 0:08:07.400 blame what's going on with interest rates or whatever else. Well, 0:08:07.680 --> 0:08:10.640 it's definitely sort of what we would call across assets 0:08:10.640 --> 0:08:15.800 psychology and the driver as it has been the entire year, 0:08:16.360 --> 0:08:20.640 is this now positive correlation between stocks and bonds, and 0:08:20.720 --> 0:08:24.400 so as the yields continued to ratchet higher, uh, you know, 0:08:24.480 --> 0:08:29.040 obviously the U K's rise and yields feeding into the US, 0:08:29.320 --> 0:08:32.640 feeding into Italy. With the political changes over the weekend 0:08:32.720 --> 0:08:36.800 that certainly you know, put provide upside pressure two yields 0:08:36.840 --> 0:08:40.520 there as well. It's really became a bit of a snowball, 0:08:41.280 --> 0:08:44.400 which is why from our point of view, the Bank 0:08:44.440 --> 0:08:48.000 of England had to act in a reasonably decisive manner. 0:08:49.520 --> 0:08:52.360 You know, Julian, I was reading one of your most 0:08:52.400 --> 0:08:56.520 recent notes, and UM, obviously the other big story of 0:08:56.559 --> 0:08:59.520 the week is UH set a new law when the 0:08:59.559 --> 0:09:04.240 U star market for this bear market spundred, closing at 0:09:04.240 --> 0:09:09.880 the lowest since November. UM. I get the sense from 0:09:10.520 --> 0:09:15.959 your note though, that you think the acute selling UH 0:09:16.000 --> 0:09:18.520 maybe over and then maybe there's a bear market rally 0:09:18.600 --> 0:09:20.120 and store for us? Is that A Is that a 0:09:20.120 --> 0:09:23.440 fair reading of your note? We are feeling that way 0:09:23.960 --> 0:09:28.280 basically from our point of view. These kinds of bear markets, 0:09:28.280 --> 0:09:30.640 and if you go back to the highs in January, 0:09:30.679 --> 0:09:34.040 they don't move in straight lines. And the last several 0:09:34.080 --> 0:09:38.440 weeks again in response to this ratcheting higher in yields 0:09:38.440 --> 0:09:41.240 across the globe has been pretty much of a straight 0:09:41.280 --> 0:09:44.720 line moved down UM in stocks, which if you think 0:09:44.760 --> 0:09:47.800 about it, September, we don't want to go back to school, 0:09:47.920 --> 0:09:49.679 We don't want to go back to the office four 0:09:49.760 --> 0:09:52.600 or five days a week. The psychology tends to be 0:09:52.640 --> 0:09:57.199 poor in every September, but particularly so this year because 0:09:57.240 --> 0:09:59.680 you have all this macro uncertainty and a FED who's 0:09:59.720 --> 0:10:03.360 commit a it UH to hiking rates and keeping pressure 0:10:03.480 --> 0:10:05.760 uh really on the rest of the world via the 0:10:05.800 --> 0:10:10.360 stronger dollar through the rate hike transmission mechanism. But for us, 0:10:10.600 --> 0:10:16.320 we started seeing signs that this kind of activity was unsustainable. 0:10:16.880 --> 0:10:21.480 The VIX has started spiking. You've seen investor sentiment really 0:10:21.640 --> 0:10:24.400 only as bad as has ever been near the trough 0:10:24.440 --> 0:10:27.520 in two thousand and nine and near the bottom of 0:10:28.000 --> 0:10:32.240 the first Gulf War bear market in And so for us, 0:10:32.600 --> 0:10:35.840 those kinds of ideas, along with the fact that October 0:10:35.960 --> 0:10:41.320 tends to be a turning point for stocks and the 0:10:41.400 --> 0:10:43.319 data that as much as we don't want to think 0:10:43.360 --> 0:10:47.200 about mid terms, the following year after mid terms tends 0:10:47.240 --> 0:10:51.199 to be good as well. Uh, to us, just really uh, 0:10:51.559 --> 0:10:55.240 Given the fact that we thought that the yield moves 0:10:55.440 --> 0:11:00.360 were becoming parabolically unsustainable, we did feel and do feel 0:11:00.600 --> 0:11:04.960 that that will transmit into higher equity prices, certainly in 0:11:05.000 --> 0:11:08.760 the near term, perhaps even longer. And I think, Julian 0:11:08.800 --> 0:11:12.319 you wrote recently for stocks, the bigger, the bigger they fall, 0:11:12.440 --> 0:11:15.040 the harder they bounce, right, So is that part of 0:11:15.080 --> 0:11:18.200 that equation here? Very much so? So? He basically, at 0:11:18.800 --> 0:11:22.400 at the new lows, you were down almost twenty from 0:11:22.440 --> 0:11:24.920 the highs. And what we did was we looked at 0:11:24.960 --> 0:11:28.840 the history of prior bear markets going back fifty years 0:11:28.920 --> 0:11:32.439 or so, and what we found was, once you started 0:11:32.520 --> 0:11:36.319 a bear market rally, which we defined as either five 0:11:36.320 --> 0:11:39.640 per cent or more over five trading days or more 0:11:40.280 --> 0:11:44.280 from that kind of depressed level, the average run is 0:11:44.440 --> 0:11:49.720 on the order of seventeen over the course of thirty 0:11:49.720 --> 0:11:55.199 five trading days, which interestingly enough takes you in proximity 0:11:55.240 --> 0:11:57.960 to the two hundred day moving average, which is where 0:11:58.000 --> 0:12:01.160 the market failed in its rally and August, but more 0:12:01.200 --> 0:12:05.880 importantly takes you in proximity to not only the November 0:12:05.880 --> 0:12:10.280 second FED meeting, but also the November eighth election, which 0:12:10.760 --> 0:12:14.199 you know are going to be very interesting events. Indeed 0:12:14.800 --> 0:12:18.000 so so all the stars are aligning in one place there. 0:12:18.000 --> 0:12:21.440 But what let's talk about those mid terms a little bit, Julian, 0:12:21.480 --> 0:12:24.600 because um, you know that is something people talk about 0:12:24.640 --> 0:12:27.559 a lot, is that uh mid term ears can can 0:12:27.559 --> 0:12:30.000 often be weak in the stock market. I mean, I 0:12:30.040 --> 0:12:32.120 think I think you just have to chalk that up 0:12:32.120 --> 0:12:35.240 to coincidence. Perhaps this year, although you know, maybe some 0:12:35.320 --> 0:12:38.920 of the extenuating uh nos of the of the drop 0:12:39.080 --> 0:12:42.320 was was related to that. But what type of you know, 0:12:42.559 --> 0:12:47.840 scenario do you think is most constructive h two stocks 0:12:47.920 --> 0:12:51.000 in this mid term. There's that sort of generalization people 0:12:51.080 --> 0:12:54.600 like that, you know, gridlock, a divided Congress is often 0:12:54.640 --> 0:12:57.440 supportive of stocks. Is is that the type of setup 0:12:57.520 --> 0:12:59.840 you think that that would work best? Uh? In this 0:13:00.640 --> 0:13:06.320 So it's particularly difficult to handicap that outcome now, especially 0:13:06.400 --> 0:13:09.920 since A you've had as negative a year as you've 0:13:09.920 --> 0:13:13.160 had thus far, and be because the balance of power, 0:13:13.280 --> 0:13:16.640 despite the fact that the Democrats controlled both houses, the 0:13:16.679 --> 0:13:20.120 balance of power is so perricarious. So what we'll do 0:13:20.320 --> 0:13:22.760 is we'll tell you what history actually says about this, 0:13:23.080 --> 0:13:26.000 And what history says is that there is a very 0:13:26.040 --> 0:13:29.920 pronounced out performance over the course of a hundred years 0:13:29.960 --> 0:13:35.800 worth of stock market returns when government is unified, you know, 0:13:36.280 --> 0:13:40.120 one party controls both Houses of Congress and the White House. Now, 0:13:40.280 --> 0:13:44.480 the market would, in our view have a knee jerk 0:13:44.520 --> 0:13:49.479 reaction lower on that kind of outcome because A despite 0:13:49.520 --> 0:13:52.760 the number of times that my team and I remind investors, 0:13:52.800 --> 0:13:56.680 and we've been doing this constantly since of that kind 0:13:56.720 --> 0:14:00.640 of data, people refuse to acknowledge it. Okay, Number one 0:14:00.840 --> 0:14:05.280 and number two. The assumption is here with the presidential election, 0:14:05.320 --> 0:14:08.640 which is obviously going to be an exceptionally contentious event. 0:14:08.840 --> 0:14:12.480 Whoever ends up running two years later, the preference would 0:14:12.480 --> 0:14:16.439 be more than likely for less action rather than more. 0:14:16.800 --> 0:14:22.000 But yet the data clearly shows that unified government i e. 0:14:22.240 --> 0:14:26.360 The potential for more action rather than less has been 0:14:26.400 --> 0:14:35.560 better for some I think in a recent note you 0:14:35.640 --> 0:14:39.480 also said that DCS aggravating some of the recent trends. 0:14:39.880 --> 0:14:41.560 Is that right? So maybe you can talk a little 0:14:41.600 --> 0:14:43.080 bit about this because I know you think a lot 0:14:43.120 --> 0:14:46.280 about how policy is affecting the market. Yeah, there's no 0:14:46.360 --> 0:14:49.280 question about it. Look from from from the point of 0:14:49.400 --> 0:14:55.760 view of the political situation, I don't think that there's 0:14:55.840 --> 0:14:59.600 any debate about the fact that the divisiveness and the 0:14:59.720 --> 0:15:04.560 part citizenship in the country without the ability to actually 0:15:04.600 --> 0:15:11.120 have reason discourse uh is certainly affects markets, It affects uncertainty, 0:15:11.200 --> 0:15:14.760 it affects how people are thinking about policy. But again, 0:15:14.840 --> 0:15:19.000 when when we think about further down the road on 0:15:19.160 --> 0:15:23.000 Constitution Avenue, which is the home of the Federal Reserve, 0:15:23.360 --> 0:15:26.800 there's no question about the fact that the FED, in 0:15:26.960 --> 0:15:31.800 our view, is perhaps gone a little bit too quickly 0:15:32.320 --> 0:15:36.640 and hasn't given the markets and the economy enough time 0:15:37.000 --> 0:15:41.200 to digest the amount of hiking UH that has been 0:15:41.240 --> 0:15:44.400 put into the system already, and that to us has 0:15:44.440 --> 0:15:47.680 really been sort of where the pressure points have come? 0:15:47.680 --> 0:15:50.760 And where are you know, our head of ever, coore 0:15:50.960 --> 0:15:55.880 s I ed Hyman has taken his GDP forecast down 0:15:55.920 --> 0:15:59.320 to zero. So it tells you that in a lot 0:15:59.360 --> 0:16:03.920 of ways, the FED is thinking very closely that a 0:16:03.960 --> 0:16:09.480 recession might be a necessary condition to get inflation under control. 0:16:09.840 --> 0:16:14.440 Certainly not desirable, but counting and counting thing that that 0:16:14.560 --> 0:16:19.200 kind of outcome, as was the case forty years ago 0:16:19.280 --> 0:16:23.760 during the Valkal administration. So all of these underpinn volatility. Well, 0:16:23.840 --> 0:16:27.360 let's talk about that November FED meeting coming up, Julian. 0:16:27.480 --> 0:16:30.640 You know, I think it's safe to say that the 0:16:30.680 --> 0:16:34.680 FED sort of surprised most investors by being more hawkish 0:16:34.720 --> 0:16:37.080 at the September meeting than perhaps a lot of people 0:16:37.160 --> 0:16:41.320 were expecting. The initial sense was that we'd get at 0:16:41.400 --> 0:16:45.120 least seventy five basis points in November and again in December. 0:16:45.160 --> 0:16:48.160 Some I think we're even thinking perhaps a full hundred 0:16:48.160 --> 0:16:52.280 basis points um at at least one of the meetings, UM. 0:16:52.320 --> 0:16:55.080 But you know, financial conditions have tightened quite a bit 0:16:55.160 --> 0:16:57.520 since then, in part because of the UK and just 0:16:57.600 --> 0:17:01.520 the reaction to the the hawk ish FED itself. Is 0:17:01.640 --> 0:17:04.080 have they tightened enough for for maybe the Fed to 0:17:04.840 --> 0:17:08.320 reconsider seventy five basis points, maybe go to fifty in 0:17:08.400 --> 0:17:11.640 the next two meetings. So the first thing I'll say 0:17:11.880 --> 0:17:16.119 is that the fact that you could have an outcome 0:17:16.680 --> 0:17:21.040 more hawkish than those eight minutes at Jackson Hall was shocking. 0:17:21.200 --> 0:17:23.520 I think it was shocking to the markets. It's certainly 0:17:23.560 --> 0:17:27.080 shocked us, UM. But what we think is the FED 0:17:27.359 --> 0:17:32.080 is really potentially in its zeal to not commit the 0:17:32.160 --> 0:17:36.240 mistakes of the mid nineties seventies. I e. Chairman of 0:17:36.240 --> 0:17:41.199 the FED, Arthur Burns cut rates in the middle of 0:17:41.280 --> 0:17:47.199 the inflation firestorm because there was an oncoming recession. Ultimately 0:17:47.240 --> 0:17:50.480 he was able to, uh, you know, cause the recession 0:17:50.560 --> 0:17:55.800 to dissipate, but the outcome was inflation remaining higher for 0:17:56.000 --> 0:17:59.600 much longer. The FED might actually be making a different 0:17:59.680 --> 0:18:04.840 kind of mistake in a similar type of way. By overtightening, 0:18:05.240 --> 0:18:08.160 you really get to the point where you may have 0:18:08.280 --> 0:18:11.200 to cut rates despite the fact that the FED has 0:18:11.240 --> 0:18:14.160 been adamant about not wanting to do that, and and 0:18:14.200 --> 0:18:16.919 from our point of view, you know, what do you 0:18:17.040 --> 0:18:21.800 do if you've got a GDP quarter or quarters. We've 0:18:21.840 --> 0:18:24.240 already had two negative quarters, even though this is not 0:18:24.320 --> 0:18:27.000 a recession in two. But what if you had a 0:18:27.080 --> 0:18:31.680 negative three quarter and it was clear that there might 0:18:31.800 --> 0:18:34.720 be a need to cut rates at the same time 0:18:35.240 --> 0:18:38.960 inflation stays call it above three, which is number not 0:18:39.080 --> 0:18:43.480 tolerable to the FED. That's a conundrum that really really 0:18:43.520 --> 0:18:48.560 could have serious reverberations. And that's part of our view 0:18:48.920 --> 0:18:52.600 that the FED might be better served instead of being 0:18:52.680 --> 0:18:57.000 dogmatic about doing seventy five in November, being more open 0:18:57.080 --> 0:19:01.159 minded about what it may remain not do. And I 0:19:01.160 --> 0:19:04.320 think it's entirely possible over the next number of days 0:19:04.480 --> 0:19:08.760 that we see some commentary from other FED governors that 0:19:08.880 --> 0:19:13.720 perhaps the door is open to a little bit of flexibility. Julian, 0:19:13.800 --> 0:19:16.399 you're very prolific with your note writing, which makes my 0:19:16.480 --> 0:19:18.600 job so much easier. And I read all of your notes, 0:19:18.920 --> 0:19:21.480 but this is why I have to have been referencing 0:19:21.480 --> 0:19:23.160 a lot of them so much so. One of them said, 0:19:23.320 --> 0:19:27.200 the FED space case is a recession in three. So 0:19:27.359 --> 0:19:30.840 do you think that stocks already have prices something like 0:19:30.880 --> 0:19:35.280 that in so we'll clarify that just that was dramatic intent. 0:19:35.400 --> 0:19:37.359 So the FEDS base case, if you look at the 0:19:37.440 --> 0:19:40.920 at the summary of economic projections, is one percent growth 0:19:41.520 --> 0:19:47.320 or thereabouts in three However, it's projection of the unemployment 0:19:47.400 --> 0:19:50.840 rate at four point four percent, up from the trough 0:19:51.160 --> 0:19:54.480 this July at three point five pc, really is an 0:19:54.480 --> 0:20:01.000 implicit call. It nod to the probability of recession being 0:20:01.040 --> 0:20:03.399 close to a hundred percent, because you've never had that 0:20:03.480 --> 0:20:07.960 kind of rise in unemployment without recession happening really almost 0:20:08.280 --> 0:20:12.840 subsequently in in very uh neyar time. And so for us, 0:20:14.040 --> 0:20:17.920 when we think about how stocks are priced, a deep 0:20:17.960 --> 0:20:21.479 recession is absolutely not priced in right now because if 0:20:21.480 --> 0:20:23.480 you look at a hundred years of stock market history, 0:20:23.720 --> 0:20:27.000 the average recession bear market ends up being down on 0:20:27.040 --> 0:20:29.440 the order of forty one and a half percent. We're 0:20:29.440 --> 0:20:33.080 only down around twenty at the trough. But we still 0:20:33.160 --> 0:20:37.520 think there's enough uncertainty and enough potential, particularly if you 0:20:37.600 --> 0:20:42.080 had other geopolitical positive developments, uh you know, lessening of 0:20:42.080 --> 0:20:46.200 the tensions in Russia, or or perhaps you know something 0:20:46.240 --> 0:20:50.040 positive recurring in China. All all outliers right now. But 0:20:50.160 --> 0:20:53.239 this entire year has been a series of outliers, So 0:20:53.280 --> 0:20:56.800 we don't want to fully you know, eliminate the upside 0:20:56.840 --> 0:21:02.160 tail risk along with recognizing the degree of the downside. 0:21:02.200 --> 0:21:05.159 Tell that's what I was gonna ask you. How realistic 0:21:05.359 --> 0:21:10.000 is it to think of um, uh, some improving rhetoric 0:21:10.280 --> 0:21:12.359 out of Moscow? I mean that. The other big story 0:21:12.359 --> 0:21:16.120 obviously this week was that nord Stream pipeline uh, mysteriously 0:21:16.240 --> 0:21:19.520 malfunctioning and springing a leak in the middle of the ocean. Obviously, 0:21:19.520 --> 0:21:22.480 there's a lot of speculation that perhaps it was it 0:21:22.480 --> 0:21:25.800 was sabotaged by Russia. That's that has been confirmed, but 0:21:26.280 --> 0:21:28.440 I think, um, a lot of people are just assuming 0:21:28.480 --> 0:21:30.680 that's that to be the case. Russia sort of sending 0:21:30.720 --> 0:21:35.000 a signal how bad could this winter get for Europe? Um? 0:21:35.119 --> 0:21:39.000 And has the market really priced in that worst case scenario? Uh? 0:21:39.720 --> 0:21:43.040 So far we're um, could could there be a further 0:21:43.320 --> 0:21:48.240 negative shock that really Royal's markets uh, due to the 0:21:48.240 --> 0:21:52.920 the Russia Europe tension? So if you've got a terrible winter, 0:21:53.840 --> 0:21:58.320 I cannot imagine that that's price in you know, rivers 0:21:58.520 --> 0:22:02.199 icing over and so on and so forth. Um, But 0:22:02.320 --> 0:22:06.840 if you actually look at natural gas futures traded in Europe, 0:22:07.200 --> 0:22:10.119 they peaked earlier in the spring. Yes, they've remained at 0:22:10.160 --> 0:22:13.360 this very elevated level that clearly is going to put 0:22:13.400 --> 0:22:16.479 an enormous amount of pressure on the European and the 0:22:16.600 --> 0:22:22.120 UK consumer. But on the other hand, it really hasn't. 0:22:23.080 --> 0:22:26.840 What's happening is the market is adjusting to a base 0:22:26.920 --> 0:22:32.040 case where Russian supply will be next to nothing for 0:22:32.080 --> 0:22:34.560 the foreseeable future. And I think if you go back 0:22:34.600 --> 0:22:38.720 several weeks ago, part of of what calmed markets for 0:22:38.840 --> 0:22:43.720 at least a while was this idea that storage was 0:22:43.840 --> 0:22:48.639 proceeding on pace or even ahead of the normal seasonal build. 0:22:49.320 --> 0:22:53.439 So from that perspective, you know, combine that with getting 0:22:53.480 --> 0:22:58.040 new supplies from the US and and elsewhere. Could you 0:22:58.119 --> 0:23:03.560 bandid it? You could? Do? You need the weather to cooperate. Absolutely, 0:23:05.000 --> 0:23:08.720 This is part of the idea that maybe potentially we 0:23:08.760 --> 0:23:11.560 could have some upside for stocks, right, the idea that 0:23:11.880 --> 0:23:15.120 we could see some positive developments maybe out of DC 0:23:15.400 --> 0:23:18.120 or Moscow or London. I think is what you said recently? 0:23:18.200 --> 0:23:21.080 Is that right? Yeah? Absolutely, And and if you look 0:23:21.119 --> 0:23:25.399 at what's happened this week. Thus far, the b of 0:23:25.760 --> 0:23:32.200 boes intervention and switching really on a dime from quantitative 0:23:32.240 --> 0:23:38.480 tightening quantitative using once more buying bonds is the first 0:23:38.560 --> 0:23:43.800 positive policy development, certainly in terms of stabilizing markets, and 0:23:43.840 --> 0:23:46.880 again going back to that relationship that has been a 0:23:46.880 --> 0:23:51.440 near unity correlation between stocks and bonds recently, you could 0:23:51.480 --> 0:23:55.840 also get a positive policy development out of Tokyo in 0:23:55.880 --> 0:24:01.320 the coming days. The Japanese intervened in dollar again a 0:24:01.400 --> 0:24:04.080 week ago or so, we would say that if they 0:24:04.119 --> 0:24:08.640 were thinking about trying to achieve maximum efficacy, they might 0:24:08.760 --> 0:24:11.760 look at the fact that the market has endorsed the 0:24:11.800 --> 0:24:16.520 Bank of England's policy response and perhaps maybe would endorse 0:24:16.800 --> 0:24:21.280 to a greater extent a further intervention by Japan. So 0:24:21.400 --> 0:24:24.119 that's something that could happen. But again it's one of 0:24:24.160 --> 0:24:27.920 these things where you don't want to plan for a 0:24:28.000 --> 0:24:32.520 base case being positive policy developments, but when the psychology 0:24:32.680 --> 0:24:36.200 turns as we think it could over the next few days, 0:24:36.400 --> 0:24:39.400 it's something that could make the moves and markets all 0:24:39.480 --> 0:24:43.600 the more exaggerated. Yeah, that's even before we get into 0:24:43.680 --> 0:24:48.040 China and the coming Communist Party Congress, which uh could 0:24:48.119 --> 0:24:52.840 could bring some surprises I guess if they decided to reopen, uh, 0:24:53.200 --> 0:24:55.840 who knows what that will do to markets. But Julian, 0:24:55.960 --> 0:24:57.919 I know it's great to talk to you because I 0:24:57.960 --> 0:25:01.240 know you've got an eye on every asset class uh 0:25:01.280 --> 0:25:04.679 and sort of all the different catalysts in the market. 0:25:04.760 --> 0:25:07.360 And I know you you uh always keep at least 0:25:07.359 --> 0:25:10.399 one eye on the options market. And there's really been 0:25:10.440 --> 0:25:13.439 a narrative that's evolved over the last few years that 0:25:13.560 --> 0:25:16.480 options are become sort of the tail that wags the 0:25:16.520 --> 0:25:19.199 dog in the US stock market, that you know, gamma 0:25:19.280 --> 0:25:23.080 hedging and other delta hedging and other Greek letters that 0:25:23.119 --> 0:25:25.840 I don't I'll be honest, I don't really understand completely 0:25:27.320 --> 0:25:33.280 that that you know, all that hedging and expiration activity 0:25:33.480 --> 0:25:36.400 really tends to push and pull the stock market, uh 0:25:36.440 --> 0:25:39.879 in a way that suggests the fundamentals aren't really always 0:25:39.920 --> 0:25:43.120 in charge, that the the the options market has sort 0:25:43.119 --> 0:25:46.400 of taken the driver's seat in the market at least 0:25:46.600 --> 0:25:51.040