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Foreign.
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Welcome to another edition of Macro Mondays here at Real Vision. My name is Mick Rosenwald and I'm joined as usual by my co host Andreas. Welcome to the show Andreas.
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Thanks Miko.
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We've had a great weekend dress. We're getting close to the holiday season so we're going to see if we can try and pump some hope into the Santa rally that we are looking for. We're going to be talking about that for the next half hour. Andreas, see what we have in the in the Macro landscape. Remember this is our weekly Macro show where we give you a free sneak peek into the research that we do and publish at Real Vision. We have a great week ahead of us at Real Vision. Lots of content there for the various tiers. So let me just go through that before we get started here. Andreas. On Wednesday I'm Hosting Jacob Shapiro 10:30 Eastern on geopolitics big Geopolitics show. On Thursday we have our Ask Me Anything pro session you Andreas. And on Friday Raul and Julian do their weekly or their, their their monthly Ask Me Anything. So lots of good stuff to come up here right before the holiday season. We're also publishing our three weekly reports Andreas, your stenos signals my the Drill and then our trade ideas portfolio update every Friday where you get our full access. We are getting close to a new year, Andreas. A new addition or new new season for our portfolio. Our show next week will be a little bit more about that and publishing a a full breakdown of our view into 262026 including our investment thematics and the way we position ourselves to to go into the year. So be on the lookout for that. That's going to be released on on the approach here in Real Vision but should be really, really interesting Andreas. And before we get any further we might want to remember people that even though we try to be very, very actionable we have a model portfolio tracking our trade ideas. So you some of these are sometimes.
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May be good summertime. It's maybe.
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That'S the way it is Andreas. We have to get get him in there as well. And one more thing Andreas, I forgot there are still tickets available for Real Visions annual Critter gathering. It's in Miami Beach. You're not going to be there. Andreas. January 22nd to 25th so you won't want to miss it. Check out the the website for tickets for that. So without further ado Andreas, let's get into it. We had a very interesting week last week. We obviously we, we had the rate cut that we expected but we Also had quite a sell off towards the end of the week. A lot of people tried to explain it. Obviously we had some, some, some less than stellar numbers out of both Broadcom and Oracle. A lot of people are talking about private credit. How did you read this sell off, Andreas? Because that, that's not really what we wanted for this.
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In many ways I consider it fully unrelated to the Federal Reserve meeting on Wednesday. We got the most dovish message from the Federal Reserve in years, basically since the peak of the pandemic. But it still hasn't really been enough to turn the tide on everything tech related. In particular, we're back to talking about AI bubbles, especially in the mainstream media. We're also back talking about the risks related to private credit, et cetera, even though everything is actually improving in that sector beneath the hood. I'll get back to a chart on that in a second. And we're I guess back to being scared about, you know, the investment pays related to the data center build out and all of that. Also some of these names related to the data center build out and the AI build out, they're taking a beating as the market has opened here this, this morning US time. And as was the case on Friday, we've actually the optimism into the open bill fading very quickly in the future here. So it seems like there is still some stress related to this AI tech buildup story that is not going away. And my best guess is that we'll have to wait a few weeks before it fully goes away.
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Interesting address. I want to point to this chart that you posted that's really interesting. It's an Oracle and the relations between their profits and cash flow. Is it charts like this that are fueling the fears of an AI bubble? And what do you read out of this? Because obviously it's extraordinary to have such negative free cash flow with decent net income.
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Well, it happens if you're a growth company. So the difference between the two here is basically the CapEx going into the AI build out for Oracle. Right. So CapEx obviously impacts the free cash flow immediately while you use depreciation to slowly but surely depreciate your capex investments in the net income over time. Right. So of course they'll meet again. The question is just when and how. And by design, the most likely thing is actually that the free cash flow flips above net income if the investments into AI are actually profitable over time. Right. So you know, this chart made the rounds. It is admittedly a bizarre chart, not least given how Oracle has developed over many Decades. Right. You've basically, you know, gone from being a semi value stock, am I allowed to say that about a tech company to now a clearly a growth stock.
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Right.
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This picture of capex diverging from net income, you've seen that before in growth cases. So I don't necessarily think it's an issue. The issue is mainly related to the potential lack of return on investments. If the return on investment is not solid, then you obviously have a problem. But otherwise capex, it's not a problem in many ways. You've actually we've been longing for capex for a long while, a lack of capex across the board and then as soon as we see Capex a lot of people start moaning about that. Right. So it obviously all depends on whether AI will turn into a good investment or not. And as you know, I'm pretty upbeat on that.
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We're getting a lot of questions in on Japan, Andreas. And we'll get back to that a little bit later in the show. I just want to touch upon our regime models. Regular listeners to the show will know that we like to pull in these proprietary models from time to time and they might shed some light on some of the prints that we're getting this week as well. Andreas. So let's dive into our regime model for the US and obviously very, very big on Thursday we are having the inflation prints from the US and the non farm payrolls as well I believe. So what are you reading out of our regime model right now? Inflation is at floor level, basically flatline there and we saw a little bit of a hiccup in growth in our growth parameter as well. What are you reading into this and how will this feed into the prints already this week?
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So let's start with inflation. You're absolutely right that we get the delayed inflation numbers on Thursday and since they haven't collected data through October, it will be slightly out of the ordinary setup where they, they actually, you know, we're basically talking about two months of inflation data in one inflation report. Right. Based on the sample that they've managed to collect during November and the consensus is roughly 3.1 for inflation, it's actually a tad higher than the last inflation print at 3. And the way to read the now cost that you just showed Miguel, is that it is a probability based model. So I mean when the probabilities is close to zero, it basically means that our data suggests that inflation will go from three to below three. So I feel fairly certain that inflation will surprise lower during the data that we received this week. But the uncertainty is larger than usual since we're talking about two months of data and one report. Right, but that also means that we can actually get a pretty sizable surprise compared to what's in the survey. That's on inflation. I also think inflation will surprise obviously next year in the US Mainly due to the inventory cycle. We're talking about a country that front loaded a lot of stuff before the tariffs. So all of the critical resources are there in huge stockpiles in the US and that's actually a bigger issue for the rest of the world than it is for the US next year, now that the immediate tariffs effects are fading. And on top of that, you're obviously right that we've seen a setback in growth as well in the US and given what we've been through, it's probably not a big surprise, is it? I mean, we've had a government shutdown, a very long one, one of the longest ever, if not the longest, at least in modern times. Paired with the trade standoff between Xi and Trump back in October, that double whammy ultimately had to show up. And I'm not overly scared that we're talking about something temporary here, but it certainly has led to a hit in various growth measures over the past, say six, eight weeks. And therefore, which is probably a very, very important takeaway, Miko, for next year, the Federal Reserve's still got a pretty decent case to cut interest rates, which is not necessarily the case for some of the other big central banks. So I think it's a very solid trend story, this story about the Federal Reserve cutting interest rates to a much larger extent than their peers into next year.
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Absolutely. That is also very much going to be defined by the job numbers that we're getting. And we're getting sort of a bit of a composite, bit of a weird report this week, some October weeks and some November weeks. But do you expect continued weakness in those numbers or what's which expectation there?
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Yes, I mean, first of all, I think it was a very interesting part of the press conference last week when Jay Powell referred to the official numbers and basically stated that they've been higher than the reality. So I think he said that the Fed considered the non farm payrolls to have overstated the job creation by 60k jobs a month, meaning that we're actually running below zero if they're right. So that's probably the kind of numbers you should look for this week as well, around zero, something like that, in the trend job creation. And it obviously looks weak, but it's not really a super big surprise when you shrink the size of the labor force, as has been the case for a couple of quarters running now. It would actually be a bigger issue almost if the economy created a lot of jobs when you're not importing any supply of labor. So in my opinion, the weakness in the labor market is blown a little bit out of proportion here. But nevertheless, it works as a good excuse to cut interest rates, right?
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Yeah, yeah, yeah. The question is how well functioning is it as a guiding principle. But for now, it is the guiding principle, the guiding number. So that's how we should address it.
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But, Miguel, I'd like to show a final chart on markets and everything related to the US So we have this chart on private credit versus the broader equity market on page six here. Remember back during the early autumn and into October, we had a lot of discussions about the private credit names underperforming the broader market being in a sell off as an early warning of liquidity trends turning more negative as, you know, almost a smoke alarm. And it proved to be at least partially right that it was a smoke alarm. But no one's highlighting that this particular space is rebounding a lot beneath the hood. And it has rebounded a lot during the first couple of weeks of December as well. So I think this is worth paying attention to because this is essentially some kind of a live bellwether of what's going on in the liquidity space. Because, you know, these names will be impacted very directly from high repo rates and stress in broad liquidity terms. And we've actually seen a substantial rebound there, which boats well for the first quarter of next year.
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Yeah. And then the question to get back to the job numbers, this money that's flowing into companies at some point, are they going to use it on anything else than the data centers? Are they going to use it on anything that creates jobs? So that's the interesting part where the job numbers might become less and less relevant for this, but that's a much larger discussion. Andreas, I want to talk a little bit about bitcoin before we get to Japan here. We have a few questions here. Maybe we should do the one from King Blink Kong. I think he's called from Twitter. Or actually before that, let me get my laugh of the weekend here, Andreas. I love this from a guy named Smokey and a bunch of Japanese letters here. If you found a penny on the street in 2025, you outperform Bitcoin. Homeless people outperform bitcoin. This is great Rage Bait, in my opinion, pulling the knife around the wound here. Andreas, what's your vibe regarding Bitcoin into 2026 and what kind of year has this been?
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It's obviously been a bad year, right? But I guess we're at crossroads because everything related to this discussion on whether we have a four year cycle and those people who make the very simple calculations around bitcoin peaking in October because of this cycle thesis and all of that, they've so far been proven right. Maybe that's a coincidence. I think it is. But they've so far been proven right. And as you know, with people fanatically looking at charts and patterns, as long as patterns have been recognizable and they play out again, the market will tend to follow. And therefore we need some sort of an exogenous shock to blow this four year cycle into smithereens. And that exact shock could be a positive surprise to the economy in 2026. Right. We need a business cycle optic in 2026 which would be sort of of the typical cycle schedule to rock the boat on this four year cycle thesis. Because currently, if you subscribe to that one, why would you stop subscribing to it when it has apparently worked and it still works? Apparently so I think that's the key question here. And as a fan of business cycle frameworks, I still feel Fairly confident that 2026 will surprise many to the upside, not least in terms of the more cyclical parts, the economy. And we've actually seen a pretty decent rotation towards cyclical names, everything from banks to commodities linked to the industrial cycle and all of that over the past couple of weeks, which rhymes pretty well with this. But we just haven't seen the spillovers to high beta assets yet. And I think that again relates to the liquidity question that we've discussed over and over for weeks now on my calculations. I can maybe summarize the whole discussion on bitcoin and high beat assets with that. On my calculations, will will be fully out of the woods by mid to late February when it comes to the dollar liquidity available for money markets. The Federal Reserve will buy roughly 40 billion over the next month. And then my personal assumption is that they'll increase the pace a little bit ahead of the April tax season, which should bring us back above pain levels somewhere at the very latest around 1st of March.
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We are still going to have digital assets as part of our 2026 macro portfolio, but with some distinctions in there. But we'll get back to that over the coming weeks when we present our thematics for 2026. Andres, let's get on to talking about Japan because we're getting a lot of questions about this. You're very knowledgeable about Japan and the BOJ policies here. I want to bring in the question from ATRO from the Real Vision platform here, if we can get it on screen here. Hi guys. So apparently BoJ is expected to start increasing rates in the near future. Question. If we didn't have an extended business cycle, I guess that we could say that these increases should have marked the start of the bear market of the current circle. Since the cycle was extended, how should we view these news and should we position ourselves differently? Is M2 still king?
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Yes. So first of all, I kind of like the question here because you've seen it before. The bank of Japan has been the last mover in many cycles, right? They've been the last central bank to hike interest rates and when they finally joined that camp it proved to be too late. I don't think that's the case this time because this has not been an ordinary cycle by any means. We've actually not seen a cycle uptick at all, for example in the ISM PMIs. So we've had a flat business cycle development, but still rates going up and down through that, which is kind of an odd relationship between rates and the business cycle. So typically I'd argue that you see around 14 to 18 months of time lag between moves in new curves and interest rates and the subsequent moves in the business cycle. But that hasn't really worked three or four years running now probably as the debt profile was altered materially across the board and across geographies during the pandemic when we had a yield curve that was flat as a pancake and when the debt profile is changed it also changes the sensitivity of the economy to interest rates. And that's ultimately why we've seen a different cycle this time. That's my take at least. So is Japan something to worry about? I get the question because it's a 15 months ago we had this major scare after a hike from Japan. Remember they hiked interest rates but they also allowed the yield curve to move towards a steeper direction, meaning that long term bond yields were allowed to move more than front end bond yields. And we had this massive pullback from the so called carry trade of being long the US and funded in Japan. What's different this time, you can see that on page 12, Michael, is that the positioning in this exact carry trade is very very different to that carry scare back in 2024. So what I do here is that I collect various sources of positioning in the Japanese yen versus the dollar and then I standardize it by looking at the volatility in the measure over the past 52 weeks. And on such a rolling score we had a three standard deviation position in dollar yen back in 2024. So a lot of market participants were long dollar short Japanese yen as a funding vehicle. While now, as you can see we're much closer to what I would consider a neutral territory. If you look at the official data available from the CFTC you can see that on page 13 it's even more visible that we have a much different situation than the 2024 carry scare we've actually had on a net net basis. More people speculating in a positive development in the Japanese yen than the opposite this year. And that is very out of the ordinary in many ways because you haven't seen that a lot for years. So I'd actually argue that the situation is vastly different to the summer of 2024, not least because a lot of these levered players are not involved in the bet and they typically amplify a move once we see the ball rolling. On top of that we've gotten a new PM in Japan, Takaishi. She's been fairly vocal in her opposition to the planned rate hike this Friday. That doesn't necessarily mean that she will be. That should be proven right. But it probably means that the bank of Japan is even more incentivized than last year when it comes to sugar coating the impact of a rate hike. And therefore my best guess is that yes, they'll deliver a rate hike but the governor of bank of Japan, where he's a master of that, he'll deliver a rate hike and then no promises at all to do anything related to tightening from here one big mudd picture, you don't have a clue when they will move next, etc. And that will probably calm down things. So I get why people are asking this question on Japan, but I don't think there is any signals in the quant package. When you look through the market data and the positioning in Japan that really worries me.
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Does that also include Treasuries? Because that's often mentioned as the pain point here Andreas, that the Japanese incentive, we have a choice chart on that here that the Japanese incentive to buy US Treasuries could be weakened. Are we still not in the danger zones on that or what you take here?
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So the important thing is whether there's a spread pickup in US Treasuries relative to local bonds, especially when you adjust for the running cost of hedging your currency exposure, which is important to note because the Japanese investors typically hedge the foreign exchange risk. So when you make that calculation live, the pickup is not super attractive. To be honest. Actually there is no pickup in buying Treasuries. But obviously a Japanese pension fund, they cannot only own local bonds, so they'll buy Treasuries no matter what. The question is just how many. And that how many question is typically defined by the change in this variable since the quarter that went by. And currently when you look at that metric. So here the 30 year spread in, if we can get that on the screens again a 30 year spread in between Japanese and US treasuries and then adjusted for the running costs of hedging the FX exposure. And subsequently you can see that we typically see the impact on the actual purchases of Treasuries by Japanese investors a while after. And currently as you can see here, it doesn't really point to a sell off of Treasuries, rather slightly the opposite. The reason why, just to underscore that, is that the Federal Reserve is cutting interest rates. So it basically gets cheaper to hedge the interest rate cuts when you adjust for the steeper yield curve in the.
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U.S. okay, I want to get to another question here Andreas, and we're doing a lot of questions we're not going to get through everyone remember that we do an ask me anything on on Thursday as well where we can get through more of this. One thing we will be talking about Andreas, is also the dollar and the outlook for the dollar. You've been texting a bit about that or tweeting a bit about that. But a question here from Theta and maybe we can use this to explain some of these dynamics. There's a lot of talk about the delta and interest rate differentials suggesting a weaker dollar. But what about the growth differentials cut should be pro growth and if the new ESLR is also the new ESLR also accelerate growth, this should positive.
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I agree with that. You know on again timing is important here because when you cut interest rates now it will impact growth in a while, right? So you don't get that immediate impact through the growth channel. And you know, judging from our now costs, we need to see further cuts to really reignite the US cycle next year and we'll eventually get there. The point I'd like to make on the dollar, first of all, I agree that the divergence between the Federal Reserve and the ECB is crystal clear right now. I think that's a negative dollar story. And we've also seen Eurodollar breaking higher. I think we're heading towards 120 now and it's a matter of time before we break. And the point is, when you see a growth uptick both in the US and in Europe, that's dollar negative. The only time where a growth uptick in the US is positive the dollar, is if it happens outside of a sort of uniform global growth upswing. So when you see growth ticking up everywhere, it's $negative due to trade channels. And let me briefly go through why that is. When you see an uptick in trade volumes, which you typically see alongside a growth uptick, it basically means that dollar liquidity is distributed to a larger extent across the globe. And we've seen various hiccups, for example, back in October when we had a trade standoff between China and the US related to global trade flows. And every time we had a decent rebound in the dollar, for example, as back in October. But now that trade flows are improving, that dollar's liquidity, which was scarce by the way, also back in October, is distributed across borders alongside this distribution of the dollar trade deficit, you could argue, right, and that makes the case for a weaker dollar once trade flows resume. It is almost a rule, but it happens very much by design that when trade picks up globally, the US trade deficit worsens. A lot of stuff has happened on trade deficits and trade channels and all of that this year. But as a rule of thumb, that is a decent assumption that when trade improves globally, it means a weaker dollar and a large distribution of dollars via the trade deficit of the United States.
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Okay, Josh, let's round off by this question from Ileana. I wasn't going to take any more questions, but she sort of sums up my my summary here. Is a center rally still likely? I think I feel like Andreas, where the mood is way too negative for a market that's at least in equities is at or very near all time highs. But how do you see the. We don't have too many trading days left, but is there still enough time and enough gas in the tank for a center rally here?
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Seasonally speaking, we should actually expect the positivity in December to play out between now and New Year's. So I mean, it's very rare that you have the positive seasonality between the 1st and 15th of December. So I mean there's still hope for that Santa rally. Also remember that the US equity market is actually open on most of the Christmas days where we close here. So I mean in that sense you have a few more trading dates to make it. In any case, I think we're getting there on a rate of change basis. Liquidity is improving now, but we're still, as I said, probably six, seven weeks away from fully exiting this very narrow, narrow liquidity picture in the US And I have to admit that equity markets outside of the U.S. they're currently outperforming the U.S. so we've also tilted our portfolio away from the U.S. to some extent towards Japan, Eurozone, et cetera in recent weeks again. But there's light at the end of the tunnel and much more light than most people see currently.
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That's great, Andreas. Great Christmas holidays message here for everyone. Thanks a lot to you Andreas for joining. Thanks to all your listeners business for chipping in with your questions and joining us for another week. We are still running next week. We are still issuing a macro Mondays so do check in for that. Otherwise you can check our portfolio update including all positions etc on Real Vision Pro. Thanks to thanks to all of you for joining us this week. We'll be back.