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Foreign.
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Welcome to another edition of Macro Mondays. My name is Mikael Osenval. I'm your usual host here at Real Vision. And today, as usual, I'm joined by you, Andreas. Welcome to the show.
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A
Thanks very much, Michael.
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It's been another volatile weekendreas. We have to face that and we'll try and take a deep dive into everything that's going on. We've got the American government on the path to full reopening. We'll see. Try and take a dive into, into what that might mean for liquidity and a couple of other issues, including looking a little bit ahead at the Fed decision next month. Some interesting stuff going on, Andreas, before we get to that, just a little reminder of everything that's going on this week on Real Vision. This is obviously our free show. We do this every Monday. But aside from that, if you're a subscriber to Real Vision, you also get access to our Ask Me Anything, which we're doing tomorrow. Andreas, you and I on Thursday, we have a similar one with Raoul Pal and Julian Biddle. Very much recommend that one. And on Wednesday, for all of you, whether you're subscribed to Real Vision or not, Ro is doing his monthly afternoon drink. I think it's called the Monthly Drink with Roald. That's always a fun one. So make sure to join that on on Wednesday as well. Lots of good stuff. We'll get back to some of the articles that we've posted over the last week. Andreas, just we we're going to throw in a couple of breadcrumbs from that. But as always, and perhaps even more so during these times, Andreas, it's perhaps important to remind people of our us here that our research and trade ideas, they might be sometimes maybe good, sometimes maybe. Andreas, I saw this little clip on X earlier today, which kind of, kind of ran with me how it's been trading lately or at least following markets lately. So let me just show you this and see if you're feeling the same here. So this is how it's supposed to go. We're filling it up, getting a nice pattern here. And this is reality chasing the damn cop, throwing milk all over the place. So, Andreas, how's the past week been?
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A
Well, it, it certainly looks like my trading for the past couple of weeks. That video there, I actually tried making a heart with the steamed milk for my wife this weekend in the coffee, and it also looked like that. So in many ways I'm probably one of those. I think we're starting to see some early, compelling signs of a stabilization now, but we're still not fully out of the liquidity woods, if you know what I mean, Mikkel and I think we should spend some time on that today because it really seems like the Fed decision in this December, maybe even Fed action before December, will be key to defining the next steps for the market here, especially since we are running close to what I would call a pain level in dollar liquidity, especially the very narrow dollar liquidity that defines the money market rates between banks.
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B
Before we get to that, I just want to post one headline here because maybe you can explain this to me. I thought we had a trade deal with China done and dusted last month, but then suddenly these headline going to be having a China rare earth deal before Thanksgiving. Didn't we already have a deal? What's going on here, Andreas, if you know.
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Honestly, I don't know. But I guess the question here is whether you can trust anything from these negotiations. The trade deal that was signed between the US And China during Trump's first era was pretty decent on paper. None of it happened in reality, more or less right. They didn't buy any of the promised agricultural goods and so at least they did buy what they promised China. And I think the same is happening here. One of the headlines from the Trump Xi meeting in Korea was that China immediately needed to buy soybeans from U.S. farmers. As far as I'm concerned, we haven't seen any of that. They also promised us a 12 month detente to use geopolitical cliches on rare earth magnets. Suddenly Scott Besson this weekend says that they're still negotiating around this exact topic on rare earth magnets. So I don't know whether this explicitly refers to the rare earth magnets that you use in military equipment. That could be. But in any case, it goes to show that this is nothing but a handshake so far. I mean, they're still negotiating behind closed doors, but at least it seems like they've agreed upon not negotiating in public, if you know what I mean. They've sort of, at least they've tried to agree on some sort of rhetorical detent where they don't throw garbage back and forth on a running basis. And that has, you know, at least been temporarily helpful.
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B
Yeah, and I think this also underscores what we talked about a couple of weeks ago, that, that yes, we might have some details, some, some ceasefires in this trade war, but in the long term, there is no alternative to the US and Europe rearming or re establishing our own Rare earth supply chain. That theme goes on no matter what deals are done with China. You might, we might be able to buy ourselves sometimes some time, but China has decided to weap the supply chain and their control of the supply chain. And in the long term there is no alternative to building up a separate supply chain. So that underscores the validity of that thematic in my opinion.
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Yeah. And maybe one thing I could add to that, and it's basically the one main counter argument against the solar trade that I've liked a lot this year. If you plan on implementing solar in large scale in the US and in Europe, you cannot avoid the Chinese supply chain either. And it is actually an issue that we face a lot of in, in terms of the broader energy question. Right. Maybe outside of, of the good oil, old oil and nat gas, we almost always have to include China in the supply chain when we look at this energy question.
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B
Absolutely. Okay, let's get back to the main topic this week of liquidity. You posted your weekly editorial this morning about whether we are out of the liquidity, so to speak. Roll has talked about liquidity is coming, but there's a problem with the plumbing. Maybe you can, I don't know if you're not a plumber, Andreas, but maybe you can explain that one for me. So is the money coming from the government to pretty very simply, what's the holder, what's the outlook here?
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A
Yes. So first of all, is the money coming from the government? To some extent, yes. We've had this issue of the US treasury having trapped cash at the Federal Reserve as a consequence of the shutdown. And the government is fully reopened as of today, as far as I'm concerned. So it basically means that they're allowed to pay the bills again. They also get the possibility to pay some of these furloughed workers again and so on and so forth. It should bring the amount of trapped cash at the Fed down. And when the US treasury pays its bills, you essentially end up on the receiving end of that flow of liquidity in the private banking system. So when they pay their bills, it ends up at either at a worker's deposit or at a bank's deposit. And in any case it ends up in the financial system. So that's obviously good news. The bad news is that I don't think it's enough. And we've seen crisis meetings between the New York Fed and banks late last week because we continuously see repo rates pricing above the standing repo facility that the Federal Reserve has. So the standing repo facility is at 4%. But we for example, see the repo rates two weeks down the line pricing at 405 ish. So that is to me a sign that we still have almost a scarce situation in dollar liquidity, especially between banks. And the obvious question that the Fed asks these banks is why is this facility, this repo facility, not enough? Because it intends at capping money market rates at 4%. But it does. And I guess the response that they've received, at least if I'm allowed to speak on behalf of the financial system and the banks, is that, well, the issue is that not all players in this money market have direct access to this facility, meaning that you can have refer rates priced above the standing repo facility since some of the agents of the system, they don't have access to the 4% facility. That's at least one of the reasons why. The other reason why is that maybe banks dislike having a loan understanding repo facility for communication purposes. Is it a sign of crisis if you borrow from the Fed as a bank? So we've seen that issue before also with some of the other lending facilities from the Federal Reserve, that it's not given that it's the optimal choice for a bank to use a lending facility if the consequence of using the lending facility is that the market suddenly responds to a bank having to use such a lending facility, if you know what I mean. So that could be another reason for banks hesitancy to fully utilize this facility. In any case, what I'm trying to say here is that repo markets still signal that we're not out of the woods fully. And it basically means that the Federal Reserve will have to act either by expanding this facility in one way or the other or by adding liquidity via purchases of assets. And I think the latter is increasingly likely, it's even increasingly likely before the meeting in December.
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Interesting. Andreas, let's zoom in on the Fed meeting in December. I just want to pull up my usual polymarkets chart here. You know me, Andreas, always lean on those. So the odds on another cut in December has narrowed dramatically to almost a 50, 50 chance according to markets, maybe even 40, 60 here. Is this fair and do you think this is what the market is currently pricing in?
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Yeah, well, it's pretty decently close to what's in the forward pricing in markets. Maybe the market is actually a little bit ahead of this in terms of pricing out the cut as we speak. Well, I think this is a response to a whole, you know, range of, of committee members publicly stating that they, they're in doubt on, on whether to cut interest rates more. We had Collins out saying that last week. We had Schmidt saying that last week. So we actually have a handful of members now explicitly voicing their concern about this cutting cycle. We also admittedly have almost a handful more or less open D supporting the cut. Most of those members are still in the race for the nomination for the next chairman job. We're talking Waller, we're talking Michelle Bowman, etc. So it's a very divided committee. We haven't heard from the chairman himself, which is probably the key here. When you have a split committee, it's typically the job of a chairman, you know that from, you know, any board, basically that it's the job of the chairman to try and form a consensus in such a case. And we haven't heard from Powell yet. So I would personally lean towards them cutting in December, especially since the reason most of these members explicitly voicing their concern is given to us is that they're concerned about the lack of official data available and they're concerned about taking a decision until they know more. And they will know more by this meeting. The most interesting thing is that the inflation report will actually be released I think six hours in advance of this Fed decision. So the next official inflation print will be released ahead of the press conference. Most likely the members will be allowed to take this CPI report into account. Remember, it's a two day meeting but the conclusion is revealed on a press conference on the second day. So I guess given under the circumstances, they will probably be allowed to wait and see or maybe they will be given this inflation data the day before to, to try and you know, give them the optimal data background to, to, to, to take a decision upon. Right. So I think underneath the hood while all of this is happening, you know, we, we run inflation data while this is happening, right Michel? And it looks incredibly soft. The latest anecdotal evidence we could provide you with this morning is that Noble Nordisk, they've more than half the price of oic, the fat drug as Trump calls it. And it's actually one of the cost categories in our now casting that looks incredibly soft now. Everything related to healthcare, both goods and services. So I think that once we get the job report out, I think it's this Thursday, right. And once we get the inflation data, I think the committee will on the margin be convinced to cut interest rates further and it's, you know, it's probably needed to really stabilize things here.
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Is there a case of this if this is priced in at a 50 50. If we get a cut, shouldn't that be sort of a positive wind? Or do you think we'll, we'll have the market adjust to that in the weeks leading up to.
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So I, I think the most important discussion now is whether this is a cutting cycle that continues into 2026 or not. You know, of course it's important whether they cut in December but, but they could also sugarcate a sugar coat a hole by saying we intend on cutting through 2026 still, while if they cut and say that that's it, then I think it will actually be perceived as bad news. So to me the most interesting thing is whether they will continue to signal that they have an easing bias and that they will continue to signal that we should rather look down than up for policy rates. On top of that is also important, of course, whether they communicate that they intend on expanding the balance sheet already. Now in my opinion, it's increasingly likely that they'll end up taking that decision even before the meeting, especially since and you should really take take notice of that. Williams, the head of the New York Fed, basically also the head of the balance sheet and the head of the repo facilities, he's explicitly stated last week that this is a technical decision. It's not something that they need necessarily to vote upon it. He can just implement that after having some bilateral dialogues with people on the committee. So I think that's a pretty strong signal that it's something that they're already looking into now.
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B
Interesting. Andreas. Okay, before we get to a handful of listener questions, Andreas, just a quick review of sneak peek into some of the articles that we posted last week or during the past week today. Andreas, you obviously posted your stenos signals you go into depth with the liquidity issue. We've touched upon it briefly here, but you get a much deeper dive into that and the role of leverage in all of this. You also cover our some of the bets in our model portfolio. Some of them have admittedly taken quite a beating lately. We try and dive into that. Amongst others the drone shield case, which has been quite special, and a couple of other drone stocks as well, which is a very hot topic right now. I also did a long read last week on the drone issue a bit wider than what we've been implementing in our model portfolio. I see some trends towards an exponential adoption of drones within the military realm, particularly in the Ukraine, Russian war. So some interesting numbers there to support a case, a slightly more long term investment case, especially if we get some headwinds into 2026. So that's for those of you on the real Vision pro tier. Lots of good stuff here in there. Remember also that we are throwing a Ask Me Anything tomorrow. It's at I'm just looking here tomorrow at 3pm Eastern Time so lots of good stuff.
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A
We got to stay up late, Miguel.
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Yeah, yeah, yeah we do. There's an election tomorrow in Denmark as well and the national team is playing it's yeah, everything all at once but we're doing that right in from, from the office to tomorrow evening European time tomorrow afternoon US Times and you can get your questions in there but for those listening to this question to, to this show we, we we've had a handful of questions here. This one I, I found quite interesting. What are your thoughts on Michael Howell's view that liquidity growth is actually slowing and that 2026 looks to be a bad year for risk assets without explicit Fed qe?
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I've had many fruitful discussions with Mike Howell on liquidity over the past handful of years and I think he's one of the best guys out there. To my understanding, the way that Michael Howell constructs his liquidity index, in that index he includes the collateral value of bonds. So what we've seen say over the past six to nine months, setting the treasury market aside, is a bond market that has not behaved well. We've seen that in Japan, we've seen that in the uk, we've seen it in the Eurozone to a large extent and even in the treasury market from time to time, even if treasury bond yields are lower than they were at the beginning of the year. So what I'm trying to say here is that Mike Howell liquidity index is very dependent on bond yields going lower. I'm not sure I fully agree with that method for a couple of reasons. What we've seen in Japan and Europe this year is a much steeper yield curve, meaning that bond yields have gone up mostly in the long end but to some extent in Japan also in the short end. That filters in negatively in Mike Howells liquidity index because of a decline in collateral values. I'm of the view that a steeper yield curve is a natural liquidity enhancer in the sense that private banks create credit when there's a steep yield curve because they can ride that carry. Let me try and explain why if long bond yields are high relative to short bond yields, it's actually the sweet spot for private banks commercial model since they thrive when they are able to borrow from the market at Low rates. Their main vehicle to borrow is a deposit from potentially you and I or a short term paper. And those are very linked to the front end of the yield curve while they typically lend out further out the curve. So when you have a Steve curve they can actually write that difference in yields. And therefore we've seen the liquidity and credit creation moving from central banks to private banks to a much larger extent in this cycle. And that is where I disagree with Michael. I think you need to accommodate to that natural amplifier for liquidity from a steeper yield curve. And it's especially been the case in Japan and Europe where we've had a very flat yield curve for a long while. So the global liquidity picture looks better than if you assess it only through the lens on collateral and central bank liquidity. So I mostly disagree with Michael even though his, his inputs always very valuable.
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B
Let's jump onto one of our compatriots here, Andreas Patrick Jensen asking you about solar stocks here. Andreas has discussed solar which is obviously a big opportunity within the broader energy trend. Do you prefer to play it by owning more direct companies like First Sonar or by focusing on picks and shovels? Please.
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Such as Next Tracker picks and shovels plays. I like that. You know obviously there is an ETF covering the WHO Solar and it's called Tan. I love that by the way.
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That's a great ticket. Yeah.
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And, and you know, I still like the case and I think Elon has been very active pushing this case also over the course of the past week. You know, he's basically referring to solar being energy itself and everything else being noise. Oil. Oil is solar by the end of the day. Right. But so, so don't. I'm setting that aside. I, I still like the case. I'm you know, heavily invested in it. We have I'd say actually four or five cases in our portfolio with links to the solar theme. Next is in it just to admit to that we're still decently up on the, on the next case. I think 20% or something like that, 15% maybe by the time of speaking here. I would probably prefer to be exposed to several parts of that supply chain and in particular to companies with a very strong US domestic footprint. It's already a strong consensus story. In China they built out solar capacity to an extent that is almost impossible to imagine. Over the past couple of years the European Union has built out its solar capacity to a larger extent than the US So the big catch up play is if the US domestic market plays catch up to the rest of the world. I have my money placed on that since I think the small nuclear reactors will disappoint in the near term. It's been the focus of the administration to try and get that theme up and running as fast as possible to accommodate the electricity demand from AI and so on and so forth. But I think by the end of the day, solar and NAT Gas are probably the two plays that are capable of catching up to the demand side of the electricity equation within the foreseeable time horizon. Say the next 12 to 18 months.
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Yeah, just from political standpoint, I mean, solar is more politically immune, so to say. I know nuclear is not as controversial in the US as it is many places in Europe, but still solar is very much the Gavin Newsom play. So even if we get a Democratic win in the midterms, and even a Democratic president in 28, solar is still going to be the big the big one, I think. Okay, Andreas, usually when I ask for these questions on Twitter, I'm overwhelmed both by a lot of new fancy coins to buy, but also questions of when Moon I didn't bring that one, but I brought two other when questions. I'm just going to put you on the spot with these two, Andreas, because I love this from yeah, he's called why that a nickname when repocalypse and when ism over 50. I love the repocalypse phrase I hadn't heard before. So putting you on the spot here. What do you think?
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A
I guess the first question refers to when the repo market blows up, right? I already think that we've seen the first signs of that. I think the New York Fed is sufficiently on top of this issue for it to not spiral out of control. So I don't think we will get Apocalypse by any standards. Nothing that is even bordering what we saw in 2019, where shit really hits the fan. Hit the fan when is I'm over 50. It's a question I've answered quite a few times this year and I've gotten it wrong every single time. But let me provide you with my best guess. It will happen within two months from now. So I think we're on the precipice of that upswing and I've said that before this year. Admittedly, the reason why I've been wrong footed is in my opinion the standoff between Trump and Xi back in October, which basically wrong footed that view once again. But at least if we assume that this detent between China and the US is in place until Thanksgiving, I think there is a pretty decent chance that we jump back above 50 over the course of the next two months. Final thing I want to say, Miguel, is that maybe in, in one of the next shows, maybe next week or the week after, we should also, we should also take some of the comments from, from the audience where they just throw garbage at us, because that's always funny.
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Let's do that. Let's do that.
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A
I, I had one last week when I tried to, you know, pitch this idea that we, we're on the precipice of an upswing, um, where someone just commented, you're fat and retarded. And I responded, yes to both. You know, you're right about both. But what, what has it got to do with this view?
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B
That's absolutely fair. Andreas. Let me put, put a pin in that. For next week, we'll, we'll, we'll do that. Ism over 50 sounds really good for my dj and bag in any way. So let's, let's hope for that address. That's all we had for you this week. Tune into our Ask Me Anything tomorrow or the free Wednesday show with Ro on Real Vision. Lots of good stuff coming this week. Thanks to all of, all of you for joining. Thanks to you, Andreas. We'll be back next week.