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MacroVoices #324 Louis-Vincent Gave: A Major Geopolitical Transformation Is Underway
01:29:52
MacroVoices Erik Townsend and Patrick Ceresna welcome Gavekal co-founder Louis-Vincent Gave to the show. Louis has a different take on the impact of U.S. seizure of foreign-owned assets, and he also shares his outlook for bonds, the dollar, stocks, and precious metals. https://bit.ly/3G5dOmI Join Free LIVE webinar this Sunday May 22nd at 11am ET: https://bit.ly/3FYN4nL Download Big Picture Trading Chartbook 📈📉 https://bit.ly/3Nm7wkQ ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/2JjZR7J Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
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- [00:08]
A
This is Macro Voices with hedge fund manager Eric Townsend. The free weekly financial podcast targeting professional finance, high net worth individuals, family offices and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics, telling it like it is, bullish or bearish, no holds barred. Now here are your hosts Eric Townsend and Patrick Suresna.
- [00:38]
B
Macro voices Episode 324 was recorded on May 19, 2022. I'm Eric Townsend. This episode of Macro Voices was brought to you by farmtogether.com where you can hedge against inflation and protect your portfolio by investing in US Farmland now available to all accredited investors. Gavcal Research Co founder Louis Vincent Gav returns as this week's feature interview. Guest Louis has a different take on the impact of US Seizure of foreign owned assets and will relate that view to his outlook for bonds, the dollar, stocks and precious metals. Then be sure to stay tuned for our post game segment when Patrick's chart deck will be titled Option Strategies to Repair Losing Positions.
- [01:21]
C
And I'm Patrick Ceresna. Eric, let's get to that S&P 500. It looked like at the start of the week that we were getting that bounce. The selling just came in from yesterday into today, bringing us right back down to the 52 week low and it just feels like the selling is relentless. Do you think a bottom's coming soon or is this just going to keep going lower?
- [01:43]
B
I think there's plenty of room for it to keep going lower. And you know, I just have to laugh at some of the guest pitches that we get in email. There's several people offering to come on the show and explain to our listeners why the market is crashing. It's not crashing, folks, and when you pitch that to us, you just make yourself look like a fool who doesn't deserve to be on any podcast. This has been a very orderly sell off so far. Now it doesn't have to stay that way. In fact, Charlie McElligott, who we had on the show, just had a warning out from Nomura earlier today saying brace yourself, it could get unorderly and that could get really interesting. Now Charlie had said to us back when we had him on last to expect a bottom in May. So there's one argument there, but it sounds like Charlie is coming around to see that there's potentially at least a risk of this turning disorderly. And that would happen when retail sellers start to panic, which probably hasn't happened en masse yet, although it's starting to happen. So to be clear I have no idea when the bear market rallies are going to come, whether the next direction is going to be up or down. I'm not shorting this market because I know it's always possible that we could see a policy intervention at some point. But I think the game has changed in the sense that the Fed is now fighting infl and there's plenty of room for more downside and if it becomes disorderly, there's plenty of room for it to accelerate. We're not seeing a crash, at least not so far. All we've seen so far is a very orderly, civilized sell off. That makes perfect sense given the fundamentals. Doesn't mean a crash isn't coming. So we'll have to keep an eye on the market and see what happens.
- [03:21]
C
All right, let's move on to that US dollar index because while the markets keep selling, one of the catalysts that was driving some of that weakness was the fact that the US$TWNG was so prevailing. But really in the last week we've seen the dollar index coming off of its highs where we hit those highs near 105 and we're down to about 102.80. What's your thinking here on the dollar?
- [03:45]
B
Well, Patrick, 104 has been a really important resistance level. That was the high from back in 2016, 2017 timeframe. And it would be perfectly expected, even if you're going to see the dollar move higher, that there would be significant resistance high. So far we've seen the Dixie retreat from that 104 level after briefly breaking above it. And you know, as far as I'm concerned, as long as we stay above 99 or so, which is where the previous resistance level was, that should now come in as support. I don't see this as anything other than a healthy pullback from a very important resistance level. I do think we'll eventually break through it to the upside if the fundamentals don't change. But hey, it's a major resistance level. It would make sense to have some consolidation for potentially a few months before we see a breakout above it.
- [04:37]
C
All right, well, we gotta move on to crude oil because this week we got a breakout above those March April highs. And while it did pause a little bit and pull back towards this 104 level, we're back here at 109 and the trend seems to be starting to turn up here. Is this a legit breakout in your mind?
- [04:57]
B
Oh, I think it is a legit breakout, but we still have the realization that there is going to be a recession because the Fed is trying very hard to engineer one that I don't think the market has digested yet. So it's definitely some challenging trading territory here because it's not just a one sided story that it has to be up. There's a good reason to expect that that recession risk could bring a dip. Before we move higher on fundamentals, let's start with EIA inventory though. Crude oil. The headline number says we had a drawdown this week of 3.4 million barrels. But that's before considering the 5 million barrel drawdown from the Strategic Petroleum Reserve. Including the SPR, it was a total of million barrels drawn down on crude oil inventories. Cushing, Oklahoma, which is the very very important and frankly very, very inventory constrained hub in Cushing, Oklahoma, where the WTI futures contract is settled, drew down 2.4 million barrels. Gasoline was the really big product drawdown. 4.8 million barrel drawdown. All these drawdowns are happening at the tail end of what is still technically restocking season when we're supposed to have builds in order to replenish inventory ahead of the high demand season that comes in the summertime due to both driving home building and other demands. Distillates was the only build on the board at 1.2 million barrels. So again, this is supposed to be restocking season. Yet 14 of the last 15 weeks have seen drawdowns on gasoline. So there has been no restocking in gasoline net. This week it's a drawdown of 12 million barrels. If you include the SBR and finished products, that's a pretty darn big draw when we really haven't seen any restocking. This restocking season, US production ticked back up to 11.9 million barrels. That's up 100,000 barrels from last week and that's back to the plateau that we had for quite a few weeks. I lost track of how many the catalysts for the strength this week. Shanghai lockdowns ending. And that also means speculation in the market. A lot of people thought, well maybe whatever is going on in Shanghai is about to spread to the rest of the world. The fact that Chinese lockdowns are finally ending both corrects the issue around Chinese demand and it also corrects the issue around speculation that there could be a contagion to the rest of the world. The EU banning Russian crude is back in the headlines. And of course OPEC's response to the US NOPEC bill, which would try to make it a crime for people outside of US jurisdiction to do things that their government says they're required to do. I'm not sure exactly how sovereignty fits into that equation, but that obviously has been one of the factors here. The catalyst I think for the weakness we've seen just temporarily in the last couple of days is US recession fears. I don't think that that recession fear is fully priced in yet. I think people need to come to terms with the fact that it's not just a fear, it's a near certainty of recession. At some point that should lead to a little bit more weakness in the market, but it might be completely overco by more bullish factors. Now I've been ridiculed for saying on macro voices that OPEC is out of spare capacity. And I guess I'm just a little known guy that nobody pays attention to, so it doesn't matter what I think. Well, there's another fellow who's not quite so little known. His name is Prince Abdulaziz bin Salman, Saudi Arabia's Oil minister. And he seems to agree with me as well. Making statements this week that there is no switch or dial for producers to push or twister or activate in order to solve suddenly and magically increase production. Now he wasn't specific enough to say we're all out of spare capacity and we have no ability to increase production because he would give away negotiating power if he admitted that. But if you look at most of the OPEC producers underperforming their production quotas, these are countries that have had a decades long history of consistently cheating the system by over producing beyond their quotas and trying to get away with it. Suddenly they can't seem to even keep up with their qu. It says to me that there can be no question that OPEC is out of spare capacity. And that is an incredibly, incredibly bullish sign for prices. Now the counter argument some people might offer is to say, wait a minute, Saudi Arabia is just saying that because they're pissed off about the no pec bill and you know, they don't really mean it. I think it's probably entirely true that Saudi Arabia's timing of admitting this very inconvenient truth about OPEC being out of spare capacity was motivated by the NOPEC bill. But I think they're speaking the truth and it's a very, very important point. Most of the market, as I said, doesn't know a U.S. recession is coming. So I think there should be a catalyst for a big dip. We'll see what happens. My message is enjoy these low prices at the pump while they still last, which I don't think they will. These are the good old days back when gasoline was less than $10 a gallon in the United States. And by the way, if you don't like the prospect of more than $10 a gallon, it the result of failed policy. It didn't have to happen this way folks. Far more important than price, the Strategic Petroleum Reserve hit a 35 year low this week. Now the purpose of the SPR is not to buy short term votes in an election year by temporarily suppressing gasoline prices during high demand season. The purpose of the SPR is to protect national security from geopolitical risks such as a major war leading to supply interruptions that could completely cripple the national economy. We are at a 35 year low in SPR inventories and this is not a 35 year low in geopolitical risk. It's more like a 50 year high. I'll discuss this more with Louis Vincent Gavin Today's interview.
- [11:07]
C
All right, well let's move on to gold because it seems that almost to the day when the dollar put in short term high, gold put in some sort of a short term low. And we've been getting a little bit of a relief rally here as bullion's slowly crawling back towards about 18, 1850. It's 1839 at the time a recording. What's your thinking here on Gold?
- [11:28]
B
Well that long term support line on Ola Hanson's chart is around 1830 or low 1830s in there somewhere. We're back above that now, which is great news. Today's close right on the 13 day moving average, the highest of the three short term moving averages was the first time in a month since April 20th. So what did not happen on this breakdown below that support line is we didn't see a downside acceleration which would be the mark of a true breakdown. Instead it looks like a fake break below that line. So far we're recovered above it. Now sometimes you get a fake break above it and it all falls back down. We've only got one day so far to say that maybe we're on the recovery here. I think there is a reasonable argument for this to have been the bottom. But I also want to remind our listeners of what happened in 2008 when the fundamentals for gold were incredibly strong because the financial system was showing signs of outright failure. And that should be the strongest possible bullish signal for gold. And it did ultimately end up resulting in an epic rally, but not immediately because what happens in a crash situation, remember we don't have a crash situation yet in the stock market, one might be coming. What happens in a crash is everybody panics and correlations go to one. Everybody is selling everything to raise cash, whether it makes sense or not. And there are plenty of of leveraged holders of gold that could easily be forced out of their positions in a sell off. So if we get to a disorderly liquidation in equity markets, which has not happened yet, then under those circumstances, there's plenty of reason to expect gold to sell off and sell off hard. Although if 2008 is an example, it would be a setup for a buying opportunity to get on board just before another epic rally. We'll see what happens. But I do think there's plenty of room for at least short term downside if we see a stock market crash.
- [13:27]
C
All right, and let's wrap with the touching on the 10 year yield. And we basically obviously had the yield double from like 1 1/2% to 3% basically in just two months. And finally over the last week and a half or so, it seems like we found a level where bonds or at least interest rates are settling in here. Do you think a short term high might be in here at 3%?
- [13:50]
B
I sure hope so. You know what I've been saying for, I don't know, more than a month now on Macro Voices is watch that round number up 3% on the 10 year. Cause if we get a sustained break above that in yields, below that in price, it really could be the beginning of something big. Now we got a fake break in that direction for a few days, but now it's been what, two or three weeks that we've been below 3% on the 10 year yield. That's pretty encouraging. It says maybe the Fed's efforts to fight inflation are starting to work, at least in the short term. My overall take here is I don't have any directional prediction or expectation of where this market is headed. But boy, something I'm not taking my eyes off of because watching this market is a very strong macro signal to tell you what else is about to happen with the rest of the financial system.
- [14:39]
C
This week's feature interview guest is Gav Cal co founder Louis Vincent. Gav Eric, why did we get Louis back on the show this week?
- [14:47]
B
Well, Louis is one of the very few people I know in finance who might be actually more international than I am. Louis is a French guy who founded his institutional research company in, in Hong Kong because at the time Hong Kong and Asia in general was very much the up and coming place very Good call on Louis part there. He's since taken up another home in Canada, lives in Canada part of the year. So he's a very international guy. And after hearing David Rosenberg last week tell me that he's not at all concerned about foreign divestiture of U.S. assets contributing to the sell off in both stocks and bonds, I really wanted to get another opinion because I think it is a major factor and I'm very concerned about it. You know, is that just my personal bias? I wanted to hear from somebody who has an international perspective and comes at markets, not necessarily from a North American point of view. Louis is great in that regard. So I wanted to find out what he would say on that issue and also just to get an update on his outlook on markets and where things are headed generally.
- [15:51]
C
Well, Eric's interview with Louis Vincent Gav is coming up as Macro Voices continues right after this message from our sponsor.
- [15:57]
B
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- [17:21]
A
And now with this week's special guest, here's hedge fund manager Eric Townsend.
- [17:28]
B
Joining me now is Gavkal co founder Louis Vincent. Gav Louis, it's great to have you back on the show. I've really been looking forward to getting you on because you know, you're a guy who is a French guy based in Hong Kong, also have a home in Canada, very international guy. And something that actually surprised me when I asked David Rosenberg last week about the fed survey citing 41% of respondents saying that divestiture of US assets was a major concern. Rosy thought it was not really a big deal. And I wanted to get the perspective of a European on this, how do you see this situation? Is it no big deal that in my feeling about this, we kind of abandoned the rule of law and said, look, we know Russians are bad guys, so let's just take their FX reserves of these oligarchs, let's seize their yachts. Not through rigid and aggressive application of the rule of law with a court of order, but rather by abandoning rule of law and saying, we don't need a court order. They're Russians, after all. We can do whatever we want. Is this going to actually hurt the financial system, or am I silly to think that that's a real concern?
- [18:31]
D
Well, first of all, great to hear from you, Eric. I have to say I need to do a better job of tracking our conversations because each time we talk, it seems something fairly big is happening. I think one time we had the oil price go negative while we were talking. This time we've got the Nasdaq down almost 5%. So maybe I need to start buying puts each time you and I are scheduled to have a conversation. Just buy puts on everything, I guess. But no, look, it's great to catch up and no, I. I think the way you frame the question is exactly right. I would add one more thing is we've basically chosen to, in essence, change the rule of the games on people we don't like. We've changed the rules of the games on the Russian, and we've decided to do so at a time when real returns on Western assets have never been so low. Right. So you've got your real rates, your real returns on US Treasuries is about as deeply negative as it's been in two generations. And it's at this moment that we choose to tell the world, not only are you going to lose 3, 4, 5% real per year in these US treasuries or in these German boons, but if you don't behave in the way that we want you to behave, then you're going to lose 100% overnight and without due process, without debate in Parliament, without your day in court. We're just going to grab your football club, grab your yacht, grab everything. Now, I do fundamentally believe that this is a massive game changer, because the way I conceptualize the world, probably the greatest comparative advantage of the Western world is the rule of law and the property rights that derive from that. The reason every rich Chinese guy buys a house in Vancouver, the reason every Saudi prince buys a house in London, is not because they think, oh, returns on Vancouver real estate is going to be better than returns on Shanghai real estate. But it's in essence, it's your safety asset, right? You buy these assets. If something bad happens, I can move to my house in Vancouver and I'll be fine. But now what we've told the world is, well, if tomorrow Xi Jinping invades Taiwan, then we're going to take your house in Vancouver. Now if you're the rich Chinese guy who's bought this house, you think, well, I bought this house for precisely this potential scenario where all of a sudden there's a war in China and I want to get out. And you're telling me that at this very moment you're going to confiscate it. Well, then this house isn't what I thought it was. That I think is the first massive shift we've in essence put a big question mark on, on the safety of a lot of assets in the western world. But I would say there's a second, and I think most people that I talk to seem to understand this and are deeply, deeply uncomfortable with it. Because you take the Russians stuff today, tomorrow, who's to say that they're not going to take your stuff for making money on oil stocks and contributing to the climate crisis crisis or the day after tomorrow? Why can't we take the assets of the social media barons because they've created mental health pandemic amongst our kids. Once you can just grab stuff, why stop at just the Russians? There's plenty of other bad guys out there. So you can just keep going down the list of bad guys. And indeed, if you're a Saudi prince, if you're a Chinese tycoon, you feel most likely that you're not that far down the list of bad guys. So right there, I think by seizing these central bank reserves, we've really completely, I think this completely upends our entire global financial architecture. Since before 71, we were on a gold based system. After 71 we were really on a US treasury based system system. And now we've just told the world the US Treasuries are not what you think they were and neither is Western real estate. So that's a profound shift. But there's a second shift, and I'm sorry to drone on because this is really important. And that is if you're looking at this from an emerging market point of view, it's the speed at which decisions were made and the process through which decisions were made. I think if you're an emerging market guy, you're used again, let's say you're a Chinese Taiko. You're used to your government making unilateral decisions without debate in Parliament, without campaigning on a platform, without any of these things. That's part of the world you live in. And that's one of the reasons you want to own Western assets, because in the Western world, the policy risk is just far lower. Getting anything done is a long process. But again, this has just shifted all of a sudden. What we've seen is that over the course of a weekend across the Western world, rules can be changed without voters having a say, without parliaments having a say. And you could say, well, we already knew this because we saw this through Covid, but this is now a confirmation that the sort of processes that we saw through Covid, where governments unilaterally decide to do stuff again without debate in Parliament, without any kind of democratic feedback loop, can now be applied not only on people's freedom, that is locking down people, et cetera, but also on their inalienable property rights. So this is, again, if you look at this from China or from Saudi Arabia or from any one of many emerging markets, you're like, well, this is just like home. I used to think the Western world was so different. I used to think it was so special. But when push comes to shove and their back is against the world, it turns out that actually it's the same thing as emerging markets.
- [24:31]
B
Now, Zoltan Pozar, the Credit Suisse analyst who's a very smart guy on all subjects other than accepting our interview invitations, has made the rather profound statement that the entire global financial system is essentially in the process of kind of a meltdown toward a total reset. And that's very consistent with my view, which is been that by the end of this fourth turning, I expect it's very possible that the US Dollar's hegemony over the financial system will be challenged not by a conventional currency, but by a digital currency that's created by people whose motive is to come up with a suitable or superior replacement for the US Dollar. And what everybody told me when I predicted that in my book four years ago now is they said, you're crazy, because there will never be a viable alternative to the US Dollar that can match the depth and liquidity characteristics of the U.S. treasury market. My contention is, first of all, you can actually use technology to match those depth and liquidity characteristics of US Treasuries in a new digital sovereign bond market. But what seems to be happening now is the bar is getting lower. The depth and liquidity, according to the Federal Reserve of The US treasury market is suddenly, suddenly getting really fragile. What could be the knock on effects and implications if that really is true?
- [25:56]
D
So look, I think first, first things first, it's, it is a shame that Zoltan doesn't come on your show because he has been, I think, you know, he's been so right through this crisis and I think time, time will show that, that his analysis has been very much on the ball. So having said this, here's for me, your question is a very important one because we've always lived in a world where indeed there was one head honcho, one big dog to dominate all others. It used to be gold, then it became the US Dollar. And so I think inherently we're formatted to believe that, that you need one currency to rule them all. To your point, if the US Dollar isn't going to do that because the US Dollar all of a sudden no longer offers safety of assets for half of the world's population, then who steps in? Well, perhaps here's an idea is perhaps we move to a world where there isn't one massive head honcho anymore dominating everybody, but just lots and lots of different currencies. In essence, something where if you look at China's trade with Indonesia gets settled in renminbi, India's trade with Russia gets settled in rupee, Brazil's trade with Argentina gets settled in Brazil and real and so on, you no longer need to go through the intermediary of the US Dollar because partly technologically, this is now much easier to do. I think there's already massive signs of that, right? The obvious consequence of this crisis and one again, because we decided everything in a weekend and perhaps we didn't really think things through. The first obvious consequence is that Russia is now turning to countries that it deems friendly, I.e. brazil, India, China, and saying, well, look, look, there's no point in me earning euros or US Dollars anymore. I can't do anything with them. So if you want to buy my commodities, if you want to buy my weapons, pay me in your local currency. And so we're already seeing oil for rupee trades, we're already seeing coal for renminbi trades and natural gas for renminbi trades. But this right there, this is a massive game changer. Now put yourself in Xi Jinping's shoes for just a second. Second, Russia exports 8 to 9 billion dollars every month to China, which is roughly pretty much all of it is commodities, right? So that's $100 billion a year that China used to have to earn. It Used to have to go to the US sell $100 billion worth of tennis shoes and electronics and textiles and whatever else, and then turn around, take that money and buy the commodities and need it from Russia. And now it can just print the money. It doesn't need to trade with the US anymore. So now if you're Xi Jinping at the stroke of a pen through the course of a weekend, you've had $100 billion improvement in your terms of trade right off the bat. And you've also gained massive leverage. Because now that Russia sells you your coal in renminbi, now that Russia sells you the oil and the gas in Renminbi and the iron ore, you can turn to Indonesia and say, you know what, Indonesia, I like your coal so much better than this Russian crap. It's such higher quality. I really love your coal. But, you know, in Russia, I get to pay it in renminbi. So unless you're going to do a deal in Renminbi, I'm going to just buy more from Russia. And you can do the same with Saudi Arabia for oil and so on and so forth. So we move to a world where all of a sudden instead of having one currency, we move to many different currencies. And that brings me, and I'm sorry to be long winded, but that brings me to what I think is the single most important thing going on today that most people aren't taking enough time to think about. And that's deglobalization. Now, when we talk about deglobalization, most people think about Apple's supply chain or Nike supply chain and how the factories need to move from China back to Mexico or wherever else. And that's true, that's an important deglobalization and that's contributing to today's inflation, etc. No doubt. But the much more important deglobalization for most of us who work in financial markets is the deglobalization in financial flows. That's much more important and has far deeper consequences than Nike bringing factories back from China to Mexico. Look at it this way. Since the Asian crisis, all of emerging markets savings have basically flown into the Western world. And what you've had is an odd world where where emerging market consumers were in essence subsidizing consumption in developed markets, subsidizing consumption through undervalued exchange rates, subsidizing consumption through a constant recycling of savings. What if we move to a world where Chinese savings now stay in China and where Indian savings stay in India and where Russian savings stay in Russia, where all this money no longer turns around to buy London real estate or buy US Treasuries or whatever else. Well, then how do Britain, France, the us, all these countries that were benefiting, running massive twin deficits year in, year out and funding them through the sale of assets, how do they keep doing that? The answer is they don't. So either you need these countries to adopt severe fiscal tightenings and basically move into recession, or their currencies are, are bound to go down structurally against those of emerging markets. And I know I'm being long winded, but I just want to finish on one point because I think it's important. If we'd spoken a year ago, Eric, and if I'd said, look, Eric, oil is going to be above 100 bucks, US treasury yields will be 3%, the Fed's going to be very hawkish, or sound at least sound very hawkish. Turkish, the euro will be at 105, the yen is going to get crushed. And if I told you, and by the way, you're going to massively outperform U.S. treasuries by owning Brazilian bonds, that'll be up for the year, and Indian bonds, that'll be flat, and Indonesian bonds that'll be up for the year, and Chinese bonds, I'll be only marginally down for the year, you'd have said, louis, you're the biggest idiot I know and I'm never doing an interview with you again. Don't you know, haven't you know that after 30 years in working in markets, don't you know that when the Fed tightens, emerging markets get smoked? And yet here we are, we have the Fed tightening and all your fragile fives, your Brazil, your India, your Indonesia are actually holding up very, very well. So it tells you right there. It's like the dogs that didn't bark in the Sherlock Holmes thing today. The fact that Indonesia is holding up so well, India's holding up so well, it's the dog that didn't bark. These are the guys that are actually benefiting from the deglobalization of financial flows.
- [33:08]
B
Well, Louis, isn't it true that under those circumstances, what does happen every single time is there is a flight to safety trade, but what's happening now is the flight to safety, at least the perceived safety is in the opposite direction.
- [33:22]
D
Yeah, but, you know, you're absolutely right, but the flight to safety used to be typically in US Treasuries, but now.
- [33:30]
B
They'Re fleeing to safety away from US Treasuries. Because if you've got US Treasuries, we, we can just change, we have to pay that money back. Unless we kind of change our mind to decide we don't want to, in which case, never mind.
- [33:40]
D
Exactly. So, I mean, how is an asset that can be worth zero overnight at the decision of a politician, simply at the decision of a politician. Not even out of a bunch of politicians with no judge and no judicial system involved. No judge, no judicial system, no debates in parliament, no nothing. Just a White House that decides we're going to do this. How is that asset considered safe again? And it depends who you are. If you're French, if you're German, if you're Japanese, sure, US Treasuries are safe. But the reality is these guys, the French, the Germans, the Japanese haven't been the marginal buyer of US Treasuries for 25 years. The marginal buyer. Since the Asian crisis, the marginal buyer of U.S. treasuries, the Foreign marginal buyer, has been coming out of emerging market. And that emerging market investor, I think is now afraid of being on the wrong side of cancel culture. We live in this cancel culture in the Western world. And if a Russian oligarch can be punished for something Putin did, which by the way is another big departure in our legal systems, our legal systems used to be all about you only get punished for things that you, you do. I can't get punished for the crimes of my father or the sins of my son. I can only get punished for what I do. And here when you look at the punishment of the Russian oligarchs, it's like, oh, well, they're friends of Putin, so we're going to take all their stuff. It's a very slippery slope. Right. The whole point of our legal systems is again, you can't be punished for being, I'm Catholic, I can't be punished for the sins of the Catholic Church. Church. But here we've thrown all that to the wind for the Russians. I think out of the emotion of the horrible things happening in Ukraine, our politicians wanted to be seen to be doing something that was something. So we did this. But the precedent it set, again, if you're Chinese, if you're Saudi, et cetera, and you're looking at this, the precedent it set is a very scary one for all those people.
- [35:49]
B
Now, with respect to the so called Russia, Ukraine war, something that I've said several times on this program is I don't think it's a Russian, Russia, Ukraine war. I think it's the battle of Russia, Ukraine in the context of a much larger conflict between the world's largest superpowers, what I have feared is that the next battle might be the battle of China and Taiwan. You know a whole lot more about China, and you actually mentioned that possibility earlier in this conversation. Am I right to be concerned about that? How close is China to potentially trying to. To forcefully take Taiwan, which it claims is part of its country, back? And of course, Taiwan doesn't see it that way. Is this likely to come to a head in the next couple of years?
- [36:34]
D
I don't think it is. I really don't think it is. You know, first, we could of course, say that, look, that's perhaps the silver lining of the Russian invasion. The fact that Russia is really struggling with it is a reality check for China. So on the first, that. Because, you know, militarily speaking, an invasion of Taiwan would be much more complicated than invasion of Ukraine, right? You're. You're having to cross an ocean. There's a Pacific fleet in between you and Taiwan. So there's, you know, just, just logistically speaking, it's a. It's a hell of an undertaking. Secondly, of course, there's. There'd be the economic costs, which is another warning for China. So again, again, if you want to look for a silver lining to this terrible Ukraine war, it'd be this one. But even before that, I didn't really believe in the whole Taiwan invasion for a pretty simple reason, and that is that look at that generation that Xi Jinping is from and the entire Politburo is from. I think we're all the fruits of our own experiences. And if you look at that Xi Jinping generation, these are the guys that were in their twenties during the Cultural Revolution, right? So they would have been sent to the countryside to dig out roots and boil leaves for food. They would have almost starved. All this in their formative years. And during those five or six years where they would have been in the countryside, the only book they had to read was Mao's Little Red Book. That was the only approved reading which they would have all learned by heart. Now, I don't know if you've ever read Mao's Little Red Book, but. But it's basically a combination of Marxism for dummies and guerrilla warfare for dummies, because fundamentally, that's what Mao was, right? He was a sort of poor Marxist thinker, but a terrific guerrilla war leader. And so these guys in their formative years will have done nothing but learn guerrilla warfare tactics. And the whole point of guerrilla warfare is you attack by stealth. You attack when you your enemy is weak. You press your advantage and then you retreat. And you never, ever try to confront a strong enemy head on, which is how Mao won China over, which is of course, how the Chinese supported Vietnamese ended up beating first the French, then the Americans. So in their whole mindset of the world, you don't fight wars head on. You, you attack your enemy by stealth. So maybe if your enemy has eight and a half percent inflation rate, you shut down your biggest port and you make sure that that inflation rate keeps on climbing. Because also if you're a Marxist in your worldview, inflation ends up triggering revolutions and triggering all sorts of social problems. So if your enemy has inflation and you don't, then you press that advantage. And so you reopen and you make sure that for the summer, the Walmart shelves are empty. And then you reopen just in time for the oil price to go from 100 bucks to 150 so that Americans can pay $7.50 a gallon to go to Walmarts where there's nothing on the shelves. To me, that's what seems to be more what's unfolding rather than a takeover of Taiwan.
- [39:53]
B
Let's come back then to the situation in Russia, particularly with regard to the European Union, because what's going on right now is we've got a lot of political grandstanding in the EU where they're saying, look, Russia, if you're going to behave this way in Ukraine, we are going to teach you guys a lesson. And that lesson is going to be, we're done with buying energy from Russia. Never again. Well, you know what, that's an easy thing to say when you're a politician and it's May in October. It's a little bit harder considering that from an infrastructure standpoint, Europe is totally dependent, dependent on Russian gas. And I don't mean gasoline, I mean natural gas and propane. You know, it's about the heating of Europe is mostly dependent on natural gas. What if, and it feels to me like everybody thinks Russia's in a corner and has no options, and we're going to show those Russians we're going to put them in their place. What if Russia were to say to China, look, we got a problem here, which is we're really sick of dealing with the west, but we do need to sell our gas. What if we cut a deal with you, China, where you buy all of our oil and all of our gas, which means we got to build a new pipeline, but it's not that far to build that pipeline and we're going to stop dealing with Europe completely. We're going to turn this around and say, Europe, you can't buy our gas, it's not for sale to you. Find another source. We're going to sell it all to China. I have no idea what it would take from an infrastructure standpoint, how long it would take to build out a pipeline to make that happen. But it seems be to me that politically Russia and China are getting to be closer and closer friends. And if they could figure out a way to not need the west, particularly with respect to energy, I think they'd try to do it. Am I crazy to think that?
- [41:30]
D
No, no, not at all. Look, I'd go one step further. I actually think that while it's very obvious that Europe is the massive loser out of this very unfortunate war, the big winner I think is potentially China. Because. Because what's ended up happening here is that China, sorry, Russia, apologies, Russia is in essence becoming an economic colony of, or in time will become an economic colony of China. Look at it this way, all of Russia's commodities are now indeed going to be increasingly going towards the Chinese market and they're going to be paid for in renminbi, which again for China is a massive game changer. China's been trying to get to this point of buying commodities in its own currency for the past 15 years. That's why they open up their bond market. That's why they opened up the renminbi to international investors. They've been trying to get to this point and in one weekend they got there. So for them that's a massive, massive boon. And then on the other side, the only goods that Russian people will be able to buy will be Chinese made goods, right? So they won't be able to buy Mercedes or Volkswagen cars anymore. They'll buy Cherry automotives or BYD cars. So this is a game changer. In essence, Russia is going to have the relationship with China that India had with Britain Pre World War II. You may remember that Gandhi would complain that all of the Indian cotton would be sent to Britain to be treated in the mills of Birmingham and Manchester and then sent back back to India in the form of expensive textiles. And in this way, in essence, all the money from India would end up going back to Britain. Well, that's exactly going to be the relationship between Russia and China going forward. So this is not such a good deal for Russia by any stretch. The big winner will be China, but yes, the massive loser will be Europe along with Russia. But but the other big loser will be Europe. Now, again, put yourself here for a second in Xi Jinping's shoes. You've just had $100 billion improvement in your terms of trade because now you can just print money and buy whatever commodity you want from Russia and probably also from Indonesia, from Malaysia, et cetera, who will have to fall in line or risk losing the China business. So that's a big win. You've just had another big win. And the that one of the problems, or perhaps checks on your power was the threat that rich Chinese people would put their money away, put it in Vancouver, in Sydney, in London, wherever else. Well, that threat has just disappeared. Now you can turn to them and say, hey, look, all the Russian oligarchs who put their money abroad, they've lost everything. The oligarchs who stayed at home, they still have everything. So if you're Xi Jinping, your ability to, to keep capital inside your country has just dramatically improved. Again, going back to this idea of the deglobalization of financial flows. And then when you look at your relationship with Europe, your ability to push Europe around has just also improved. Because having lost the Russian market, Europe can now not afford to lose the Chinese market. It'd be just too devastating economically for you, Europe. So now China can push Europe around a little more than it could before. So you put all this together, it's pretty obvious who the winners and losers are, I think.
- [45:12]
B
Let's take this geopolitical conversation and tie it back to what's happening today in financial markets. Because when I said to David Rosenberg, boy, it seems to me like sell off in the stock market, sell off in of terms Treasuries really kind of accelerated right around the time that the US Started these extrajudicial seizures of assets and seizures of foreign exchange reserves and so forth. Seems to me like they might be related. Rosie said no. Look at the fact that the stock market sell off is really global. It's happening in other markets. It's not just the U.S. there's no reason to think that. What's your take? Is the current activity in markets being driven by, by these changes in US Policy or is it just coincidence?
- [45:54]
D
No, I think it is being totally being driven by it. You look at, since late February, U.S. treasuries and German boons have in essence been in meltdown mode. But meanwhile, if you look at Indian government bonds and Chinese government bonds, I don't think it's been as bad. Now, granted, when you change the property rights on things, things you end up with much higher risk premiums on everything. And that's what we're seeing. I think we're in a panic phase in the markets where people are realizing, you know what, I've had risk premiums on too many things for too long. I was always expecting we never have inflation and that's turned out to be wrong. And I was always expecting that my property rights were sacrosanct and that turned out to be wrong. And now I have to live with a world where there's much greater bond market volatility and there's much greater currency volatility. So all this makes for very, very different, very different outcomes.
- [46:56]
B
And what's your outlook for both US treasury yields as well as for the S and P?
- [47:01]
D
Well, I'm a bear on bonds. I think you buy bonds for safety and you can't change the rules and not expect long term consequences. So no, I'm a big bear on U.S. treasuries. And that's a hell of a headwind for equity markets that are, especially US Equity markets that are priced, they're no longer crazy expensive, but they're not super cheap either. And I think when you look at US Equity equities, it's pretty obvious to me that we're in a bear market, right where we've got increased volatility. I don't know if we're down exactly the 20% on the S and P. You need to call the bear market. You're definitely down on the NASDAQ and on all the aggressive growth stocks that was leading the stuff higher. But you know that a bear market, to end a bear market, you need either for the Fed to start adding liquidity and cutting interest rates. Rates. And that's definitely not a story for 2022, maybe 2023, but definitely not a story for 2022. Or you need energy prices to collapse. And for all the reasons we discussed, they're nowhere near collapsing. They're going to keep going up. So that's not going to provide any, you know, falling energy prices aren't going to provide additional liquidity to markets that very much need it. Or you need asset prices to get so cheap that things bounce back just on their own because it's so cheap. But, but we're not really there. So we're in a bear market on the s and P500. And the usual things you would expect to stop the bear market on there. If you want to look for a silver lining and you think, okay, how does this turn around? One potential silver lining is there's some resolution in Russia which allows energy prices to roll over, at least in the short term. So that's one possible. I don't really buy it, but if it, you know, as, as you and I always discuss, you know, money managers, we're not paid to forecast, we're paid to adapt. So if there's a change in Russia, then you adapt. That's option one. Option two, maybe we don't get easing from the Fed, but we could get a bunch of easing from the PBOC and we could get a bunch of easing from China if we get that. However, my guess is the immediate impact will be be higher commodity prices and rebounding emerging markets more than rebounding S&P 500. So I think the trade today is to be overweight emerging markets and underweight the S&P 500. Because if there's good news going to come, it's going to come from the emerging markets. I don't think it's going to come from the U.S. louis.
- [49:44]
B
One of the things that really shocks me is the number of people that are talking about the so called stock market crash. I don't see any crash. What I see is, is a bear market that has been remarkably orderly so far. As you said, we got to look for. What are the signs that tell you when a bear market is ending? It's usually when you see it become disorderly selling, that retail capitulation where people are panicking and just, you know, selling into already technically oversold conditions. We're not seeing that yet. I think it's still to come. What are your thoughts and what could be ahead? How far do you think we could go on the S and P before this is over?
- [50:21]
D
Well, no, I don't think we're there. I think all the way down. You've seen retail increases in the high energy, high growth funds like ARK and others. So you definitely haven't seen the retail capitulation. For me, the first quarter was pretty ugly. But interestingly, hedge funds didn't really have redemption. And when you think of it, most hedge funds have sort of it's a quarterly redemption notice and you got to put in sort of 45 days ahead. So, you know, for this late June, you should have put it in mid May or late May at the latest for the end June redemption. Where from what I'm hearing, you're still not really seeing that. Still not really seeing that. So my guess is, is if the NASDAQ stays ugly, and right now it looks and feels ugly for sure, and if all those long Short equity hedge funds that have proven to be much more long than shorts and that have often even underperformed on the way down. So really showing that there wasn't much of a hedge at all. I think you're going to see all these guys get redeemed in mid August. And so that means that you come into to late September and you get the selling. And what will be interesting then is you get the selling. It's the old story in a bear market, you sell not what you should, but what you can. And I think you get to September and in September, a lot of these funds that will be facing redemptions by then will be selling not all the illiquid stuff because that's not sellable. They'll sell the big names, they'll sell the Microsofts, the Apples, the Googles, all those things that have so far held up so well and that have given the impression that this hasn't been a bloodbath. Right. Because to your point, while it's been a bloodbath on the names like the Pelotons and the Zooms and the Shopifys of this world, the underlying market has been held up by the Apples and the Googles. I think there's a chance this cracks in September because of the redemption cycle.
- [52:29]
B
Let's go back to energy, because that's a market where a lot of people, I'm really surprised are saying, look, we're over 100 bucks. That's kind of unprecedented. It never left. Surely energy prices are about to roll over. It seems to me like, if anything, the opposite is true in the sense that we've done so much with the misplaced efforts of the ESG movement to vilify the oil and gas industry, that there's no investment in finding new resources to replace those whose production is in steep decline. And what's going on, as I see it, is we're telling ourselves, you know, it's going to get better any day now. But in reality, everything we're doing from a policy standpoint is making the situation worse. Where is this headed and where do you think energy prices could go from here?
- [53:17]
D
Well, look, to your point, if you go back three years ago, before COVID the US was producing 13 million barrels per day and the oil price was 55 bucks. Fast forward to today. The old price is, you know, 100, 510 picking up number, and US is producing 11.8 million barrels per day. So I think there's the growing realization that U.S. oil production that was only going one way for the period 2011 till basically 2020, it kept going higher. People are realizing this isn't a magic tap that you turn on and off, that indeed, to your point there aren't enough workers in the opacity that getting that oil out is extremely capital intensive, that all the capital that was spent to get that oil out in the first place in the previous decade actually turned out to have terrible returns on invested capital. So no. So look, you and I have discussed this before, but we were entering into an energy crisis before Russia. We were heading into massive energy shortages partly because of the esg, partly because of the capital destruction that went on in the shell patch for 10 years. Years. Partly because of massive mal investment in alternative forms of energy, partly because of knuckleheaded decisions in Europe to turn away from nuclear. My own country of France, which used to be a nuclear France, used to be a nuclear superpower. We've gone down in 10 years from 90% of our electricity produced by nuclear to 60 because we tried to meet the European Union directives that we needed more wind and we needed more solar, which turns out the to be like worse carbon. This is the stupidest thing of them all because when you do more wind and more solar, you need to have redundancies built in which can only basically you end up building coal plants. So you shut down the nuclear plants, build more windmills and coal plants. Real smart. Anyway, so we've done a bunch of that. So anyway, it brings us to where we are today. And to answer your question, we're entering into an energy crisis and you're going to have, I think, different kinds of countries. The first are countries like the US that are more or less energy self sufficient and so those will withstand it. You could say, well, $150. Oil is horrible for the US consumer, but it's not horrible in the way it used to be in the past, right? In the past when oil was 150 bucks, it meant money was leaving the US to go to Nigeria or to go to Saudi Arabia or wherever else. Now it means money will leave from New York to go to Texas and it'll leave Chicago to go to Oklahoma. So as far as the US goes again, it's not an absolute disaster. It's probably a disaster for a lot of municipalities that are going to see their tax receipts absolutely plummet and people leave. But that's a whole other debate. Then you have the countries that will be able to buy meet their energy needs from Russia and pay for it in their own currency and the Chinas, the Indias, Maybe the Singapore, the Thailands of this world. And those guys will be, I think, winners out of everything that unfolds. And then you'll have the countries that will face a choice. And the choice will be a pretty simple one. It'll be either we go back to coal and we get rid of all this, the climate change rhetoric and COP26 constraints and we keep our houses heated in the winter and our industry going. So we go back to coal because we can turn that on decently, quickly. There's lots of coal in the world and building coal plants is not that complicated. So either we turn to coal or we ration energy. Now if you look around the world, China's already decided they're going back to coal. Coal consumption. China is going through the roof. India's done the same, Brazil's done the same. It's pretty easy for emerging markets in a choice between paying a high price price or increasing pollution. They choose pollution every day of the week and twice on Sunday in the Western world. It's much more challenging, at least for this current generation of political leaders who have so tied their political fates to the climate change rhetoric. But on this I'm decently hopeful there as well. As Milton Friedman said, politicians never learns, but voters do. What's going to happen in countries like Germany and France is politicians will stand up and say, you know what, you're paying too much for your electricity, you're paying too much to move your car. If you vote for me, we'll turn on the coal and prices will collapse because producing electricity through coal is a fraction of producing electricity through any other measure. I think that's where we're heading towards and it's just going to take a little time.
- [58:01]
B
Louis, some of our listeners have ridiculed me for making the statement that I think OPEC has run out out of spare capacity. Now another little known fellow decided to agree with me this week. His name is Prince Abdulaziz bin Salman, the Saudi Arabian oil minister who said this week that hey, we don't have the ability to just increase production. Now I'm sure some people would say, oh come on, he's just saying that now because of this NOPEC bill. And you know, it's a political statement. I don't think so, Louis. I think that maybe, maybe the no PEC bill has made it timely for him to bring up this inconvenient truth. But just look at what's going on with most OPEC producers being unable to meet their quotas. These guys have a decades long history of Cheating and overproducing beyond their quotas. Now all of a sudden they can't make their quotas and nobody seems to get the message that it means they're out of spare capacity and we're in real time trouble. Am I missing something?
- [59:01]
D
No, I was about to say that. I was about to say look at the OPEC production for the past year and pretty much every single country to your point isn't meeting their quota. Now with oil at 100 bucks, why wouldn't you be meeting your quota? Right, you'd be to your point historically when you look at these guys patterns with oil at 100 bucks they'd all be cheating. So no, if you think okay, okay already OPEC can't produce the capacity, how do we get back to normal? Well, how do we increase production if OPEC can't do it and if Russia can't do it? Well, there's the US but that's massive capital intensive and it's not going to turn on a dime. There's Brazil where there's a lot of oil, but here again it's not going to turn on a dime and it's very capital intensive and it's offshore and it takes a while. There's Iran, we can let in Iran from the cold. But how much spare capacity is there truly in Iran? There's probably a lot of it already on the market anyway. So now you look at it and you could say, well there's Venezuela, but the infrastructure in Venezuela is by now so derelict that to turn that around is going to take years. So wherever you look you end up with the simple realization that anywhere you could get spare capacity is probably going to take a year or two. Except you Iran. Except Iran. And I'd add one more thing on this is we got oil at 100 bucks or over 100 bucks and we have OPEC producing as much as they can, et cetera, against a backdrop where Chinese imports are basically down a million, a million and a half barrels from where they should be. If you believe in a world where at some point China abandons the zero Covid then oil prices I think have another 20 or 30 bucks in them just from China rejoining the global economy. And you could say, well they'll be supplied by Russia and some of it will be in coal. And I agree with that. But there again you mentioned Russia can build its pipelines instead of serving Europe, start serving China. But here again all these things take time. The distances between Russia's oil fields and Russia's gas fields to China are not, you know, it's big distances in extreme weather conditions. There's a reason nobody lives there in Siberia. It's a hard place to live.
- [61:29]
B
Well, Louis, I can't thank you enough for a terrific interview, but before I let you go, please tell our institutional listeners a little bit more about what you do at GAFCAL and how they can follow your work.
- [61:38]
D
Well, again, thanks. It's always a great pleasure to catch up. The best easiest is to go to our website, gafcal.com we also have a US private wealth arm and we publish a free newsletter from there called Evergreen Gafcal. So if you want our free newsletter, it comes out every Friday. You can sign up there. What we do we're a bit of an odd firm. We have a money management arm where we manage money into Chinese fixed income. In fact, we recently launched and into Asian fixed income in general. We recently launched an Asian government bond ETF called tickersagov us. So we've got a big money management arm and then we publish research for institutional investors. Obviously we're based in Hong Kong and Beijing, so we have a lot of what we publish is on China, but we do try to keep it global, keep our clients engaged beyond just the China stuff.
- [62:34]
B
We look forward to getting you back on the show for an update in a few months. Patrick Seresna and I will be back right after this message. Message. After being sold out of advertising space for a couple of years now, we do finally have some capacity to add another advertiser. If your company is interested in advertising on Macro Voices in the spot where I'm speaking right now, send us an email@sporshipcrovoices.com meanwhile, let's get right back to the show.
- [63:15]
A
Now back to your hosts, Eric Townsend and Patrick Ceresna.
- [63:21]
C
Eric, it was great to have Louis back. You know, he did kind of go on about this whole reshaping of the world. But I really do think it is really critical, you know, and especially in this kind of fourth turning view view that that the view towards U.S. assets and different way that the Western world functions in in the greater scope of things is dynamically changing. Thought that was really interesting. The other thing that I found really interesting was his view on emerging markets because I tend to just look at emerging market equities through something like the EEM ETF just to see the trends which have been very weak. But you know, he really does point out that some of that money flow and safe haven and some of those bonds around these emerging markets have actually been really good at least for this year. So I was a really interesting interview. What did you take away?
- [64:13]
B
Well, I definitely am more in Louis camp than David Rosenberg's camp when it comes to the importance of foreign divestiture of U.S. assets and, you know, the bigger picture. I sure wish we could get Zoltan Poser on the show. If anyone has his ear, please encourage him to accept our interview invitations. And for anyone else who's not familiar with his work, just Google his name and look for some of his writing on the subject of a reset of the financial system. Now, I'm not at all convinced that Zoltan has exactly the right picture in his mind of how this is going to go. And I would guess that he would probably freely admit that he's not sure either. But I do think that we're in the final innings of a fourth turning, which is when major major changes tend to occur. The last one was at the end of World War II when we saw the implementation of Bretton woods and the US Dollar replacing the pound sterling formally as the world's global reserve currency. I've predicted a digital currency would eventually replace the US dollar. Zoltan has a set of his own views. I don't know who's right, but I think a really big systemic change is underway and we're still at the early stages of that big systemic change. And I try to get as many different perspectives as I can to get my head around it. And Louis certainly has a very interesting one as well. But I want to get to something I know is on all of our listeners minds, which is, look, we have had a sell off here that has become protracted. Some people think that there's room for it to get worse from here, which means you've really got to start thinking about protecting your positions if you didn't get lucky enough to get out of the top. That's the subject of today's postgame chart deck. Listeners, you'll find the download link in your Research Roundup email. If you don't have a Research Roundup email, just go to our homepage, macrovoices.com, look for the red button that says looking for the downloads. Patrick, it says option strategies to repair losing positions. What are we talking about here?
- [66:09]
C
Well, I want to get to that in a second. I just started with a few charts just for us to do our typical technical chart. Look at the markets and then we'll get to the repair strategy in a second. Second, I wanted to start on page two with that S&P 500 and just highlight the interesting moment we're at that. You know, you had the market wrap, you were kind of referencing the, the fragility of the market in terms of this moment. And I wanted to highlight that we are really at a, an interesting crossroad. It is the option expiration week and we're basically one day away from an OPEX roll off. And one of the things that arguably has contributed to the weakness of the market is the typical monthly OPEX roll off that dealers get stuck with Gamma. We're certainly in a gamma flipped zone where dealers are actually contributing to creating volatility into further weakness as their need to hedge their books. The last time in March 2020 when we had obviously much more of a crashy like drop, the OPEX ended up being actually a short term market. Well, that actually ended up being the market low. And not necessarily saying that that has to be the case, but I certainly want to pay attention here going into this weekend to see whether or not we have some sort of a short term relief rally once all of those options get rolled off or expire off the books. Right now we are retesting that low which many technicians kind of start fishing around whether some sort of a double bottom could form on the short term. But just to your point though Eric, like if for whatever reason a catalyst was produced that once again had us break to a fresh new multi month low on the S P, it could really start some sort of a more liquidity event style selling. And so it's such an important moment on this chart to see whether or not going into Friday, today's lows hold.
- [68:08]
B
Well, I just want to point out, look at this chart folks. If you look at the beginning of 2022, from January 1st down to the middle of March or so, you can see that there's a fairly orderly price channel that the market was trading in. Then we got to a relief rally, a pretty significant bounce in the second half of March. And now we've got an even more defined nice clean price channel where the market is trading fairly steeply down, but inside of a well defined price channel in an orderly fashion. Fashion. This is not a market crash, this is an orderly sell off so far. If it gets disorderly, it's going to look very different from this.
- [68:49]
C
Right. And so I wanted to just touch on page three with the chart of the Euro. We always talk the dollar index, but on a trade weighted basis the Euro single handedly drives the dollar index with over a 50% weighting in it. And we came even though the dollar index index broke a higher high largely because of the the move in the yen. The Euro never broke its decade lows yet. In fact that that kind of spot just under 104 was where those lows came in four or five years ago. And so it's a very interesting moment where the euro bounced. And so it will be really interesting to see whether this begins some sort of a period where the euro, euro works its way back to 107, 108, 109 on the upside and we see those short term highs come in the dollar. So moving on Eric, I wanted to really touch on oil and one of the interesting things, in spite of all the dollar strength for the last two months oil has perpetually made higher lows. It's and even though you don't want to call it any steep uptrend or anything, it's been very well defended the whole time and just, just it's working its way higher and it just feels like obviously anytime we approach a previous high there's always that risk of a double top along its previous high. But it really does still look like a very bullish chart and it'll be really interesting to see whether next week brings about that breakout.
- [70:14]
B
Well, it's going to depend I think on the news flow Patrick, because there's plenty of reason to expect a break to new highs and eventually taking out the 130 or whatever the number was back when we first had the invasion of Ukraine and that could be coming. But at the same time I think there's plenty of room that we could start to see recession related news. And frankly the recession related news has been plain as day for weeks and weeks and weeks as far as I'm concerned. But I don't think it's digested by the market yet. If we have a realization where finally the CNBC and Bloomberg clowns have figured out that the recession is imminent and everybody knows about it, I think that could result in a huge amount of speculative long liquidation from the crude oil futures market. That has to mean a significant bit of downside. I don't think that downside would last. I think it would create a very viable bottom. But as far as bringing new money into the long side of this market here, there's pretty significant risk that you could see a big move down before we see more sustained movement up.
- [71:16]
C
Eric, just wanted to touch on gold here and just show that while you were talk the 1830 level that Ol Hansen was referencing, there is a substantial support from previous lows all through that December and January period that were just below 1800. And so it is a really interesting support line from where gold is bouncing. And I think the correlation to the Euro is going to be there as really the gold has really been behaving almost like a cross asset to the US dollar for now. And so it'll be interesting to see whether the dollar continues to take a break and whether that allows gold to work its way back to 1900 in this window.
- [71:58]
B
My guess is that the bottom is in for gold unless and until we get a disorderly sell off or outright crash in the stock market, at which point I think all bets are off and there's probably new lows to be found. But if the stock market stays orderly, I wouldn't be surprised if the, the bottom is in.
- [72:17]
C
Right. And so on page six, I just wanted to touch on that 10 year treasury note and to kind of put it all together like what we see here is it stops selling. We're basically selling at the same level on Treasuries as we were trading at in the first few weeks of April. The point being here is, is that the ugly bond bear market sell off that we saw ravaging the markets through the first quarter of the year into into April, really things have calmed down. And this is where I asked the question as to, you know, obviously there's always the risk that the markets are going to have a, some sort of liquidity event or mini crash or something on the downside. But when we really look at it from a bigger inner market perspective, treasury bonds have calmed down, the dollar is coming off of its highs, everything seems to be calming down a little bit. And I kind of asked the question maybe is that suggesting that maybe the stock market may be due for a little bit of a short squeeze rally of some sort if this trend continues? It's certainly something on my mind, Patrick.
- [73:20]
B
I think that's very possible. As you say, the signs of a double bottom on the stock market are there. There's lots of reasons to think that maybe it's time for the next big relief rally. And if you look at just what's happened since the 1st of April, that move down on a measured move basis wasn't quite as big as the one from January to mid March, but it's pretty close.
- [73:40]
D
Close.
- [73:40]
B
Plenty of room to think it's over here, but I want to make sure that we do our listeners the favor of not assuming it's over and discuss what we could do to prepare just in case it's not. Now how do we deal with this because obviously you don't want to just bail out of your positions and go short the market because if it is the bottom, then you're really screwed. What can we do with options in order to cover both bases?
- [74:02]
C
Well, you know, I want, we haven't talked options on the show for like ever. And, and it's, I think, oh, come on, not ever.
- [74:08]
B
It's just in a while, it's been a while.
- [74:11]
C
And, and I felt that this is a, a perfect time to come back and circle back and, and discuss this. You know, the first thing is that many people often stereotype options as being risky, but I like to look at them as a tool. And those people that don't take the time to educate themselves on how the tool works don't know the different choices they have beyond the conventional buy and sell features that you have with just traditional equity. And so I wanted to kind of produce a little presentation on a repair strategy because obviously most people find themselves holding stocks today that they're down on and often you want to get out of that stock but don't want to sell it at a big loss. And so you look to repair the trade to get you an exit closer to break even. The traditional way way the vast majority of investors approach this is dollar cost averaging, which is, you know, you buy some shares, gets cheaper, you buy some more, and you keep bringing your cost base down. But the shortcoming of that is during bear markets, stock market drops are always deeper and last longer than most people expect. And like, think of it as someone who's been dollar cost averaging on ark over the last year. It's just been a painful adventure trying to bring your cost base down. And so what I wanted to do was present an alternative way of approaching this and, and just share one of the scenarios of, of what our listeners could do as an alternative to just dollar cost averaging. So in this example, just to make something very relevant, I wanted to use Walmart because Walmart just a few days ago reported its earnings and just had a devastating market market drop, right? And we saw a scenario where the stock went from the mid-50s down to $130 just in one day. And so an investor that for instance, saw Walmart trading down toward $132, which was its February low, would potentially see that as a support line that potentially could have bounced the stock. And so I wanted to kind of go through the scenario that this investment investor goes and buys 100 shares of Walmart at that $132 price. So on page 11, we though continue the story, which is that the investor was proven wrong or early, as we like to say. When Target came out to earnings the next day, it drove another aggressive round of selling where Walmart dropped another $12 from $132 down to $120. And so any investor that bought Walmart the day before thinking they were getting a $20 discount day over day, suddenly found themselves in a pretty significant losing position, owning what many view still a fundamentally great stock and a blue chip name simply a bad timing for owning it. And so what I wanted to do is go through the scenario of what the investor can do to try to fix this position and what are the advantages and disadvantages of doing it different ways? So our starting position here is that the investor bought those shares at $132 and Walmart's now trading at 120 and their investors down $1,200 for every 100 shares they own. And so we kind of got to go through that. We want to build an option strategy that has the element of asymmetry to it to repair this. It's like we want to be able, the goal is to get out of the position without a loss, lower the break even point, but more importantly, do not increase the downside risk through strategies like dollar cost averaging. And so this is where we've talked in the show in the past about these ratio call spreads. But I wanted to debate the idea of actually marrying one of these ratio call spreads to your long stock position and what it does. And so what I want to do is go through the 2 scenarios comparing the scenario where investor 1 does the traditional dollar cost averaging strategy and buys an additional 100 shares of Walnut Mart at $120. So now they $132 for the first hundred shares, 120 for the second, they have $126 average cost base. But their key here is that they went from owning $12,000 of Walmart to now owning $25,000 of Walmart. And so they have this now big dollar position in there. Now, Alternatively in scenario 2, our investor still owns the same 100 shares they originally had, but what they do is they turn around and in this example, I'm using a June 17th expiration, $122 strike call, which is just a few dollars out of the money. And the investor turns around and sells two 27-6-1 calls, which are $5 higher on the strike. Now, the first thought when someone sees that is that you might be naked. The call, but you're not because you still have the shares that are ATT, which make this position a zero margin carry for putting this on. But the key to the element of this, Eric, is that we were able to open that ratioed call spread for a zero cost, right? We collected three, we paid $3.70 for the 2122 call, and we received $1.85 premium, but sold twice as many of those calls at the 127 premium strike. And so we have this ratioed call spread open up above the Walmart position. And so what outcome does this give us? So what I wanted to do was basically show a scenario of what happens one month later. Now obviously we know the scenario of if the stock remained unchanged, if Walmart stayed at the same $120 price one month from now, the dollar cost average trader would be no better or worse off. And in the same way, if the ratio call spread cost us nothing and they both expired, then our Investor 2 would actually also be no better or worse off in that scenario. So we don't need to build that scenario. What I want to show is the asymmetry and Eric, the asymmetry is that what if we were wrong and Walmart kept crashing? What if Walmart just went from 120, kept going down 1002010 and then $100? Well, the investor one, who dollar cost averaged is now sitting with a loss almost twice as big because they bought an extra hundred shares. And what they thought was a good strategy to dollar cost average just started to mean that they had twice the exposure into something that was in a massive downtrend and continued to lose money. Alternatively, notice that Investor 2 2, while their loss did increase and they're down $3,200, it was only on the 100 shares they owned. They actually didn't double down and the loss didn't accelerate by them having dollar cost averaged. And the ratio call spread of course, just expires worthless. So we were able to buy a strategy that allowed me to capture more upside quicker. But if the market kept dropping, there was no additional cost for me to have put the trade on. And that is always a great scenario because the last thing you want to be doing is margining up into a market crash. And so this is why I find the strategy very attractive. So on page 19 though, I just want to show is how the repair strategy worked. So let's just say, alternatively, Eric, that Walmart did rally over that month back to $127. Well, in this scenario, both the investor, that dollar cost average got the position back to break even. But the person who implemented the ratioed call spread married with the stock actually also got to break even at $127. They didn't need the stock to go back to 132 where they originally bought it. And so the key is, is that they were both ways to repair the strategy and get your yourself closer to break even faster. But the one allowed you to do it without taking any more downside risk.
- [82:56]
B
Well, Patrick, this is fascinating, but of course I know our most astute listeners have already figured out that if you allowed Walmart to go not just to 127, but, you know, to 200 or something without taking those positions off, now, those short calls that you have could become really problematic because they're not completely, completely offset by the long calls. So it seems to me like this is a brilliant strategy if you're really careful about when to get in and when to get out and follow careful rules. What are those rules?
- [83:27]
C
Well, Eric, the thing is, is that there isn't that danger because in the end, what you want to think is that the extra short call is actually the equivalent of a covered call against the underlying stock position. So you literally have no risk of the stock going higher, but you've cut off the upside and that is what comes with it. The strategy in itself is simple, but the implementation is a little tricky. When do you implement it? When do you get out? When do you roll up the strike? Or do you close one part of the short leg at some point, do you cut off the upside completely like that we were just talking about? Or do you pay a debit and leave room for upside? If your stock keeps dropping, do you reapply the strategy but at lower strikes? So the implementation is actually the tricky part. The strategy is simple and that really is what I'm going to be focusing on when I do this special webinar with my Big Picture trading members this weekend.
- [84:28]
B
Well, Patrick, if you're going to bring that up on the air, I know it's intended for your big Picture trading members, but how about getting our Macro voice listeners in on the deal as well?
- [84:38]
C
Right, so what we do have is some room left in the webinar, but I can't guarantee everyone will be able to join.
- [84:45]
B
Okay, understood. You got to give first dibs on this one to your paying subscribers. That only makes sense to the extent that there is available space after that first come, first serve for Macro voices listeners. How much does it cost?
- [85:00]
C
Well, considering the markets are getting Crushed. I wanted our listeners to get benefit from this strategy with no barriers to learning. So we're making the session completely free.
- [85:10]
B
Okay, thank you Patrick, on behalf of all our listeners. But let's also be clear, it's only free if you get in on time before it sells out. So in order to not waste any time, let's tell our listeners exactly how they can sign up.
- [85:22]
C
Well, the live webinar is going to be happening on Sunday, May 22nd at 11:00am Eastern Time. They can click on the link from either the chart deck or in the research roundup you email or they can go directly to the URL@bigpicturetrading.com TradeRepair okay.
- [85:42]
B
So that's this Sunday, May 22nd, 11:00am Eastern Time. And you just need to go to bigpicturetrading.com TradeRebair to get free access to Patrick's trade strategy. Move fast before it sells out.
- [85:54]
C
Yeah, looking forward to it.
- [85:56]
B
And what about our listeners who may not hear this until after May 12th?
- [86:01]
C
Well, Eric, we're going to be recording it, so if you still go to that landing page, we're going to find a way for our listeners to be able to access the recording.
- [86:08]
B
Okay, great. We're going to leave it there for this week's show, folks. This episode of Macro Voices was made possible by FarmTogether.com Diversify your portfolio with U.S. farmland, one of the most inflation protected and recession resilient asset classes in the world now available to all accredited investors. Patrick, tell them what's in this week's Research roundup.
- [86:30]
C
Well, this week you're going to find a transcript for today's interview as well as a link to the chart book we just discussed in the post game. There's also a number of links to articles that we found interesting so you'll find this and so much more in this week's Research roundup. So that does it for this week's episode. We appreciate all the feedback and support we get from our listeners and we're always looking for suggestions on how we can make the program even better. Now for those of our listeners that write or blog about the market markets and would like to share that content with our listeners, send us an email@researchroundupacrovoices.com and we will consider it for our weekly distributions. If you have not already, follow our main Twitter account Acro Voices for all the most recent updates and releases. You can also follow me at Patrick Ceresna on behalf of Eric Townsend and myself, thank you for listening and we'll see you all next week.
- [87:29]
A
That concludes this edition of Macro Voices. Be sure to tune in each week to hear feature interviews with the brightest minds in finance and macroeconomics. Macro Voices is made possible by sponsorship from BigPicture Trading.com the Internet's premier source of online education for traders. Please visit bigpicturetrading.com for more information. Please register your free account@macrovoices.com Once registered, you'll receive our free weekly Research Roundup email containing links to supporting documents from our featured guests and the very best free financial content our volunteer research team could find on the Internet each week. You'll also gain access to our free listener discussion forums and research library. And the more registered users we have, the more we'll be able to recruit high profile feature interview guests for future programs. So please register your free account today@macrovoices.com if you haven't already. You can subscribe to Macro Voices on itunes to have Macro Voices automatically delivered to your mobile device each week, free of charge. You can email questions for the program to mailbagrovoices.com. and we'll answer your questions on the air from time to time in our Mailbag segment. Macro Voices is presented for informational and entertainment purposes only. The information presented on Macro Voices should not be construed as investment advice. Always consult a licensed investment professional before making investment decisions. The views and opinions expressed on Macro Voices are those of the participants and do not necessarily reflect those of the show's hosts or sponsors. Macro Voices, its producers, sponsors and hosts Eric Townsend and Patrick Ceresna, shall not be liable for losses resulting from investment decisions based on information or viewpoints presented on Macro Voices. Macro Voices is made possible by sponsorship from BigPicture Trading.com and by funding from Fourth Turning Capital Capital Management, LLC. For more information, visit macrovoices.
- [89:39]
B
Com.