Macro Voices Announcer (3:45)

And now with this week's special guest, here's your host, Eric Townsend.

Eric Townsend (3:52)

Joining me now is Gavkal co founder Louis Vincent Gav. Louie, you know any other guest but you? It's so easy to do an August interview. It's you talk to the guest off the air. It's like, okay, dog days of summer. Nothing happened in the market. Nothing to talk about. Let's make something up. We don't have to do that this week, do we? And you know, when the Vix hit 60 on Monday, I actually, my first reaction was to look at the calendar and I thought to myself, wait a minute, I thought we didn't have Louis Gavin till tomorrow because it seems like every time you and I talk, something crazy happens in the market.

Louis Vincent Gav (4:28)

That's right. Well, thanks, thanks for having me on. It's always a pleasure to chat. You probably remember this, but you and I were taping an interview the day the WTI went negative. So with that in mind, I think what I'm going to start doing now is each time I do a macro voice interview, maybe I'll start buying calls on the VIX and way, way, way out of the money. Calls and puts on a bunch of asset classes the week or two before we were slated to talk. Because it does seem that there's an uncanny coincidence where each time we're talking, things seem to be melting down.

Eric Townsend (5:01)

Dude, I've already got plans to launch an ETF where basically the strategy is we know we have inside information. Our producer knows when Louis Gav is on the schedule. We're buying structured hedge instruments the Friday before we get you on the show, dude.

Louis Vincent Gav (5:17)

Anyway, it's the only rational thing to do.

Eric Townsend (5:20)

Well, let's Start with what just happened, because some people say it was all about the yen carry trade unwind. Some people say it was all about the jobs report. Other people say, no, no, no, those are just small catalysts and it was all waiting to happen anyway. What just happened in the market? What should we make of it? How do we interpret it?

Louis Vincent Gav (5:37)

Look, I think we were coming into the summer with a few prices that were really out of whack, and we wrote a lot of pieces saying, look, the yen is absolutely ridiculous. I know you and I had this conversation in the past about how stupid the yen valuations had gotten. And another completely stupid valuation was basically anything and everything linked to AI. Now, whether the two were linked, whether one was funding the other, perhaps, perhaps not. But what ends up happening is when things get too crazy, too out of whack, every now and then they roll over. And if you go back to say, March 2000, when you had the dot com boom and then bust, et cetera, what was the real trigger for all of a sudden the whole Internet space imploding. Now you could say, well, the Fed had raised interest rate five and a half to 6, et cetera. But it's, you know, sometimes when valuations get too crazy, they, they roll over. And, and that's where we are today. Now, I think from there, the question is, okay, things have rolled over. We've had a correction. What's the Nasdaq down, down 12% or something from its high, something like that. But is this a correction or, or is this the start of a bear market? And if it's the start of a bear market, what kind of bear market is it in one of those -20/25, or is it one of those/ -50? And I think these are the questions that, that we're confronting today. I have my view, but it's a view and it could, it could well be wrong. But like, my view is, I think we have started a bear market. I, I tend to believe that because everywhere around me, I, I see examples of capital having been misallocated on, on a grand scale. I've written a bunch of pieces trying to highlight what John Kenneth Galbraith would call the bezel. I don't know if you're familiar with that term, but Galbraith would highlight that in bull markets, what happens is that capital gets wasted and actually gets consumed, and the people who provided the capital don't realize that their capital is being wasted. So think of Madoff as a typical Bezel, right? You, you had all your, the Rich Europeans giving money to Madoff. And Madoff was consuming that capital. He was either passing it on to other folks, but he was also buying Rolexes for himself and houses in Palm Beach. And, and meanwhile the guys who had the money at Madoff thought the money is still there, the money, you know, and so they were going to Saint Tropez and to Saint Moritz and they were having great holidays and buying yachts. But meanwhile the money had disappeared. And of course once that realization happens, you get a dual negative impact. No longer is Madoff no longer buying a mansion in Palm beach, but at the same time your rich European is no longer going to a holiday in Saint Tropez. And so I think you've had a massive examples of bezels, especially in the US over the past five or six years through VC funds, through private equity funds, through real estate funds, number of which are reporting to clients. Yeah, yeah, don't worry. Your holdings are worth plus 15% a year, and they've been up 15% a year every year for the past five years. And as the economy rolls over, they'll realize very quickly that actually not only these gains haven't been there, but perhaps the capital itself has been destroyed.

Eric Townsend (9:07)

Louis, you mentioned that there were a number of assets that were overpriced. The obvious one being the AI bubble. How should we think about this bear market? Is it mostly an AI unwind where the biggest thing that you want to short now is going to Nvidia, or is it more the case that that part of it already popped and now it's going to be the contagion into other sectors that we need to worry about?

Louis Vincent Gav (9:31)

Like that's the all important question. And you know, for what it's worth, you know, my starting point when I look at, at asset prices is that assets can have value for one of two reasons. Either because they're scarce, I. E. A gold bar, a vintage Ferrari, a bottle of Petrus, or a mansion on the peak in Hong Kong. What gives these assets value is their scarcity factor or assets are perceived to be efficient, they're a source of future cash flows, and usually most of the time people spend most of their resources investing in assets that generate future cash flows. Now I think what's happened with AI is that the expectations for future cash flows got blown out way out of proportion and the excitement really stopped corresponding to reality. And then in the past really two, three months, we've had a reality check. We've had pretty much every big tech company, whether Alphabet, whether Facebook, whether Microsoft, all come out and said, hey, guys, yeah, we did spend tens, if not hundreds of billions on AI. Yes, we did think that, that this would generate returns very quickly. Actually, it turns out that we're not quite sure when we're going to see the returns from this or if we're going to see any returns at all. But if we're going to see returns, it's going to be further out into the future. Now, this has basically been the message coming out of the AI space where really quickly, from six months ago, oh, my God, AI is going to completely change the world to. We're not quite sure how we're going to make money with this. And so, yeah, the bear market I think we're seeing that is starting to unleash is linked to this very notion of, hold on, we've put all this money in efficiency assets on the premise that we'd get huge productivity gains very, very quickly. Turns out, actually, we may not get these productivity gains very quickly. Therefore, we need to reprice all these assets. And now, as this unfolds, and I think this has started to unfold, obviously everybody starts clamoring for a Fed rate cut, right? Everybody's like, oh, my God, things are terrible. We're not going to get the returns on our investments in AI that we thought we would. That's obviously the Fed's fault. So the Fed should cut 50 basis points, 75 basis points, 125 basis points. In fact, they should have done so already. And the Fed needs to cut right here, right now. But if the Fed cuts right here, right now, concretely, that's not going to make the past investments you made in AI more productive. It's not. It's not going to all of a sudden boost the cash flows at Microsoft or at Alphabet. What it might do is actually all of a sudden make the scarcity assets more valuable. Remember, there's two kinds of assets, the efficiency assets and the scarcity assets. So as the Fed starts cutting, to answer your question, do you go back into Nvidia or do you think, hold on, if the Fed starts cutting, we're now in a different cycle, one where the US dollar probably goes down and where. Because people don't want to own Nvidia anymore, because the returns over the next 10 years or five years aren't going to be what I thought they were six months ago. I want to own the scarcity assets. Maybe I want to own, I don't know, a gold bar or a Ferrari, a vintage Ferrari or whatever else. So that, for me is the big Question is, again, first, if you think of your decision tree, have we started a proper bear market? Yes or no? I think yes. The second question is, have we started? Will this lead to a Fed cutting cycle? And I think yes, because each time you have a bear market, you get a Fed cutting cycle. Let's not kid ourselves here. And with that, does that mean that, oh great, I go back to buying U.S. growth stocks, or does that mean that with this new Fed cutting cycle, we actually have a new investment cycle with new assets that start to do well? And here I'll go back to what one of my oldest clients always says is, look, bear markets are there for a reason and it's to return capital to its rightful owners. And the idea is, as you start a bear market, usually you have a rotation and the past winners are seldom the new winners, especially if the past winners drove to really silly valuations. So, yeah, I do think we're planting with this bear market, we're planting the seeds for the next bull market and it'll be our job to figure out what it is.

Eric Townsend (14:11)

Now, I definitely agree with you, Louis, that because of this market action, it's likely that the Fed is going to be more inclined to consider a cut rather than a hike as their next move. But hang on a second. I think we went from last Thursday to Tuesday, by the way, for our listeners. We were recording on Tuesday, which in this market a lot could happen in the two days before you hear this. So this is Tuesday morning we're recording. Folks, it seems to me that we've gone in just a few days to new market expectations in terms of what SOFR futures are pricing of like four or five cuts this calendar year. Recent history teaches us that every time the market suddenly thinks there's going to be five cuts this year, that is a very important signal that everybody's going to think that for a little while. But it never seems to really materialize to five cuts. Or maybe it does now because you're saying this is a real bear market as opposed to just a little correction. So how should we think about this expectation the market now has that there's four or five cuts coming?

Louis Vincent Gav (15:12)

Look, I don't think we'll get five cuts. Let me come out and say it. The Fed moves much slower. It's also gone out of its way to try to prove that it is data dependent. And the data isn't great in the US but it's not 5 cut bad either. The fact that the Nasdaq is down 12% isn't enough. Of an event. And it's still up, whatever it is. What is it up for the year? It's still up like 10% for the year or something. It's, it's nowhere near this bad that the Fed needs to all of a sudden empty the cupboard, you know, get the fire hose out and, and, and drain every, all the liquidity. Because by the way, if it does this, if it turns around, let's say tomorrow, Jay Powell comes out and says, yeah, yeah, you know, we're cutting and we're going to cut a bunch. So, so don't worry, we're here. Then at what price does the yen go? I think the Yen goes to 120 if that happens, which is one of the problems we're dealing with. So to the extent that a Fed cut amplifies the rapid deleveraging in the yen carry trade, maybe it could make things worse rather than better. I also think a very aggressive Fed, and I think the Fed has to know this will a very aggressive Fed from here on out in terms of cutting would mean that gold would go through the roof. And again, you'd have this amplified rotation from the growth stocks that have driven the markets and into scarcity assets of all kinds, which is probably not what the Fed wants to generate today. Or let me put it to you this way. If the Fed cut five times between now and year end, imagine that you're the Chinese entrepreneur sitting on the other side of that, that 100 billion monthly trade surplus that China has and that so far what you've done with all the dollars that you earn, again, $100 billion a month is a lot of money. With all these dollars that you earn, what you've typically done is you've gone out and really, you bought Microsoft and you bought Apple and you bought Alphabet because A, they were going up, B, your local economy was doing nothing. See, they're very liquid. So if you, you can always change your mind later. And it wasn't just you. The Swiss national bank was doing the same thing, Japanese insurance companies and banks were obviously doing the same thing, etc. So now the Fed comes out and says, hey, you know what, I'm going to trash the dollar. I'm going to cut interest rates by five, five times and I'm just going to let the dollar tank. Then all of a sudden it's like, well, all right, fine, I don't want to own Microsoft anymore. I want to own a gold bar. I don't want to own Apple anymore. Maybe, you know, if you're Chinese, you think, well, maybe I'm just as better off owning Alibaba or Tencent at a fourth or the fifth or a tenth of the valuation and all of a sudden the money instead of being recycled in the U.S. stays at home. So all this to say that we may reach, have reached a point in the cycle where massive rate cuts might not be that useful. So I think whatever the Fed does is going to be very, very gradual. I think you and I talked about this when we last chatted six months ago. So I've always thought the Fed would cut just before the election and I still think they will cut in, but they'll probably cut and say, hey, all right, you know, here's a little bit of help. Here's, you know, we're showing that we're here, but don't expect too much. So if really the market is expecting five cuts, I think the market's going to be disappointed.

Eric Townsend (18:37)

I want to go a little deeper on the US dollar, but before we go there, let's start with your intermediate to long term outlook on inflation. Because obviously if you're a secular inflationist or deflationist, that's going to affect how you interpret the dollar view.

Louis Vincent Gav (18:52)

Yeah, look, I think you and I have had this conversation many times over the years. I've been a secular inflationist, I remain one. I think when I look at most OECD countries today, all running budget deficits of 3 to 7% of GDP while the global economy has been humming along, it reflects the fact that none of these countries can no longer afford the welfare state that they promised their citizens. Now the reality is, you know, you look at a France, you look at a US you look at a Canada, all these countries, the maths on the welfare state started to deteriorate badly around 20 years ago and they thought, you know what, and, and this for purely demographic reasons, people aged instead of dying at 65 like they used to, they started to die at 80, 85. All along medical costs were, were rising. And so the way most of these countries dealt with this unfortunate reality was to say, you know what, we're going to bring in a bunch of immigrants, we're going to bring a bunch of 20 to 30 year olds and then the maths will work again. It turns out that unfortunately a 20 year old guy coming out of Senegal or Algeria actually doesn't have the same productivity for a number of reasons as a 20 year old guy coming out of the French educational system. And it's just an unfortunate reality, but that is the case. And so as it's turned out the immigration, instead of making the evening things out for the various welfare states of the west, has actually made the balance worse. It's increased the costs and now it's also increased the social tensions, as we're now seeing in the UK as we're seeing in France. So all this to say that when you look at the budgetary situation of pretty much any Western country, there is no exit but inflation. I mean, you could say, well, the other exit would be to default on the debt. But defaulting on the debt is so costly, so politically suicidal, that really inflation is the path of least resistance. So, yeah, I am an inflationista. I look at the US And I think here we have the US with full employment, economy humming along and you get budget deficits of 7% of GDP. Now, you know that if there's a recession that's going to go to 11, 12, 13% of GDP. How can that not be inflationary?

Eric Townsend (21:21)

Well, I couldn't agree more, but let's touch on that recession point a little bit more because if we get into a recession, although I'm totally with you on the secular inflation call, isn't it true that a recession tends to at least put inflation on hold and maybe create a false signal to validate to those who thought that the inflation was transitory, that, hey, look, see, it really did come down. And of course that sets expectations and it takes a while for it to come back. So I'm assuming that if you think this is a significant bear market, that there's likely a US Recession coming. So I guess please confirm your view on that. And if so, does that mean that even though you and I can see the inflation, that maybe it's kind of put on hold for a while?

Louis Vincent Gav (22:02)

Yeah. So I think that's a super, super important question. And look, I think you can, you can imagine several scenarios looking forward. The first scenario is you could say, okay, you, you get a bear market, a bear market that's concentrated on all the things that were super, super popular up until recently and where valuations got to be way too stretched. And yeah, the Fed cuts and yeah, the US Dollar weakens some. And we have, frankly, a scenario that is not that different from what we had in 2000, 2001, where the US economy does slow, but then the weaker dollar allows other parts of the world to grow. It allows emerging markets to grow faster. And on this, I think one of the oddities of the world that we live in is that if you compare the situation today relative to the situation in 2000. In 2000, US was a huge part of global GDP, but it was only about 45% of global equity markets. Today, the US is 70% of global equity markets, but it's a much smaller part of global GDP because over the past 25 years, you know, China's grown massively and India has grown massively, and Latin America's grown, et cetera. So why couldn't we have a scenario somewhat similar to the 2000, 2001? Now, back then, the US was avoiding a recession, the economy was slowing down, and things weren't looking great. Even as the rest of the world was picking up. 911 threw everything. Of course, with 9 11, the US did experience a recession. But even with 9 11, the US recession back then was actually decently shallow, and the US bounced back decently quickly. So that, to me, to be honest, that's more my scenario today. Yes, we have a slowdown in the US Perhaps a mild recession, perhaps not. But thanks to the weaker dollar, rest of the world hums along. You get a big rotation, and the world doesn't fall apart. And in that environment, weak $EMS doing better. Most likely, that helps boost commodity prices. Higher you get higher oil, you get higher metals, you get higher food prices. And all this together with that backdrop, it's hard to see inflation falling very much.

Eric Townsend (24:24)

Louis, you mentioned precious metals a couple of times. Let's go a little bit deeper on that. Sounds like you're definitely bullish on gold. Where do you see it going? Is there a risk that we need to think about? Because certainly, you know, the fundamentals I think should be positive for gold right now, given what's going on. But what we're seeing is, I mean, gold got dragged down 100 bucks in the last few days along with everything else. I see it as people who have to sell what they can, not what they want to, and that's why gold got dragged down. Is that the right way to look at it, and is that over? Is it uphill from here? How should we think about precious metals generally and gold in specific?

Louis Vincent Gav (25:02)

I was about to say that the old story that the only thing that goes up in a market crash is correlations. And you look at gold back in 2008, it took a big dip and then rebounded strongly. In fact, I would say that these kinds of events are. It's a great opportunity for people who do have capital to buy back gold. The reality is gold is in a structural bull market. It makes a new high, it consolidates a little bit, and then it goes out and makes a new high again. And the structural bull market reflects many realities of the world that we live in. It's partly the geopolitical tensions, partly the fact that a lot of wealth is being created in parts of the world, whether China, India, Indonesia, et cetera, where perhaps people don't really trust either their banking system or their government. And that historically, if you don't trust either your banks or your government, you know, gold is the obvious choice for you to store your wealth. So, you know, for, for all these reasons, yeah, I have been bullish gold. I've argued many over the years that gold is really a play on emerging markets. And I remain very bullish emerging markets. So it's very hard, I think, to be bullish emerging markets and not be bullish gold. Now, against that, you could say, okay, what's the negative scenario for gold? How would gold fail? One way gold could fail, of course, is if the Fed turns around in September and says, hey, things are fine, I'm not cutting, and sends the US dollar higher. That'd be one, one possible scenario. But you know, if the Fed goes there, yeah, you take a hit in September, October, but I don't think the Fed will be able to, to stay on that stance for very long. So then it just becomes a question of timing. What's the other bearish scenario for gold? You could say, well, a bearish scenario would be India and, or China imploding and all the local owners of gold there having to basically flood the market to buy food and pay their bills. And you know, while I think you could have said that argument about China a few years back, the reality is that yes, China has slowed a lot, no doubt, but it has not imploded. Far from it. You've had a massive asset price adjustment. Stocks went down two thirds, real estate went down by a third. You had the balance sheet contraction. But all this is, is more behind us now. And in fact, one, one of the very interesting developments for me in this current market pullback that we're going through is that this must be the first risk off event in the past five years or so where the renminbi rose instead of a fall. It's also a big risk off event where Chinese stocks broadly did nothing. Even as the Nikkei imploded and even as the, the Cosby imploded and the Nasdaq imploded, Chinese stocks basically, you know, they, they hummed along. And that brings me to, to perhaps a side point on gold. But, but if you think that a lot of the buying on gold of Physical gold in the world takes place in China and, and it takes place of, in India. Think of Xi Jinping for a second. You know, if you're, if you're Xi Jinping, you want to de dollarize global trade, the US has tried to take you down, or you feel like the US has tried to take you down, you feel like you're under attack from the US you desperately want to de dollarize your trade. What's the easiest way to de dollarize global trade? I think it's to ensure that gold keeps going up and to so that everybody around the world starts to say, you know what? I, I really shouldn't be in US Treasuries, I should be in gold. That, that'd be a much better trade, whether you're managing the Thai central bank reserves or the Indonesian central bank reserves, or the South Korean central bank reserves. And so I highlight this because if you're Xi Jinping and you feel like the US has been attacking you, attacking you, attacking you for the past few years, and now all of a sudden, the US Starts to feel a little bit wobbly. It starts to feel the NASDAQ is rolling over. It's no longer all about the Max 7. It's no longer all about Nvidia. And is this the moment that you start tightening the screws? Is this the moment where you start bidding up gold and saying, hey, I've got a, got a bid at 2,500. I got one at 2,600. I got one at 3,000. What would you do if you were him?

Eric Townsend (29:29)

Louis, I just want to make sure that I understand your point correctly. Your hypothesis is that China may be intentionally buying gold for its own reserves, obviously, but as part of a strategy to intentionally foment an outcome where the whole world says, boy, look at this structural gold bull market. It makes so much more sense for central banks and other big institution holders to replace their U.S. treasury holdings with gold because it's a better strategic asset. You're saying essentially they may be mounting a campaign to manipulate price in order to bring more attention into this market for the purpose of essentially a form of economic warfare to defend against what they perceive as aggression from the United States.

Louis Vincent Gav (30:15)

So I'm not saying that this is happening, but what I would say is this is that we're all the fruits of our own experiences. Now, if you're Xi Jinping, you're part of that generation that was sent out to the countryside during the great proletarian culture revolution, that you were sent off in the middle of Nowhere with not a single book to read except Mao's Little Red Book. Now, you've probably never read Mao's Little Red Book, but it's actually, it's not a great treatise on philosophy. It's really a how to do guerrilla warfare book. You know, because Mao was actually a terrific guerrilla warfare leader. You know, he beat the Japanese, he beat the Nationalists who were funded by the United States and had all the equipment. He was, he was obviously not a good guy at all, but he was a great guerrilla warfare leader. And you know, one of the great quotes that's often cited of the Little Red Book is, you know, when the enemy attacks, we retreat. When the enemy rests, we harass. When the enemy retreats, we pursue. Now, so imagine you're Xi Jinping and you spend your entire youth with nothing but that. Your formative years with nothing but that. And if you think, okay, the US Is out to get me, do I take the US Head on? No, I fight a guerrilla warfare against the U.S. when the U.S. attacks, I retreat. And when the U.S. retreats, I pursue. So the big question is, when you look at US Politics today, when you look at the starting shifts in financial markets, is this not the time where China starts to pursue? And how do you pursue? For me, the most obvious one is you crank up the gold price.

Eric Townsend (31:59)

Okay, let's also cover industrial base metals, particularly copper. We saw a really strong rally in copper. Everybody thought, okay, it's this energy transition rally that's on because, because copper is so essential to electrifying the economy. Then it started to blow off. We were holding the 200 day moving average just barely, and took it out as a result of the last few days. Where are we headed from here? Is this part of the structural bear market that you're talking about? Are we headed much lower in copper before it's over?

Louis Vincent Gav (32:30)

So it's actually interesting, right, because copper, if you look back, really started to puke before everything else. It started to puke before the yen, it started to puke before the nasdaq. So to some extent, you know, copper once again was a, was a great leading indicator. Now to, to answer your question, I don't want to make like a Jesuit priest and answer your question with another question, but I think at this stage, when, when you look at copper, you have to ask yourself the question is, okay, do I believe we're entering into a big bad global recession or not? If you believe. And I don't, I don't believe. But if you believe we're heading into a big bad global recession, then why would you own copper?

Eric Townsend (33:10)

Right?

Louis Vincent Gav (33:10)

You know, you're going to get a lot less construction in the us you're going to get a lot less construction in China. It's, it's all going to go to the dogs. So. But if, if, like me, you think, well, actually they are trying to stimulate growth in China. You do have an emerging market boom unfolding in Indonesia and Indonesia across the Middle East. If you think of all these things, then you have to see the current dip as a buying opportunity. So that's where I stand. But again, if you're of the view that, no, no, no, the global economy has become so financialized that a U.S. bear market really is going to trigger a cataclysm of collapsing consumption, of collapsing capital spending, then. And if that's your view, and I'm not pooh poohing the view, I'm just saying, like, it's a perfectly rational view. If that's your view, then, yeah, there's not much point in buying copper, that's for sure.

Eric Townsend (34:06)

While we're on metals, I want to hit you up with what I'm going to call the uranium conundrum. And that conundrum is this. I am absolutely convinced, Louis, that the fundamentals have never looked better for uranium and therefore indirectly for uranium mining shares. And the reasons for that we've gone into in other episodes. But very briefly, the demand is knowable. You know, you know how many reactors there are, you know how many new ones are being built, you know what the available supply is, you know that the world is getting more constrained. A lot of it comes from Kazakhstan. There's just so many reasons to be bullish here. But hang on, this sector has seen not an AI like bubble, but boy, it's really been up a lot. And equities are equities and, and it's also a very, very heavy retail participation sector because for people who are running institutional money and have to worry about ESG scores and so forth, you know, it's nuclear, it's mining, it doesn't really tick their boxes. So most of these uranium mining companies are almost entirely retail held. And those are the people that tend to panic in bear markets. So on one hand, I don't think the fundamentals have ever been better. On the other hand, I know who owns these things. I know they're people that are prone to panicking. And I see the same concerns that you see in terms of where we might be headed with the broader market. And frankly, I can't figure out how to Hedge it. Because even if you think, well, okay, the risk is to the S and P, the broader market, so you hedge the S and P. Yeah. The thing is, I think because of that retail participation, uranium shares could be down even harder than the S and P. So I don't see an efficient way to hedge it. I don't know what to do. I don't want to let go of it, but I'm a little concerned because I am very much overweight. Uranium. What do you think?

Louis Vincent Gav (35:56)

So I feel your pain because I'm in the same boat. So I definitely feel your pain.

Eric Townsend (36:02)

So, like, are you in the same boat? Long uranium or just.

Louis Vincent Gav (36:05)

Okay, long, long uranium and feeling the squeeze. Now, I would say that, you know, if you look at the big sell off we've had in recent days, surely that's got to be some of the retail coming out, right? You would imagine that a lot of these producers have gotten absolutely smoked in, in the past few, few sessions. So that that might now be behind us. Then you're left, I think, with the quandary. When you look at the uranium miners, is it going to be like, like the gold miners, you know, where if you look at the past five, six years, gold has done great and gold miners have done nothing. And a number of reasons. But the simplest reasons why gold miners struggle is that they spend all this money on exploration, they spend all this money on production. But actually finding gold has gotten really, really hard, and extracting gold has gotten really, really hard. And perhaps it's the same story for uranium, right? The spot price of uranium goes up, but production of it, pretty challenging. And it takes a long time to get the mine up and running. And finding geologists, as you and I have discussed in the past, is now impossible. Finding people who want to go work in northern Canada or work in Kazakhstan is pretty tough in a tight labor market when people would rather be in Austin, Texas, or in New York City. So for a number of reasons, miners should be making money hand over fist, provided they can get the stuff out of the ground. But getting the stuff out of the ground is whether you look at gold, whether you look at silver, whether you look at copper, whether you look at uranium. It's just tougher and tougher and tougher.

Eric Townsend (37:38)

You know, there's a scenario that I can't decide if it's a big deal or not, which is I really won't be that surprised if in the next few years the geopolitical tensions escalate to the point that somebody detonates just one of the, you know, the smallest yield, tactical nukes, in order to make a point, so to speak. I really hope it doesn't come to that.

Louis Vincent Gav (37:59)

This could happen as soon. I was going to say it's going to happen as soon as next week. When you look at the saber rattling going on in the middle.

Eric Townsend (38:04)

Exactly. So, you know, obviously if we had a Fukushima sized nuclear power plant accident that would put a huge, huge cloud over the uranium market. Would a tactical nuke detonation make everybody freak out about nuclear energy again? I mean, it wasn't rational last time, so you can't really apply logic. How do you decide what size risk that is? Because I think if you're as overweight as I am on uranium shares, you ought to at least think about whether or not that's a, a, a big deal. And I can't decide.

Louis Vincent Gav (38:35)

See, I think that's, that's such an important point you just made because the reality is that there is no logical thinking around uranium. You know, mostly because of it first appear in our collective consciousness with Hiroshima and Nagazaki. You know, before that nobody knew anything about nuclear. It really wasn't a point of discussion. Now we've had a couple accidents. It's been Chernobyl, there's been Fukushima. And think of the panic that this triggered in markets, that this triggered in the media. I mean, go back to the HBO show that they did on Chernobyl, which is really frankly ridiculous about how the guys who had been exposed to uranium needed to be contained because they would be contagious, et cetera, et cetera. So in our collective consciousness there's this thing, this belief, oh, uranium is so dangerous, nuclear is so dangerous, etc. When the reality of course is that there's hundreds of people who die every year on oil rigs, down coal mines, well, tens of thousands who die on coal mines around the world. There's people who die every year falling off windmills that they're being repaired. The reality is that nuclear is by far the safest. If you look at the total number of casualties relative to the energy produced, it is, it's not even close how safe it is. It's like it's so much safer than anything else we've ever used for energy. But in the public consciousness, you ask 100 people on the street and 99 will tell you nuclear is the most dangerous, even though it's the safest. And yes, to your point, you have a nuclear event, you'll go from 99 to 100, everybody will say, and it will Set it back. Yeah, it will. So that's a risk.

Eric Townsend (40:30)

Let's broaden out the energy discussion and talk about what's happening with the oil market and where it's headed. You know, there's now, although I think in the big picture, longer term we're going to have a really serious spare capacity problem. We don't have a spare capacity problem right now. OPEC is withholding about 4 million barrels per day off the market. So anything, I suppose an escalation with Russia that took Russia totally offline would change everything. But you know, short of really major geopolitical escalations right now, we've got enough. But boy, really major geopolitical escalations are not out of the question with what's going on in the world. So how do we think about this?

Louis Vincent Gav (41:09)

Well, first I would say OPEC says they're holding back 4 million barrels per day. You know, and we don't want to go down the rabbit hole of how much capacity does Saudi Arabia really have. You know, OPEC says they're holding back withholding 4 million barrels per day. I'm skeptical on that. So Number one, number two, you know, you look at the past 30 years outside of massive global economic meltdowns like 2008 and of course Covid, global demand grows by about a million to a million and a half barrels per day every year. And that's because, and that's not coming out of Europe, that the growth in demand, it's not coming out of us. You know, for the past 30 years all that growth and demand has come out of emerging markets. Now with that in mind, you know, what's the biggest trend in emerging markets right now? And I think you and I have discussed this in the past, but what nobody saw coming, and one of the biggest macro trends for me of the past few years is how China's become the biggest auto exporter in the world From. From nowhere, from nowhere. Four years ago, China is now the biggest auto exporter not because of cars it's selling into the US or Europe, but because of cars it's selling into Indonesia, into Pakistan. You know, China is selling sub ten thousand dollar ICE vehicles, you know, internal combustion engine vehicles all across the emerging markets. And it's not electric cars, they're ICE cars because that's what emerging markets can afford. And in any event, you know, most people in emerging markets don't have a powerful grid enough for cars, et cetera. So I guess the point I'm making is, is that we have had been used to growth in Oil demand being a million, a million and a half barrels per day coming up over emerging markets. And this was when everybody in Indonesia, everybody in India, everybody in Colombia was going around either on a bicycle or at most a moped. And what's happening is that all those guys who were driving mopeds are now buying cars. Not only that, they're buying cars. And the next year their cousin's buying a car car and the following year their niece is buying a car. So are we going to stay in a world in which China is now exporting millions of vehicles every month around the world? Are we going to stay at a steady million million and a half growth in demand, or could we conceptually move to two, two and a half million in demand? And if we do, then that spare capacity that you mentioned is going to get absorbed much, much faster than anybody expects.

Eric Townsend (43:33)

Louis, let's go back to the nuclear conversation and tie it into what you were just saying about China. Because if there's any theme that I think is the absolute most important one, that there is, not just in macro, but for the sake of knowing where the future of the world is headed. Everything that I've learned in the last couple of years about advanced nuclear technology leads me to two primary conclusions. Number one, US Policy has screwed this up so badly that it's really hard to see how we're going to get back on track. Although they're finally starting to talk a good story. The advanced reactor certifications that Jennifer Granholm talks about, she has no idea what she's talking about. I mean, that's what they need to do, but they're not really doing it the way they're pretending to. China, on the other hand, is at least 15 years ahead. China's not fantasizing about molten salt reactors. They're building them. They've already built them. They've already announced their intentions to build a container ship fleet that is powered nuclear powered by molten salt cooled thorium fueled reactors. Exactly the right technology, in my opinion, that we should be focusing on globally for energy transition. The only people that are doing anything with it is China. The only people that are developing a thorium rather than uranium nuclear fuel supply chain is China. And what I see is a very, very clear trend which is going to elevate China economically and therefore militarily eventually because of their energy superiority and the fact that they're already an industrial powerhouse. Not this year, not next year, not in five years, but over the next 25 years, I see China becoming basically invincible and, you know, exceeding the United States economic and military capabilities dramatically within 25 years. And it's not some secret conspiracy that's hidden behind anything. It's all in plain view. China's not hiding anything. When I try to emphasize this, people either get mad at me and say, why are you down on China? Well, I'm not down on China. China's doing exactly the right thing for the Chinese people. I applaud them for their leadership in nuclear energy. But, Louis, something our generation knows, and I think a lot of newer generations seem to have forgotten, is the world is a competitive place. If we don't compete to have the same energy capacity in the west that China is already building, their planned and under construction nuclear plants in the next 10 years is like more than half the size of the entire US fleet. This is just so clear as to what's happening. Nobody's talking about it. Nobody's worried about it. I think it leads us to a very different world. And I'm not saying China's bad. I'm saying we should get our shit together. Nobody's listening.

Louis Vincent Gav (46:31)

Look, I love the points you make because it goes back to so many of the themes that I've harped on about in my letters over the years. But I typically start off with the idea that economic activity is energy transformed. That, you know, you look at most gdp, you know, economic activity is extremely, extremely energy intensive. So that's the first idea. A second idea is that every country, you, you, every businessman, every industrialist, every entrepreneur really has to deal with four things. He's got the cost of labor, huge cost for most people. You've got your cost of capital. You've got your cost of government. And the cost of government can come in many ways. There's the taxes, but there's also the regulation. And then you've got your cost of energy. And it's the interaction of these four things, cost of labor, cost of capital, cost of government, cost of energy, that make you competitive or not. Now, the reality is that most people look at the boom in the U.S. of the past 15 years and say, well, you know, the U.S. we're smarter, we're better. U.S. exceptionalism, American exceptionalism, and, you know, we've got the best tech sector, et cetera. I've argued time and again that what the US has had over the past 15 years is the benefits, the massive benefits of the shale revolution. You know, the fact that the US could get a natural gas a fifth of the price of the rest of the world was such a boon, such a tailwind for the US economy, it allowed for a stronger dollar, it allowed for an improvement in the trade balance, it allowed for low inflation and the Fed to keep the cost of capital very low for a long time. So now, not to belabor your point, but if we look at the next 10 years, the next 15 years, who's going to have that cheap cost of energy? Now you could say, well, it'll still be the US because of shale, because the US has a deregulated energy industry. If you basically think the next 10, 15 years are going to be still be all about carbon, then probably the US remains the winner. If it's all about carbon, the US remains the winner because A, the US has a lot of carbon, whether coal, natural gas, oil, the US has a lot of it. But also the US has a very entrepreneurial energy sector. Wildcatterers and people, you give them a dime, they immediately start digging a well. So the US has that in a way that very few countries do. But if you think, no, no, no, the future of energy is not carbon, both for political reasons, but also simply because of cost reasons, because the scale efficiencies from carbon actually are nowhere near as good as the scale efficiencies that you get from nuclear, from solar or from wind. Now, if you think the future is wind. I don't, I don't, to be very clear, if you think the future is wind, then you might be bullish Germany because they're a clear wind winner, wind leader. But if you think that the future is either solar and, or nuclear, and for what it's worth, I do think that then those two industries are today completely dominated by China. And yes, to Your point, they're 10, 15 years ahead and it's, it's hard to see them give up that lead in, in the future. So, you know, I think people underestimate how China has leapfrogged us over the past 10 years in so many industries. It's leapfrogged us in the manufacturing of cars, it's leapfrogged us in the manufacturing of solar panels. It's leapfrogged us in the. And when I say us, I mean the Western world. It's leapfrogged us in the manufacturing of nuclear plants and that this has now sown the seeds for comparative advantages in China for probably the next decade.

Eric Townsend (50:23)

Louis, I want to close with a cultural question because you are a Frenchman who has lived in Hong Kong, I'm an American who's lived in Hong Kong. And something I find interesting is when I express my view to other Americans, which is that I think China is better than we are at long term planning. I think that China has a very clear long term energy plan. They understand everything you just said a minute ago about why the economy is really energy transformed. I think that they understand exactly that. They already have enough thorium to run the entire world indefinitely. They have enough uranium to breed that thorium into U233. They are already building that supply chain. They're already building the advanced reactors. But I think culturally there's more to it, which is I think that the Chinese government and the Chinese people see themselves exactly the way their country is named in their language, central nation. And I think a lot of people misinterpret that. They call it the Middle Kingdom. What I think it means is the Chinese culture sees itself as basically the center of the universe. We're in charge of everything because we are the Chinese. That's the way as they see it. It's always been for 4,000 years. And this last 200, 250 years of industrial revolution in the west, being in charge of things, that's like a, a very unfortunate mistake in the long term history line that's about to be corrected through what I think is a brilliantly crafted Chinese energy policy. Now, I wouldn't get through that little monologue with most of my American friends before eyes are Rolling. You're a nutcase to think that that's what the Chinese people actually think, that they're supposed to be the leaders of the world. These are people, Louis, who've been to Chinese restaurants but haven't lived for years as you and I have in Hong Kong. My counter to them is kind of like, okay, I don't know what else to say, but try living there. Get a sense of what the culture is really about. You've lived there a lot longer than I have. Am I crazy to say these things?

Louis Vincent Gav (52:35)

No, but I look at. No, you're not. But I look at it a little bit differently. I'm sure you know the story of, you know, the two young fish swimming in the ocean, crossing the. The old fish and, and the old fish says, hey, guys, how's the water? And. And the two young fish say, you know what? What's he talking about? What does he mean?

Eric Townsend (52:51)

Water?

Louis Vincent Gav (52:52)

I think if you live in the US You've never had to worry about energy. You were awash in it. Or at least you. You have been for the past 20 years, in case you didn't have it. You had a powerful enough army to send around the world to make sure that you would get it. So all this to say, if you were in the US Again, you never had to worry about energy. You never really needed an energy policy. It was there. It was one of those things you could take for granted, just like the young fish can take the water for granted. Now, I think what makes China fairly unique today, not just right now in its position in the world, but frankly, in its position of over 5,000 years of history, is that if you look back at the history of the past 5,000 years, there's lots of examples of empires that rise and empires that collapse. Mesopotamia, Persia, you know, Rome, Cartage, you know, you, you, you name it. Empires rise and fall, and it's. It's the pattern of history. What makes China quite unique and today is that China was once a great, mighty empire. And to your point, you know, they did see themselves as the central nation. And, you know, when the Westerners first showed up, when the Brits. It was really the Brits in the 18th century, they. They show up, they say, hey, we want to trade more with you. Look at all these things we can bring. They look at it and they say, well, this is gadgets. We really have no interest. You know, when. When the great fleet on the Ma went around the world in 1421, you know, it was 300 ships. They, they went all the way down the coast of Africa, all across the Middle east, all across India. Some people believe they even went across the Pacific. And anyway, they came back and said, yeah, there's really nothing interesting in the rest of the world. And they burned the fleet down. Yeah, you know, whatever. We're so, so much more advanced than everybody else. Everybody else is kind of a waste of time. That was. That was the perception. And then, so when the foreigners came in and invaded them and excuse my French, but basically slapped them around, it was a, you know, it was. They couldn't compute. It was a huge disillusion for them. But what makes China very unique is that it's an empire that rose, that was very powerful, that collapsed in a spectacular fashion. You know, living in China between 1860 and 1975 was probably living in one of the most miserable places on earth. Famines, civil wars, warlords. And that's if you were a man, if you were a woman, it was even worse. You know, bound feet, et cetera. It was just a really rough place to live. And having tasted that very bitter taste of utmost defeat, etcetera, you now have, of course, a leadership. Now that they've come back up and really being the first empire in the history of humanity that picked itself off the floor, dusted itself off and came back up. Having done this, there's of course a lot of thinking of we can never go back to, to what it used to be. Now, unlike the U.S. china does not have the natural resources. It does have some oil, it does have some natural gas, but not nearly enough for 1.2 billion people aspiring to consume at a high level. And so China has no choice but to embrace technology. You know, technology is the necessity, is the mother of all inventions. China has no choice but to go down the technology route to deal with its energy needs. It has to embrace nuclear, it has to embrace solar, because it doesn't have again, the luxury that the United States have, has of, of being a very well endowed in terms of commodities country. And so, you know, this is why you look at China today and you know, China now graduates more engineers every year than there are engineers in the United States. China is just, it has no choice. It has no choice because a, it feels like foreigners want to take it down just like it did last time around when China rose. China was cruising along, doing well. And then China, foreigners came in and tore it apart. So they do have this in their collective memory. And so when foreigners come in and say, you can't do this, you need to do that, we're going to take you down, we're going to prevent you from growing, we're going to prevent you from having the semiconductors that you need. Very quickly they think, okay, it's semiconductors today, it's going to be energy tomorrow or food tomorrow. So again, necessity is the mother of all inventions. Given the deep historical trauma that China went through, 18 to 60 to 1975, they have no choice but to plan, but to innovate, but to move forward.

Eric Townsend (57:44)

Louis, I can't thank you enough as always for a terrific interview. I always enjoy our talks, despite the fact that you cause market dislocations every time we schedule you. Before I let you go though, just tell our listeners. I can't imagine who's not familiar with Gavcal, but you guys are an institutional, boutique, institutional advisory firm. Tell us more about it.

Louis Vincent Gav (58:04)

Yeah, absolutely. Well, again, thanks again for having me. I always enjoy our chats. We're a bit of an odd firm. We do different things. We do produce research for institutions. And people who are interested in that should probably just look at our website, gafcal.com G A V E K A L We do have an institutional money management arm run out of Hong Kong mostly running Asian strategies, Asian Finx Income, Asian equities. We recently actually launched a Latin America debt fixed income strategy. And then we, we have a private wealth arm and then joint venture in the US With Evergreen Gafcal. So people can look at that website if they're American or Gafcal wealth if they're not American. So two, two separate entities there. So yeah, we really do three things private, well, wealth, institutional money management and then institutional research.

Eric Townsend (58:55)

Patrick Ceresna, Nick Galarnik and I will be back as Macro Voices continues right here@macrovoices.com.

Macro Voices Announcer (59:08)

Now back to your hosts, Eric Townsend and Patrick Ceresna.

Patrick Ceresna (59:16)

Eric, it's always great to have Louis back on to the show. Now joining us again in the Post Game segment is Nick Galarnik. Now let's get to that Chart deck. Listeners. You're going to find the download link for the Post Game Chart deck in your Research Roundup email. If you don't have a Research Roundup email, it means you have not yet registered@macrovoices.com just go to our homepage macrovoices.com and click on the red button over Louis Picture saying looking for the downloads now, Eric. Let's jump into crude oil, starting with the EIA inventory.

Eric Townsend (59:45)

EIA printed a drawdown of 3.7 million barrels. Cushing, Oklahoma, building half a million barrels. Gasoline building 1.3 million barrels. Distillates building 0.9 million barrels for a net petroleum drawdown of 1.5 million barrels. US production ticked up 100,000 barrels to 13.4 million barrels. I think that may be a new weekly record, at least in the weekly data series. What remains to be seen is will it hold and will we be able to sustain a trend even higher? We've been holding that 13.3 million barrel plateau for quite a few months now. This week's low on WTI was a perfect test of the 200 month moving average, which is at 71 spot 74. For the moment, increasing recession fears and broad market weakness are driving crude back towards its December 23 lows down around 67 spot 77. We got a bounce on Wednesday, but we did not clear the 13 day moving average. So the trend has not really reversed yet. In my opinion, geopolitical risk is higher than the market is discounting, but absent any immediate threat. And by the time you guys hear this, it may have happened. Everybody keeps thinking that the big Iran, Israel thing is happening any minute now. Hasn't happened as of the moment. I'm recording. We'll see what happens in the next few days. But until there is that immediate threat, we've got plenty of spare capacity and thus plenty of market complacency about supply. The term structure is still in solid structural backwardation, which is normally bullish, but the extent of that backwardation is diminishing rapidly and the trend is more important than the absolute number being in backwardation or contango. If Louis is right about the bear market and recession call that he made in the feature interview, there's plenty of room to trade lower on oil until the geopolitical risks resurface, which I think is coming and probably coming soon.

Patrick Ceresna (61:42)

Well Eric, I get it that crude oil generally can weaken going into a potential economic recession. It certainly is trading at the bottom end of its trade ranges. I think that on the very short term these support lines can offer a reaction. A reaction is not a new bull phase, but simply offer several dollars on the upside from a very oversold state. And while during the first impulses I could see the view that crude oil could still make a low, a little bit of a lower low and push there, the one thing that I have observed in the past though is, is that often these commodities will sell off going into a recession, but then bottom and even reverse during the actual recession. So even though the recession call is an entirely plausible scenario, it's probably too early to buy crude. It probably may still go a little bit lower, but I'm not as bearish about the downside in terms of how low it's going to go further from here. Nonetheless, let's move on to equities. And Eric, I know you have some thoughts here. What's on your mind?

Eric Townsend (62:46)

Well, my first observation is I'm concerned that we have a new generation of traders who thought this small correction was a crash. There's even a T shirt saying you survived the crash of August of 24. Folks, this was not a crash. And the fact that everyone thought it was a crash or a lot of people thought it was a crash tells me that the marketplace is not ready to deal with a real crash. And that makes one more likely. The bank of Japan's capitulation came after we taped Louis Gav's interview, so he wasn't aware of that news when we spoke. Election year politics could influence monetary policy and shock markets in either direction from here. So I'm not quite as confident as Louis is in terms of his bear market call. I think it made perfect sense. But I also see plenty of opportunity for interventions to occur in this election season that could take the market in either direction. As I've said before, I think election related risks are underpriced in the market. Look at what just happened over a BOJ rate hike and a jobs report. Now sure, you can argue that those things were just catalysts and the market was set for a correction anyway, but look at what a big event we just had in the market over relatively small catalysts. Now imagine a much larger event. We've got this Raskin guy threatening to have Congress ban Trump even after he's elected. If that happens, we've always got the risk of further upsets in this election process. There's plenty of things that could be bigger catalysts for a market event than a jobs report or a policy error by the BOJ unwinding the carry trade. And I don't think that those risks have been correctly priced by the market. Look how quickly the UK's unrest has escalated over these migrant knife attacks. I think that big things could happen in this election season and they will affect markets. Bottom line, there's a huge uncertainty for the next five and a half months until Inauguration Day, not just election day. Short term, the biggest question in my mind is whether the bounce that we're seeing in reaction to the BOJ's capitulation on Wednesday will lead to a meaningful rally or just a dead cat bounce. My vote, at least on the data I've seen so far, is definitely in the dead cat bounce category. First we saw before the BOJ's capitulation, right after that big sell off, there was a little bit of a relief rally right up to the 100 day moving average. It failed and failed badly at that hundred day. Rejected strong to the downside, closed almost back down to the lows of the day. Then we had the BOJ event. We rallied on that right back up again to the 100 day moving average, which was the key support previously. Now it's acting as resistance, couldn't get above it and again sharply corrected back down. These things say to me that we probably have not ground down to the final low yet in this sell off before we get a meaningful relief rally. Once we do get that meaningful relief rally, maybe it's down to the 200 day which is not that far below down. It looks like 55,060 or so is the 200 day. Maybe that's what we see next and then we get a relief rally. Do you short or hedge on the top of that relief rally because you think we're in a new bear market as Louis has suggested, or is it all over? I'M kind of leaning towards Louis call of the bear market, but anything can happen in this news flow.

Patrick Ceresna (66:14)

All right, I want to get Nick involved in this conversation now. Nick, the s and P500 volatility has been taken up a notch here. First of all, let's just talk about your levels and what are your thoughts here on the S picture?

Nick Galarnik (66:28)

Yeah, Patrick. So right now the spot price on SPX is approximately 5,200, and we have an implied move for next Friday's monthly OPEX of plus minus 150 points. Therefore, the upper implied move is 53.50 and the lower implied move is 50 50. Right now we have key resistance at 5350 and we have key support at 5100. I'm inclined to think we see a bit of a kangaroo market the next few weeks as the VIX has really spiked up and we're looking at ranges each day from top to bottom of over a hundred points. So we're seeing a lot of these pops then drops or drops, then pops, and I think that will continue until next Friday's monthly opex at minimum.

Patrick Ceresna (67:07)

Yeah, that's an interesting perspective there. I agree with that. First of all, the implied daily ranges is, is the part that's very hard for a lot of people to, to kind of absorb, which is the fact that 100 points swing higher or lower is often meaningless to the primary trend, and it's just normal daily volatility. I think that overall, on the very short term, we are very oversold. And while I actually think the window is open for a quick drop down to even the 5,000level on the S P, I actually think that the tactical opportunity to be short on this in the month of August here is come and gone. Now, you could clip a quick swing trade on this, but. But I think that we're gonna probably put in a swing low that will end up later in August seeing a retrace easily back to 53,5400. Anyone who's trying to put on brand new shorts here is going to have their resolve tested during some sort of retrace. Now, in the bigger picture, it is very likely in my mind that the high of the year is in. And when we go back to an analog Like 2007, when that July 2007 market drop occurred, the high was still retested in October. And so even though I think that the high of the year is very likely in, what is not clear is whether or not this is some sort of a straight line move down into a deeper correction. Odds are actually quite reasonable that it's going to be a meat grinder here for the next couple of months that is going to test all the shorts and the longs in both directions and, and it's better to just trade smaller sizing and, and be tactical about those entries and exits. I want to move on though to just touching on the Russell chart here Nick on page four and what we had was a very clear pop and drop. And one of my convictions was was that whether the Russell out forms on a relative basis that it was likely not going to have a negative correlation where it was going to be rallying when the rest of the market selling. And that clearly became the case here where simply the, the weight of the whole market declining dragged the Russell right back down. It's now trading right back into the trade ranges that established throughout the year. And I don't, don't think I have a strong conviction here. I think it's neither going to be really bullish nor do I think that this is where one should be bearish. I think it's just going to end up being a place where I'm not going to spend a lot of time watching. Are you, do you have a different conviction on the small caps?

Nick Galarnik (69:43)

Yeah, right now I'm staying long in the small caps only because I'm short mega tech right now. So right now it's kind of a nice pair trade. As we see the market decline, typically the large caps tend to underperform the broad market and small caps fall less than those large caps. So right now I'm long via butterflies on Russell. So you know, asymmetry of risk is pretty strong. If I'm incorrect, not a big deal. But more so that it's a pair trade with the NASDAQ right now.

Patrick Ceresna (70:09)

So on page five I wanted to squeeze in a chart on the Nikkei because this really was where all the action happened. We'll talk about the yen in a moment. But the Nikkei had a peak to trough 25 plus percent decline that was truly the, the kind of like 1987 style crash that happened. But it happened in Japan and it was an unwind of that carry trade. We can see is that the Nikkei already bounced and I do believe that on the short term that low is going to be a low that's going to hold for months on the Nikkei. And I think that until the bear market develops another theme somewhere else where something else is breaking. The fact that the Nikkei is probably put in its low is going to also generally put in the low in most risk assets, at least on the short term. And, and so the Nikkei I think could work its way back to 36, 37,000 during this bounce. And watching, you know, vulnerabilities as to when the Nikkei starts to sell again later this year will actually I think be an important tell on global risk assets. Moving on to page six, we have the chart of the Nasdaq and this is where much of the aggressive settling was as the AI stocks were a focal point during much of the selling. What are the levels you're watching here, Nikki?

Nick Galarnik (71:30)

Yeah, so Right now the Q's are at a spot price of approximately 440 and we have an implied move for next Friday's monthly OPEX of plus minus 15 points which is pretty large considering it's only about a week time frame. Right now the implied move to the upside is 455 and the lower implied move is 425. We have key resistance right now at 565 and key support at around 415. As I mentioned previously, I would be very cautious with mega caps right now as I do think that they have potential to either if not fall further, at least not bounce too much in the short term. We've seen names like Nvidia for example sell off. However they have earnings in a couple of weeks that could be a catalyst to the upside if they do outperform again and kind of surprise the upside on EPS and revs as well as guidance. There are some names that in my opinion make sense to own like Palantir and Shopify for example. They've been outperforming. Overall they had great earnings as well. Shopify had a phenomenal report yesterday and I'm long Shopify right now but overall the broad tech sector to me doesn't look investable in the short term.

Patrick Ceresna (72:34)

On page seven here, Nick, we got the volatility index that Nikkei and Carry Trade Unwind had a whole series of traders grabbing at risk premium and essentially the VIX puked with a move north of 60 on the upside. We haven't seen that since the COVID crash. Obviously it's mean reverted quite a bit since then, but what a move. How do you size this up?

Nick Galarnik (72:58)

Yeah, Patrick, so with the VIX right Now at about a 28 handle, we expect to see top to bottom ranges in SPX of about 1.62% or so from last Thursday's close on the S P to Monday's decline. The s P declined by 8% in just two trading days, which is pretty insane overall. So seeing this kind of action, you know, come out of nowhere is pretty surprising overall. But I've been saying the past few weeks that buying insurance when it's cheap makes a lot of sense. You don't want to be buying flood insurance during a hurricane. You want to be buying it when it's dry outside. Right. But over the last few weeks we've seen the VIX ramp up a little bit, and I think that's in large part due to the election approaching and so much uncertainty around that event. So right now I think that it's important to look at your portfolios and understand that insurance right now is very expensive, so hedging isn't very wise. And as Patrick previously said, downside may be limited in the short term, but as the VIX gets lower again and in the future when we see the VIX that low, it makes a lot of sense to look at buying insurance on your portfolio, assuming it correlates heavily to the S and P. And moving on. Eric, let's talk about the US Dollar. What are your thoughts here?

Eric Townsend (74:04)

Louis Call that we may be entering a new US dollar bear market is absolutely essential to understand and monitor. If he's proven right, it's a major opportunity to belong. The right strategic commodities. I say uranium, copper and crude oil will be the big winners if Louis Dollar Call proves right.

Patrick Ceresna (74:23)

Well, Eric, the dollar has been in bigger context in a big meat grinder against all the different cross currencies. So really on page 8 I just wanted to talk specifically about the one that is genuinely trending and that's the US dollar yen as the yen carry trademark just blew up. I mean, we had a 2,000 pip move on the US dollar yen in a span of less than a month. Just an incredible move. But the thing is that at this stage it's so incredibly oversold that I think that this precipitating driver of market volatility is likely to have a pause. Now I think that the low of the yen and the high of the dollar is definitively in the idea that the that somehow the US dollar yen is going to go and retest once 62 is very unlikely. But could we have a bounce back towards 150 on the upside during a period where the market just kind of absorbs this extraordinary move? I think so. And that could be the driver of calming the markets right down for the remainder of the summer. And so this is why thematically in general, I think that while we have seen a Lot of volatility and likely a bear market has begun and likely the highs of the market are in. But I also think that the next couple weeks or even a month or more is going to be a lot of absorbing and, and backfilling of this first initial move and that a lot of the real volatility and, and crazy things is probably going to be pushed towards the fourth quarter of the year.

Nick Galarnik (75:55)

Now moving on to page nine, we have that gold futures chart. What are you guys thinking here?

Eric Townsend (76:00)

Everything going on right now is fundamentally bullish for gold. But, but as Louis said in the feature interview, if we get an actual market crash, the only thing that goes up is correlations. Gold will be dragged down with everything else. It'll then bottom before everything else and that will be the buying opportunity of the decade. Trying to time that is probably a fool's errand. I'm not selling anything here. I'm holding my longs and I hope I'm smart enough to know when to add to them if I can time the bottom. But I'm not going to take anything off the table because a geopolitical escalation could come at any moment to send gold dramatically higher.

Patrick Ceresna (76:39)

Technically, gold is in a bull trend. Higher highs, higher lows, holding above its moving averages. The trend lines are holding along the upside. So technically there isn't anything negative to say about gold. The bigger question I always think about here is is this the macro backdrop from which gold is ready to make a move to 2700 on the upside, I've been generally quite bullish gold, but I think that at this stage, during the initial violence of these, this market volatility, I think that there could be numerous fake outs. Overall, if there is any short term liquidity event that causes gold to lose 100 or 200 announced, I think it would be an extraordinary buying opportunity on dip. I'm not predicting that will happen, but in these kind of market conditions, if there's broader liquidity issues, gold tends to be volatile with all risk assets. So it's one of these scenarios where big picture, I remain quite bullish. Technically there's no reason to be concerned. But the conditions in the broader macro markets is certainly just something that makes me want to make sure I remain structurally hedged on it. What I love to do with gold is wrap those collars around it because of the, the nature of the skew. And I think that just trying to reduce gold volatility through collars is a tactical way to make sure you have the staying power to stick with the Trade.

Nick Galarnik (78:03)

Now, moving to page 10, we have that uranium chart. Eric, what are your thoughts here?

Eric Townsend (78:08)

Uranium mining shares were utterly slaughtered Friday and then slaughtered again even worse on Monday. And all of this was easy to see coming. We predicted it here on Macro Voices several times saying that if we saw a broader market sell off, despite the fact that we really had a strong buy signal on uranium, if you analyze it in isolation, we also said that if there's a broader market dislocation, uranium's gonna get wiped out with it because of all of the retail participation. I also suggested the safety trade there was out of the mining shares and into the sput and that proved prescient. Sput's actually been up in the last couple of days and is pretty much held its ground since its low last week, whereas the mining shares predictably have moved much lower. So to be clear, uranium is a strong buy here, as it has been for weeks by any measure, as are the uranium mining shares. But as both I and our friends over@ uraniuminsider.com have warned, this is a famously volatile sector and a broad market crash could easily cause a washout. Now, if that happens, it's a generational opportunity to load up on uranium and uranium miners. It's already a fantastic opportunity. It might get better. The fundamentals are not going to change and the fundamentals will win in the end, but that doesn't mean that we're not going to have a wild ride before we get there. And there's of a lot, a lot of retail participation and weak hands that are going to be wiped out if these guys get margin called, which is probably what's about to happen. In reaction to this market volatility, our friends at Uranium Insider moved their monthly webinar up to yesterday to address this market weakness. These guys are real pros and doing a fantastic job. I cannot comment in detail out of respect for their other paying subscribers, but the gist of it is pretty much what I've already said. Uranium and miners are way oversold. It's a fantastic buying opportunity, but that doesn't mean the buying opportunity isn't going to get even better if this broader market sell off continues in the broader stock market. Spot traded at a 16% discount to NAV this week. That is absolutely amazing. It's only a couple of times before that that's happened and it usually has marked market bottoms. Think about that. The spot price of uranium is already just a couple of dollars over the long term contracting price. If you can buy it for 16% discount. Just as A function of SPUT being a closed end fund that can trade at a discount to its nav. That means you're buying it below the long term contracting price. You've also got a sub 30 RSI which has always been a very reliable buy signal in the past. There's a whole bunch of other charts and graphs and fundamentals. The essence of it is the Uranium Insider guys are saying essentially the same thing I am, which is there's a zillion reasons they go into much more detail than I do for why this is an absolutely strong buy right now, with the strong caveat that that doesn't mean it can't go down farther from here, especially if we get a broad market crash. I've tried to figure out an efficient way to hedge this. I can't find that. I don't think there is an efficient hedge that you could have carried unless you magically knew exactly how to time this. And it's not easy if you're trading in any size at all to unwind large positions in these illiquid uranium mining shares. So I don't see a really strong hedging strategy. You've got to be willing to tolerate the volatility of this market. If you can't, it means your position size is too high. People keep hitting me up for symbols. First of all, look, Uranium Insider is dirt cheap, is a newsletter subscription. They do a fantastic job. They're gonna give you better advice than I can. But I'll give you some highlights. The safe trade here is to buy the uranium itself as opposed to the mining shares. It's gonna have less upside ultimately, but I don't think it has nearly as much downside risk right now. If the broader stock market goes down, if it does go markedly below its nav, you're still buying, you know, you're buying a commodity at a discount to its price. Yellow cake, which is, and I should mention sput. This ticker for that is U un Yellowcake, which is traded on the London Stock Exchange, has traded at an even deeper discount to nav. That's YCA Yankee Charlie Alpha on the lse. If you're set up to trade the LSE in British pounds, great. Otherwise I would, I'd stay away from that one just because although it is a deeper discount to nav, it doesn't seem to track back up to nav. In other words, when I see SPUT get to more than a 10% discount to NAV, you buy it and it's not too long before you get a chance to sell it at nav. I don't see YCA returning to NAV as easily. So I still prefer SPUT over YCA for buying uranium itself. Moving down from there in terms of a little more volatility and a little more upside. Cameco is the blue chip IBM of nuclear, if you will. They own half of Westinghouse. They're one of the biggest uranium producers. They're also a very large stakeholder in global laser enrichment, which is the laser enrichment technology instead of centrifuges, just big company but a staple trading at a huge discount to where it's traded recently. So we get into a little more risk. The producing uranium miners and just in terms of which ones look like the best bargains to me because they're oversold to a ridiculous extent. I would say Next gen Energy, that's NXE and Encore EU would be my favorites in terms of big producers getting into the higher risk, higher speculative opportunity category. We've talked about Global Atomic before. That's the company that has the the DASA mine in Niger. I think that mine is definitely going to be very important. The thing is at this point Global's banking syndicate appears to be walking away from the deal. I think they are going to build their mine. I think it is going to be very important. Unfortunately for me and the other prior shareholders, I think it's going to be a much more dilutive transaction to get the funding that they need than we had hoped for. I don't think they're going to get bank financing. They're probably going to have to do another equity raise and we're going to be diluted. So I'm not rushing to put anything more into that one. For the speculative trades, I would say the biggest sell offs have been in Lotus Resources that trades on the Australian Stock Exchange on ticker lot. I think the fact that it's on the ASX where a lot of people don't have access to it, might be the reason that it's sold off harder than a lot of its peers have. I think it's an excellent company. And finally, if you want a much more stock speculative and therefore risky pure exploration trade, in other words, they don't actually produce uranium. They they find uranium and get ready to build the mine later. That would be F3 uranium ticker FUU on the TSX venture I believe so. Those are some symbols. If you want better symbols and better analysis, frankly. Subscribe to Uranium Insider. That's what I do.

Patrick Ceresna (85:36)

Eric, you're bang on 16% discount to nav like the Sprott physical is taking some abuse on a relative basis to where spot uranium prices are. Overall the bull story for uranium is there, but the thing is is that when will investors care at this stage? This has been distributing all year and I don't know if under this backdrop is when new money flow is coming in here. I overall think that this is a great long term investment but we're going to watch for technical signals when short term lows really start to establish themselves and potential new bull trends start. But I think it's going to be a process here and patiently waiting. We'll observe obviously technically when things start to turn here, it really hasn't shown any sign of life just yet. Finally guys, I want to just touch on the yields now. First off I want to touch on the 10 year treasury yield which is essentially as this market had hit the fan, you had a scenario where yields collapsed. Bonds were a safe haven. That was a thematically something that we touched upon in the show numerous times. I still think that that's going to be the case for the remainder of the year. I'm not super bullish on bonds that I think we're going back on the 10 and 30 year bonds to like 2% yields or something. But generally I feel that the bear market of bonds that was the theme through 2022 and 23 is over and bonds will perform a safe haven element throughout this leg of the bear market and the yield is going to be something that investors are going to be grabbing at generally shorter duration makes a lot of sense here like going to twos and fives. But overall the 10 year has been in this very clear bull trend here and I don't think it's going to stop. Maybe pauses here for a month because of just, just the conditions of the market are so oversold. But I think all dips should be bought on Treasuries tactically for the next few months ahead. Now the last thing is on page 12 I have the twos tens yield curve which for the first time has approached the 0% after being negative for almost a year and a half, almost two years and I think it's a pretty big deal. Generally the bull steepener is going to kick in largely because well central bank banks are cutting and it's going to impact a two year on a relative basis and this is typically a recession signal. It has in the past. A lot of people wouldn't soft or landing, no landing camp were skeptical of it. But I actually don't want to ignore this signal. Obviously Powell is already very clearly advertised that there we are going to be in a rate cut cycle that usually will cause the two year to move in a bull steepening and that does drive the trend higher on this. So it's definitely a breakout and I wouldn't be shocked if we get back into positive territory and stay there on this yield curve folks.

Eric Townsend (88:35)

If you enjoy Patrick's chart decks, you can get them every single day of the week with a free trial of big picture trading. The details are on the last pages of the slide deck or just go to bigpicturetrading.com Patrick tell them what they can expect to find in this week's Research Roundup.

Patrick Ceresna (88:49)

Well, in this week's Research Roundup, you're going to find the transcript for today's interview as well as the chart book we just discussed here in the post game, including a link to a number of articles that we found interesting. You're going to find this and so much more in this week's Research Roundup.

Nick Galarnik (89:03)

Well that does it for this week's episode. We appreciate all the feedback and support we get from our listeners and are always looking for suggestions on how we can make this program even better. For those of our listeners that write our blog about the 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've not already, follow our main Twitter account acrovoices for all the most recent updates and releases. You can also follow Eric on Twitter EricsSnowSend, that is Eric spelled with a K and follow Patrick Trricksarezna on behalf of Eric Townsend, Patrick Ceresna and myself, thanks for listening and see you all next week.

Macro Voices Announcer (89:55)

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