Odd Lots - Why A Longtime Bull Just Flipped Very Bearish On The Stock Market

Episode Date: July 15, 2019

There's always bears out there predicting that the stock market will tank. But many of them aren't worth listening to because they're always saying the same thing, regardless of the market environment. What's interesting, though, is when a longtime bull changes his or her mind. On this week's Odd Lots podcast, we speak with Bloomberg's very own macro strategist Mark Cudmore. He's been consistently bullish and optimistic about the market and the economy since 2011. But, in the last several weeks, he's flipped his view and is now warning about a recession and a market tumble. On this episode, he explains his reasoning.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello, Odd Lots, listeners. It's Joe Wisenthal, and I just wanted to make a special programming note before you listen to today's episode. We recorded this episode on Wednesday, June 26th, so several weeks ago. And because this discussion is related to specific events coming up, specific forecasts of the, the world economy, the world markets. We wanted you to be aware of when it was recorded so that anything that's happened subsequently you can put in context in case things have changed a little bit. It's still an interesting, timely and relevant discussion in the grand scheme of things, but we just wanted you to be aware of exactly when we had this chat. Hello and welcome to another episode of the Odd Lots podcast.

I'm Joe Wisenthaw. And I'm Tracy Allaway. Tracy, something I've been thinking about lately is that we're in a pretty interesting time for financial markets. And I should start by noting that today we're actually going to have a conversation about markets themselves rather than some esoteric topic tangentially related to markets. But it feels like we're, I don't know if Crossroads is the right word, but lots of interesting things are just happening right now. Well, I'll take the bait. I can think of a few interesting things that have happened recently for a start. As we're recording this, we're coming up to the G20 meeting. There's a bunch of expectations around Xi Jinping meeting Donald Trump, whether or not they'll agree some sort of trade deal or a trade truce.

And we also have the 10-year U.S. Treasury back below 2%. That was after another doveish pivot from, Jerome Powell at the Fed. And we have a whole lot of negative yielding debt. We also have earnings season coming up. So yeah, there's a lot going on. But the one thing you didn't say and what makes it really weird is that with all this tension out there, whether it's trade, the Fed feeling that it needs to pivot to a more doveist stance to signal possible rate cuts, all this debt falling deeper into negative territory in many instances. The stock market is more or less right now at an all-time high. So despite all these concerns out there and interesting stresses showing up

in the market, the one market that's sort of the purest proxy for risk sentiment is basically as good as it's ever been. Yeah. So we have this big divergence between bonds and stocks. But if I could just say one thing, it's interesting because we talk a lot about the bond market pricing in a potential recession, but it, of course, depends on what bond market you're talking about. Government bonds, sure, but if you look at corporate bonds, other types of credit risk, those are also doing amazingly well. So again, the riskier parts of the market, equities, credit, all doing really well, while other parts are sort of screaming that a slowdown is about to hit. Exactly right. And then the one thing that I think also sort of makes even the stock market

interesting is if you look at various survey measures, there's not a ton of bullishness out there, you know, various surveys of, say, fund managers, lots of anxiety, lots of evidence that people are engaging in a high level of hedging, defensive stocks, leading the rally higher. So even within the internals, not many signs of euphoria. It's just kind of a, it's kind of a weird time. Yeah, it feels like a lot of people are in wait and see mode, but I'm not sure. what we're waiting for at this point. I don't know what we're waiting for either. Anyway, so I mentioned at the top we're going to be talking about actual markets today.

And I'm very excited about our current guest. He flew all the way from Singapore for this podcast. No, that's not totally true. Of course. He's one of our colleagues here at Bloomberg. And I always love talking to him because he's based in Singapore and every once in a while he comes to New York. And he's our macro strategist or he's one of our macro strategist. here at Bloomberg, he puts out views, he's a former trader, he has a very strong opinions about

the market. And what I think makes him really notable right now, among other things, is that he's been a longtime bull who suddenly flipped bearish. And that's not very common, but someone, you know, there are a lot of people out there who are bearish, but they're always bearish. It's a refreshing and different to hear from someone who may have flipped or who has flipped. You forgot the most important part, which is he's also a previous Othot's guest. That's true. And I think he was probably significantly more bullish on the market the last time, which is probably, I don't know, maybe a year and a half ago or two years ago that he appeared on the show. So anyway, without further ado, I want to bring in Mark Cudmore. He's a Bloomberg macro strategist. He's also the editor of the

M Live blog, which you have a terminal you have to check out. And as I mentioned, he's a longtime Bull going back to at least 2011. He's been optimistic about the market and the economy. And for the first time in years, he's warning about significant market sell-offs in a possible U.S. recession. So, Mark, thank you very much for joining us. Yeah, absolutely, Joe. I'm really excited to be here. And as you say, all the other previous times I've spoken to you on TV or on odd lots, I've always been bullish. I've always been kind of a permibals, what I've been kind of laughed up on my colleagues here. And I think that I've had periods of tactical bearishness like, oh, this will hurt the market for 5, 10 percent. But I've always been. I've always been kind of a permable. I've

been very much in the camp that, you know what, we're going to go back to record high soon. There was these three pillars driving the rally, and that was growth, earnings, and liquidity. And I'll kind of come into that later, why some of those pillars are disappearing. Just for the kind of the context and the history, I was someone who I was working in Lehman Brothers before the last crisis. And I did turn bearish, like I think many people at the forefront of the financial crisis in 2007. I was, you know, not particularly astute or smart, but along with the people in the financial industry, I became negative in kind of sometime late 2007, can't remember.

And I stayed too bearish too long, right? I stayed bearish till definitely through late 2009 in 2010 and 2011 when the euro crisis kind of flared up. I was like, this is it. It's the next kind of sell off again. And then I kind of learned from when we got through that, I was like, hey, no, wait a sec, the game has changed. Too much liquidity has come in. So since then

I've been to basically, you always buy the dip. And the difference is now, I think in the US equity market in particular, we've now changed to sell the rallies. And I think we'll get a proper bare market as in a 20% plus decline over the next kind of year. Well, you mentioned your three pillars of bearishness then

walk us through your thesis, Mark. Yeah, absolutely. So I think that two of those pillars are about to be taken out completely. And the other one has lost a little bit of its impact. So I don't think liquidity is disappearing anytime soon. But I think the amount of leverage in the system can be harmed pretty quickly. So what we've actually seen in economic forecasts over the last two months is that they've not been changed or in fact they were actually raised about a month ago for the three largest economies in the world, US, China and the Eurozone. But overall, all economists aren't yet factoring in all the tariffs because they want to believe they're temporary, because they don't want to suddenly slash all their forecasts and then suddenly find that Trump signs a deal. And because he's been shown to kind of change tack quite quickly in the past, it means that economists are in a hold. So what happens is you've still got US economists, the consensus forecast is still for two and a half percent growth in the US, even though all high frequency indicators show that's quite clearly just not going to happen.

So it will take not just a truce in trade war, it will take a removal of all tariffs and some extra positivity. deal, so removal of tariffs and the rate cuts to come through for us to get that kind of growth rate. So we're seeing global manufacturing PMI has fallen for 13 straight months, is now in contraction territory. The preliminary PMIs, which we get for about 50% of the readings that we've already got this month for the next reading next Monday, show that will probably fall again in contraction. And that's been a pretty good guide for growth. And that's more of the global indicator. But it's very much in the US, we're seeing that as well. You talked about, you know, stocks are at record highs, but stocks haven't always been a good indicator.

We look back in the last crisis, 2007. So the market knew there was a real problem in the economy suddenly flaring from about August. We suddenly started seeing that steepening the curve as we start the easing cycle. So what happens is the Fed actually started their 500 basis points rate cutting cycle in September 2007. The stock market made its record high in October 2007. The recession came in December 2007. I would not be surprised if we get a roughly similar timeline then. We had the same thing back in 2001.

I can't remember the exact months. But the 550 basis points rate cycle, rate cutting cycle, I think started in January. January 3rd. The recession still came in March 2001, so two months after the rate cutting cycle started. So just to back up your three pillars, one is liquidity, and that's the one you're not particularly concerned about right now. Yes. The other one is growth, and obviously, and then what's the middle one? So earnings. Okay. So I think one of the problems with earnings is, again, earning strategists also are starting to slash forecasts, but not too aggressively yet, because they use as their macro inputs, what their economists say. This works for most banks. Some banks,

they're actually not allowed to have different inputs than their official economists, other ones they are. But overall, they're still going, hey, all the experts are saying growth isn't going to slow, it's not going to be impacted by the trade war, even though we know it's definitely going to be impacted, and even though all the surprise indexes have been missing anyway. So even ignoring the trade war, the data is saying that the economic growth is going to slow down drastically. Now we've had fresh tariffs in May, which will feed through to the economy in about August, as that's when we'll get those indicators come down. So growth's about to drop, like, massively from about August, September onwards,

even without an escalation in the trade wars. We actually need removal of tariffs to change that. Now, once we get past G20 and once economists start slashing their forecasts, that'll start feeding through to the earnings strategist, the equity strategist, and then I'll start slashing equities. We do have a pretty good correlation between the direction of kind of earnings

and whether we're getting earnings growth or earnings recession and equity markets. And I think we're about to see quite a drastic kind of earnings slash, you know, an deep earnings recession, partially because we had such a high peak from the tax stimulus before. So both earnings and growth

are about to be completely taken out. But Mark, I guess the response to all of that, and you know, you've laid out a very clear list of worries there, but the response that any bull would tell you would be, well, we have the Federal Reserve, which is now back in easing mode. Won't they be able to offset a lot of this? My simple answer is no. The Federal Reserve has got a very poor track record of preventing recessions. And I said, I refer to the last two recessions, the only two recessions we've had in this century. and both times the easing cycle started aggressively before the recession came the recession still came and both those times the Fed had 500 basis points to cut so in 2007 they did actually cut by exactly 500 basis points and as I said the easing cycle started in September 2007 they'd cut I think 125 basis points before the recession came but I'm not sure exactly that but basically they were already cutting aggressively in 2001 we I think it started with a 50 basis point cut and we still got the recession starting a couple of months later it didn't stop it ultimately monetary policy policy is not the best tool for changing the economic cycle. And that's become even more constrained,

given the amount of QE we've seen in the system. So the transmission has been broken. So I don't think the Fed can stop the economic cycle when it's this drastic. I think they can slightly massage it, but we've now reached breaking point. Talk to us about this divergence that we're seeing in the stock market and the bond market, because everyone knows there's all this negative yielding debt, curvin versions, you name it. Meanwhile, as you pointed out, stocks are. they may be at all-time highs, but historically they don't often call the turn and they can be slow to the game. Is it a matter of bond investors knowing more? Because that's often this sort of naive, like, oh, the smart market versus the dumb market. But how do you think about that divergence?

I think that, first of all, as you kind of pointed out, this is not so anomalous in history as people think. So quite often, it normally goes this way towards the end of the economic cycle. Well, you pointed it out. That was very flattering that you said I pointed out. But anyways, you're the what you pointed out. But normally we do see that equities kind of top out just kind of, just as recession is basically guaranteed, whereas bond markets turn much quicker. And I think that a lot of people got very panicked about the bond curve flattening over the last year or two. And like since 2016, I've been writing macro review articles in my bull guys as like, stop this panic mongering over the flattening yield curve. It's not a good indicator, blah, blah, blah.

It's about the steepening after the flattening. We're now getting that steepening. We're now getting the bond market is now saying, hey, the recession is probably coming. in the next kind of six months or close enough to recession. So we're kind of following the historical path of where equities markets keep on going to record highs because we get that kind of bond market react first, which provides extra liquidity,

lowers the discount rate for earnings and for stock prices, which makes them seem even more attractive as an asset. And that is basically what we get in these economic cycles. And normally there's a little bit of the same sentiment story as well where we've gone through the economic cycle long enough that stock investors have learned, you know what, you buy the dip, you ignore the scares, I don't want to miss out in the rally.

And so when they see this, bond market signal, they go, great, that's extra easing, that's extra liquidity, that's a lower discount rate, this means I buy that dip, I don't not get scared by it. So I think that's what we're seeing there. So you mentioned economic cycles, and this is something that I've been wondering about in recent months. We're pinning a lot of the economic concerns that we've seen on the trade dispute. And you mentioned that economists hadn't really yet been ratcheting down their forecasts due to the tariffs because they're sort of waiting to see how it comes out. But I'm wondering, is it possible that what we're seeing is actually just the end of the economic cycle,

a sort of natural end versus anything that's been spurred on by the trade war? I think that's a really valid question. And probably I'm not the best person to answer that deeply. I'll give you my impression of it. And my impression is, yes, we have, we've had already a very long economic cycle. And there's been a sign of a kind of a change in some of those indicators for some times. And like even as I said in the equity market that's reaching record highs, we've now suddenly seeing weakness in transport stocks and small caps in home builders.

So we're seeing that kind of change. We're also seeing jobs that, you know, at a low and now we've just seen some bad jobs prints. And jobs is actually a lagging indicator. So people shouldn't watch it too closely. But NFPA and ADP last month both show that there is kind of a turn in the job cycle. So I think that already we are reaching the end of the economic cycle. And I think that's part of the reason why I've suddenly become structurally bearish in the last month and into this kind of sell the rallies mode.

And that's because even with, out the tariffs in May, we were looking like we were getting to a kind of a difficult place in the economy. I thought if we got some wonderful deal, all went well. So I actually turned bearish on April 30th. But when I turned bearish, it was my usual, just to sell off for a few weeks, don't worry. And I was in the mindset, we'll be back at record highs again. It was a tactical bearishness. But it was the change in the trade war that said, oh, wait a sec. We've got a really tough economic situation. And since that April 30th date, all the data that from before when the trade war flared up again has disappointed again. It's coming even worse. So the

economic cycle is looking really, really drastic. And now we've added tariffs on top. So this is a really, really bad story. And it's not only that we've added tariffs, but there seems to have been a complete breakdown in the relationship between China and US and May. And I think that's really the key point that I now no longer see a solution on the horizon. Expand on that. And I'm curious how your perception or how the perception of the trade situation is different here when you come to New York for a couple weeks versus when you talk to people in your home base of Singapore. Yeah, sure. I mean, I'm going to give my views here. And I'd love if Tracy kind of either contradicts me

and tells me she sees a different ear, validates this given that she's in Hong Kong. But I feel that the trade war is viewed completely differently on the either side of the globe. And I think that in the US, everyone's very much believes that the trade war comes down to Trump's decision. It's a unilateral decision. He's going to want a deal before the election is how the narrative goes, and

therefore he'll get a deal at some point. It might not be to next year. It might be a little bit difficult. It might be noisy. But ultimately, Trump wants a deal and therefore he'll get a deal. I think that that narrative in Asia has completely shifted. I think in China, China, China also wanted a deal and they did want a deal. But there was a real change in May.

And the reason the talks break down, we heard from, I think it was the Wall Street Journal that broke that story, saying the idea that the Politbuquerque told Xi Jinping, you can't sign something to change laws. And that does go back to their long history, the opium wars, they still regret that. So what's happened is that in China, the idea of a trade war wasn't mentioned in the mainland press before May. And suddenly now, it's not any mention. It's been really hyped up. They're going to stand up to imperial aggression from the US. They're going to go through the long march again to get their kind of independence and prove

China's authority on the world stage. They're demanding an equal footing. So I think the whole narrative has changed that China can no longer agree to any deal without US essentially making all the initial concession. So US will have to remove all tariffs first before China will get to some kind of trade deal. I don't see Trump going that way soon. So suddenly I think the narrative has changed that I think there's no chance of a trade. I think optimistically we don't get more tariffs. And I think that's the optimistic case. But I just don't see how you get a resolution given that China can no long, they've talked themselves into the mainland audience that they no longer can agree to a deal without being seen to win. And Trump can't afford to be seen to concede to China, given he's built up so much out of the election. So that's the way

I see it. How do you see it, Tracy, from the age perspective as well? Yeah, I would broadly agree with that. So I think partially because of the type of people who tend to work in markets and finance and investing, they have a high tendency, let's say, to ascribe rationality onto other actors. And I'm not entirely sure at this point in time that the major actors in the trade war are actually acting that rationally. And I think you're absolutely right that both China and the U.S. at this point have boxed themselves in a bit when it comes to satisfying domestic public opinion in very different ways. But it's particularly acute in China where you're right. We didn't see the Politburo sort of ramping up the trade tensions talk and talking about. imperialist aggression up until very recently. And you can imagine it's going to be very, very difficult

for them to roll that back in any significant way. And the same thing goes for the Trump administration to some extent as well. If you think about, for instance, what they've done when it comes to Huawei, how in the world are they going to start rolling that back? That feels really, really difficult to sort of undo to me. So I think you're absolutely right. I mean, it's got bipartisan support in the US here. So I think that's why the Trump camp back day in both sides. do actually want Trump to kind of get some win against China, even if not the exact manner of how it's doing it. So I'm pretty negative on the trade deal. And I think that's why we're going to start seeing capex slump a lot. We're going to see earnings slashed. And this goes back to the core point.

Why am I so worried about the U.S. stock market? Well, it was expensive already with an economy that was turning. As Tracy kind of implied, maybe it's just even the economic cycle was already turning. And now we're suddenly adding a completely disastrous scenario for both private companies that rely on these. these big US multinationals rely on the consumer base in Asia. I think people forget that, you know, suddenly Asia is the rising rampant middle class, consumer and middle class. I think people have this idea that there's much, especially in the US, people have this idea that much of Asia is still poor and not buying, you know, Apple goods, but that's just not true.

So I think that this is a really, really bad situation of both growth and earnings slashed at a time when stocks were expensive on a forward-looking basis. The S&P 500 is trading around 16.8 versus the 10-year average of 15. So it's expensive already. but that PE, four-looking P, will look completely different once that the denominator, the earning side of that, gets slashed. The news doesn't stop on the weekends. Context changes constantly. And now Bloomberg is the place to stay on top of it all.

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That's Bloomberg this weekend. Saturdays and Sundays starting at 7 a.m. Eastern. Make us part of your weekend routine on Bloomberg Television, radio, and wherever you get your podcasts. So, Mark, you've been talking a lot about equities being overvalued, but I'm wondering how you feel about credit, because when it comes to a lot of finance professionals, overheated credit markets has really been the sort of bug bear that people have been worried about for a long, long time. Is it as simple as when the economic cycle turns, the credit market is going to be in for a world of pain. Is it that simple in the sense that what everyone has feared and expected for such a long time now is just going to happen?

I think it is that simple. I'm really glad you brought this up because I think that it's hard to get a 20% plus sell-off in the S&P 500 without some kind of financial pain. And I should be clear that even though I've turned structurally bearish the first time since the last crisis, I don't think we're having a repeat of 2008. I don't think the global financial system's at risk. I don't think it's quite as scary as that. But I do think that we're going to have some severest financial market pain. And that will come in credit markets. And we've heard a lot of warnings from the big credit names, you know, whether I think leverage finance of the area that people are most worried about. But I think that it's the structural

problem for me that most worries. The lack of liquidity in credit markets. So when the credit market turns, there's just no ability, because the regulation we've put in since the crisis, for the banks as middlemen to step in and kind of control the sell-off. So I think the credit cycle can turn much more painfully and much more rapidly than previous crisis. Is the recent stress that we've seen in various funds in London, the Nittixis funds, Woodford, is that an early indicator of anything? Is that a, like, I don't know, some sort of presage of trouble? When the tide goes out, you see a sitting naked type thing. If you're in my point of view, it's very easy to see it like that way. I'm sure that many

people can kind of pick these kind of anecdotes if you want. It's the same with suddenly this year we've seen all those kind of massive unicorn IPOs. And again, people would say, that's a sign that we're reaching near the peak. I think if you're looking for these signals, you can definitely see them. And I do think some of these funds things are worrying. And one of the things is interesting is that while I've turned structurally bearish, I've no particular strong view on where we're going to trade in the next couple of weeks, because we might come out of G20 or some platitudes, positive platitudes.

But I think the point is that professional investors have started trading more defensively in terms of their stock rotation. And they started being a little bit more bearish. But if you looked out this week, saw that the hedge fund leverage is actually reaching back to kind of pre-crisis highs again. So that's the idea that people are actually taking on more risk. And I think there's that leverage in the system there that will get squeezed very quickly because of the lack of liquidity in the credit system. So you mentioned lack of liquidity in credit. And, you know, this is something that

lots of people have talked about for a long time. And I certainly have written my share of articles on this and also overheating in that market. And one thing that has given me pause at various points of time is the notion that when the big sell-off comes, you sell what you can, essentially. So I just wonder if we do get a big rupture in financial markets, is there a chance that instead of people rushing to sell off corporate credit and leverage loans, that because of the very fact that these things are extremely illiquid and it's going to be tough to find buyers for them, that they actually don't move that much. and instead we see people selling off much more liquid items like stocks or government bonds.

That's a great question. And I'm trying to, you know, remember the playbook from how I was trading to the last crisis. And I have to say that the last time I was trading the GFC, it was my first crisis to be in a trading seat. And therefore I was learning and making the mistakes back then. And some of the mistakes I learned quite painfully and I remember quite vividly. And other ones, you know, I'm not sure if I've fully learned them. But I'm trying to remember then. And I think one of my big takeaways then is that it was very clear from late 2007 that,

that there was an incredibly big problem brewing in the financial system. And I have emails that I wrote on my Gmail account to all my friends back in Ireland saying, look, I think all the banks are going to fall. I did naively think that Lehman Brothers was one of the safest, I will confess, which is a little bit embarrassing, but that was, I think, a bit of hometown naivety. So I thought Lehman Brothers be fine,

but I thought most of the banks were vulnerable. I was telling friends from November 2007 that I thought there was going to be a massive systemic financial crisis and, you know, cash machines might not work and stuff. I was a doonger phase. But then I was an emerging market trader. Emerging Market FX reached a record high in August 2008. Now, as I said, the stock market actually topped out in October 2007.

It was, you know, we had Bear Stearns in March 2007. I mean, Lehman Brothers' stock price where I was working was plummeting throughout that summer. And yet emerging market currencies reached an all-time high in August 2008. And I think that was an important message. I'm probably indirectly answering your question, Tracy, but to kind of affirm that, yes, how these kind of sell-offs go when we do get a negative cycle, they're very difficult to trade. It's not necessarily you find the most overpriced thing

and you sell it or you find the most vulnerable thing you sell it. You've got to really care about the timing of when things go. And I think you're right that sometimes actually assets which aren't particularly expensive but are more liquid gets sold first. And then you suddenly see these massive step moves later on. But I guess one of my main takeaways from the last crisis is that for those slightly harder assets that are a little bit less liquid, they are a little bit step moves.

You can probably wait to you're sure the cycle is turning. You know, get in the trade at a slight. slightly more expensive price, but you know it's going to make the jump move at some point, rather than trying to be clever. Basically, don't try to be clever through the illiquid instruments. If you're trying to be clever and time it perfectly, do it through the liquid stuff where you can keep on chopping and change your mind. Through the illiquid stuff, wait till it's certain, wait to maybe we see how the G20 trades out and plays out, and then you can kind of go, yeah. It's interesting. I hadn't remember that or realize that exactly how well

emerging market currencies did throughout 2008, but it's interesting because we just recorded an episode with Hjong Shinn of the BIS talking about the dollar and we're talking about that sort of relentless dollar pessimism that pervaded markets really in the years preceding the great financial crisis, but really 2006 through 2008, so much negativity on the dollar. And that seemed to be a major source of concern. A major difference in the post-crisis era where the dollar has just been phenomenal. I think that's going to be a dynamic we're seeing again. I guess part of that is because what happens is bond markets start, bond markets do react quicker than stock markets

because they have to react to data. They're macro instruments, whereas equities traders rely on their macro strategists to provide those macro inputs. So bond markets basically force the Fed to act, and we seem to see that even more than normal this time, where the Fed is being pressed act. So the easing cycle starts,

that weakens one of the dollar supports. The dollar starts weakening. And then what you see is that because the dollar's weakening, that eases the liquidity situation in EM, so EM actually does a little bit okay in that initial circumstance. And you start saying commodities, well. I mean, people forget where oil went to $150 a barrel, you know, just going into the crisis. And I think that's because we were seeing this kind of dollar bearishness just before the crisis.

And then obviously, once the crisis hit properly, even though it was US-centric, dollar absolutely roared. And I think that we're going to see that playbook this time. We're going to see the dollar weakened quite a bit. It's going to support assets that you would think would be really vulnerable to a global financial crisis, like emerging markets, like commodities. But it's going to support them until quite far in until it's clear that this is a much bigger problem. And when that happens, I don't know. Maybe that's early next year. It's hard to know the exact time span. The one difference I'll say this time is I do not think the dollar gets the subsequent massive boost it did. You mentioned hedge fund leverage. And I'm always curious. I enjoy asking people this question. But where do you see the leverage in the system now? You already mentioned that you don't see it on a scale of sort of pre-2008 levels. But I'm sure you have some idea of where there might be sort of hidden pockets of leverage in the system.

I'm not best place to answer that question. I mean, part of the reason I kind of said the hedge fund leverage this week is that, you know, I saw the actual article on Bloomberg, actually. And I want to say that, you know, I didn't remember the exact details from it, but they were saying that leverage is back to the pre-crisis highs of kind of jumping up again on the hedge fund leverage system. I think what you do see is how certain assets trade. And I think that it's more in the certain sectors of the credit market where we are seeing that

in the leverage finance, in the CLOs. And you're seeing those kind of those permanent buyers. I mean, those stories, again, you know, you know, just asked earlier about whether you see these kind of signals from certain equity stories. And I think it's, again, in credit market, it's very easy to see the warning signs if you're looking for them. Warning signs I might have ignored even only six months ago. But when you find that, like, there's just, you know,

one Japanese asset manager that is the main buyer of some certain type of credit product, you know, and they're lapping it up for, like, massive credit product back in Europe, that seems like a warning sign now that I'm more worried about the market. So I think that we are seeing that leverage in the credit system. I have a sort of meta question about this call of yours and you're shifting. to bearishness because now you're, you know, you fully identify yourself as a bear. And you say, you know, in April, it was sort of tactical, but now you're like full on with a thesis. Do you find that stating that makes it harder to be nimble and that if data, you know, like,

let's say the trade dispute doesn't get as bad as you expect and maybe the data starts to rebound a little bit, that having publicly sort of come out as a bear, maybe, you know, what if like, Will you feel comfortable in October or November say, you know what? I was wrong. Or is it harder to do that once you've sort of identified as such? It's definitely harder. And I can't deny it. It's something I'm very conscious of.

And I'm like, as I said, in the last crisis, I was pleased that I felt that I was aware of it early. And then I stayed bearish for too long. And it was horrendously unprofitable as a trader. I think, you know, I try to learn a lesson that I will turn when I think the facts change. And I guess one of the reasons I'm trying to, I like it, you know, being able to express this view is because I want to know what the loopholes are. I'm hoping, you know, listeners will kind of message me after this kind of going, you're completely missing this element, and that's the point that kind of changes the game. But having analysed at lots and kind of expressed this view very publicly in writings on TV and radio for the last kind of month or so,

I've not found the big loophole apart from. If there is a really grand trade deal between U.S. and China, they remove all tariffs, and they're suddenly in some wonderful, happy world of trading, then clearly we're not at the top now. That will provide a sustainable boost to markets. But I will say that it needs to be removal of the tariffs that are already in place, just a truce. What I've been trying to analyze is if we get a truce, no escalation from here, are we in the Barish scenario? And I think yes, but it'll just come through a little bit more slowly, a little bit more, less drastically. But yes, we are in the Barrier scenario. So, but yeah,

I'm going to be alert to that. Will we see a change? But I think it will take that massive trade deal to change my mind. Mark Cudmore, always a pleasure to talk to. Thank you very much for joining us. And I wish you were here more often. Thank you. So, Tracy, are you convinced? Are you going to put all your money in gold and silver and under your mattress? I think I told you this before, but I do have a sizable stash of silver coins that have been bequeathed to be by my dad. No, look, on a serious note, I don't think I needed a lot of convincing that we are late cycle, but again, as someone who has written about overheated credit markets and leverage and the possibility of a liquidity-driven sell-off in credit markets for many, many

years now, the question is always timing. And so, yes, we have the trade war, but I'm still a little bit uncertain exactly what the catalyst is going to be for the end of the cycle. And sorry, just one more thing, but it seems to me like the Fed is also acutely aware to some extent of problems in credit. And whenever we do see cracks in the credit market start to devise. develop like we did earlier in the year, the Fed usually responds. Yeah, no, absolutely. I mean, I don't know whether I'm completely convinced or not. Something does feel a little bit different now.

And I've been thinking about that for a few weeks really since, really since the start of May, because people have been getting very, the observers of the U.S.-China relationship have been very dire. And they're saying, this is very serious. And you see very sober-minded analysts talking about. a new Cold War is emerging between the U.S. and China and so forth. And yet, even in the stock sell-off in May, it never felt disorderly at any time. It never felt panic. And it started to feel like right then that some sort of gap was starting to open up between the sort of calmness

of the market and, you know, obviously the markets bounce back versus the alarmed rhetoric of a lot of observers. And ever since then, it started to feel a little different. And even the fact that the Fed is now shifted into easing mode with stocks not having sold off very much, it feels a little bit different than past periods of tension throughout this essentially decade-long bull market. Yeah, I suppose at a minimum, you would ask, okay, even if the Fed isn't cutting rates into a recession, if what it's trying to do is to extend the expansion. Well, then realistically, how long are they actually going to be able to do it, given that we've had, what, more than a decade now, I think, of expansion or exactly a decade.

It's sort of like pushing on a string at this point. And the other argument, and again, I'm getting sort of deja vu, because this is something we used to talk about a couple years ago, but there's this notion of bang for buck when it comes to the Fed easing. At what point is the market no longer impressed by the Fed's dovishness or, you know, easing or policy measures. And it does, especially when you look at the bond market, right? The bond market is now basically demanding three rates into the rest of the year, which seems really, really extreme. And it seems hard to believe that the Fed's going to be able to deliver on that. And just to Mark's

point, you know, the soft landing is kind of a myth. The idea that the Fed has really particularly any ability to engineer one as evidenced by what we saw with the rate cuts that started in 2007 and 2001. So even a Fed that is well attuned to the risks and observing all them at credit markets and so forth and what the bond market is saying, it might just be that they really, it just doesn't matter, basically to your point as well. Right. And one thing is for sure. This time next year, we can have Mark Cudmore back on and he will either be a massive hero within Bloomberg or we can vilify him and make fun of him for missing out on whatever epic bull rally there's been. I thought you were going to say either he'll be a massive hero inside Bloomberg or he won't be inside Bloomberg anymore.

That'd be too harsh. That'd be mean. But either way, I love talking to Mark and I'm looking forward to having him on again a year from now. So looking forward to that. Absolutely. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. I'm Joe Wisenthal. You can follow me on Twitter at the stalwart.

Our guest, Mark Cudmore, is not on Twitter, but I really think he should be. Maybe people can email him and harass him to get on, because he would be great on there, but he's not on Twitter. But you should follow our producer, Laura Carlson, on Twitter at Laura M. Carlson. You should follow the Bloomberg head of podcasts, Francesca Levy, at Francesca Today, as well as the new home of Bloomberg Podcasts on Twitter at the handle at Podcasts. Thanks for listening. I'm Francine Lacqua, an award-winning journalist, and I've got a new podcast, leaders with Francine Lacqua from Bloomberg Podcasts.

I've interviewed everyone from Heads of State to fashion icons about the news of the moment. But I've always been curious who are these people as leaders. I don't think there's one right way to be a leader. Make decisions. A poor decision is always better than no decision. Listen to new episodes every other Monday. Follow leaders with Francine Lacroix wherever you get your podcasts. What separates good leaders from transformational ones?

I'm Jessica Chen, and in season two of Leading By Example, we'll sit down with executives like Grace Chen of Bertie Gray to find out. It's important to understand where you spike, but also really acknowledge where you don't and find people who can fill those gaps. Listen to leading by example, executives making an impact on the IHeart Radio app, Apple Podcast,

or wherever you get your podcasts.