The Breakdown - Sven Henrich (NorthmanTrader) on the Ever-Weakening Economic Cycle

Episode Date: September 26, 2020

Sven Henrich is the founder and lead market strategist at NorthmanTrader. Well known for his appearances on CNBC, CNN Business and MarketWatch, Sven is also the host of the Straight Talk podcast.  In this conversation, he and NLW discuss: The ever-weakening economic cycle Why the Fed has boxed itself in  Why the asset price bubble is contributing to wealth inequality  How market capitalization-to-GDP reached all-time highs What the election means for markets  Find our guest online: Twitter: NorthmanTrader Website: northmantrader.com

This recovery from 2009 to 2020 was the slowest recovery we've ever had. So that's what I'm saying. The central banks are trying to counteract this by ever injecting themselves with ever more liquidity at the same time not being able to extract themselves from the monstrosity that they have themselves created by conditioning markets to expect them to be there all the time when at the slightest sign of trouble. And so the cycle just, you know, as we've just seen again now, you have an entire economy that's not prepared to take pain. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the

big picture power shifts remaking our world. The breakdown is sponsored by Crypto.com, BitStamp, and Nexo.io. and produced and distributed by CoinDess. What's going on, guys? It is Friday, September 25th, and today I am actually going to start with a quote. This is from a tweet sent last week after the Fed's FOMC meeting.

Today, millions of investors gather for the regularly scheduled ritual called Fed Day, celebrating free market capitalism by hanging on the lips of what more gifts the head of the Central Market Politburo bestows on the top 10% that own 87% of all stocks. A subsidy benefiting the wealthiest while leaving the poor in the dust. A subsidy based on lies told by idiots, signifying nothing other than a reflection of a bankrupt political system that is incapable of developing structural solutions and entirely dependent on ever more debt expansion and cheap money. A house of cards that

will crumble when the efficacy of central intervention and the ever-desperate efforts to make reality reach their limit. That tweet, that absolute fireball of a tweet, comes from my guest today, Sven Henrik. Sven is the founder and lead market strategist for Northman Trader. You may have seen him on CNBC or CNN business or market watch. He is the host of numerous podcasts and YouTube shows, including the new podcast, which I'm really enjoying, called Straight Talk. And as you can tell for that quote, He has quite a strong opinion about the state of these markets. In this conversation, we get into Fed policy. We get into wealth inequality.

We get into what the election might mean for markets. It is, if I say so myself, a hell of a conversation. And I'm sure you're going to enjoy it. So without any further ado, let's dive in. All right, we are back with Sven Henrik. Sven, thank you so much for joining today. I'm glad to be with you. So I'm really excited for this conversation. I've been following you for a while. I know a lot of the listeners of the breakdown also follow you. And I think share some of the frustration that comes out that you have with the way that markets have evolved or perhaps a better way to put it is has been kind of nudged by various actors. So I'm excited to dig into everything with you today.

Anything we can discuss. I'm happy to. I mean, look, if we come across as frustrated, I'm really not. I'm actually. having a great time. I mean, you know, look, I'm a child of volatility, love volatility. And, you know, when you hear me ranting about the Fed, about this, that, and the other, a lot of it has to do with volatility compression, because that's what central banks too. So when I was, you know, moaning about lack of volatility in July and August, running into this massive market top, you know, there was a reason for that. We had these tight market intradrate ranges when nothing happens. It's just not my favorite environment. Some people may like this better. than I do, but, you know, so fair game.

But that's what central banks do. They compress volatility. Now September, we got volatility back in a major way. So I'm loving it. So there you go. Perfect. All right. Great.

Well, that's a better frame set. I mean, I think that's an interesting framework to think about as central banks has volatility compression. In some ways, volatility just represents normal market functioning, right? If there's too little volatility, it suggests that something is perhaps wired correctly. Well, that's what they've done. I mean, you can actually hear the Fed themselves using the word and Powell himself, you know, to calm markets, you know, that they hate volatility in the sense that, you know, it reflects two-way price discovery. And, you know, for the last 12 years,

we've seen them step in. Every single correction has ever been, the Fed has stepped in one way or the other, or obviously global central banks as well. And, you know, part of my complaint in general has been because they are now in a mode where they've been forced to adopt this stance, to constantly step in, to always be afraid, because this is really what this is all about. They have, on the one hand, trained investors to not ever take any corrections seriously. Nothing will last more than a few weeks, right? Even in the March crash that we had, they stepped in so hard. December 2018, when we had that 20% of that 20% of.

drop on the heels of the Fed actually trying to raise rates and reduce their balance sheet. As soon as markets dropped hard, they stepped in and stopped it, right? That's what they do. And so investors have been trained not to take anything seriously. And I understand, and that's been working. I always keep buying the dip and so forth. But the perpetual machine that's been created as a result of that is that we see these exorbitant market valuations.

One of the metrics I've been using is market cap to GDP. Now you can argue about market cap to GDP based on technology companies having a global footprint and so forth. But what we've seen here in this run up here in September was insane. We got to 187% market cap to GDP. And so my point is they are the perpetual bubble machine because they're afraid. They cannot take any volatility in markets and they're afraid of, I guess maybe, the corner they box themselves into because as soon as you get a right sizing of markets, it has the negative impact on the economy. And since they constantly view themselves in the business

of managing the economy via market and market trajectory, you know, we keep getting building ever larger bubbles, not only on the asset valuation side, but also on the debt side because they keep enabling it. And that's my worry because we're ending up, you know, coming out of this crisis here, not only with the largest market valuations ever, but also the highest corporate debt and the highest financial debt in the U.S. And that, to me, is creating a ever-weakening economic cycle. And that's kind of confirmed is what we've seen in the last 20 years, because, yeah, we keep lowering rates and we raise them ever incrementally to lower highs.

And so the economy is zomifying itself. Right now, obviously, they have all these companies. buying, you know, or they are buying junk debt of all these companies. And you have all these companies, these zombies companies running around that don't generate any profit or their debt obligations are higher than their, than their profits. So my critique has always been, well, are they actually doing any good here? Because, you know, it's, it's, the system never gets to cleanse itself properly. So one of the things that you said are the way that you characterized it, which I think is really interesting, is this idea of it being them buying.

into a corner and being a self-reinforcing cycle. And I think the question is whether there's any way for them to peel them back or based on this mandate for economic stability, right? And as you put it, trying to manage the economy through markets, their next move, their move 10 steps down the line is just predetermined by the past 10 moves they've made. Let me be fair. I'm not blaming everything on the fit, there's a lot of things that they don't control, and they are reactive to all of it. I mean, one of the, you know, it's called the big Ds, right? I mean, one of the big issues, obviously, is this technology revolution that we've had over the last 25 years, and that's, it's the largest deflationary force the planet has ever seen.

So you are running a wall there, and they don't control that, and they're being reactive to that. The other one is, of course, demographics. One chart I've been posting over the last few months, which I find absolutely fascinating, is the growth in the working age population actually has gone negative. We've never seen that before, right? And so what the entire financial system has done in order to combat these things, deflation and demographics, is to enable ever larger debt creation. None of the growth that we've seen since the financial crisis has been organic in the sense that economies or markets or anything can work on their own. It needs ever more debt to sustain itself. And ironically, none of that has produced above-par growth at all.

In fact, this recovery from 2009 to 2020 was the slowest recovery we've ever-euvre. ever had. So, you know, that's what I'm saying. They, they, the central banks are trying to counteract this by, you know, ever injecting themselves with ever more liquidity. At the same time, not being able to extract themselves from the monstrosity that they have themselves created by conditioning markets to expect them to be there all the time when at the slightest sign of trouble. And, and so the cycle just, you know, as we just seen again now, you have an entire economy that's not prepared to take pain at all. Now, obviously, what we saw with COVID was unprecedented, no one could have seen it.

But if you think about how many companies and people individually could not handle a three-month, you know, tough period without major intervention, that's got to be concerning structurally. Are we prepared to do to actually do anything on our own without permanent intervention? And I'm afraid that's kind of the scheme we're in. And the larger question to all of this is efficacy, because it takes ever more debt, ever more intervention, and produces incrementally ever less growth. That's not a winning combination in my way.

The marginal unit of intervention required to move things is definitely getting stretched further and further and further. And I guess part of this is, to your point, the zombification of the economy. I mean, what's your take on? on the counter critique of the zomifying argument that says, look, you know, these companies aren't, they're not preventing any other companies from raising money, you know, yada, yada. I mean, do you kind of buy that or do you think that these companies are just a net drain on the economy long term?

Well, you know, we used to have, you know, this concept of free markets. I know it sounds radical these days, right? It was called capitalism. You should try it again. it was pretty cool for a while. It's called creative destruction. You know, you have companies that are well managed and they do well and they survive. And you have companies that are not well managed and they don't have good business models and they don't survive. That's the way it used to be. And everybody, you know, from the Fed on up and politicians, none of them want to see recessions,

I guess, I get it. You know, politicians don't want to see a recession because it's bad for re-election, right? The notion that has kind of been come to the forefront, it has to view recessions as a bad thing. Yes, they're not fun, but they serve a purpose. That cleansing process I talked about, you want new creativity, you want a cleaning of the slate.

It's like a forest fire, right? A forest fires are terrible, but then you have new growth. And that's what a organically grown economy needs in the long term. But by preventing every single forest fire, you know, we're just ending up with this jungle, intertwined and non-efficient companies that are, yes, a drag on the economy.

And now you get the argument from the Fed. So, well, if we don't intervene, all these companies go bust and we're going to have to lay off more people. Well, duh, they're laying off people anyway. I mean, if you're looking at, you know, airlines or this, that, and the other, they're continuing to lay off people, despite having gotten, you know, bailouts and obviously spent billions and billions and billions of dollars in, buybacks. That's maybe the problem to start with, you know, because, you know, as I said, there was no safety net. These companies had no safety net. Well, great. If you blow billions of dollars

in buybacks over the years, your cash position is low and you loaded up on debt, financed by a cheap money courtesy of the Fed. Yeah, you may not have a big cushion to deal with your business model. And so now, basically, the Fed is subsidizing that bad behavior, if you will. I mean, no one says that buybacks need to be a key ingredient to a functioning economy. Not at all. Buybacks are luxury that's used by management to inflate stock prices because it improves earnings per share on a per paper basis, right? Because it reduces the float of the shares. Yeah, I think that the, it was interesting to see how, if you remember, look back at kind of, you know, late March, early April, there was a strong kind of anti-buyback narrative.

It's when you saw Chamath on TV talking about the airline should be let them fail. And it's interesting because it's quieted down a little bit, but, you know, we haven't seen necessarily a huge return of buybacks, at least as kind of a headline strategy. What you have seen over the course of the last month and a half is an extreme amount of insider selling, right? record, or not record, but since 2015, the August was kind of the most executive selling of their own stock that we've seen. And I guess what that brings it up to for me or a question for you is, what do you make of the sort of September, basically, of the kind of turmoil or the struggle in markets right now? Is this sort of a temporary hitch or is this something that's more significant? And I know you actually just published a piece about three, three factors that might be shaping this.

Yeah, I called it triple trouble because it's kind of interesting how this all flows. One of the key charts I've posted in the lead up to this top that's been bothering me for months is it was called, it's a value line geometric index. It's called SVG. And I have pointed out that while the SMP and the NASDAQ kept making, new all-time highs. Based on a geometric value line, equal-weight basis, the market was trading terrible. It was interesting because that process of weakening internals in the market on an equal-weight basis dates back to 2018. That's when, on that basis, we made all-time highs.

And then the highs that came in 2019 and 2020 at the early part of the year, we're already on a market weakening path. And so what happened was we had this rally in the summer into June. We had a big rally for the lows into June before the correction. And equal weight peaked much, much lower. And then when the S&P went to new highs, the NASDAQ went to new highs, it actually kind of put in a potential double top. And that chart is highly, highly relevant. Because if you use that as you guide, then S&P actually, when we just made high, all-time highs at the beginning of September, that chart says basically on an equal weight basis, we're kind of trading at 2750 to 2850 and that these highs that we just saw were so deceiving because all that market cap that impacted

these indices was driven by those fabulous five, six, seven stocks that we all know about, you know, the Apple, the Amazon, Tesla, and so forth. And we had this hyper, hyper retail chase momentum into these stocks that created just these insane valuations. Now, I'm not denying that these tech stocks deserve a premium because they disproportionately benefited from, you know, this whole move to online and work at home phenomenon. No quarrel about that. But when you see a stock like Apple, which is a great company, I love Apple, I have all kinds of Apple products, but when you see a company that took 35 years to get to a $1 trillion dollar valuation, and then only 12 months to get to a point, the $2.34 trillion valuation.

So a $1.234 trillion increase in 12 months, what took 35 years before, you have built in future expectations of optimism that are not justified by anything that Apple does. I mean, you know, yes, get some benefit out of 5G and maybe it's a great growth story, but to recognize that not only the market cap has expanded so insanely, but the Ford multiple has doubled in 12 months. That's a lot of optimism, right? And so we got into September, we got into these just massive tech chart extensions. And I pointed out this one chart is the Nasi.

It's one of the summation indices. And it just kept showing weaker and weaker and weaker participation of the NASDAX. So my point here is that what we just saw in September. early September, early September was kind of your classic potential blow off top. And that's kind of what we saw in 2000, right? Because technology, again, just like in 2000, has this really heavy overweight component vis-à-vis the rest of the economy in the market. And maybe more deservedly so than in 2000, but it's still very much an extreme. And so you had all these just unrealistic expectations built into these stocks. And now they're got hit. So this is the first thing that happened. We got the air came out of that bubble to a large degree, right? Apple just dropped 25% for example. And, you know, I'm telling you, market cap moves like that up and down, that's not stable. That's not healthy. And for reference point, you know, that does not necessarily mean the top is in, for example. And we saw that in

the lead up to the 2000 top as well. High volatility, which we had here also in the lead up to the September top because we had the VIX kept rising and I've been pointing out bullish patterns on the VIX that I've been building and that was kind of a clear tale sign that's something not all is all that well right because if the Fed, if you believe like I do the Fed's you know quiet goal is to compress volatility they really failed here because volatility kept kept building and so that that actually broke out and that was all kind of the warning sign that this thinning market with the rising. volatility, these massive valuation expansions, that was just building up to something. And it did, right?

So now we got this flush. The other key chart there is the US dollar. The dollar has been crushed, right? Ever since we had that panic low, if you will. And the Fed has been printing money. And this is obviously the global printing phenomenon, right? It's the race to the bottom. And that's why we saw, for example, these massive runs in, and, and, you know, and, you know,

metals. It's all dollar related. And what I pointed out in early September was that the dollar ironically was building a bullish pattern. And it was this falling wedge on a positive divergence and it just broke out. We saw this breakout here in the September run. And today, as we're recording this, this is by the way, September 24th, the dollar has hit a key pivot point at 236 Fib. If you guys are into Fibonacci levels and the March low. So there's this price confluence here. And so I think this is kind of a key moment here in markets, a key pivot that may be important for metals as well. If the dollar can hold resistance here and drop from here, we can see a sizable market rally because markets are kind of actually oversold at this point, right? Because we had four weeks down.

We're 14, 15 percent down on the NASDAQ. So there's definitely some rumblings going on. So the potential is there for sizable market rally. But a lot of it also now depends on what's happening on the stimulus front, because that, as you clearly saw, has kind of fallen to the wayside. And that's kind of telling too, because the economy has now slowed down this initial influx from stimulus that we saw at the beginning, early part of the year and the Fed, they're printing. All of that has incrementally slowed, right? the unemployment benefits have expired. The Fed still keeps printing $120 billion a month, but it's incrementally less than what it was.

So to the extent you've created this big valuation balloon, you need really the growth to step up because without ever more incremental liquidity, with these incredible valuations market cap to GDP that I mentioned earlier, you cannot support this, right? And I think this is part of the reflection. that we have right now.

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see that play out a little bit. I also am really interested in the, this idea of, I think that you've summed up kind of the last piece of what you were just saying as noble market without stimulus, right? That, you know, this goes back to kind of where you started, which is that markets are just so condition now for this? It's, I mean, it's positively Pavlovian, right? It's silly at this point. I mean, the United States Federal Reserve was non-accommodative for three months only in the period between 2009 and 2018. It was in the last three months when they actually officially stopped the language in their statements because it was always accommodative, even though they, they ever so gently tried to raise rates to a significantly lower high. And they, you remember that

famous statement by Powell, you know, balance sheet, roll off on autopilot. You know, they, they tried fair enough. And, you know, when Powell first came on board, I actually thought, hey, maybe this guy is going to be different because there was a, there were notes from a Fed meeting in 2011 where he acknowledged, well, you know, we're, we're conditioning investors to exactly what we just discussed for them to know we're always there, always there to help bail them out. So I actually thought when he came in, well, maybe this guy is different and he's actually going to follow through. So when he said, balance sheet roll off on autopilot, hey, I was in Powell's camp, only to see him crumble like a leaf when markets drop 20%. That was the end. And they

immediately went back to accommodative, he flipped for policy, you know, and dropped. And remember, Remember, when we topped in February 2020, this already came on the heels of massive balance sheet expansion and three rate cuts. You know, with the repo crisis, which they've never properly explained, when that happened in September 2019, that's when markets took off. They did not take off before that. So it was always about the balance sheet. It was always about liquidity. And here we are. So this is the trap ultimately, because now they are.

Obviously, you've gone full blanket here and say whenever we're basically going to rates again until some magical date in the future, which currently is bookmarked as 2023, 24. That's just sad. Yeah. So, you know, what's interesting is they have, on the one hand, they're sort of locked into this policy around rates, but they're also now sort of on the trail pitching more fiscal stimulus. I guess, you know, Powell was on the Hill earlier this week. Do you think that the sort of commentary that he's putting out there about running out of things to do, is that just a political

tact to try to get Congress to move? Or is it really a reflection of the Fed feeling like they're running up against their limits of their ability to stimulate the economy? Well, first of all, I come from the perspective and saying that actually I think that the you know we talked about diminishing marginal returns I think this is a great illusion here that we all may want to believe that the Fed is actually maybe a lot less powerful than we think keep in mind reduction in interest rates was a powerful tool it was a powerful tool when you were at you know 500 basis points in 2000 or 500 quarter basis points in 2000 and it was a powerful tool when you were at 500. the basis points in 2007.

Well, guess what? They were not anywhere near that last year when they started cutting rates, which was basically two and a quarter. So the stimulative effect of going to zero this time around is a lot less than it was in 2007 or in 2000. And that's, I think, what we all need to recognize. For example, the ECB, which also cut rates obviously this year, but they during a long business the longest business cycle recovery ever couldn't even bring themselves to raise rates to zero right so they cut to no you know further negative from negative so what's the stimulative effect of that give me a break it's not there so the only tool they really have is to just keep buying assets and junk bonds and you know god knows what and obviously finance

U.S. debt. So I think that the notion that they are actually stimulative here, other than pushing asset prices, is a delusion. Yes, but the economy bounced back from just a historic shutdown. You would expect that. But the reality is none of the central banks can stop. I mean, this is the question I keep asking. What would this all look like?

what would all this look like if they stopped? I mean, not one of them can't, I mean, they couldn't even afford to raise rates a quarter point. It would be a complete disaster because, A, because markets are so conditioned on them, but B, because the debt loads and everything is so intertwined with cheap money, the entire system would collapse. And, you know, let's, let me bring back market cap to GDP because I think this is really important. 187% in September. To put this in perspective, the historical run rate of this in the 80s leading up to this

to 2000 was around 65 to 75%. It was the bubbles that came, the tech bubble in 2000, which was also fueled by the Fed, because Alan Greenspan injected a bunch of liquidity ahead of Y2K. Remember everybody was afraid was going to happen, Y2K with the, you know, everybody was afraid was going to happen, Y2K with computers blowing up. So they injected a bunch of liquidity. I guarantee you, that liquidity went straight into the tech bubble. They did that.

And then Greenspan withdrew the liquidity following to Y2K and everything blew up, right? And then in 2000, we had the same thing. We had a move back market cap to GDP that was high, but not as high as in 2000. In 2000, the peak of that market cap expansion was 150% market cap to GDP. then the recession came and it dropped to 75%. Now the housing bubble got us to about 130, 130, 305% market cap the GDP and then the rate financial crisis dropped it to 50%.

So just to put this in perspective, when you're in a deep recession with trouble, you have some cleansing process and it drops are usually sizably below 100%. What you don't expect to see is to see it to go to 100%. 87%. So my criticism here this year has been, while I recognized the Fed had to intervene, they've again done it via asset price inflation. They've created a asset bubble that specifically has evidence manifested itself in tech with unsustainable valuations. And in the process,

they keep repeating the same trick, which unfortunately is producing ever wider wealth inequality in society. And my biggest criticism here is they are refusing to acknowledge it. And frankly, are straight out lying about it. I mean, Powell comes out there and says, to fit policy, absolutely do not contribute to wealth inequality. Are you kidding me? It's absurd. Do you think that they actually believe that? Or do you think it's just a line that they're forced into? It's a fair question. I mean, I cannot, you know, I cannot project what they actually think. I think part of, part of this is, I could say, okay, maybe they're in an ivory towel bubble, maybe they don't, you know, talk to people like me, which I mean, look, the Fed, you ever see Fed officials

challenged in a real way in their thinking? No, they have friendly interviews. They have a press court that's asking, in my view, not the hard questions. there's never any follow-up. They never get themselves into a controversial situation where they're really challenged on subjects. So maybe they believe what they're actually doing. Maybe they believe their policies are right, but maybe it's also a group thing type situation

where they never expose themselves in a proper way to the criticisms that are being brought forward. I mean, an example. Last summer, you know, I was having a go at Mr. Kashkari from the Minnesota Fed, right? And, you know, he's just dismissing any, and I was not being aggressive. I was not being unfriendly or unprofessional

whatsoever. But, you know, he goes out there and is dismissing any Fed critics as swashbuckling pirates, you know, he's not engaging in a real dialogue there. So there's a bit of institutional arrogance there. And maybe it's method, because here's the other thing. And I've been writing about this for the last, last few years as well. I call it the confidence game, capital C, capital O, capital N. The Fed has to

project confidence. The Fed has to maintain the aura of all-knowing and invincibility, because if the Fed ever loses credibility with the market, I think it's game over. They cannot really admit failure or even admit to the issue of wealth inequality. For example, if it were to be proven, which is my assertion here, that by creating ever larger asset bubbles in assets that are predominantly owned by the top 10%, if they were found to be a direct link, which I think there is, I think a well-established link, right, because of Fed policy and market movements are very much intertwined, then they have a major public relations problem because they claiming to want to improve maximum employment, but that maximum employment does not produce

a population that is actually able to sustain itself on the long term, that's a major policy issue. Because I think it would go to the core of whether the Fed is an instrument of good versus an instrument of bad. You know, they themselves see themselves as good as the saviors of the economy, but as I look at a larger macro economy, that's getting weaker and weaker, with the bottom 50% being left ever further behind, and that translating into ever more, you know,

extreme political tensions, because there are so many people that are susceptible to all types of populist arguments, that leaves them angry and frustrated. I see their major societal implications that no one wants to address. But so at this point, they just keep doubling down on what they keep doing, and I don't see how that's improving the long-term shape of the economy. It's really interesting.

There was a, Keshkari did an interview, I don't know, three or four weeks ago, and one of the kind of interpretations that I saw was someone saying that, although he didn't formally acknowledge any sort of asset bubble, because of course they're not going to acknowledge that, he seemed to indicate that even if there were an asset bubble, if the price of full unemployment or full employment was an asset bubble, that was probably a price they were willing to pay. Again, this was just interpretation. But the interesting thing about this commentary was they were like, play this out to the furthest extent. Would we want to live in a society? where the only people that own assets are the 1%, but everyone else is guaranteed at least some

job, no matter how menial. And of course, that's not a society that we want to live in. And so it almost feels like it's not just even the sort of outright denial of wealth and equality. It's a vision of what how how much inequality matters in a society that they're sort of implicitly engaging in. Yeah, I mean, I obviously can't speak to him directly, but I think that is, that is the reality. I think, you know, look, what's the, put themselves in their position, what's the alternative here? Are we going to let this whole thing deflate? And the consequences of that would be horrible. I totally get that.

Yeah. We'd be in a depression right now. But there is no solution to it. So it's the only game they have is to exacerbate the price bubble ever. ever further. And as a result, it continues to exacerbate wealth inequality. Where does that lead you ultimately? And of course, since everything is debt financed, you are in a situation where you can never, ever raise rates because you cannot sustain a debt. That's why you come up with all these MMT arguments and so forth. You know, obviously, you know, now we can argue that nothing matters and

we can just keep financing, you know, goods and services with non-earned money, if you will. I mean, I guess that brings up the question, which is pretty essential, right? How can you get out of this? Is there any way out other than debt jubilee or currency devaluation? I'm afraid there's so, I mean, look, ultimately the only way I think this whole thing can solve itself to something better is to go through the pain. Unfortunately, because they keep intervening, they've created a set of circumstances where the pain eventually will be so great that no one wants to fathom it. I think that's been the fear ever since 2009.

That's why we had QE2 after QE1 and then Twist and QE3 and now QE4. I think everybody is afraid of the consequences and ever more so because obviously the bubble has ever more expanded. My worry here in the near term is that, you know, it was actually fascinating to see unemployment dropped to 3.5% in this cycle because my view was always, wow, with all this new technology that we have available to ourselves, when a company is actually going to take advantage of that technology and streamline their processes? If efficiency can be achieved via online via all kinds of services. Banks, for example, have been doing that already for a while, right? I did that last year already, right? You can know a lot of banking services. You don't need tell

us anymore and you just close these branches down. Well, now with COVID, we've got the perfect excuse. And companies are doing that in a major way. They're obviously reorienting themselves how to do business in a different way in a more efficient way. And that now brings us into a whole new problem because the Fed keeps saying we want to go back to three and a half percent unemployment. Well, you may not be able to because companies, you know, while you see some companies now announcing again seasonal jobs for the holiday season, mainly in packaging and shipping goods to other people, you know, these are not your high quality jobs. And when you see major companies, I have to thread on Twitter been running since May about

layoff announcements by large-sized companies. And it's frightening. This thread is going on and on and on and and these are not a little layoffs. I mean, these are major companies laying off by the tens of thousands. I think we're looking at a very different economy going forward. So I think, you know, the FETs narrative of, you know, we're going to keep at this until we achieve our, you know, fairytale goal of 2% plus inflation and maximum unemployment. That sets them up for ever, never, ever, ever being able to raise rights again. That's the concern, right? I guess one other dimension of this that I'm interested in your take on

is how you see the markets preparing for or thinking about this election cycle coming up. Well, this one is a tricky one. You know, I mentioned earlier about, you know, the more extreme that we see in the political discourse. We are now faced with a real possibility that we don't have a clear winner in November. We may. And actually, I hope we do one way or the other.

I hope there's clarity and everything's fine. If that's the case in my mind, we're going to see a major relief rally in markets. I think markets are increasingly concerned about they're not being a clear winner and that we end up with a contracted legal process. the you know the president president Trump has made that very clear right he keeps talking about rigged and this yeah other democrats have also said the same thing you know if there's there's an erosion of trust let's put it this way there's there's an erosion of trust and to the extent you and i know political opinions very greatly and everybody's in their

own camps i'm just saying you that is not healthy that is frightening i mean i mean America has always been a beacon of democratic process, a champion of free elections all over the world, right? And now we're in a situation where the world looks at America and goes, what are you guys doing? And I'm not going to go into the politics of it and the motivations of various people. I think that's relevant. What's relevant is that markets do not like uncertainty. And if this uncertainty gets pushed past the election and now you have a legal protracted process for whatever reason, right?

This may be long-term damaging to the extent that, okay, so if you have a protected process that lasts maybe, or two, three, four weeks, maybe that's acceptable. And then we have a clear winner and then we have a relief rally as a result of that. However, if this thing gets so ugly, so ugly that half the population does not accept the results because of whatever's going on politically. You may not have, even though you may have a declared winner by the courts, you may have a in the eyes of many an illegitimate president. And I think that would be dreadful.

because one of the core issues I've seen over the last few years is, and I'm going back to central banks on this one, by central banks continually bailing out markets, they have inadvertently given license to politicians not to do anything. We don't need to do anything structurally. We don't need to really solve the hard, complex problems because we always have the magic Fed fairy there that helps us or bales us out out of the problems. And so these structural problems that no one wants to address keep lingering. And if we, and one may argue our political process is already horribly broken. But, you know, if it gets worse, I don't see how other than keep running up dead, we're going to go to anywhere.

Especially if you have this aura of illegitimacy. So I think what happens in November is really important. but unfortunately, it's also highly unpredictable. Yeah, that is, that's for sure. Well, Sven, I really appreciate your takes on all these things. You may not be frustrated, but you're certainly fiery, and I think a lot of folks really enjoy being able to follow along with what you do. I guess as people are trying to make sense of everything happening,

trying to make sense of what markets are doing and where we're headed over the next few months, what signals would you recommend looking at that maybe people aren't paying enough? attention to. Well, I pointed out a few charts on my Twitter feed, but I'll just summarize a couple of them. First of all, the VIX, I mentioned volatility again earlier. VIX has been acting in an interesting way this year. I mean, obviously we had this massive rip to 86 on the crash. And then typically what you've seen in the last, you know, few decades is when the VIX

has a big rip, it then ultimately gets compressed back to pre-crime. levels. That hasn't happened yet. Now, if you want to be bullish about this on markets, you can say, okay, the VIX continues to have open gaps. For example, now in September and August, it's built on the VIX futures contract, open gaps. Typically, I'm in the camp that says every VIX gap ultimately fills. So if you want to have that, I'll look, and I'm kind of in that camp myself, is eventually we'll fill this, fill these gaps, you know, like to get a vaccine and everything recovers next year. Wonderful, right?

But the fact that the VIX hasn't managed to fill its February gap while markets made, the indices, made new all-time highs in August and September, that is interesting, okay? First of all, second of all, it continues to build compression patterns that keep breaking out. That's bullish on the side of the VIX. And then I put out this pattern, this larger pattern, it builds a potential inverse pattern. It's not confirmed, but it's not invalidated either. And that pattern points to 55 to 70 on the VIX right into October November.

So if the market is kind of anticipating trouble with the election and no stimulus package, for example, and a coming downturn in the economy in a major way, then we can have another massive volatility event into the latter part of the year. So again, not confirmed, but not in. invalidated, I think the VIX is key to watch. Equal weight, I keep pointing to that. If at the chart, at the current constellation, there is potential for a double top and equal weight. That means that the new highs on the indices were an illusion and that the kind of the proper weighting of the market is much lower in this regard. Now, having said all this, if you do get a stimulus package and you get clarity on the election, then, and maybe even the Fed adding more

liquidity and early November, by the way, their meeting is right after the election, then, yeah, you have potential for massive rallies. You know, that's, that's there as well. So none and nothing is set in stone. I think the natural state of the market without an dimension is much lower, but clearly liquidity so far has managed to propel markets to levels that frankly are undeserved in regards to the fundamentals. And so navigating through these markets, I think you have to be.

practical and not dogmatic because, you know, as I will certainly challenge this summer. But, you know, we've had very good move from the long and short side. And even here in September, there's a lot of tradable opportunities here. Either way. It's interesting that you pointed out the FOMC meeting that's right after the election. It seems not coincidental, right? You know, it's interesting how they always do that. I mean, you know, like last week, they had a a Fed meeting right during OPEX week during the day when VIX futures contract expires. I mean, it was just this classic move we saw the week before. You know, there was another technical pad on the wedge.

And I just knew they're going to compress the VIX and they did it right into the Fed meeting. And that was the end. That was the top for that week, right? So, you know, I don't know to what extent it's all coincidental. But if you want positive results in markets while you have a meeting, you may want to do it during OPEX week when the VIX Futures contract expires. And them having placed that meeting right at the two days after the election, let's say it gives them at least a lot of flexibility to react if they feel they need to do that.

And I think maybe part of what's going on right now here with the latest Fed meeting was that they did not want to commit to more purchases, but rather reserve that ammunition, if you will, if things get really shaky in November. Really, really good thoughts. Sven, I appreciate you spending this time with us today. For people who want to follow along, where can they find you? I know you put out a ton of content. Well, there's the website, northman trader.com. If you want to see kind of my daily blurbs and thoughts, you can find me on Twitter at Northman Trader. Wonderful. All right. Well, thank you so much for hanging out today. And we'll be sure to check in again soon. It's been a pleasure. Thanks, Nathaniel.

There was a phrase Sven used in that conversation that I wanted to pull out. He called what we're experiencing the ever-weakening economic cycle. I think this is a really important point. The problem isn't just central bank intervention. It's that each unit of central bank intervention is creating marginally less impact on the economy than the one before it. Of course, that means that the intervention has to grow in size, in scale, in scope. The problem is that process of accelerationism has created a nearly

Pavlovian response to markets where we forget that they were able to think for themselves before this sort of central bank intervention was the norm. This reminds me of my earlier conversation this week with Corey Hofstein as well, who showed what he called a market incentive loop that as it accelerates seems to get stronger. What we have then are the self-reinforcing market loops that leverage us higher, tear us down faster, and ultimately leave us more vulnerable. Understanding these loops and how they are self-reinforcing is perhaps and hopefully the first step to figuring out how we can get out of them. However, that's a lot easier to say than to do. For now, I appreciate you hanging out. I hope you enjoyed this conversation,

and until tomorrow, be safe and take care of each other. Peace.