The Pomp Podcast - Sven Henrich, Founder & Lead Market Strategist at NorthmanTrader: What Central Banks Do Next

Episode Date: September 4, 2019

Sven Henrich is the founder & Lead Market Strategist at NorthmanTrader. In this conversation, Sven and Anthony Pompliano discuss the macro environment, how we got here, what central bank options are moving forward, what is "The Confidence Game," and why some people are forced to buy overvalued assets. CRYPTO.COM-----Crypto.com is a pioneering payment and cryptocurrency platform that seeks to accelerate the world's transition to cryptocurrency. With the vision of "cryptocurrency in every wallet", the Crypto.com App offers a full range of financial products with competitive pricing, well designed UX and high security. It is the best place to buy, sell and pay with crypto. COINMINE-----The Coinmine One is like an Xbox that turns your electricity into Bitcoin. You just plug it in, connect to wifi, and tap on the crypto you want. It’s so easy anyone can do it. Everything is controlled from the Coinmine mobile app and the Coinmine keeps getting better with over the air updates that add new coins, features and services to your Coinmine.  Visit coinmine.com/pomp to get a Coinmine and earn crypto for powering a new world. BLOCKFI -----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Sven Heinrich is the founder and lead market strategist at Northman Trader. In this conversation, we discuss the macro environment, how we got here, what central bank options are moving forward? What is the confidence game? And why some people are forced to buy overvalued assets? I really enjoyed this conversation, and I hope you do as well. Buying, earning, lending, and card payment. Everything you could want at Crypto.com.

Go help your boy out. Tell him Pomp sent you. Download the app or visit Crypto.com. Pomp's got you, always. Ever wanted to get into mining and didn't know how? Don't worry, your boy Pomp's got you. Everybody got some electricity and Wi-Fi. All you got to do is go to CoinMine.com.

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paid monthly in cryptocurrency six percent is an absurdly high rate it's the best rate in the industry. I highly suggest you go check out BlockFi.com slash Pomp. Again, that's BlockFi.com slash Pomp to sign up and start earning crypto today. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang. I'm

here with Sven. I'm super excited to do this. Yet again, we have somebody who understands both the crypto world and the macro economy. So thank you so much for taking the time to do this all the way over there in London. Hey, Paul, I'm glad to be with you. Looking forward to the conversation. For sure. So maybe before we get into the macro conversation, just give us some background on yourself and kind of what you're doing today so we understand the perspective you're coming from. Yeah, sure. I mean, I actually come from originally a corporate background, was in corporate development for a long time with large wireless companies who build up networks across the globe. So I had a lot of international corporate development, then saw the startup phases of these businesses. So I always had a very analytical mind in terms of looking at businesses from the grounds up and get a realistic perspective, what is doable, what is not doable from a valuation perspective.

Then I always had an interest in markets myself as an investor and then ultimately transitioned into a trading environment because i quite enjoyed it and uh i found myself in in europe a few years ago and uh had a difficult time connecting with the financial world via via the access i had there and i ended up on twitter and uh twitter is a fantastic medium to to reach out to people and connect with people and uh actually found that uh market analysis especially independent market analysis is actually a very highly appreciate commodity. I mean, obviously, we're all used to the standard Wall Street analysis and viewpoints. But I think social media in particular is opening up the opportunity for independent voices to come out and offer an alternate view, maybe even sometimes a much

better perspective, as there's no conflicts of interest, if you will. And so we can be fairly unbiased. So that's what I've been doing for the last six, seven years or so. And I love it and enjoyed it very much. Very cool. And so maybe let's get into the conversation with just kind of a state of where we are, right? I think that there's a lot of folks that are paying attention on Twitter. They're paying attention to some financial metrics. And I think they're getting the sense of there's some alarm bells going off, right? And we've kind of are on the end of what was one of the best bull markets in history. And you've said previously that it's almost like the economy is kind of hitting a wall. So maybe kind of just give us a, you know, where are we and how

do you see that in the historical context of maybe the bull market that we've experienced last decade or so? Yeah, I'd be glad to. I mean, first of all, what we are, I think you have to view 2018 and 2019 as massively important years from a policy perspective. Last year, as you recall, we had initially the tax cuts in the early part of the year. There was a lot of optimism about growth coming. And of course, you know, we had all this liquidity from buybacks. And technically, what happened was when yields rose to a particular point, specifically the 10 year, he reached roughly around 3.25%. Something dramatic happened from my perspective. What a lot of structural bears have been complaining about for the last 10 years is that, you know, this

bull market has been financed by cheap money, by massive debt expansion. And the view was that at some point, there will be a time when actually you would see yields rise, that the entire debt structure cannot sustain itself because obviously everything rises, right? If you accumulate massive debt, at some point, your interest exposure becomes too high to be able to maintain that. And that's precisely what happened last year when the 10-year yield rose to 3.25%. The entire narrative literally fell apart. And actually, obviously, we can't show this in a discussion here, but the 10-year hit a trend line, a technical trend line that it's hit ever since the 1980s. We've gone from a period of lower highs, lower highs,

lower highs lower highs on on yields and central banks in in the same token have reached or failed in their ability to ever reflate basically the system they're forced to also capitulate if you will at ever lower highs and and to me from a structural perspective that is so fundamentally important because we keep going from cycle to cycle the cycle in the same manner right we had the tech bubble which ended up producing a massive crash and we had the housing bubble which produced a massive crash and each time the fed had to react when these bubbles were created and it had to drop rates and of course what happened in the last 10 years we ended up at zero in the united states we ended up negative in many places in the world specifically europe and we've never

been able to really re-inflate again and the fed in the last few years and i give them credit for that they tried they tried to raise rates again they tried to reduce the balance sheet and when they hit the wall in october right when the 10-year hit that wall that game was basically up the fed tried to still maintain its credibility by raising rates in december and it blew up in everybody's face right that's when we had that big massive market sell-off and obviously since then they've dramatically turned on 180 on their policy and have gone back from not only not raising rates to not raising rates to cutting rates which is now the cycle that we're in and and just to maybe wrap this particular point up. We're finding ourselves in a position after 10 years where

central banks across the globe have not been able to normalize. And I cannot emphasize enough how important this is because as we approach a critical point here in the economy and maybe in valuations, if a global recession is to ensue, the ability of central banks to be effective in a policy response is greatly, greatly diminished. And this is what I called on Twitter and on my website also the confidence game, because a lot of this is wrapped around psychology. And as long as you're still in a cycle where unemployment is low and asset prices are high, you can maintain confidence. But if you get into a position where you have a larger equity sell-off, then you lose that confidence. And central banks are struggling with this right

now because they don't know how to respond in any shape or form other than to pursue what they've done over the last 10 years, which is to cut rates again or even further and bring back asset purchases again. So, that's kind of the macro backdrop of where we are. Critical phase and it's a matter of control. Can central banks still provide enough juice and stimulus to extend the recovery that has been going on so long or will they lose ultimately control and the macro wheels that are already turning globally will wrestle control away from central banks. And then we're faced with a global recession and bear market, if you will. Yeah, it's funny because I saw you talking about recently, like this idea that historically

the Fed raised rates during loose conditions and they cut the rates once the conditions tightened. That's not necessarily what's happening right now, right? And so you almost get this weird activity. And then what that leads to is if you already have low rates and we enter into a recessive period, that tool is essentially mitigated. It doesn't have the impact that it historically has. And people have heard me talk about on the podcast before. In the last two recessions, the central banks cut interest rates by over 500 basis points.

There's not 500 to cut today. that's that's exactly it and you know ezb is still on negative and they're talking about going more negative i mean this this is this is just how absurd this all is you you mentioned the loose financial conditions yeah we the the fed cut rates in july with the loosest financial conditions in place in over the last two and a half decades since 1993 um it's absurd i mean if you can't grow with the loosest financial conditions in decades, what does that tell you about the inherent structural strength of the economy underneath? I mean, look, 2019 has been all about multiple expansion in assets. Why? Because of the Fed pivot, right?

The Fed put, the central bank put, it's already inflated. It's already been run on the expectation that they're going to raise rates. But has it improved in any shape or form the growth equation? It has not, I submit, right? We still see slowing growth everywhere, even in the United States. And yet we can talk about trade wars and what the impact is of that. But the fact is global markets peaked in January of 2018. That was before the trade war.

And the structural issues that are playing out in the economy, they will they will not go away no matter what they do at this point so the only question is how much can they in keep reinflating asset prices and there's a point that i made recently that i've you know kind of discovered on on the fly myself and that is how do you recognize that you're in a bubble and my my view on this has been that one of the different you know you can talk about sentiment and excitement and all this but there's one point to be made about valuation And that is how far do asset prices disconnect from the underlying size of the economy? And what I found was that if you look back at the big bubbles, 2000, 2007, asset prices, stock market values reached 146 to 140% above GDP, right?

And that's each time they hit that wall, if you will. And we've just reached the same thing again in January 2018, in the fall of 2018, and again in July of 2019, around 145%. So we're already stretched, and we're stretched because there is an alternative, right? Money has to go somewhere. So to me, what will have to take place is for central banks to be successful here, they have to blow a bigger bubble than we have seen before in terms of that valuation disconnect. For sure. And I guess as part of this, the other tool here that central banks have obviously is quantitative easing. And while they use that for almost a decade, there has been some relief from that. But I think that there's been multiple members of various central banks and governments

who have basically either explicitly said or alluded to the fact that we're probably going to go back to that and that's probably going to become the new normal, right? And I think that that is another piece of, you know, if you have two tools, you can cut rates and print money and you're kind of doing those and then you hit the recessive period. You just don't have the tools available to you that were previously there, or at least they're not going to be as severe on impact as they previously have been. Well, several points on this. I mean, we talked a little bit about rates and let me start with the rate equation first, Because no one's normalized, no one's been able to get to a period where they have a lot of ammunition, they are left with a lot less ammunition.

I found this, you know, with the Fed here in particular, fascinating. As you mentioned, 500 basis points were necessary in 2007. I think it was 550 in 2000. And, you know, now we're sitting at 225 basis points. The Fed only raised rates nine times since December of 2015. Historically, that's just not very much at all. It's not even half of what they were able to do in previous cycles before they're now back to cutting, which means now after this rate cut in July, they only have eight cuts left before they're hitting zero bound, right?

And with quantitative easing, you have the same issue. Yes, they reduced the balance sheet a bit, but Europe hasn't. I mean, the ECB ended QE just in December, and they're sitting at 45% balance sheet to Eurozone GDP. These are still massive amounts of balance sheets. I think globally combined, we're close to – I may be wrong on the figure, but I think it's close to $18 trillion still. I mean, globally, if you look at the cumulative central bank balance sheets, that equation hasn't really changed. And I mentioned the global central banks because they do have an influence beyond their own borders, right? This whole equation is creating this thirst for yield.

And so you get dislocations in terms of where capital goes. Just the prime example is the Swiss National Bank, the SNB, right? Tiny Switzerland has been printing money like you wouldn't believe if you look at the M1 money supply. And they've been using a lot of that money to invest in U.S. stocks. They're buying U.S. stocks directly and have a portfolio of almost $100 billion in FANG stocks, if you will. They own Apple. They own Google. They own Facebook.

I mean, that's part of the liquidity equation as well. So, you know, where to go from here, I question the efficacy of it all. To me, it's a policy failure because they've never been able to grow. grow. And keep in mind, originally, and this is, I think, another really critical point here is when the financial crisis hit 2008, 2008, and they had to do what they did to rescue the global economy. And I totally get it, totally support it. I mean, we were hours away from all the major banks blowing up. They had no choice. Fair enough, fully supportive of that. But the original premise, and this is where I go to the entire intellectual integrity of the construct,

The original premise was that these were to be emergency measures, that we're going to do this temporarily, we're going to reflate the economy, and then ultimately we're going to normalize. That was the premise, and that turned out to be the big central bank lie, because they never did. In fact, QE2 came, QE3 came, you know, we had twists and all this in between. And then in 2016, and maybe just add to this historical perspective, we had an earnings recession in 2015, 2016. And we were kind of heading the way toward a recession back then. And this is when the period of the largest central bank intervention ever happened, not on the side of the Fed, but on the side of everybody else. And they added $5 trillion plus in intervention between 2016 and 2018. And guess what? When that stopped, global markets stopped rising. That was the end of the game. And that's why we've seen Europe and Asia and everybody else already disconnecting hard. And U.S. markets actually not making much progress in the last year and a half at all.

So, what that basically shows is how much these markets continue to be dependent on the central bank put, this artificial liquidity put. And so, then the fair question to ask, I suppose, in regards to what I mentioned with stock market values above GDP, what is fair value of these markets if they don't have this artificial intervention nonstop? I mean, that's basically what it comes down to. These markets cannot do without. And as soon as they're left without, they're in big trouble. For sure. And so this brings me to this idea of QE4, which I know that you've said will be very big. Maybe talk a little bit about what you mean by QE4 and kind of how you look at that, again, from like the historical comparisons to the past ones. well the q you know we've been jokingly talking about qe4 for a couple of years on twitter because ultimately that's where this is all heading right the the fed in their minutes this week actually

talked about being proactive uh and what they call confidently experimenting with with additional asset purchases which tells me they're they're already talking about internally um preparing for that moment, which is an interesting kind of communication for a part because, and I call this the game of confidence. You know, the Fed's daily was talking about yesterday also carefully gauging the mood because you don't want people to stop spending because that's ultimately what we are. You know, the U.S. economy, we see, you know, recessive or at least slowing trends in a lot of aspects, be it manufacturing, be it in agriculture, be it in, And, you know, all these pieces and, of course, in earnings.

But the U.S. consumer is still holding up. And know that in December when markets dropped hard, retail sales dropped hard with them. There's a really close correlation now. That's why this emphasis on keeping U.S. consumer confidence high is very important. And when they flipped policy in January, when Powell came out with his flexible speech and markets just ripped higher from there, that's when confidence came back because asset prices rose again, right? When people see bad news and markets dropping, they get less confident and it's a natural consequence. So, the Fed now is very cognizant of this. And this is why when Powell came out in July about the rate cut, they did not want to let on that they may see darker times ahead, if you will, right? That's why they called it a mid-cycle adjustment, you know, like they did in the 90s. Don't worry, it's just a little adjustment. And therefore, you know, don't be concerned, don't lose confidence. Well, I'm sorry. If you're talking about a mid-cycle adjustment, as they did in their minutes as well, but at the same time, you're talking about large-scale asset purchases, you're talking on both sides of your mouth. You can't have your cake and eat it, too.

They are clearly worried about a recession coming. The stated objective by Powell is now to extend the business cycle. Because I think ultimately, and this is the biggest worry of all, how do you combat a recession? How do you deal with a recession where we have the largest corporate debt ever, the largest government debt ever, where 78% of people are literally living paycheck to paycheck? I mean, to me, that's the larger macro concern because people have not saved. They don't have savings. They're completely dependent on their job. and here we are at 3.6 3.7 percent unemployment at the end of a large cycle and there is no safety net that there is no protection you know i think that has to worry everybody you know whether you

bullish or or bearish and you know when you when you look at you know 3.6 unemployment and things look great and that looks manageable yeah of course it always looks great at the end of the cycle. It's what will it look like if we go back to 4%, 5%, 6%, 7% unemployment? That's the big major one. Absolutely. And so if you kind of continue on this trend around the world, right, there's, you know, again, as I said in the beginning, these kind of warning signs or alarm bells that are going off. And so you get the negative yielding debt, talks of the negative rates, et cetera. And one of the things that I've seen you say that just absolutely cracked me up, because it's so true, right? Every great joke has a hint of truth. You said, who's buying this stuff?

We're all on Twitter, essentially mocking it and laughing about it and saying, what is happening? But there are people buying it. And so any ideas there as to who those people could be or why people would be buying this stuff you know one one of the things that i find fascinating and i think that also everybody should be be aware of in terms of the investing universe to find themselves in we have buyers in in markets for all kinds of asset classes that are forced to buy that have no choice to buy or that are completely price and sensitive right because you you have on the one hand you got passive investments right money just keeps flowing in into etfs etfs track stocks and they just keep allocating to the stocks the big the stocks the

biggest stocks get the biggest allocations right you have pension funds that have to meet certain returns and they have certain legal obligations and they just have to keep allocating and and so i think what what's happening with the negative yield curve is a lot of that related oh and the negative yields they just have to allocate and it's it's frightening because that's a spiral that can keep going and and it it's one of those maybe potential factors that could wrestle uh control away from from from central banks you know you you always get to a point where it becomes systemic right when when something you don't anticipate um breaks the the stability curve and yields is a perfect example this year in 2018 right that two things happened they were first

obviously was in the september october time frame there were all these positive projections every major thing got upgraded apple's going to this this is going to that and s&p is going to 3200 and whatever and then of course we ended up at 2300 and the bottom fell out at the same time yields were projected to go significantly higher in 2019, based on the premises that were made in 2018. I mean, the range, I had a tweet on this one, that was a hilarious article in the Wall Street Journal a few months ago. You know, the projections were between 2.5% to 3.3% on the 10 year yields. Jamie Morgan, he was talking about 4% on the 10 year, even 5% last year. And this year we just now we ended up at 1.5 percent what does that tell you if this is the bond market is

the largest market on the on the planet and if everybody's getting the bond market wrong then please everybody step back and pause before making any more larger projections because obviously there's something broken in in in everybody's forecasting model the fed the same way right i I mean, they went from, hey, we're going to raise rates multiple times in 2019 and we're going to have our balance sheet roll off on autopilot to completely flipping policy. And this is maybe I go back to what I said at the very beginning. This is why there's a place for independent analysis, because maybe the systemic institutional analysis, like in 2007, just doesn't protect investors from seeing what is maybe coming down the pike. Remember, 2007, no one talked about financial crisis coming. Bernanke, the subprime is contained. There were no warnings. No one ever tells you to sell. No one. and and that's when people get really really hurt when things break now as long as things go up it's

fine but the song as soon as something breaks and obviously it's it's a big big big hurt factor for a lot of people for sure and do you feel like the fact that um i'll say everyone is talking about but but everyone probably being a very small portion of the world uh that just happens to be on financial Twitter, but so many people are talking about a potential recession or a market crash. Does that, to you, increase the odds that we won't have one, that we will have one? Do you think that there's no impact? How do you kind of look at the idea that there are people who are paying attention to the alarm bells? I just don't know if it's the right people or if it's just the folks on twitter yeah that's that's always the the uh the risk that we're all kind of in our own

echo chambers right we we we're exposed to certain people on social media look i think the vast majority of people are not paying attention to to any of this i think part of it is is driven by the fact look if you have a job and you're able to pay your bills and you see markets high then you know your confidence is up we actually still have very high consumer confidence although it's just recently dipped a little bit right so you always have to to watch out for that um if if there was evidence um of a real negative sentiment we should be we should be seeing it in in the retail allocation data uh there's a technical chart i follow is the right x fund allocations and actually i'm fascinated by that because when you looked at like major corrections of bear markets in the

past you see the the bull bear ratio spike there very significantly right that's when people get really negative they panic they sell and and what's been happening over the last 10 years and this is the big unanswered question to your question what i've seen over the last 10 years is the spikes have been getting smaller and smaller and smaller and smaller. Even in December, when we had a 20% route, no one really reacted on the retail side. I mean, some people did, but people stayed largely invested, which turned out to be right for the moment. But to me, it's kind of suggestive of a high level of complacency in markets. Why is this the case? because investors have been trained so far rightly that central banks will always be there

and any sell-offs will be extremely short-lived, which is exactly what happened, right? When you look at the – I have a chart on that posted a few times, which shows that whenever markets get in real trouble, there's intervention. And that's precisely where we stopped in December, the key trend line that we've been following for the last 10 years. This is when the Mnuchin liquidity calls came in and Powell's flipping on his speech. So, investors have been right, but they've become very complacent. And this is why I'm kind of concerned about this whole systemic issue of it if we get to a point where central banks do lose control.

Keep in mind that there's been a huge flip from active investing to passive investing. People have been given up on hedge funds. They've been given up on actively choosing vehicles because even the professional hedge funds are struggling. They've been lagging because everything is so geared towards the few winning stocks as opposed to maybe the broader stock universe, which is actually suffering. And that's actually one of the major technical points I'm concerned about, how the last year and a half has unfolded. So, ultimately, the point is, if you get to a point where central banks lose control and passive investors start to get concerned, you may have a flood of selling that we've never seen before. Because then the programs that keep automatically allocating cash, they're going to have to be doing the opposite. They're going to have to start selling. And they can't stop. The more sell orders they get, that's when you have that big problem when everything kind of right sizes, if you will.

But it could right size much more extreme to the downside. We're not there. Hasn't happened. I'm just observing at this point. Everything is still kind of hunky dory from a retail investor point of view. Want to know who has the best URL? Crypto.com. That's right.

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in my mind, the governments, the central banks, the policymakers, you know, the individuals who have more control over the structural elements, and can kind of pull these levers that have, you know, hopefully some macro impact. And then there is the more micro participants who are like you and I who just are frankly trying to figure out what's going on, what's likely to happen in the future, and how to navigate those market cycles. And so if you continue thinking about the incumbents there or kind of the structural control, there's the central banks, but there's also things like the G7, right? And recently, central bankers basically were saying, look, we can't do this all by ourselves. We need help from other people who have structural control.

And I know that you were kind of providing some good fodder on that's unlikely to happen for a whole host of reasons, but maybe talk a little bit about kind of the relationship between those various groups that have that structural control and why you think that there's unlikely to be help on the web. Yeah, I think this is actually a hugely underreported issue. And I want to, you know, I'm not a political guy, but I am obviously an analyst and I look at it globally in terms of what's happening on the political side. You know, we love technology. Technology has, for people like you and I, it's done fantastic things, wouldn't live in any other time, any other place. Love it. But it also has brought about some challenges, one of which is, of course, technology being the greatest deflationary force ever. and that's where a lot of these central banks are failing you know it's why their policies have not

worked and kind of reinflating the growth equation the other part is demographics that's that's another one that they can't change but there's another aspect of technology that i think we all see unfold and that's providing the the big disconnect as you said does central banks say they themselves admit that they have limits to what they can do and that they need help from policymakers. And this is why I'm going to tie this with technology and social media, because I think it's massively important to understand this point. We all see globally, we see it in the US, we see it in the UK or Germany or wherever, we see a complete fragmentation, political fragmentation of the population. You know, when we were all younger, there was limited choices

of information and news and what have you there was a more cohesive i'm not saying it was better or worse i'm just saying there was a more cohesive experience of information meaning that you know people had a common understanding of information from which to argue with technology internet social media the promise was always that if you're smart you can have a massive amount of information at your fingertips and it's going to make you a more educated person fantastic i think that is true for a lot of people unfortunately it's the polar opposite is also true it's not true for a lot of people that are simply getting fed misinformation don't for whatever reason are able to discern what's good information what's bad information and what what happens is you you

You get this massive fragmentation in the political sphere. I mean, to the point where governments are not able to come to any cohesive solutions, structural big problems cannot be solved, cannot even be discussed because people don't even agree on a common reality. And to me, that's actually one of the biggest structural threats that's out there. Because, you know, you and I can sit together, we can look at a problem, we can decide what the problem is, and we can debate solutions. We may agree or disagree on the solutions, but at least we're going to give this a go. We're now at the point where nobody can even have an in-depth discussion about what it takes to solve issues. And that's a non-starter because the structural issues are vastly complex. I'm not saying that there are solutions to them that are even feasible, but we're not even having a debate about it.

And look where we are, right? I mean, the United States is back on trillion-dollar deficits. Both Democrats and Republicans just signed this new budget deal that's going to level us up even further. The CBO, the Congressional Budget Office, came out yesterday and said, well, you know what? We're going to have 1.2 trillion deficits on average for the next 10 years, and we may have 1.8% growth. Come on. You know, this is a curve to nowhere that ultimately, you know, will render all of us paralyzed because, you know, the interest and debt will keep rising and there's no organic growth to actually get us out of this situation. And so that's why central banks fall back to what they have been doing.

Well, we need to cut rates again and we need to add more QE. And so when you see this G7 come out this next week, and already President Macron says, well, for the first time in 44 years, we don't have a joint memo because we can't even agree on a memo, that kind of tells you what realistically actually is in the coming in terms of coordinated policy response. It's concerning. For sure. And so if we flip around to the other side of the market participant, which is, you know, essentially the individual investor, what are options here, right? So kind of while the chaos is happening with those who have structural control, the rest of us have to kind of push forward, right? We don't have the luxury of just kind of saying, hey, time out. What do you see as what those options are?

And then kind of how do you think about navigating some of this as we go through it? Well, we're obviously on the active side. And what we do, you know, I don't recommend for the general investing public because, you know, we're on both ends of the market, meaning when we see long opportunities, we go long. When we see short opportunities, we go short. And selling is hard. It's harder than buying, actually, because tops are processes, if you will. Bottoms are events, as it's often called. But, you know, there are things people can do.

And that is, you know, if you're long and you're invested, you can still have exposure to the upside, if you will. There's nothing wrong with that. In fact, we may, and this is why I called this a battle of control earlier, we may still see a crazy blow off top. I mean, you know, if there's some resolution to the trade war, if central banks actually do prove they still have efficacy of pushing these markets to no highs, You just got to know where you are in the valuation scheme, where you are in the period of the cycle. An example I mentioned, and I think that was widely publicized as well, that was about Apple. Apple has the same earnings now in 2019 that it had in 2015. But the stock is almost double.

Why? Because of buybacks, and they've been able to reduce their float. and so it appears that they have earnings growth per share which they do on a reduced number of shares but in absolute terms they haven't grown as well so you're now paying 17 for multiple for apple vis-a-vis 11 or 12 four years ago and so you know as people are into passive investing they may not even realize how expensive the asset underlying assets are that they actually have exposure to right so my view on these things is that it never hurts to have some flexibility to create flexibility and that means either diversification and yes even the the famous

c word cash because you know once once the tide turns things can get ugly very quickly and then it's going to be very difficult to to to adjust and so different asset classes um obviously that i think i've done pretty well recently is is gold in in 2019 as as well as bitcoin gold we had a buy on in 1277 in may because there's a big technical pattern and you know to the extent that central bank's going to start printing money again um gold may keep keep rising as well and so as you look at this is there a artificial cap on how high something like gold can go? Or do you feel like it does participate in and respond to more of a free market? And really what I'm talking about there is if you look at stocks, for example, given the

interest rate cuts and the QE, et cetera, over a long period of time, it would be very, very hard for the entire market to not go up. The inflation of the asset prices is a structural situation. When it comes to gold or any of these other assets, I've seen a bunch of people, I don't know if arguing is the right word, but maybe debating, are there structural downward pressures? And some people even argue the opposite, structural kind of tailwinds for those assets that you see? Or do you feel like, no, that's probably more people bored on Twitter just kind of debating things for the sake of debating things and not really something to pay attention to? well i'm i'm a ultimately a market technician so i i view any asset class uh through to the lens of of technicals because technicals give me a a sense as to shifting risk reward right i mean there's times when i i see something i say well now let's say i'm short on something like the

market and and you know to your point asset classes rise over time you know i i can make certainly a technical point says, well, now my risk reward has shifted for all kinds of technical indicators and I'm closing my short and I may even be going long on this particular point in time. On stocks in particular right now, I have obviously a big structural concern because we have so many stocks, big market cap stocks that haven't really corrected in 10 years. They're massively disconnected. So, I'm on the cautious side on equities, recognizing that they may still go higher because of artificial intervention again with regards to other asset class like gold for example gold itself you know it's it's it's gold it's right it's a commodity

um that's used to a certain degree in in some production but other than that it's kept in storage wall so what's what's really the utility for it other than obviously it used to be a currency base and of course central banks actually hoarding it themselves so i look at gold as purely a technical vehicle for us that's why we had that call in in may it was a specific call for 15 20 target and we reached that target and now we're kind of reassessing in terms of the the global picture on on gold so you know when when we get to a particular point we shift risk reward i don't look at it in terms of you know unlimited price advances uh in from a structural perspective i just look at it from a from a technical perspective which is actually where bitcoin is kind of

interesting too, because I've been charting a little bit on Bitcoin this year. And it was interesting what I've seen there, because it does react technically. And that's the primary interest for me in any trading vehicle, does it act technically or not. And so elaborate a little bit more on what you've seen as you've charted Bitcoin and kind of started paying more attention this year. Well, obviously, last year, we had that massive move to 20,000, right? That's why had this the big sentiment move and you know the futures contract got in and then they had this big massive correction which i think historically when you look at it obviously is is not unusual but of course you know for for anyone participating in cryptos you know there's massive volatility

and it's a it's it's a it's a service a product that is currently kind of i view it as an in an early adopter phase, which means that there are still maybe unproven things about the business model. At the same time, you have a lot of people like yourself who see a lot of potential in it, big believers. And so there's a price discovery process. And when you look at the chart on Bitcoin specifically, you can draw some very clean structures and patterns. And it's very impressive i mean we had uh basically the the correction from 2018 highs to to these lows late in the year formed what we call technically a falling wedge very clean broke out of this wedge this year pushed higher into i don't want to get too technical here but we had a 0.618 fib

retracement from the highs in 2018 to the lows and it was perfect and i just you know i highlighted this even on twitter it just had a correction from there and and so you see these technicals working and what i see now at the moment which is not confirmed yet but it's it's a bull flag that's building uh i see it i think it's dropping a little bit loud 10 000 right now still has room lower on that bull flag but that bull flag if it plays and it wouldn't confirm until it breaks above the the upper wedge of that flag has potential this year at least to go into 16 000 At which point, obviously, we're overtly close to the previous highs. And then it gets interesting because then once you get above that, then you have a much larger technical target out there.

For sure. And now one of the things that I've really tried to understand, and I do not have kind of the technical chops that you have when it comes to charts, et cetera. And so I'm thinking a little bit more in the kind of macro trends of these assets. But I'd love to hear your perspective on the difference from traditional markets where there's much more electronic trading algorithms and machines at work versus in the Bitcoin or crypto markets where it just doesn't seem like there's that much of that going on yet. And so there's more of a kind of pure retail psychology at play and you get what appears to be much cleaner technical analysis. Does that line up with what you've seen in both the traditional markets and in this market or are maybe thinking about that incorrectly? Just from what I've seen so far, I mean, obviously, yes, in equities and the big index, it's amazing what's going on in terms of the algorithmic computerized trading. And I always say, you know, we've all been taught this and that and the other about technical analysis.

I think we always need to keep a keen view of how things are changing. That's why I call it navigating changing markets because they are changing all the time. And the key challenge for anyone is to figure out what is relevant because, you know, it doesn't matter what you and I think, right? What an asset should be trading at is what matters, what it actually does. and these algos and computerized programs they are exactly that they're they're they're also following specific instructions and and so what i always look for is okay where do the algos live what what do they find relevant and yes i i find these points where you go okay this is a and i find trend lines being incredibly effective um you may get these occasional overthrows like

you get them like a stop run that comes you know people have position stops there and then And all of a sudden, you get price extensions to the up or down side. But these patterns form on not only the long term, but also on the short term. And you can see it daily, even on the shorter term time frame. So when we have kind of consolidation periods, it's almost laughable because they're so precise in how they revert on a particular point. And you can see it in advance. I mean, it's great for us traders if you want to kind of play the day-to-day action. but it's it's it's all it's so obvious basically that that it tells you a lot of this has nothing

to do with real valuation or price discovery in any shape or form as i said earlier there's a lot of participants in these markets that may not even be human that don't care how much they pay how much value they get it's it's just basically programming's pinging back and forth and what i mentioned about bitcoin before you know i'm not looking at it every day to be honest so i just look at the macro chart and i i just say from from now what i've seen 2019 it's acted very technically and i find that oppressive at this point yeah it is um it's pretty crazy when you see uh folks who have um less kind of uh um qualitative uh attachment to these assets specifically bitcoin uh and come from the traditional markets are more technical

in their analysis, and then they look at this asset and the upside potential that they look at, both in the short term and in the long term, it's quite impressive, frankly, right? And I continue to tell various folks that I talk with that even if they're wrong by 50%, right, the numbers and the magnitude of movements that we're talking about, both short and long term, are just not available in other markets, right? And so you've got to look at that as they can go in your favor or against you, right? So it doesn't necessarily mean just because there's massive movements, that's a positive. But if you're on the right side of those investments or trades,

obviously, there's a lot of potential value capture there. Yeah, the volatility is back, right? I mean, last year, obviously, when it went through that big correction, it was a period of, I recall, of several months, it really wasn't doing anything, right? It was just kind of meandering and basing. And you get that with assets as well. But then if you're on the right side of a breakout, these things can absolutely move, you know. And I think, you know, Bitcoin, you know, looking at it in probably the more broader structure, you know, ultimately these currencies may, these alternate currencies may pose a threat to or maybe already viewed as a threat to the existing currency system.

And, you know, rightfully so, because, you know, every currency is a complete mess at the moment. What is the one surprise that you think could happen over the next 12 to 24 months in the macro economy that maybe people aren't talking about and should be? Well, I mean, you know, again, I'm looking at it from kind of perspective what can go wrong against my thesis, for example. My thesis has been I think equities are massively overvalued and, you know, we're hanging on a string here macroeconomically. I mean, I think ultimately right now from a psychology perspective, how this trade war plays out is massively important. because you could see – it could be something as simple as a tweet by Donald Trump saying, you know, he's going to let go of the terrorists for now and he's going to roll them back.

I mean, you would have just a massive, massive melt-up, I think, in stock markets. Why? Because there's so much uncertainty right now in the globe in terms of investments. They don't know – this is one of the problems why we see all these slowdowns manufacturing and hiring or what have you there's no policy certainly about what's what's going to happen um so that's that's kind of an upside risk factor how realistic that is yeah i'm i'm not clear because i i see no comprehensive strategy to bring these two parties together they're very far apart they've put themselves both now in a position where they can risk losing face

to their own respective audiences, and I think that makes compromise very difficult. So it becomes a question of who's got the upper hand here, who can hold out the longest, and that's obviously a completely separate debate. I think on the downside is simply, you know, are we all kind of in – I see a lot of recession denial out there. I mean, I see it from Wall Street, I see it from central bankers, I see it from politicians. This weekend, we saw it from the side of the administration, right?

Cut low and folks came out in the bar and said, oh, there's no risk of recession. Oh, by the way, we're talking to donors and preparing them for a recession, right? So this goes back to this whole optimism game. And I wonder if there's a trigger that we all can't really foresee that ultimately brings that about a lot faster than any of us think at the moment. That's the risk. So I think we're in a very critical phase of markets. Can they push asset prices higher one more time with intervention programs, massive rate cuts in September? Or are they starting to lose control and something happens and we're basically right-sizing again?

And from a Fed's perspective, let me just add this point here. I think they're mad to cut rates here, having only eight rate cuts left. as you said at the outset 500 basis points were required to deal with the last recession they're playing with fire because if you do have an earnest turn and all these confidence measures are not working what are they really going to do how are they really going to stop the downturn and that's that's the big answer unanswered question for for all of us for sure um all right before i finish up i usually ask some rapid fire questions um and i wish we could just talk forever because it's uh yeah very similarly and this is a super fascinating to me

um what's the most important book that you've ever read oh i'm a historian i'm i'm i'm excited to hear uh you know i i there's there's so many historical books i've read uh from the ancient roman times i love the ancient roman period uh the the the the ancient writers have so much to offer i would record everybody recommend that even julius caesar i mean the gallic wars i mean that's obviously not related to markets but it's related to strategy and that's always a good yeah good lesson to learn in any environment so no no trading books for you unfortunately that's all right um and then the the other question is uh aliens believer non-believer i think we are the aliens why do you think that i mean look at us

we've taken over the planet we're ruining it that's i mean that's what aliens would do right absolutely i i saw recently uh well i think it was yesterday um i guess there's a fire in the amazon forest and there's 10 000 fires it's huge and uh the thing that i saw was you know when the uh the notre dame uh building went what went into flames every single uh media organization in the world rushed to cover it and people couldn't stop talking about it um and you know it's a historic building and there's importance and it's you know near people geographically and things like that so it's very visual but to see what's going on in the amazon today and to see that uh there's much less coverage much less interest um it's i think pretty

telling about uh just humans in general and kind of our relationship with the planet oh it's massive and if you've never done this try this finding uh google satellite images of you look at major metropolitan areas over the last even just 30 years you know and see how how they have expanded it's it's it's massive and if you want to be philosophical about it you can say hey well this looks like there's a virus spreading on this planet, right? I mean, you mentioned Brazil. You know, we got these massive ice melting in Greenland. I mean, you know, at some point, you have to kind of acknowledge reality here that climate is changing. It's changing rapidly. Now, the planet has gone through lots of changes before, but, you know, we are seven and a half

billion going on eight billion and we're leaving a footprint and it's very visible and it's very real so um that also brings in a cost for the economy but it also brings opportunities right if you can apply technology to really dramatically change our footprint i think that's that's an opportunity for for investors as well because these changes are real and we see them every summer unfortunately gets hotter for sure i end every podcast letting the guests ask me one question after they've patiently sat and answered all of mine uh any question you have for me yes how do you handle distractors on twitter it's always a fun subject for me so this is uh this is one of my favorite topics uh mainly because my my strategy has uh evolved

over time in the beginning i responded to everybody right and just if you were a detractor you just were a future fan who didn't realize it yet um and what you realize you know over time i think is just, uh, there are a lot of really great people on Twitter. They have a really good intentions, but there are a few, you know, I'll call them the bad apples from, from an analogy standpoint. And they just either are unhappy. Uh, they, they, um, their strategy is to attract people and argue and do all this stuff. And so, um, one of my partners told me, um, when he first joined Twitter, he got the advice block and mute early and often. Um, and so for the longest time I fought doing that because I was scared of creating the echo chamber and all that. And so

now what I essentially do is I use the mute button. So it's like, look, you can say whatever you want. If I come across it when I'm reading through something, that's fine. But if you're just going to consistently be the negative Nancy in the room and kind of be overly detracting and uh, kind of aggressive, I'm just not here for that. Right. And so, uh, those two features have, have become a much more, um, valuable to me over time, uh, compared to when I first started. And frankly, uh, you know, just answered everybody, which was, uh, you know, very interesting and definitely led to some, uh, some stories of your, your shock that what people will say on the internet when their name's not attached to it. Oh yeah. Oh yeah. I mean, it's, it's, it's been

a fascinating writing experience for me as well i agree with a lot what you just said i mean i try to engage as much as i can but obviously you can't respond to to everybody and there's very limited time for for negativity and and hate and i i just don't understand why people are oftentimes focused on that but that's unfortunately part of the human equation is as as well but bottom line i think it's a fantastic medium and it's, it's, it's a great way to communicate if people choose to, uh, use it that way. I couldn't agree more. Well, listen, sir, I really appreciate you taking the time to do this. Um, I think people will really enjoy hearing your perspectives. Um, so, uh, thanks so much. We'll have to do it again in the future as all this plays out. Thanks, Bob. That's great.

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