The Wolf Of All Streets - Bull Trap Or Bull Market? Bitcoin Hits 25k | Macro Alf, Dave Weisberger, Mike McGlone | Macro Monday

Episode Date: February 20, 2023

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Bitcoin continues to flirt with the $25,000 level, which is key because obviously a break above that area would signal a higher high technically on the market for the first time since $69,000, giving a lot of bulls hope that the bear market could be over, but not so fast. I think that even looking at the Bitcoin chart, we all know that everything will be driven this year and into the future by macro, by the Fed, by Jerome Powell, and what's happening in global markets. As usual, of course, I have my, we'll call him co-host, Mike McGlone and Dave Weisberger here today. But we also have a very, very special guest, Macro Al from Twitter, Alfonso Pectello, who has his own thoughts on what is going on

with the market. You guys don't want to miss this one. Let's go. What is up, everybody? I'm Scott Melker, also known as the Wolf of Wall Street. Before we get started, please subscribe to the channel and hit that like button. Of course, as always, on these weekdays minus Thursday, we are sponsored by PrimeXBT. Check them out in the description and on the banner below. I'm going to go ahead and just bring our guests straight on right now. I've got Alf, Dave and Mike. And thank you. I got to say, Dave and Mike, it's President's Day. Alf, I doubt you're celebrating.

But thank you guys for showing up on your day off when the markets are closed. I really appreciate it. So obviously, Alf, I want to start with you here. You had an amazing tweet, which I can actually go ahead and show. I have it here. The 2023 year-to-date rally looks like the mirror image of the 2022 stock market slaughterhouse. The most dumped stuff in 2022 is rallying the most in 2023. In my humble opinion, a system of re-leveraging flows and reflexive market behavior rather than the first stage of a new healthy bull market. So we simply have a mean reversion here.

Is that what you're saying? Let me try to explain a bit further. Thanks for inviting me. Hi, Mike. Hi, Dave. Look, what's been happening over the last three months in markets all started in late October when we got the first disinflationary print in CPI. And the market staged the rally, especially the bond market, and Powell didn't fight back. So effectively, what happened is that financial conditions started loosening. Powell didn't fight back. He started talking about this inflation more broadly. So the market could re-accelerate. But most of the flows we have been seeing in the equity market are lifting the stuff that was the most battered last year because those are re-leveraging flows. So what's going on is there are the so-called risk parity funds, volatility targeting funds, all these quant funds that use implied volatility as a metric to decide how much to lever up and buy. So if I am a risk parity fund or a bulk targeting fund,

the lower the implied volatility in bonds and equities, the more I can buy. That's how these funds work. And they mechanically just apply these techniques. And as volatility was coming down, as it seemed like the Federal Reserve would be more predictable and Powell would stop tightening conditions that hard, these funds got a signal to start buying the market in general.

Now, when they buy the market, they end up buying everything. And these mechanical flows have a disproportionately big impact if the sectors that they are buying are very illiquid and very shorted as well. So the biggest short base in October November last year was in guess what? Retail, high beta, crypto home builders, all the stuff that gets punished when the Fed is very tight. So that's also the most shorted, most hated kind of stuff. So a lot of short base in this very

illiquid stocks plus this mechanical flows coming to the market led to that chart you have shown below scott which is a reflexive rally chart so the stuff that has underperformed the most last year has been lifted the most this year as well that's not normally a behavior you see in a healthy bull market that's a reflexive rally that comes from a very short base for a reason that was then lifted all of a sudden when we got the first disinflationary prints. Mike, I'm going to guess you agree. I got to, and I love Alf's way take on it because I, let's have a little disagreement,

but it's complete agreement. And that is, I disagree that Powell didn't fight back, but I agree that the market thinks that Powell didn't fight back. And I look at, the man said we are going to raise rates. I look at all my indicators that rates are going higher. And the number one thing I watch, I've always watched is Fed Fund futures one year from now. They show, before he spoke, they show price rates a year from now, we're going to be a bit lower. Now they show them higher, around 5%. So that's fighting back. I mean, the market heard what it wanted to hear, but it's the wrong time to hear. That's why I think this is one of the classic,

best short covering bear markets we're going to see in our lifetimes. And I look at it akin to what happened in 2930. Market dropped 50% in 29, rally 50% in 1930. We don't have to talk about the rest of that. The Fed's tightening into a recession environment. Yes, some data is strong. But if you look at what came out last week, retail sales, if you take retail sales, annualize, divide PPI and CPI, it's negative. It's deficit. And it's very much recessionary. So to me, market can hear what it wants.

But the cool thing that's been happening is compared to last year when Bitcoin was leading the way down, Bitcoin's been leading the way up this year. Again, Friday, that was an awesome trade. Bitcoin was down about 3%, 4% and end up unchanged. The stock market's been falling. So I don't know how long that's going to last. But for now, I'll end with this. A typical recession, US stock market peak withdrawal drops 50%. we're so far from that we're early days Dave well whoops let's make sure am I unmuted yeah okay I mean it's hard to argue with the notion of a short covering rally and having worked at at Two Sigma another I've been in quant trading for a long time i i understand exactly what alfonso was talking about and i'm sure that from the stock market perspective that's absolutely true although i would be bluntly surprised if many of those risk parity funds even talked about or

touched bitcoin i think that it's the risk parity funds are doing what they're doing. And I think that Alfonso's point kind of makes a lot of sense or kind of explains a lot of why there. I wouldn't say Bitcoin has been delinked from risk assets, but it's not nearly been as tightly correlated on an intraday or certainly on a, you know, intra hour sort of thing like it used to be. So, I mean, you know, Mike was right. I mean, Bitcoin led on the way down when things were horrible, mostly because bad things happened on the weekends and Bitcoin was one of the only assets that could be sold on the weekend because everything else is freaking closed. I mean, you know, 24-7 markets are very interesting, but there is some other things going on. I mean, I think that you can't the biggest macro thing from a Bitcoin perspective is the news out of Hong Kong and China. And on the same day that the SEC sued Paxos and I was blissfully trying to ski last week and ignore the news. But, you know, you can't ignore it completely.

You know, SEC is going after Paxos, who's one of the most compliance focused of the crypto firms. And without any allegations of harm, now they're sending Wells notices for stuff. That happened and the market started going down and it didn't go down. And the reason the reason for the Friday trade is because the whispers and the rumors that that China is going to open up Hong Kong, you know, for real, for crypto investment. And, you know, that's kind of a big deal. And I think that that's why we've seen a little bit of de-linking, but it's not really de-linked. It's just, you know, Bitcoin is now higher than it was. I mean, if you look at the one-month chart, as all of what Alfonso was talking about has gone on,

you know, the Nasdaq and the Russell chart over the last month compared to Bitcoin, there's a big difference. Bitcoin is dramatically higher than it was at any time in the last month. And both of those are reflexive, but aren't up nearly as much. And I think that's because of the international global nature of Bitcoin and the news out of Hong Kong and China.

That'd be my guess. So do we have a real expectation that China and Hong Kong are coming back online? I mean, we're even seeing an alpha. I'm sorry to go down this rabbit hole, but we're even seeing altcoins that are based in China being a new narrative for things to start going crazy. I think that's nonsensical personally personally. But the real story there, then, isn't it that there's actually some liquidity coming in in Asia, in China? I mean, they've basically started pumping QE, right? I mean, they're pumping liquidity back into the markets. And that might be the real narrative behind this East versus West trade. I mean,

Alf, have you been paying any attention to what's happening there with the central bank in China? Yeah, definitely. So China has reopened and has all the incentive schemes in the world to try and make sure the economy restarts again. You can also see it from the attitude when it comes to encouraging banks to try and lend back to the real estate market, construction, housing, etc. And China has been a big pain point for the last two years. They've tried to deleverage the market hard because it's, I think, as we enter 2021, I estimated the Chinese real estate market was the biggest single asset class in the world, $50 trillion. Many people think it's the US stock market, not nearly close. So it's a gigantic leveraged market, and they try to deleverage that in an orderly way.

I'm sorry, that's not possible. So it just came down very quick, and I think too quick for the PBOC and the CCP standard. And now they're trying to, you know, rescue it a little bit. They are effectively encouraging, using Chinese policymaker jargon, banks to lend to the real estate market. That shows that they're willing to backstop and also to, you know, give a boost to economic growth. The thing is, so far, the Chinese reopening hasn't really shown up in any meaningful macro data yet, yet. So what I look at is rather not Chinese data because the transparency is debatable, to say the least, but I tend to look at other proxies. So

let's say economies that have a high economic beta to China, and those are Taiwan, those are Korea, those are Malaysia, Thailand, so all the East Asia, let's say, area close to China. And if you look at Korean export growth, very transparent data, Korea has a very high beta to China. Didn't pick up yet that much. So unless, probably there is a lag, and it makes sense, right? First China restarts, then there is Lunar New Year, then we really get the data feeding in. So far, the evidence is a bit mixed, to say the least. But it's one thing it's clear. Chinese policymakers are trying to back up this reopening, are trying to back up economic growth in China. And I'm

pretty sure at some point it's going to show up. It was page one of the newspaper, almost, I think, in the first half of January. That was the only thing everybody was talking about. I think Chinese stocks went up like 20% in three weeks. That's quite the rally. And now it's moved back to page six or seven of the newspaper. But I think it is one of the global macro forces that will be underpinning markets in the first half of 2023. Doesn't that effectively beg the question whether the Fed can continue doing what the Fed can continue doing and the rest of the world can change their policy? And is that enough to

change the market globally? I mean, is China pumping liquidity enough to fight the Fed, so to speak? Mike, I'm sure you have thoughts. Yeah, that's the crash that's coming. So we just talked about the three largest economies in the world, China and Japan, completely export focused and massive stimulation. And one of the most significant import demand pool economy in the planet is doing the opposite and clearly stated by the senior people controlling this, i.e. Jerome Powell, in terms of paying, focusing on a recession. So that's a crash that's coming. And it's showing up in all my indicators. Now, first, we can just talk about the U.S. unleaded gas demand, housing. They are collapsing at a higher velocity than 2006, 2007, and 2008. Let's look at some macro in terms of China. The

key thing is it should show up in copper. On a 12-month basis, copper is down 8%. I love how people point to the first of the year. And all the people on this line who know what trading is about is this is when you cover those positions from last year, put on the hopium from this year. This is a time of year you've got to be careful with the trade. It's the trend that matters. The trend in copper is down. The trend in aluminum is down 25%. The trend in crude oil, China's largest incremental demand pool for crude oil on the planet copper is down. The trend in aluminum is down 25%. The trend in crude oil,

China's largest incremental demand pool for crude oil on the planet is down, down 15% on a 12-month basis. Let's look at US natural gas. It's the lowest price since 1990. So what I'm describing to you is I think this massive global economic reset that's coming and it's deflationary. Natural gas, the number one measure of heat and electricity in this country is at the same price as 1990. So I know I pointed that before, but everything's following that. Lumber's done that. And the key thing is what stops this?

Maybe some stimulation from the export-driven countries who are completely dependent on and they've completely, I'll end with this, this third world war is really accelerating. Mr. Z made one of the biggest mistakes in the world with unlimited friendship with Russia before the war. Now, Europe has no desire to do any business with China. The U.S. is divesting at the most significant pace ever. And then we have this autocratic regime accelerating. So I look at this as what drove this, you know, this commodity boom from 2000 is completely reversed. Unless you expect per capita GDP in India to double or triple in the next two decades, we're heading towards that

deflationary recession. And the two economies that are dependent on exports are hoping that US will not go into recession. It's almost a guarantee. It's based on things like the curve. And I'll end with this. Most people alive in this country have not experienced inflation. And unlike unemployment, it hurts everyone. So to me, that's just getting started and the Fed's still tightening. I think that the most important point for your viewers, Scott, is everything that Alfonso and Mike are saying. And I'm certainly not disagreeing with Mike. I think that people do not know what's going on. We've seen this story before, sadly. Some of us are old enough to have actually experienced the 70s. I was an economic

student, and I've told the story before, argued with, you know, my macro professor, Robert Gordon, who literally wrote the freaking book that we were using. Turned out I was right because he didn't understand what inflationary expectations and all the other stuff could mean and how the cycles work. The fact of the matter is, however, the U.S. is only part of the world. And there's been this this basically had this massive shock in 20, you know, because of the pandemic and the response to the pandemic, where 30 years of policy were unwound in a panic. And the 30 years of policy was to promote capital over labor, to promote asset inflation while managing and decreasing consumer inflation via globalization and automation and making capital cheap and you know once the stimulus checks were handed to people uh all of a sudden they people were were like you know all the modern monetary theorist types all over the world are like uh-oh i guess we shouldn't take for granted that that economics that laws of supply

and demand and other things like you know actually work right you know they basically ignored economics for years because they said oh you know we got this goldilocks thing we're driving up assets the fact is that's what they want again and let's face it there's not a central bank policy maker anywhere that wouldn't prefer to see asset prices go up and mute consumer inflation. The problem is, as Powell correctly analyzed, and Mike has charted this really well, he says, look, you know, you can't get this genie back in the bottle without a recession in the United States. But if you think about this from the perspective of Bitcoin and what your audience is thinking about, the narrative is starting to change because

recession doesn't necessarily knock Bitcoin down particularly if it's a stagflationary recession with where the where their their purchasing powers continue to be eroded and so there are people who are looking at that and at the same time you know we're looking at other markets like you know look at real estate in places where foreign investment, aka Chinese money and other money, can come in. Those real estate markets are not nearly as weak as one might expect. Here in Miami, the real estate market dipped a little, but the activity has slowed. You try to buy right? It's not trivial. And so we're in a situation where there's still a lot of liquidity sloshing around, but Mike's also right that you can't, that liquidity doesn't necessarily get your way to consumers when that liquidity is more expensive than it used to be.

So there's a lot of cross currents going is what I'm basically trying to say, but it feels to me like we could be seeing a delinking from, you know, at least in terms of Bitcoin. But on the altcoin side, I can't. There's so many of these things that have no value that I don't really understand. But I think that the reflexive point that Alfonso makes is exactly what you're seeing, right? There's a lot of reflex, let's or use my words, hopium. I like that one. A lot of that going on too. Yeah. It's interesting that you talk about the real estate market in Florida. I'm obviously in Florida as well. It hasn't really dipped, but it is completely dead.

As you said, there's no activity, right? So we haven't seen prices drop because there's no purchases to measure that on. And so that's one metric. And then, of course, the thing that's slightly different this time, Mike, you talk about this quite a lot, we still have a strong labor market. So does that mean that, quote unquote, this time it's different? Or does it mean that, holy shit, the shoe is seriously about to drop because real estate has to go down and the labor market has to be broken? Anyone can answer. Mike, can I take this one for a second? I saw you ready on that, Alfonso.

Go for it, man. Thanks, Mike. So real estate is one of the things where I have quite a conviction, and I think prices have to drop another 20%, 25% from here. Notice in some places like the San Francisco Bay Area, for instance, or Australia, or some frothy places in Canada, prices are already down 15% to 20% from the peak.

So we're talking about another 20%, 25% decline. And why? Look, it's pretty much simple mathematics, if you ask me. So every time that monthly mortgage installments in the US housing market have surpassed $2,000 a month on a real basis, so you're asking in real dollars, US families to pay over $2,000 a month median house prices, a mix of median house prices and mortgage rates in the US, housing markets simply had to come down. One thing had to adjust, either prices and mortgage rates in the US, housing markets simply had to come down.

One thing had to adjust, either prices or mortgage rates. One of the things need to adjust here. And when it comes to mortgage rates, it's going to be pretty hard because the Fed is looking in the rear view mirror, setting policies still very tight. Risk-free rates will be over 5%. Mortgage rates will probably be hovering around 6.5% to 7%. So the only way to bring these median payments down is by lowering house prices. It's simple mathematics. It's a new equilibrium that needs to be reached. You don't see that level yet because the market is frozen.

There are no transactions. So sellers are basically refusing to sell for as long as they can and simply refusing to basically meet the bid, which is much lower than what listing prices, unsold listing prices are today. One other example of that is Blackstone or KKR. If you look at the real estate funds, this stuff is pretty big.

What they're doing is they're effectively limiting redemptions. So they're locking investors in, making sure they can only redeem a small amount per quarter because were they to redeem more, as you remove assets from these funds, they need to liquidate their holdings, which means they need to sell a large amount of properties all at once in a market that is bidless, unless for bids that are 15, 20% below listing prices. So basically, you have a frozen market that is trying to hold on and be frozen as long as possible until somehow it restarts, right?

We have seen this a little bit in the past as well. Every time housing sales were like 30, 40% down on a year-on-year basis, the only way to really come to the rescue is a magic immaculate soft lending, where the Federal Reserve can just lower rates, lower mortgage rates, economic activity remains okay, and then we all start the engine again. One statistic there to say this is very improbable is that every time we try to bring inflation down by six or seven percentage points in the US over the last 100 years, we always needed a recession to engineer that. There was no episode in which inflation came down by five or six percentage points, and we didn't have a recession at the same time. So there you go again, agreeing with Mike. Is this time different? Well, my mentor

taught me, and also me losing money in markets, taught me a couple of times that very expensive four words to use in finance, let's say. So I'm not very keen in using them again. So, Alf, I think that's what we have in common. We all know what it's like to lose money in markets, admittedly so. I'm just a sayer. I have to admit that. But I know from my own positions where I get stopped out. And to me, I like to start with the macro human nature thing. It's typically what I'll do is I'll find the absolute data, what I expect I'll see based on what markets did. And that happened in 2006, seven and eight. But the data I'm finding now, basically, if everybody would largely expect when

you throw money at people, drop rates the lowest ever, tell them to move and make the market that wonderful to move, people will do that. They bid up the housing market all over the place with 40% addition to money supply. And then you fully expect that pump to dump. And everything I see is it's dumping rapidly. Like one thing I'm looking at is, one thing I love is new homes under construction

is just rolling over from the highest ever. That's your lagging thing from jobs and things that you mentioned earlier, Scott. I'm glad you mentioned it. It's completely lagging, but those homes are being built and that's that inventory that's collapsing. At the same time, sales are near the lowest. That spread, sales are lowest. Then you look at new home applications for mortgages and everything. It's just getting started. So it's the leading lag thing, I think, it's early days. So that's why. And I also want to agree with what Dave said.

I do think at some point going over to leading this to this is that recession is coming, undoubtedly, but leading over to what you said about Bitcoin is, yes, I think at some point Bitcoin is going to trade more like gold than U.S.s treasury long bonds but if the stock market does what i think it's going to do s p 500 going to 3 000. it's not a big deal a normal recession um that's normal um bitcoin's going to have a problem crypto's going to problem but i think they're going to come out ahead more gold and bitcoin's the problem is it's still um they still have a higher correlation to the risk asset of the stock market if you look at bitcoin over 52 weeks, 50 months, 50 weeks, 50 days, it still moves more at the stock market. So I think it's leading. But that to me is the macro.

And this housing situation in Japan, according to our Chinese analysts, who in Hong Kong have to be very careful, is just early days. So it's global. It's fully expected. The thing is it's happening in the data. So I'll end with this. This is one thing that I enjoy with some of my younger colleagues. We have the experience of having run money and lost money. And when I was calling for crude oil to drop to $40 a barrel

when I was at 130, yeah, I was looking like an idiot. That was about a year ago. But my younger colleagues point out supply and demand. I'm like, don't look at that because I can tell you what's going to happen to supply supply demand based on price. And it always works that way. It's just that elasticity. The thing is that demand elasticity is greater than ever, and the supply elasticity is higher than ever. Yeah, I mean, Mike, we had you here when oil was $130, $140, wherever it was topped. And you said that's the top when people were calling for $200 barrels of oil with very strong conviction, if I recall. Well, that's called a trader knows how to get

stopped out, get stopped out, move on to the next trade, man. Absolutely. And we haven't even talked, I mean, I think we're all in agreement on the real estate market. What do you make of, then Dave, I'll direct it to you. What do you make then of the fact that labor is still so strong because that's the at this time it's a different thing that people keep pointing to saying that the economy remains strong to me that just means that jerome powell yeah i mean one of you guys should pull up i mean mike you should pull it up i'd love to see labor force participation as opposed to unemployment rate and look at that and tell me the labor market's really all that strong. I think that it's a bit of a, the unemployment rate is a terrible way to measure the overall

strength of the labor market because the reality is what the labor market really is, is what percentage of the population is actually productively employed and that number is not nearly as strong as people who keep keep saying that and i hate to sound have like it's like here we are we got you know three older dudes all basically saying people don't get all that excited but the truth of the matter is you know we've seen the wealth effect and we know that the single biggest engine of the wealth effect, even though we stare at our screens all day looking at the stock market, the fact of the matter is the biggest engine of the wealth effect over the last 20 years is the ATM of people's houses and refinancing. nor will there be for quite some time. So people who thought that they had enough cushion are running out. The home equity loans are probably getting pretty close to topped up and the rates are going higher and that decreases the amount that people can actually spend. You know, in the

West, that is a very big deal, right? You know, and we haven't seen that yet. You know, it's like, like I laugh. I have no interest in moving i mean this is my you know in my i'm at my home now because it's it's not a work day but and you can see my view and it's all nice yeah lovely but if i were to think about moving would i really want to give up my three and a quarter percent 30-year fixed mortgage now if you think that i'm the only one who's who's having that conversation with themselves it's like people are like stuck and you can't take more money out and that's a big engine that's gone so i i don't know and i tend to think that from a economic macro perspective that recession is baked in the cake i'm not sure that that the way we're measuring it is correct either and i think that labor force

participation is probably a bigger or probably a better way to look at that labor market than the other. That's the other thing I will say. Let me add on that. I pulled that up. Oh, sorry, Mike. This time it's my turn to hand over the mic to you. Go ahead. Oh, no. Well, politeness might be contagious. I just did what you said, Dave. I've always kind of looked at that. I put labor performance participation, and I don't see any correlations with bond yields or economics and stuff. But I did enjoy doing a piece recently that was one of those lessons I learned trading commodities is almost all the recessions in this country in a history of going back as far as we have unemployment data start when unemployment is really low. It just doesn't go much lower.

And then I think I might have learned that on Al podcast but then i checked the data i'm like my gosh this is 100 correlation so we're at the lowest about the lowest ever you got to go back to like 62 so there's only one way for unemployment to go up um so to me that's that's where it's going and it's just how do you fix that? Fed's tightening. Okay. Alf, you. So look, on the labor market, I tend to agree with you both. There are two leading indicators that I like to follow. The first is temporary workers. So if you look at the pace of temporary workers hiring, that's been declining very rapidly. And that's a leading indicator of broad labor market conditions. Why?

If you run a business, you're very well aware that when you are in labor shortage and the economy is running hot, you need labor. So you first hire temp workers. You know, they're readily available. They join, they're flexible. You hire them, they help you out. The moment you have stabilized and you can hire permanent workers, you lay them off and you move into your core hiring, right?

That's permanent workers, long-term workers. Temp workers have topped six months ago on a trending basis in terms of hiring. Full-time hiring in the US on a six months analyzed basis is running at zero percent. Zero. Zero percent. Six months, six months analyzed full-time hiring in the US. Of course, that's one statistics. You need to have a blend of them. So you look at the trending basis on non-farm payrolls, ADP, challenger job cuts, and all of that. You put all of that together and US labor market is slightly above trend, but it's declining on a trending basis pretty rapidly. So the direction of travel remains that one. It's pretty clear,

if you ask me. It's being delayed, as in people expected unemployment rate to be up already by now. It's not up yet, mostly, I think, because of labor hoarding. There are a lot of anecdotal evidences that companies are not laying off people because, holy crap, during the pandemic, to hire somebody back, it was impossible. There was such a shortage of labor when we reopened the economy that companies are really psychologically scarred, I think, from laying off people because they are really afraid that getting them back could be pretty complicated. So they rather are instead decreasing their average work week. So go have a look at average work week, have a look at temp hiring, full-time hiring.

All these trends give you an indication that we are in that freezing labor market period. So the housing market is frozen. The labor market is about to getting frozen, which means people are not being laid off. They're not getting hired either at a very rapid pace if you put together and blend together a lot of indicators. What's the next step here? Well, again, it's like for the housing market. If the Fed would ease financial conditions, if we really get this inflationary soft lending perfectly priced in starting from late 2023 onwards, then there is a chance that the labor market doesn't need to go into a recession either. What are the chances that that happens? I think they have decreased.

The more we postpone a recession, the more likely it is that it's going to get worse because what you're doing is you're choking off the economy today for a longer period of time. You're imposing corporate borrowing rates at 7% and 8% for a longer period of time. You're imposing mortgage rates, as Dave said, where nobody's going to refinance. Nobody will be able to top up their equity in their home for a prolonged period of time. So you're just freezing the economy for longer,

which means most likely you're making the downturn happen later, but be worse than what would have otherwise been. Could you write that up and send it over to Jerome Powell, please? Because it feels like then by that rationale, we've already overshot, which is what the Fed does, right? Because they're obviously not looking at this data and what they do lags, but they should have,

I won't even call it pivoted, but they should have then stopped tightening or ceased much earlier because you're basically saying that this labor pivot is baked in and it's just not there yet. So it's guaranteed to happen. The recession is coming. And now we're going to, as Mike likes to always point out for the first time, keep tightening right into a recession. Right, Mike? Well, that that's part of the part of nature of leaders in history. They always get to pick the time and cycle.

Like people point to Volcker, he just came in at the right person at the right time, but Powell just got the absolute wrong time. Number one, remember, this was a guy who pushed back on Trump. So I completely respect him for that. He really established, that's part of the reason the dollar in the U.S. kind of is tilting towards, the world's tilting away from the aggressive nations

and towards the U.S. Like, okay, you guys kind of, your system is autocratic. But what Powell did is he stuck in the wrong time. He got suckered into the transitory phase. And I fully think he is going to find out it is transitory, but there's a year lag. So we have the big pump in inflation, biggest ever, a year on the back of the biggest pump in money supply ever.

Now we're heading towards that deflationary paradigm. He's tightened. So he's going to be looked back on, in my view, as just making some of the wrong decisions. And the stock market is part of the problem too. But that's where I see there's no end for this. I keep saying, I've been saying for a year now, what stops this trajectory of risk assets going down? Other than these little bounces that just inspire the Fed to tighten more. And people think liquidity is actually loosening. It's not loosening. It's stock market going up and testing. It's just bear markets have to do that. I'll end with this. Bear markets have to take money from everybody and make it difficult. If they're not,

they're not bear markets. Yeah. So clearly that means we have a bear market bounce. Still then it goes back to asking the point of does liquidity elsewhere matter? You know, but we already sort of talked that to death. I mean, it's China. It's China big enough to sort of change that narrative. But it sounds like this time is not different. We're just early export economy. Now, it matters in the U.S., but their major export economy, they're going to find out the hard way. They cozy it up to the wrong nation who's not an import economy. And what is Russia? Okay, you can get, it's a gas station. Yeah. I quickly now, because we talk about this all the time, just for people's reference, while we were talking, I quickly pulled up this chart. On the bottom, you have the S&P.

You have the US 10 to US two year in blue, and then the light blue is basically the Fed funds rate and pivot. You guys know what I'm going to say. We generally get an inverted yield curve, then a Fed pivot, then the bottom of stocks, right? This has happened sort of the last three times. You look over here, we're still raising rates, to your point, Mike, into this. We have a slight dip, but we have basically historically long inverted yield curve already. We haven't seen the Fed pivot. So doesn't that mean that we get the Fed to pivot eventually, meaning just they basically stop, and then we get the bottom in stocks? So what's the number one short-term catalyst to make the Fed pivot? The stock market will go down,

unfortunately. Right. It just seems like we're very, very early on this cycle if people believe somehow that we are back in the bull market because we usually have the end of the bear market after the pivot, not at the pivot. That's where you put your trader hat on. You say, that's my opportunity. And that's what most of the hedge funds who are not talking to us, I get to speak to once in a while, are doing. And they all know that, okay, we fight. Once you see the death cross on CNBC, then you do the opposite.

You see it on Bloomberg. You do the, it's just that, come on, we've all done this. You just, you wait for it to hit the popular press. And here's the narrative I'll give you. I'll end you with this. This bear market's going to end when the demand or the estimate revisions, which are still towards people saying

that silly thing called soft landing. I've been caught doing it, even though the Fed hasn't done tightening yet. You're not supposed to talk about soft landing until a good lag after the last tightening. And just spend a few of those markets. But I think what's going to happen is right now markets are doing what human nature does. You underestimate the extent of the decline. Remember this time last year, everybody, no one called for a 20% correction stock market. Didn't call for the war either. Now they're at the stage of calling for a soft landing. We got to get to the point where people give up say no it's going to be

a bad recession for a long time that's going to take a while and that's when you start saying okay then it's time to buy and i think we're so early dave got dave on the unmute button yeah dave was looking for the unmute button. Yeah, Dave was looking for the unmute button on my laptop. I mean, I think the one thing that's really most interesting to me is how Hummingbird-like time cycles got. I mean, because of the difference between now and the 70s, probably the biggest single difference is in the 70s, there was this no such thing as this thing called the internet. And, you know, I know I'm kind of trying to be a bit folksy on this. But the fact of the matter is people get FOMO. And it's like fast twitch versus slow switch muscle fibers. I mean, people want to respond and say, okay, it's safe. Let's get back to it again, all the time. So the overshoots and the undershoots of the volatility

is likely to be higher, but at a certain point, people always ignore, and this is something that Mike and I, where we always nod at each other, we people always ignore that you can't, there are certain unescapable facts. People have less money to spend, the economy is going to go down, right? People have less money to spend. The economy is going to go down. Right. People have less disposable income to spend than discretionary goods are going to go down. Commodities demand

goes down when construction can't happen. We've just said we have a frozen housing market. What are you going to build? Who's going to buy what's going to build? Right. You know, all of these things are interrelated. But there is thing that i do want to make make clear is while we like to group risk assets together and say risk assets are a thing well they're not a thing i mean yes they are in the sense of their speculative money chasing it but a company that you're investing in there's some reason you're investing in it at the end of the day in manias no one cares about price to sales. No one cares about fundamentals of companies. They just kind of buy the story. But at the end of the day, story value matters.

And I don't mean value in the sense of cliffhands value versus growth stocks. I mean, growth stocks have to be growing to be paid for. Whereas when you're looking at gold or if you're looking at Bitcoin or if you're looking at something that's new, that's completely highly speculative, you don't. I mean, one of my favorite things that I used to look at and laugh at people, they would say, well, in the internet bubble, going back to 2000s, it was like the kiss of death for one of these companies was they started to show earnings. And all of a sudden people had something to look at it's like okay so this thing is this incredible cmgi it's at 300 it's like okay and wait a minute you got two cents of earnings so instead of looking at an na on pe all of a sudden now you're stupidly expensive oh crap

maybe it should go down and then of course things started going the fact, is whatever your value metric for a thing, an asset, either if it's real estate, it's, you know, what, you know, what people are willing to pay for. If it's Bitcoin, really, it's what people are willing to pay for. But if it's a company, it's based on cash flows. And in a recession, cash flows are going to decrease. And so the earnings, I think that what Mike has said many times is that people's expectations of earnings are unrealistic if the recession happens. And I think so looking at the equity market is very different than looking at other markets, depending on what it is that you're looking at. I think it is important that it is uneven. We keep talking

about this recession that's coming. I mean, Couldn't one make the argument that we're in a recession? No, I think not yet. One needs to be honest. Recessions are characterized by job losses. Somebody says if your neighbor loses your job, then it's an economic downturn. If you also lose your job, then that's a then recession. And we haven't seen one yet from that perspective because job losses are not really widespread.

To be honest, they are not there in most sectors. One of the reasons really is construction because it's one of the housing market and the labor around the housing market is one of the most interest rate sensitive sectors of the labor around the housing market is one of the most interest rate sensitive sectors of the labor market. So if you look at downturns in job creation, when the Fed is tightening policy, then normally construction and housing related jobs would be cut off first. Brokers, whatever, anything ancillary to housing activity would see job losses first, including construction. Have a look at construction employment.

It's up on a year-on-year basis by 5%. With these mortgage rates, so we have had the fastest increase in mortgage rates over a year basis, I think, in 30 years or so, and still you have construction employees being hired on a net basis. Yeah, that's great. Go ahead. I thought you were done.

No, no, no. My thought was over because it's like, dude, basis. Yeah, that's my thought. My thought was over because it's like, dude, if it doesn't, that sector doesn't fall over. It means the really the the hoarding appetite coming from industries is so large and it's going to take a little bit longer than we're used to. So we definitely can't call the recession yet. We can call a frozen economy 100%. And I also like people saying, look at GDP growth. It was very high. Yeah. So let's

have a look at the underlying part of GDP growth. For instance, real final sales. So let's detract everything, which is government expenditures, inventories, et cetera, et cetera. Let's look really at the core part of gdp growth real final sales in the us are trending close to zero so we are looking at a decelerating economy trending towards zero but job losses aren't there yet so i i'm not gonna call this a recession yet i think we're walking into one pretty much base case not markets base case markets are on la la land or a this inflationary soft landing island sitting there and we are not even pricing higher for longer i mean that's the other thing where people are like hey look we're pricing higher for longer what do you mean like between june of 24 and june of 25

there are like 90 basis point of cuts being priced in. So if you are in higher for longer, it means the economy can now run at 5% Fed funds forever. And nobody's in their right mind is betting on that. We are assuming that we're going to have this inflationary soft lending starting in 2024. That's where the market is. And I don't think it's the best risk reward position to be in. Sorry, Mike, I blabbered for too long. Go ahead.

Oh, you did. And the way you speak, I appreciate it. I just feel like you're making me sound smarter. Scott, you got that look. Are we close to time? I got time for a little response. Oh, we have 15 minutes. You're good.

Okay, so I just wanted to follow up on that. And the first thing is that it's the leading and lagging nature of watching markets through the rear view mirror of data. The data is so far behind. That's why I've just been trained to watch markets. What are markets tell me? And then also you have to decipher out the filter of some of the volatility. So a key thing I like to point out is like construction. You know, when you see a lot of those construction cranes that's typically near the end of a cycle because it took

five years minimum to plan to get that crane going and that's usually how this work it's in markets that's like to point out this you know new home sales owners construction just rolling over from the highest level ever it just so you don't make that stuff up the highest level was in 82 by the way or 81. And when did that recession start? Right around then. It's already too late. So I look at it. Also, a key thing like inventories. This time, it was when crude oil was around 130, and everybody's pointing out how bullish it was. Inventories were low. I'm like, no, every crude oil trader that actually has run money, pushed a button, and loses money if they make the wrong trade knows that prices peak

when inventories are low, and it's the opposite when they're high so three that's what's happening in this macro and this is why i think a year from now we're going to be eating the warning of the curve and we're going to be classically saying okay fed please save us only because everything lags so much and the thing is that we've lived through, because of this inflation, that's the difference this time. They will not save us with the velocity they have in the past. And there's a history of death threats to Fed governors, not just Volcker. And I think that's just part of human nature that we're going. It's the key thing. It's the psychology. Every day you hit the tape now, some firms are hiring, but most of these high-end tech firms are people who

spend money and a lot of them are firing people, banks and everything. And that's the psychology of, OK, you're in that space. You were going to buy the do the remodeling. If you hadn't done it already or buy the car, you turn it off. You don't want to take that risk. Early days. I got to ask, Alf, because we've got you here. How are you then positioning in advance of what you think is coming? I mean, what should people actually be doing? I mean, Mike just sort of talked about you freeze, obviously, you're sort of spending. But it seems like when you look at the data right now, people are just running up credit card debt and burning through their savings and not actually changing their behavior very much.

So let me say something. In 2021, as Dave said, you had an historical chance to lock in the third-year mortgage rate at 3%. Great. Now you have a historical chance to be rewarded risk-free rate 5%. You shouldn't pass on that, I think. That's not too bad.

People have been used for 10 years to call cash trash, right? I mean, we have heard Ray Dalio as well predicate that for decades, basically. And he was right to a certain extent, I would say. Cash gives you an incredible optionality in these markets. They're going to be choppy. They're going to be volatile.

Normally, being in cash is expensive. It's an optionality that you pay, right? You want to be free to invest and get opportunities, right? Normally, you pay for that. You pay cost opportunity, you pay negative real rates. Now, you don't pay anything of that. You get paid to be patient. And I can't stress enough how this is important. The other part, obviously, will be that bonds will be looking incredibly tasty at some point. The thing with bonds is obviously they perform well right ahead of these inflationary cycles

and during this inflationary cycle and also during recessions, obviously. So the thing is the Fed will be trying to tighten policy and to choke the economy and buying bonds in that environment doesn't deliver too much returns. But the moment the choking off of the economy turns into data that validates a recession,

bonds are going to perform incredibly well. In 2001, that's a typical example. The Fed choked the economy in 2000 with rates at 6.5% for a year and a half. And then, you know, the economy suffered. In 2001, you got negative earnings growth. You got the labor market cracking. And the Fed was forced to cut 500 basis points between January 2001 and March 2002. 500 basis points. That's a Fed pivot. The bond market rallied roughly 10-15% returns from the bond market. With rate cuts by 500

basis points in 15 months, the equity market dropped 12%. So it's not like the Fed pivots and the equity market rallies. It's not a one-on-one relationship. That's what I said earlier, I sure. I mean, yeah, you see stocks absolutely dump after the Fed pivot. That's when the bottom comes, not in advance. Everybody's waiting for this mythical Fed pivot for their stocks and risk assets to go up, and that's just not what happens. The thing is that in this environment, because the Fed is reactionary, because the Fed is late, the moment the Fed pivots, it's bad. It means it's

been so badly validated by data that you definitely, you don't want to be long risk assets. I mean, I think it's a pretty straightforward concept, but the market is really, has a strong muscle memory. Guys, for 10 years, we've been used to Fed pivot equal buy stuff. Let me front load the Fed pivot. The Fed is here. The Fed has my back. As soon as there's hinting at easing, I need to front load and buy every risk asset I can.

This has been what people have been trained to do for 10 year plus. It can be pretty difficult to understand that this cycle doesn't work like the last 10 years. I guess it's a hard lesson people are going to have to learn. At least I think so. Well, I just want to do one little thing before we transition today. The human nature of this.

Let's say we've had the boomers just had very much of a gift of a one decade rally. You got way overweight stocks without touching it. You got overweight just because of performance and now you're being the gift of i can lock in and get nine percent for two years in a two-year note hmm i'm 70 something years old thank you very much i think human nature and good money managers get it that why would you touch anything until you're given a discount in stock right just give me that that tune. Thank you very much. Go ahead, Dave. Yeah. And this is the point where I'm going to bring it back into the crypto world, because I think we're all in agreement that in the traditional financial markets,

that there is some pain ahead. It almost has to be. I don't think that any of us are disagreeing. Real estate is, I think, what the Fed is really more concerned about. But a couple of things. The first is from a macro perspective, the most amazing chart is the Bitcoin hash rate, which is now sitting at an all-time, yet another, I mean, new all-time high. I mean, we've been talking about this for weeks. We're talking about a network that's growing and growing with large global demand. And I think that this is the year that it will start to de-link from being a risk asset. I think it will be more like home stake

mining was in the 30s, where during the Great Depression, the only proxy for gold, because you couldn't own gold because it was outlawed, went up i think that the same thing that happened in the global financial crisis three months in gold started to rally uh i think that those things i think bitcoin is likely to do that for a lot of reasons you know we've talked about the technicals we're right at the 200 week moving average the most bullish thing that could possibly happen is it stays here for a while, you know, two, three months around these levels. But I think it's the reason is because everything we're talking about, the traditional players have such a tiny allocation into Bitcoin, into crypto, relatively speaking, that, yeah, you know, 5% a year is awesome when you consider the potential risk of the stock market.

But if you're 40 or younger and you want to have some macro parts of your portfolio, I think that you're going to see that. And so I do think it's important to understand that one can be bullish on certain things and not on others. At the end of the day, however, if Alpha is right, and I think he probably is, that we're going to see a major correction in real estate, which will lead a major correction in the stock market. All things from whatever that level is, all things, because correlation goes to one in those sorts of markets on the downside. You know, be very careful out there is really what I would say, because I think Alf is right. And we are going to see something like that.

Last thought, because I know the background noise is the timing from both Mike and Alf is fascinatingly how it's fascinating how it's lining up. 2023 is a year that that politics isn't going to go in and desperately say, pivot, save me. 2024, 100% is a year where the political pressure will be so large against the Fed or anybody else to save the economy because, oh, my God, if we're hitting a recession, you know know if a recession is just hitting hitting its stride right when a presidential election cycle is starting uh that's the kind of thing that that the politics will be extraordinary and it does look like that that's going to be the case so there are a lot of people in the market who who might want to try to hang on and get buried uh you know if there's a if there's a down move. But because there's a lot of people saying, well, 2024 is definitely going to be a good year

because they're going to have to bail us out. But what's the old expression? You know, it depends from what level. I mean, you know, a 50% rally sounds great, except unless you've already fallen 50% before that, because now you're 25% in the hole. And people have to remember, you know, it's all a question question of level setting so the timing does matter on the macro side so does that mean that we effectively lock in your cheap debt and sit on it right keep your low low mortgage and

buy a lot of bonds and maybe some bitcoin and gold that's really the uh is that the gist of the strategy and then just sit here for the next couple of years? I mean, that's my strategy. I don't know what other people are going to do, but that's sort of where I'm sitting. I don't want to be leveraged to anything that is highly leveraged to an economy that looks like it's primed to roll over. Alf, any thoughts? You want to be long risk assets when money is being created in the real economy and financial money is being created at the global level. None of them are true at the time being.

Credit creation has, in real terms, effectively stopped. Looking at the credit impulse that I run at the Macro Compass as a global series, trying to track how much money we create for us, not for the financial system. And the impulse is negative. So no new money being created for us. And on a financial level, no new money being created for banks and now yes okay china and japan yeah but japan is going to change course very rapidly there is a new governor coming in and he has a probably very different stance and inflation is four percent in japan as well

so forget about that offsetting factor europe is draining money financial money the u.s is draining bank reserves as well japan is going to be stopping adding bank reserves. Canada, Australia, the UK are draining bank reserves. And we are left only with China trying to partially offset that. So it's not a positive environment as well for financial money. Not it is for real economy money creation. Not the moment to be long. I mean, there are macro cycles.

And I think the economy in 2023 and the markets will be the reflection of how tight monitoring fiscal policy worldwide was in 2022. So not playing the hero here and trying to call for a new bull market. Let's be patient. We are paid to be patient. That's a great thing. I mean, why people are so obsessed about having to generate 100% return in a year. Just chill. Sometimes it's fine. You get paid 5% to wait.

That's not too bad. Mike, you get the final thoughts here because we're up against time. I have to echo that. There's times in life to focus on the history and be defensive. And I don't make advice. I'm not allowed to do that. But good old government to you notes. Thank you very much.

Let the dust settle. If you want someone to blame for this just being a great dip to buy, I'm happy to stand up with my colleagues here. So I look at it as I'm actually publishing something tomorrow. This trend versus trade. The trend is everything's going downward and people are just trying to save it. The trade is it might be. I look at this what I used to do with my clients I mean I would structure up like a put strategy in Bitcoin around 25 000 like Dave said it's so it stays here but I fully expected the stock market to

go to 3 000 S and P 500 and Bitcoin and a lot of cryptos to still have more problems but to come out ahead with gold and long bonds. Perfect. Anyone else who has a final thought, Dave, you have any final thoughts you can just shake your head and say no, because I know we've kept you guys long enough, especially on a holiday in lovely Miami. Alfman, thank you so much for joining. Really added a lot of color to our normal panel here.

So I have to say you are welcome back literally anytime. Like you can just show up. You don't even have to ask. It's totally, you know, cause we, we loved your insight and, uh, and I love the way that, uh, you guys were all in agreement and playing off of one another. So really, really very much appreciate it. I'll thank you for coming. Thank you, Scott, Dave, Mike's been a pleasure. Talk soon guys. And for everyone else, I will of course be back tomorrow morning at 9 30 AM Eastern standard time until then. Well, let's, of course, be back tomorrow morning at 930 a.m. Eastern Standard Time. Until then, well, let's see what happens with the market. Thank you, everyone. Bye. Take care. Bye. Let's go.