Federal Reserve, Barish, Bloomberg discussed on Odd Lots
Note before you listen to today's episode we recorded as episode on Wednesday June twenty-sixth so several weeks ago and and because this discussion is related to specific events coming up specific forecasts of the world economy the world markets we wanted you to be aware of when it was recorded. So that anything that's happened subsequently you can put in context in case things have changed a little bit. It's still an interesting timely and relevant discussion in the grand scheme of things but we just wanted you to be aware of exactly when we had this chat <music> hello and welcome to another episode of the odd lots podcast. I'm Joe Weisenthal and on Casey Alloway Tracy. Something I've been thinking about lately is that we're in a pretty interesting time for financial markets and I should start by noting that today. We're actually going to have a conversation about markets themselves. elves rather than some esoteric topic tangentially related to market but it feels like we're I duNno. Crossroads is the right word but lots of interesting things are happening right now. I'll take the bait I can think of a few interesting things that have happened recently <hes> for star as we're recording this. We're coming up to the G twenty meeting. There's a bunch of expectations around. She shouldn't Ping Meeting Donald Trump whether or not the agree some sort of trade deal or trade truce and <hes> we also have the tenure U._S.. Treasury back below two percent that was after another dovish pivot from Jerome Powell at the Fed and we have a whole lot of negative yielding debt. We also have earning season coming up so yeah. There's a lot going on but the one thing you didn't say and what makes it really weird. Is that with all this tension out there there whether it's trade the Fed feeling that it needs to pivot to more dovish stands to signal possible rate cuts all this debt falling deeper into negative territory in many instances the stock market it is more or less right now at an all time high so despite all these concerns out there and interesting stresses showing up in the market the one market that sort of purist proxy for risk sentiment is basically as good as it's ever been. Yes yeah so we have this big divergence between bonds and stocks but if I could just say one thing it's interesting 'cause we talk a lot about the bond market pricing in a potential recession but it of course depends on what bond market you're talking about government bent bonds sure but if you look at corporate bonds other types of credit risk those are also doing amazingly well so again the riskier parts of the market equities credit all doing really well while other parts are sort of screaming claiming that a slowdown is about to hit exactly right and then the one thing that I think also sort of makes even the stock market interesting is if you look at various survey measures. There's not a ton of bullishness out there. <hes> you know various various surveys of say fund managers lots of anxiety lots of evidence that people are engaging in a high level of a hedging defensive stocks leading the rally higher so even within the internals not many signs of you for it's just kind of a it's kind of a weird time yeah. It feels like a lot of people are in wait and see mode but I'm not sure what we're waiting for at this point. I don't know what we're waiting for either anyway. So I mentioned the top we're going to be talking about actual markets today and I'm very excited about our current guest. He flew all the way from Singapore for this podcast. Now it's not totally true but of course he's one of our colleagues here at Bloomberg but and I'm all always love talking to him because he's based in Singapore in every once in awhile he comes to New York and he's he's. He's our macro strategist or he's one of our macro strategist here at Bloomberg. He puts out views. He's a former trader. He has a very strong opinions about the market and what I think make some really notable notable right now. Among other things is that he's been a longtime bowl who suddenly flipped bearish and that's not very common but someone <hes> you know there are a lot of people out there who are Barish but they're always bearish. It's a refreshing indifferent glad to hear from someone who may have flipped who has flipped you forgot the most important part which is <hes>. He's also a previous thoughts guest de true and I figured it significantly more bullish on the market <hes> the last time which is probably I don't know maybe a year and a half ago or two years ago that he appeared on the show so anyway without further ado I want to bring in Mark Cudmore. He's a Bloomberg macro strategist. He's also the editor of the MLIVE blog. Which you've you have a terminal you have to check out and as I mentioned mentioned he's a longtime bowl going back to at least twenty eleven? He's been optimistic about the market and the economy and for the first time in years he's warning about significant market selloffs in a possible U._S.. Recession so mark thank. You very much for joining us. Yeah absolutely joe-marie excited to be here and as you say all the previous tons of spoken to you on T._V. or odd lots it's always been bullish. I've always been kind of a permeable. I've been laughed up on my colleagues here. I think that's I've had periods of tactical bearishness like Oh. This will inherit the market for five ten percent but I've always been very much in the camp that you know what we're GONNA go back to record highs soon. There was these three pillars driving the rally and that was growth earnings and liquidity and all kind of come into that later why some of those pillars are disappearing just for the kind of the context in the history. I was someone who is working even brothers before the last crisis and did turn Barish like I think many people the forefront of the financial crisis in two seven I was you know not particularly a studer smart but along with the people in the industry are became negative and kind of sometime late seven can't remember and I stayed to Barish too long. I stayed Barish. 'til definitely through late nine ten and two thousand eleven when the euro crisis flared up. I was like this is the next kind of self again and then I learnt from when we got through that I was like hey no wetter sector game has changed too much liquidity is coming so since then I being basically you always buy the dip and the difference is now. I think in the U._S. Equity Market in particular. It's we've never changed your cell the rallies and it's I think we'll get a proper bear. Market is in a twenty percent plus decline over the next year. Well you mentioned your three pillars of bearishness than <hes> walk us through your your thesis Mark Yeah absolutely so I think that two of those pillars are to be taken out completely and the other one is lost a little bit of impacts. I don't think liquidity is disappearing anytime soon but I think the amount of the of leverage in the system can be harmed pretty quickly so what we've actually seen in economic forecasts over the last two months is that they've not been changed in fact there are actually raised about a month ago for the three largest economies in the world U._S.. China <hes> on the euro zone but overall all economists aren't yet factoring ringing all the tariffs because they want to believe their temporary because they don't Wanna suddenly slash all their forecast and then suddenly find that trump signs a deal and because he's been shown to kind of change quickly in the past it means that economists Arnhold so what happens is you still got US economist. The consensus forecast is still for two and a half percent growth in the U._S.. Even though all high frequency indicators show that's quite clearly just not going to happen <hes> so it will take not just a truce in trade world take removal of all tariffs and some extra positively or removal of tariffs and the rate cuts to come through for us to get that kind of growth rate so we're seeing global manufacturing P._M.. On his phone for thirteen straight months is now contraction territory the preliminary P._M.. Is What you get for about fifty percent of the readings that we've already got this month that for the next reading next Monday show that'll probably fall again getting contraction and that's been a that's been a pretty good guide for growth and that's more of the global indicator but was very much in the U._S.. We're seeing that as well you talked about you. Know stocks are at record highs but stocks have always been good indicator. We look back in the last crisis chazan seven so the market new. There's a real problem the economy suddenly flaring from about August. We suddenly only start seeing that steepening the car was we start the easing cycle so what happens is the Fed actually started their five hundred basis points rate cutting cycle in September two thousand seven the stock market made its record high in October two thousand seven the recession came into Semitism seven. I would not be surprised as we get a roughly similar timeline then we had the same thing back in one. I can't remember the exact months but the five hundred fifty basis points rate cycle ratings. I think started in January third. The recession still came in March Tasman once a two months after the rate cutting cycle started so it just to back up your three pillars one is liquidity and that's the one you're not particularly concerned about right now. Yes the other one is growth and obviously and then what's the earnings okay so I think one of the problems with earnings is again. Earning strategies also starting to slash Josh forecasts but not too aggressively yet because they use their macro inputs what they're economists. Say this worked for most banks. Some banks direction not allowed to have different inputs than their official economists other ones. They are but overall. They're still going. Hey all the experts are saying growth is going to slow. It's not going to be impacted by the trade war. Even even though we know it's definitely GonNa be impacted an even though all the surprise indexes have been missing anyway so even during the trade war the data saying that the economic growth gonNA slow down drastically now he fresh tariffs and may which will feed through the economy in about August. That's when we'll get those indicators come down Sucrose Obata drop like massively in from about August September onwards even with Esscalation the trade war so we actually need removal of ties to change that now once we get past you twenty and once economist start slashing their forecasts that'll start feeding through the earnings strategist equity strategist and they'll start slashing equities. We do have a pretty good relation between the direction of kind of earnings and whether we're getting earnings growth earnings recession and equity markets and I think we're about to see quite a drastic kind of earning slash earning deep earnings recession parched because we had such a high peak from the tuck stimulus before so both earnings and growth are about to be completely taken it but mark I guess the response to all of that and you know you've laid out a very clear list of worries there but the response that any bowl would tell you would be well. We have the Federal Reserve which is now back in easing mode. Won't they be able to offset a lot of this. My simple answer is no <hes> the Federal Reserve's got a very poor track record of preventing recessions and I said a referred to the last two recessions the only me too recessions. We've had <hes> in this century <hes> on both times the easing cycle started aggressively before the recession came the recession still came and both those times the Fed at five hundred basis points to cut so ten seventy did actually cut by exactly five basis points <hes> and as I said the easing cycle we'll start in September tenants seven take cut. I think one hundred twenty five basis points before the recession came but I'm not sure exactly but basically they're already cutting aggressively in Tasman One <hes> we I think it started with a fifty basis point cut and we still got the recession starting a couple of months later. It didn't stop it. Ultimately monetary policy is not the best tool for change in the economic cycle and that's become even more constrained giving them into Q.. We've seen in the system so there's the transmission has been broken so I don't think the Fed can stop the economic cycle. When it's this drastic? I think they can slightly massage. We've now reached breaking point. Talk to us about this divergence that we're seeing in the stock market and the bond market because everyone knows there's all this negative feeling dad curve inversions you name it meanwhile as. You pointed out <hes> stocks are they may be at all time highs but historically they don't often call the turn and <hes> they can be slow to the game. Is it a matter of bond investors knowing more because that's often this sort of naive like all of the smart market versus the dumb market but how do you think about that. <hes> divergence a think that first of all as you pointed this is not so anomalous in history as people say so quite often normally goes this way towards the end of the economic pointed out that was very flattering so you said I pointed out but anyways you your viewpoint but normally we do see that equities kind of top just kind of just as recession is basically guaranteed whereas bond markets turn much quicker and I think that a lot of people got very panicked about the bond Kerr flattening of the last year too and I I like since two thousand sixteen. I've been writing Mike Review articles in my bowl guys as like stop this panic Margaret mongering over the flattening yield curve. It's not a good indicator blah blah. It's about the steepening after the flattening. We're now getting that steepening. We're now getting the bond market is now saying hey the recession. Session is probably coming in the next six months or close enough to recession so we're we're. We're kind of following the historical path equities markets keep on going to record highs because we get that kind of bond market I would prove which provides extra liquidity <hes> lowers the.