I
Talked to the brightest minds in the investment industry
To find out the odds of recession and to determine how investors ought to position as a result. I
Explained why I was asking the question in the first place and a piece called is recession coming
Let's pick it up where I'm taking a close
Look at a curry, which is a weekly data series that I use to determine the economic strength of the business cycle
so you see the chart here of
Accrete with quickly GDP and you can see how well correlated it is
It's indicating that we've got some weakness to come. Ok
So that's the first interesting point
Then I'd like to put the ikura against a number of other indicators that may be forward-looking and this is where it gets interesting
I'm going to show you a whole series of charts now for you to look at
So this chart is the cash freight shipments index
You can see how dramatically freight shipments have fallen and how much they're
suggesting that the equity could fall from here and therefore
the
GDP as well
Car loadings a similar way of looking at transportation. It's collapsing capsule goods orders
These are the big-ticket items the things that a lot of times you use
Financing for or are involved in the global supply chains
you can see how they are rolling over as well and
Following Acree lower if you believe in this supply chain story and it seems to be bearing itself out in the press
Almost daily
Then you've got to imagine the capital goods orders are gonna come lower but households are also struggling with the with the rates
So you've seen that and how much car sales have fallen so calf sales have languished and they're expected to go further
Clothing sales have collapsed in recent months as well, which has been an extraordinary move and restaurant sales as well have been extremely weak
so your son to see not only is shipping and
Moving Goods around week, but you're also seeing a weakness in
The consumer and a weakness in business expenditure another great global indicator. I've looked at is semiconductor sales
semiconductor sales are
extraordinarily weak right now and they too are suggesting the global business cycle has a lot further to fall back in the US we
Also got the housing cycle
it looks like that the
The case-shiller house index is starting to weaken significantly
And is now at the weakest level since before the previous recession
And we also have weakness in house prices overall and construction so I'm concerned that all
Parts of the economy are showing evidence of weakness
And I know many people say well unemployment's not unemployment strong
Unemployment interestingly enough is the most lagging of all and indicators and just remember that every time the Fed cut rates and unemployment
Is below 4% We went to a recession almost immediately afterwards
They're all lagging
So don't get trapped in the in the unemployment look at the forward-looking indicators and they're looking problematic
So that's what I found in the u.s
Then I took a look at the global data and found even more signs for concern
particularly around Europe and China
That's how I determined that based on the data
The whole world looks to be rolling over at once now some of you might be thinking
So what it's about time had a mild slowdown, but there are two major issues here debt and demographics
It could lead to a massive adverse event that I refer to as the doom loop and it's dramatic
But here's my summary of the chain of events that we could see phase one the business cycle weakens credit begins to widen
corporate cash flow worsens our tad and shares fall and volatility increases
I think that's where we've got to now I think phase one we accomplished and it started really in about October
Phase two the business cycle weakens again credit widens more cash flow gets worse as do profits tax receipts fall and state pension funds
Stop buying debt big triple B stocks fall and bonds fall even more sharply equities fall hard
So I think this is the next phase and I think it's coming after the summer. We'll wait and see my forward-looking indicators suggest that
the
Europe has a sessi up cycle right now. There's a bit of stabilization of data
I have a feeling that if I'm right about the debt ceiling or the dollar breaks higher
Then I think we're going to start to see
Phase two come in when we start seeing phase two
We know where this is going because then the story becomes very clear face one was the alarm bells face - they strap yourselves in
Okay, let's go into Phase three. This is when things get ugly the baby boomers start to panic to get out of equities permanently
There's downgrades of triple beats junk
The EU banks can't take the funding stress and the ECB and the government step in credit spreads explode credit seizes up entire lists pension
Funds are forced sellers on downgrades equities going to tailspin. There are no natural buyers credit widens dramatically offered only no bids junk bond market
Overwhelmed pension funds get to trouble defaulting on obligations big famous companies are being forced towards bankruptcy
Unnecessarily, that's the really ugly phase and that's the one
where I
Think many of us have got a sense that there was an endgame
That's at the end of all of this
If there is one it lies in the heart of that but that we get there or not
It's gonna be a function of what the Fed does and what the central banks do and how they deal with this
And there's many outcomes for that and it is not going to be a straight battle
But all I do know is these things tend to accelerate much faster
So now that we know just how much rides on the recession question. Let's try and get some answers
Straight off I talk to Laxman Atta Shan, who is the co-founder of ecru? He was really helpful in helping me interpret exactly
What the date was saying the way I would sum that up visa vie like is there a recession?
somewhere on the horizon
is
that
We're slow walking
Toward a cyclical window of vulnerability now many people think
Recession is the result of some shock. You know, somebody did something wrong or something happened that nobody could have predicted and that's why
There was this recession some negative shock
And that's not how recessions are made. We've been studying this for longer than I care to admit and
the way our basic the crux of our finding is that
There's an endogenous cycle which is being tracked by
good cycle indicators including leading indicators, which can
Tell you if you're in a downturn or an upturn now
We're in a downturn and we're looking at the forward and leading indicators to see how that downturn is likely to progress
if we begin to see a
window of vulnerability opening up which would mean that our indicators are are
Falling in a in a much more pronounced pervasive and persistent way than they are currently
then
virtually any negative shock any of the things that have occurred over the last half a year can become a
Recessionary shock when I talk to Teddy ballet. He echoed that point about a window
Vulnerability do you think the u.s. Goes into recession?
It's a tough call given the information we have if it does happen it would happen from now to June next year
There's never been a higher probability this cycle for the u.s. To go into recession because one we've had a tightening cycle
2015-16 we never had a tightening cycle in the US. It was just a trying to drag now
We have a tightening cycle and a china drag that's really pulling down the data and we have not seen it pick up
I understand trade tariffs
And now you have the trade coming in perhaps this window
Vulnerability idea also helps us make sense of some of the recent Central Bank policies
we've seen in fact according to Christopher Lee Ari the Fed and the rest of the world central banks are doing
Anything they can to forestall a recession in this tender moment
We are going into that downturn with official rights
In low twos two major central banks with negative area interest rates
14 trillion of balance sheet
So basically the ability of the central banks to answer the way they did it in 2008 is very limited. The problem is
the control for the bursts because they don't have the
meaningful tool
to address the the
consequence of a massive downtown
So they will need to be very creative and that thing that this is the message we have this year
I think they have no illusion about their ability to kick-start the economy
I think they have no illusion about their ability to boost real inflation
So these mandates are quite an illusion. So they are focusing on what they can do, which is
Keeping their financial conditions as loose as possible and because a Lyari believes that markets are in a massive bubble
The stakes are especially high and as a result central banks could pursue increasingly extreme
Sim have policies and since these policies may work in the short-term
Le re actually believes that a recession is not particularly likely right now
So what's an investor to do well for Olli re it's pretty simple. I never been as bullish as
In the past on God did I was breached when we met in March and God was 21300
It I still believe that the old yields will go further lower
And and I still believe that because you can have so much
cash injection plus a currency war between all the central bank's trying to
To put cash on their respective currencies. So you have a risk of debasement of the currencies. I think the gold is a God desire
Has got to go to mix in front of it
So Christophe thinks that central banks would destroy the value of their currencies allowing the price of gold to rise
It's a pretty compelling case and even though he and I might disagree about the economic outlook we do agree
That gold is a good way to play the central banks next move, Greg
Weldon is also in on the gold trade, but he's looking at it more from a technical perspective and that was really interesting
So the long-term picture is then here's your correction. You had ABC Fibonacci and you're rolling back to the upside
Well, this is basically 1 2 3 4 5 typical Elliott wave
Dynamic where wave 5 has just been ignited, you know, we talked about ignition and here we have liftoff in gold
So how do we want to play that well, if you're not long any retracement down into this?
I mean you guys you get below
1300 you get like a 1295 print it's a gift from the gold gods. You got to back the truck up in that case
I don't know that you're gonna see that. I don't think you'll get much below 12
65 to 1260 if you get a dip, I mean because this is a longer-term breakdown breakout
I mean so you know 13 45 would be kind of a last guest on the downside and then frankly
I mean you get below 1290 then we're wrong and then 1266 at risk, but they really don't see that happening
Not when I see stuff like this and here we get to the trade final. Yes right to the trade
All right, the GDX gold mining
ETF really like this year. I mean it is now breaking out. Look at this pattern
I mean, it makes new lows. This law was so unconfirmed by any technical, you know, a momentum indicator
You want to throw in you got the breakout you got the retest of the trendline that was violated
I love this pattern 30 years in doing this
I'm telling us one of the most reliable
patterns when you get a
Long-term trend breakout and it kind of seems like it's running out of steam and it comes down
He might even make a lower low, but it holds above the violated trendline
That's huge that retest on the backside particularly when it lays out right in the zone between the 50 and 61%
Fibonacci retracements in the meantime you get back over the two year moving average
Which is now accelerating to the upside and making a new high in line with price a very bullish dynamic and this is long-term
Stuff man here look at the 52-week and the and the two year moving averages crossing over here as well
Very bullish the GDX would be the trade here
You know in the in terms of what trade we're putting on here
one of them
GDX would be a would be an option and frankly you just plow right in here because the risk reward is still quite favorable
so playing a slowing economy and increasingly accommodative Central Bank policies by buying gold could certainly be an option but
I think there might also be a simpler way in this recession watch coverage
We had a the great pleasure of hearing John Burbank who to me is one of the greatest living hedge fund managers
He discussed his highest conviction trade with my good friend Alex Gurevich another well known hedge fund manager
Burbank also thinks of the Federal cut rates much faster much further than the market currently expects
He thinks they go to zero
But he prefers to express that thesis by using Eurodollar futures
Since those track the short-term interest rates on US dollars
They're highly influenced by what the Fed does what I like about betting on
With euro dollars and betting on fed futures is that we're we're betting on where the actual policy rate is gonna settle
It's really it's like betting on the earnings like nailing the earnings of an equity
But but not having to worry about the multiple most specifically Burbank is talking about buying options on Eurodollar futures
And he's not shying away from this trade either
I'm talking about like getting a you know, a TEDx return in a scenario. And so
in a way
I'm like bringing like a risk seeking mindset to this trade for a lot of people who don't you know aren't used to having this
maybe optionality or
Aren't seeking this kind of risk. I now believe I now can understand why
Druckenmiller could have made so much money, you know in these times right a risk seeking
mentality in an incredibly liquid
Leverageable, you know area I get it. I get that now someone else looking for massive return is Dan's happy arrow
Dan is known as one of the sharpest minds on gold and macro in general
But recently he's been increasingly interested in what some called digital gold Bitcoin is a lot of things
So what it is is it's an invention
And I think it should be referred to as an invention rather than all the other things
It's a-you know what it really is is it's a truth machine. It's a way in a way to
eradicate all
fraud or
You know lined by human beings. I mean the whole, you know bigger concept of certainty of
confirmation of
validity of security
That's what you're buying a system that you know now is ten years old has a tremendous track record
And I'm thinking well, what's that worth what I all Stan his own question
here's how he responded starting first with the market cap of Bitcoin and then discussing other people's
Predictions of the price per coin it's now two hundred billion dollars a market cap, but that's kind of small you
Know it's kind of small
If you not even if you if you just see what's been built, like, you know
It would cost more than two hundred billion dollars to build that
right, so you can start to think that you know within ten years the Winklevoss a
Million dollars or Draper's five million two hundred fifty thousand in the next few years. It's not unreasonable
And so what is the bet the bet is by and to do nothing else? That's it
I'm also interested in Bitcoin
because I think it could be a way to play this Doom loop thesis of mine from the bullish angle and pass that thesis by
The way comes back to China China
Has been the growth engine of the world and that engine appears to be sputtering
Russell Clark has noticed that as well and in this conversation with Roger hearse
He outlines of specific chain of events that basically ends in economic disaster and it's playing out in front of our eyes
The problem is is that when you combine those three things, I've just told you low tech worthy huge derivative notional
Z' that don't match up to that liquidy and then the Delta and markets been by trend followers
When you combine all these different pictures together?
What that suggests to me?
Together with issues in China he saying you get a gap in the market
base, so
one day
we all got home on Friday and
Over the weekend the Chinese go
Hey, that's it may as well, we're gonna rip the band-aid off and we come in and the remin be is it nine right and
Equities then open up
down fifteen on a gap
Right and then of course involve something goes
Down at for you, something like that
The problem then is that this huge amount of derivatives that somebody get knocked in and they're looking for the query
and one thing I've also seen is that the
The high-frequency traders that provide most of the query they pull their bids on balls bikes
Because they're not programmed to think
They're just programmed to react to market prices. So when they see vulgar low
bids get tighter when vole goes high they pull a bit and this has been the
Problem the problem of that view is that well, that means as you go one way
to pull all the CTA's long and
Then you go back the other way in it gap
So to put you on the spot sort of ran it off your your view and part of your view. Is that you?
They're an indie will move through seven. They will do something and this will trigger a whole series of chain reactions
Is that gonna happen before the end of this year when you look at?
The sort of dichotomy between like I said macro indicators and we'll head quiz Ettore
The macro indicators are saying yeah. Yeah get position four right now
Josh wolf one of the smartest most successful folks in the venture capital space is looking at liquidity as well
He believes that we may all learn exactly at the wrong time. Just how little liquidity there really is
You have the illusion of liquidity because you you have daily trading and and and ETFs and you know
They're marked on a daily basis
But the underlyings suddenly might be a liquid and so I think that there's a real risk of permanent impairment
Which is the true measure of risk of principal so if that happens and retirees start saying wait a second
You know what? Let me go to cash
Let me get out of this bond funds that I thought was safe. You know that creates problem
Well, they also might need to sell out of equity funds but to me
It's not enough just to look at the macro
You need to get your hands dirty and really investigate some of the specific sectors that matter the most
That's why I spoke to five sector experts so I could see how they're making sense of the economy through their own specializations
I traveled around the world via Skype and found about metals chemicals shipping autos and real estate
so for sure that the bigger story is trade and trade tariffs and that was a
unexpected
development that many
Particularly industrial customers hadn't come to appreciate I think the seriousness with which the Trump administration was approaching that topic
they had been used to the breakdown of barriers not a position of barriers and when the
industrial world all of a sudden had a content within particular
tariffs in China and having to deal with tariffs on Chinese
fabrication for products and Chinese exported products
That was an unexpected change in supply chains
And I think people weren't prepared
Or had forecasted to deal with it all so that that to me has been the biggest story
When I talk to business customers and people that move goods around the world for various final fabrication into media processing a different place
that to them was a major reward orienting of the
supply chain
They become used to where China is a major importer and exporter
of a number of commodity products and Commedia products from electronics to steel products to auto parts and other things that touch
China is in numerous amounts of goods that all of a sudden became quickly on economic then that wasn't forecast
It's I think we're do I think we're due for a period where we do see?
business activity contract and we do see a bit of a pullback and I think we're
Overdue for that a number of a number of industrial leaders, you know leaders CEOs of the companies involved in our industry
They recognize that what we've seen since December
2017 is a definite slowdown in the chemicals industry and this matters because we are the third largest industry in the world after
energy and agriculture and
We go into all parts in the economy, and we're in that position in the value chain
Where we we do get six to nine months lead time on what's happening elsewhere
So yeah, just that sort of start to focus down a bit
You know, one of the wake-up calls for me was October last year where there's a big industry conference in Europe
And I walked into my first meeting with some said senior people from a major company
Said how's business my always my first question. Oh, we were down 40% the second half of September Wow
I said, oh, you know and it went through three days
We had twenty odd meetings with with companies
you know judge not just European companies but global companies and one CEO joked halfway through I said, oh
No, actually we're doing better than everyone else. He said we're only down 20%
No, no, I don't want to sort of say. Oh, yeah, this is a collapse what I'm saying?
Is that marked the moment at which we transitioned from a stable slightly rising?
picture towards a real
significant downturn and so we come back we've now got the may data out from our friends at the American Chemistry Council and
Normally May would show quite a sizable
Improvement because it's right in the middle of the second quarter so car sales should be going well
construction should be going well all of these things and the weather has been good was good in May, but in fact
They only bounced by 0.2 said, you know that's less than half of what we normally get in May. So what we're seeing is a
deteriorating picture in the industry in
almost all of the of the major markets and
The bounces this is something I look at a bit
The bounces are weaker than they used to be and they're getting weaker all the time
So the outlook for the second half of the year isn't terribly good
I don't think we're virtually on the point of saying we are either in a recession or
About to enter a global recession. So starting at the global level
Total global vehicle sales are down about 6.4 percent
This is kind of morph into like a every market
Phenomenon and it's very concerning. It's it's starting to have ripple effects on
not just the the auto makers but the suppliers and
I think the phrase you use often is there's quite a bit of knock-on effects that are yet to be seen
But some are starting to filter through the best way to describe it is we have not begun the healing process
So so you're saying your short-term indicators?
Down you'll meet medium-term indicators are indicating an acceleration of weakness
And your long-term indicator is not showing any pick up
Into the extended future yet. Is that right?
That's correct
so this is quite a large bust coming in the hell in the car market if
You'll if we're not seeing it doesn't looks more than a short-term cycle here. It's not an inventory cycle
We've actually got a bigger slump
Absolutely, and that's it
That's a great great point because we can go through ups and downs where inventories get out of hand
Production gets cut all of a sudden day. Supply looks good, you know in three or four months later. We're back in the same boat
That's just how it happens as as you as the market continues to weaken over time
because of headwinds like time to equity global macro, I'm seeing similar phase you are the
World trade seems to be slowing on the demand side. We're gonna have to see what happens
You know, the trade war obviously has local drivers and shipping is in this model thing people
Love to look at the Baltic Freight index, but there's many different
Categories of shipping sub sectors, so mainly it's three of the containers. Yeah demand
For Chinese containers going into Los Angeles is slowing
but when you look at other things like Baltic Freight or
In a crude oil anytime you have trade wars and trade disruption
It means that the number of vessels on the water have to go further in the number of ton miles
Increases take the situation with Venezuela right now. It used to be that America imported a lot of Venezuelan crude
That's now all becomes circuitous where Venezuelan crude goes somewhere else and then eventually usually comes to America and Venezuela
Which is importing refined product from America is not directly or importing it. It's going somewhere else first
So what that's doing is its increasing the shipping routes and it's increasing the number of ton miles. That's actually bullying
Prices even though the global economy and world trade and especially indexes you look at my cash shipping address are showing serious
Declines it hasn't yet hit shipping
And if anything I think shipping is doing quite well right now for example
There are some serious red flags out there that if I could just briefly run through them
I think they're important for example, uh
Home sales have been weakening in even the hottest major metros for a year or so
Some of them most of them are down double digits
now slowly home sales by itself isn't necessarily a problem, but
Combined with that you have the rising inventory of homes for sale two months ago
it was in the house market in the country Silicon Valley, San Jose was
Double the inventory of a year ago and it's still up substantially the other hottest markets
Seattle Denver, LA are all showing a pretty substantial rises in
Inventories you put those two together and that it suggests to me that we're going to see and we have been seeing
increases in
Reductions at home prices finally at the end of these two weeks of programming
I talked to one of the most respected people in the entire investment research landscape
Carol Sokolov when I sat down with Carol in upstate New York, he kept bringing in historical examples to make sense of the present situation
It's an interesting approach and one that has really yield him incredible results throughout his career
Here's how he responded when I asked in the recession question
well
The great question of our time is whether this is a mid cycle correction like in 95 or 98
With the Fed easing into a recovery, but whether it's recession like 1989
2001 or 2007
And I have a very hard time seeing if this is 95, but I can go into why I don't think it is
I'm totally agnostic. I'll let the market decide for me, but all the evidence on economic data and
above all confidence and trust
Because this is really a confidence and trust issue. How are you gonna put confidence and trust back into the picture?
You've done a savage cutting on that
I cannot believe it's possible for trust to be restored in the next year and a half just impossible
So how do you rebuild trust and it takes years decades? It's extremely significant
So your sense is that we may be the cyclical turning point
But we're actually honest this is a secular turning point as well in many respects. It could be if the u.s. Goes for protectionism and
The rest of the world were to follow it definitely would be a secular turning point if the u.s
Goes for protectionism and the rest of the world doesn't follow
He won't be quite as bad
but then you have the whole cycle of wealth distribution coming and how's that gonna play out and
if Trump doesn't get reelected what then happens to all of the
deregulation and tax code all the things he did to get the stock market up will
Buybacks be how Lord I mean there's so many things that could happen
There's a significant watershed event
But the market isn't paying any attention to but he's a significant risk
And then of course you have what I call a burden of the debt, which might be the reason why it's so hard to get
Growth and the last time we tried to do economic growth
With more debt solving the problem of debt with more debt was in the 1920s. We know how that ended up
So we got two hundred and fifty trillion and Counting of global debt
which is more than three times global GDP, we've added debt at the rate of
Depending on the country one and a half or two times more than nominal GDP in the last ten years
so we've leveraged up this system and
maybe the burden of debt is is too great to grow and
Even though interest rates are low. A lot of the debt was used for unproductive purposes
So it's not generating any cash flow and then of course you have demographics which into recently the u.s
was a hopeful spot and now is almost as bad as others with the
population growing at the lowest rate in 80 years this last year, so
if in fact
It is beginning recession. It has immense implications
Which is why glad you asked me the question and the first is?
Will the recession be over by the election and the second is how will this impact?
China u.s. Trade relations
Is very very significant. So my hunch is that
President Trump wants to run on tariffs and
wants to run on
Protectionism and taking on China and even if the economy were strong he would do that
But if you kind of mean it's a week or a recession
He will double down you still he's not gonna say I'm in favor of free trade and take all the towers everywhere
It's not gonna happen. That's our song getting away
Yeah, so that means protectionism and then the next question is what does the rest of the world do?
did they put up barriers and
That's probably the most important question of all because that's what happened in the 30s where everybody went
Protectionist and beggar-thy-neighbor and of course you got some very large and export economies China South Korea, Japan
Germany
Very important to the global economy. I fear we're on a slippery slope here and when you open up the
protectionist mind shoot
You can't bring it back and there's a guy named Jude Winooski. He's since passed away, but he was one of the original supply siders
along with art laughter and Robert Mundell and
Bob Bartley editor of The Wall Street Journal and he gave me his book and wrote it to me Takuro a
Disciple of the supply-side Revolution 1978 and he wrote the book because he wanted to disprove
that it was free-market economics to cost the 29 crash and
the Great Depression and
he plotted how
The smoot-hawley Tariff made its way through Congress in the fall of 29 and how the stock market reacted to each
Support or against and finally when it became clear who's gonna happen. That's when the crash happened or happened for real
So he makes a very good point but having seen that and knowing that history repeats I had this gnawing anxiety
That we could be going down that same slippery slope here
So kills head is in a similar place to mine, but what I find so fascinating
Is he's always trying to see sense in the larger secular turns that are happening in the background of these economic cycles
We need to add into this my view that were entering the cycle of from wealth
distribution from wealth accumulation to wealth distribution, right and
It's his oldest history. He's been going on for thousands of thousands of years. Julius caesar cancelled death, for example
And there was a debt Jubilee in the UK, I think in the 18th century and probably in the history of man
There's never been a period of greater wealth accumulation. I don't see it as socialism per se
It's just a cycle and if we put that into the picture here
this means that corporate profits are going to be hurt because
Labor is going to take a greater. Share of the pie has been going down for 40 years
So that would obviously impact the stock market. I happen to like gold a lot
It's been out of favor. It's not understood at all people come to it
Very late in the cycle and they ride it up and they think they understand it when they really don't it's very sophisticated in Tremont
with much different values and
trading
parameters than people are experienced and I see it as the best barometer of
deflation and
Reflation. I'm not using the word inflation
Reflation now at the end of the last commodity cycle or it should say that were in the 1970s
gold and all the commodities went up because the dollar was very weakly making it that kind of a period so I think right now
Gold is very attractive. Obviously, the mining shears are attractive
I certainly think having the quiddity is very attractive people think that there's so much liquidity in so much cash
And I've seen so many times when there's too much of something
It becomes not enough now when you hear different people use completely different
Frameworks to make similar points, you know, you might be onto something
so there you heard from Carol about political upheaval about issues for equities about the troubles with liquidity and
About the case for gold and I think he's bang on so where does that leave us?
Well, obviously, we'll see how it all shakes out
But there's one point I don't want you to miss which I made in my last video for this series
You might reach different conclusions. And that's fine again. I've always said there are no certainties in this world
All I'm trying to do is corral all the information you could possibly need to make an informed opinion
Because being ahead of the crowd
Taking the opposite opinion to what you think the market's thinking is where you make the real money you can jump on the trend
later
But first this the turning point that matters and I think the turning point or the returning point
With the bond market yields falling is upon us again
And I think the opportunity to make a lot of money is coming up rapidly
So once a thank you for coming along with me on this journey if nothing else
I hope it's helped you understand why this recession question is so desperately important for real vision
I'm rel pal
You
You
