The Macro Trading Floor transcript – 13 September 2024

Alf: Hi, everybody. And welcome back on the macro trading floor. As always with me, Alf, this week, my friend, Brent, how are you doing Brent?

Brent: Hey, Alf, I’m good. Hello everyone. I’m sorry about the sound quality last week. Micro USB is horrible. Anyways, Alf, do you know what today is the anniversary of?

Alf: It’s the anniversary of, I don’t know, is it your birthday?

Brent: No, that’s getting close, but it’s the last day that I worked at Lehman Brothers, September 12th, 2008. Even though it actually went bankrupt on the 15th of September, our last day at work was a Friday, September 12th. So shout out to all the Lehmanites.

Alf: And you were the head of risk management at Lehman Brothers, right?

Brent: I was not. No. Actually the crazy thing at that time was I was trading dollar yen and dollar yen’s main correlation was to Lehman stock because people were using Lehman stock as a Indicator of the financial crisis and what was coming next. Cause people were scared about Lehman. So there was a very circular aspect to me watching Lehman stock go down and selling dollar yen, but no amount of dollar yen that I could sell would hedge the entirety of Lehman brothers.

Alf: We have the Ministry of Finance in Japan as a whale, but back then we had Brent Donnelly trying to save the bank, but he couldn’t make it. Okay, guys, so look we’ve had some interesting data this week that I think makes the world look a lot more similar to the pre pandemic period. Namely, you have stuff like core inflation keeps coming in at relatively friendly base.

The six month annualized trend in core inflation in the U S is 2. 7%. It’s not two, but if you use the BCE, that’s two and a half around. We’re getting slowly, but surely there, job numbers aren’t great anymore. You start having an employment rate, slowly moving up.

So it looks like we’re moving to this sort of economy. Cyclically speaking, at least, Brent, that looks a lot like what it was in 2017, 2019, with very friendly numbers, low growth, inflation is going back under control. Actually, one shout out I need to do to my friend, Jeremy Schwartz at WisdomTree. He has a very interesting metric where basically they take the shelter part of core CPI, which is a lot of the index, like 35, 36 percent top of my head.

And they replace that shelter CPI from the B, the BLS with real time indicators of rent growth of rents on the ground rents. So what they’re trying to do that is they’re trying to avoid this embedded lag that exists in the shelter CPI methodology, where you have to wait for contracts to be renewed until they actually kick in.

And if you use a real time shelter indicator, then, you know what core CPI is supposed to be today with rents today. And that number is 1. 6 percent year on year. If you replace the old lagging BLS shelter CPI with a real time one, you get 1. 6%.

Brent: And if anyone that works at the BLS or the Federal Reserve is listening to this, can you please change your methodology? There’s no reason to use a lagging indicator for monetary policy. It makes no sense.

Alf: And also Brent is long bonds, so please do it so he can make money out of it. No, just joking. But seriously basically we’re getting to a point, Brent, where if these normal lags keep feeding in on the shelter side, we are going to be around 2 percent or credibly we have a path to get there.

And you ran this interesting study comparing, no, these economic variables versus pre pandemic. So how does it look like? Is it really the case that we’re basically going back to a cycle very similar to pre pandemic?

Brent: I think it’s an interesting question and I’ll put a whole bunch of charts in the show notes because we’re probably going to go live with the video next week. But I have a lot of charts this week. And if you compare a lot of the key variables from before COVID, so the chart, if you, if people want to open it up, it’ll be in the show notes, but I’ll explain it quickly. If you look at september, 2017, 2018, and 2019, and I just picked those because it’s September right now.

So I wasn’t cherry picking anything. I just went back to ’19 ’18 ’17 and you look at some of the key economic variables. So initial claims, basically the same now as it was in those three years. NFP six month average, same as it was in those three years. GDP, same as it was in those three years, the biggest differences are core PC and core CPI are still about 1 percent higher.

But then the real crazy difference is monetary policy. So fed funds, real rates are whatever they are, 2%, 1. 6%. And fed funds is up above five. And at that time in those years, fed funds was like one and a quarter, two and a quarter and two. So I think it’s really interesting. And it brings up a really important point that’s a little bit wonky, but super important is, are we looking at the level of the economy? Or are we looking at the changes in the economy?

Because if you use Sahm rule or like the curves uninverting or disinverting or whatever the word is, You’re looking at changes, but if you look at levels things are very similar to the, where they were before the pandemic. And you have to also understand that by definition, the U S economy is not going to match what it was in 2021 and 2022.

It just, that’s impossible. So if you had that much upwards momentum, if you went to Mars, And then came back to earth that’s what we’ve done in my mind. And it doesn’t necessarily mean that all these momentum style recession indicators will actually work this time because it’s a completely different situation than it was in all the other cycles.

Alf: And so when you try always to compare periods, it’s complicated because you might look at relatively different levels, but similar rate of changes. And it’s not always the same picture. But something that there comes to mind here is the cyclical versus structural discussion Brent.

Because basically, if I would’ve told you that in 2018 or 17 that the United States, whoever the new president is basically ready to put up structural deficits to the side of one or $2 trillion per year, whatever the business cycle looks like, you would have told me what the hell is going on, man. Used to print about four to 500 billion of fiscal deficits, net of interest payments, of course, every year in the U S and now I show up and I say no, it’s going to be double that at least every year.

You would have told me that’s quite a paradigm change, is it? And yeah. We need, maybe need to talk about the structural part, not to talk about, of course, the offshoring side of things, which has become more complicated, the geopolitics, which is different. So that’s the part where I find it a bit hard to just put a blanket on it and say no, we’re back to 2019.

It’s going to be exactly the same, because maybe from a cyclical perspective, we are there. And I tend to agree, we are very similar, but from a structure perspective, is it not a bit different?

Brent: So the two questions are one, what I said, which is once the momentum starts down in the labor market, does it just keep on going? Cause that’s the assumption underlying something like the Sahm rule.

And then two is the post cycle reality the same as the pre cycle reality. And that’s why I think inflation will be structurally higher. Some of the points that you made. And so I don’t think it’s exactly the same, definitely not.

But in fact, some of the variables are actually more inflationary, not less inflationary. I think as a starting point, it’s reasonable to say, okay, we’re back to 2017, 2019. But then, like you said, it’s important to remember that was secular stagnation, especially before that. And then 2017 was really like the snip where the tax cut and jobs act came out, which was fiscal stimulus at the peak of the cycle, which we’d never seen before, which is modern monetary theory, essentially, in practice put in place by Trump.

And Now that’s the orthodoxy. And I remember not very long ago, like I would say 2015, 2016 and earlier, like all the way throughout my whole life, if politicians said we want to do this thing, like a tax cut or spending or whatever, the other party would say, okay, great. But how are we going to pay for it?

And now that’s not even a question. It doesn’t matter which party like Republicans and Democrats are both just massive deficit parties. And so that’s a big structural fiscal boost. And then the question is does it ever end? For now it’s not ending. So to me the main structural things that are new are a little bit inflationary. So maybe we settled down around here and inflation, but I don’t really think the Fed cares whether, I think they’d rather have 2. 6 than 1. 6, to be honest.

Alf: Yeah. And that’s also the way I think about it. But this, it’s a difference we need to bear in mind when thinking about asset allocation and portfolio construction, especially if you’re a long term oriented investor, because Confusing cycles with trends or cycles with structural changes is a very painful mistake in macro because this was basically akin to the mistake that one could have made by saying, look, in 2022, I could have said, I don’t think the world is very different because demographics is going down and productivity is what it is and we are burdened with debt and so on and so forth.

So rates will, continue to, let’s say the neutral interest rate will continue to be low. Okay. For example, in a place like Europe, I could say, I don’t see the reason why neutral interest rates should be higher. They’re actually headed lower. Now, if I would have said this in 2022, I would have lost a ton of money because the ECB would have hiked us out.

And then I’m basically losing a ton of money, confusing my structural view with my cyclical trading conditions. So that’s a thing where I hear people saying, okay, Alf, I agree with you. I think this fiscal thing makes structural inflation a little bit higher. And so it means that rates can never go back to zero or 1%.

I can assure you, and I agree with Brent there, that if we have a nasty recession, rates are going back to zero and one. I cannot imagine the Fed saying, Oh, but we think that maybe structurally things are different. In the meantime, the labor market is falling apart under their eyes. And they say no, we’re not going to cut to zero because structurally the thing is different.

They are going to do what’s necessary in the urge of the moment. So structural parts are always important, but let’s not confuse, I would say cycles and structural issues. I would say.

Brent: Yeah, I think that’s a really important point because structural things take so long to play out and nobody has like a 10 or 20 year time horizon, unless you’re buy and hold, then you can say, Oh, demographics in India are great. I’m going to buy India and just sit on it.

But if you have any time horizon, that’s less than 10 years, which is probably 99. 5 percent of the people listening to this cyclical stuff just always has to be first because it’s always operating at the changes level and at the more micro level and influencing price.

And then structural stuff is like humming in the background and it’s like good to know and it’s a good part of your framework. But, I don’t think I could really name a trade that I know that someone did that was based on structural factors that, that was like a killer trade. Most killer trades come from cyclical factors, not structural factors.

Alf: Agreed. Now, a difference that you have highlighted at the beginning, which I think is very important, is monetary policy. In 2017, you had. In 18, you had a Fed trying to hike interest rates, but for most of the previous pre pandemic decade, you had central banks basically saying, look, I’m going to be as accommodative as I can be to try and make sure this this nominal growth picks up. And now you have a chart that is very interesting. Again, we should put it in the show notes.

And by the way, before I go on this monetary policy thing, we are going to go on YouTube. So this show is also going to become a video thing. If you prefer that in a few weeks, we’ll have an announcement where you can see our charts and look at our bold faces discussing on YouTube if you prefer that to our podcast, but that’s for a couple of weeks to go.

So in the meantime, this chart Brent, basically shows the difference between two year rates and Fed Funds, which is a very raw and dirty way to look at what is the bond market pricing rates should be right now versus what are the rates that the Fed is imposing. And what do you see on that chart if you go back 40 years?

It’s quite impressive.

Brent: Yeah, so I acknowledge it’s a very simplistic way of looking at things. I’m not a bond guy like you, so I tend to keep it very simple. And there are more sophisticated ways to look at it. But. The general message is if you overlay Fed funds with two year yields, two year yields almost always move first. And then the Fed follows.

And the point of that is first of all, the Fed doesn’t move every day. So obviously they’re going to, they’re going to lag the market. But I think the more important point is that there’s a big part of Fed policy that’s driven by markets. And so the market the market tells the Fed when to hike.

And sometimes the fed will cut before the market tells them, but normally the market tells the fed when to cut. So if you look at it, it’s if you can imagine a black line, which is fed funds and an orange line, which is two year yields, almost every time the big moves happen in the orange line first.

And so there’s all this debate about what’s neutral and what’s the neutral real rate and where’s r-star, all that stuff. And it’s very academic and difficult and r-star cannot be observed. So it’s a frustrating thing to work with. But if you look at just the difference between where fed funds is and where two year yields are, that’s measurable, right?

So you can say. If you believe this, which I do, and which history I think has proven since at least since 1980, that generally the Fed follows the market because they’re reacting to the same information that the market has, then Fed funds is very tight right now. So if you look at the difference between two year yields and Fed funds, they basically got here in 2008, like around 1. 8 percent difference.

And the only other time it was ever higher was in Volcker’s time, which, then it was like 500 basis points or something because that was a completely different regime, but essentially the difference never really goes beyond 2%. So like to the downside in 95 it was the other way by about 2 percent and same thing in 2001 and then the Fed tightened.

So generally you can make an argument just based on market based measures. That fed policy is very tight. Now people will say yeah, but why isn’t, housing selling off and all that it’s because of the lags. And maybe the lags are longer this time because of fixed liabilities and all the things we’ve talked about. But in the end, if two year yields are trading at 3.65, Fed funds isn’t going to be around here. It’s going to be down there somewhere in a couple of years.

Alf: This is a very interesting chart, especially the Volcker reference. Olli Kruppman, the guy had rates at 500 basis point above two years. It’s like the market was trying to tell him, Hey, guy. Hello, Volcker. We see rates here. And Volcker was like I can’t hear you. We need to hike to eternity to stop inflation. Quite a time to be alive. I wasn’t but the, this is a very interesting and simple way to look at it, which is effective. Funnily enough, I’ve done the same thing And I didn’t know you were doing it on a slightly different fashion, but it’s an interesting conclusion too.

So what I did is I looked back at the last 35 years because that’s when I had forwards and data to actually look at. And I looked at the bond market pricing of two year forward cuts or hikes. So I basically looked at what the market was pricing in other words, over the next two years. back for 35 years.

And there are some extremes, right? There are situations that the market was pricing 200 basis point of cuts, 150 basis point of cuts, something like 2000 or 2008, just early 2008, the market was pricing 190 basis point of cuts. And then I asked myself, okay, today we’re very extreme. We are pricing over 200 basis point of cuts, which is like the most number of cuts we’ve ever priced for the subsequent two years.

And then I said, happens. If you buy bonds right when the market is extremely dovishly priced. That sounds like a dumb idea, I would say, because how you make money in bonds is not by, Oh, the Fed cuts. The Fed needs to cut more than the forwards, more than what’s priced in, or you’re not going to make excess returns.

But if you actually test this, the results are quite interesting. You find two instances in which the market was pricing a hundred plus basis point of cuts and it didn’t work, 1995 and 1998. Two episodes of, let’s say, soft lending, where the Fed had to cut two or three times just to adjust the policy rate, and that was it.

So the market was pricing 100, the Fed did 50 75, you lost a bit of money, basically, by doing this trade. Then there were four instances where you made a shitload of money. 2000, 2008, 2019, And there is another one I’m forgetting. So in 1990, 1990, just ahead of the 1990 recession, where the market was pricing like a ton of cuts on average, 140, 150 cuts two year forward.

And if you bought right at that moment, the Fed in the two year forward delivered like three, four, 500 basis point of cuts. So you ended up making a disproportionate amount of money versus the limited loss you faced when you were wrong. And this was quite an interesting finding because buying bonds when the market is already pricing a ton of cuts doesn’t sound like a smart strategy, but there is this asymmetry basically built in, which I found quite interesting. What do you think?

Brent: Yeah. It makes sense. And I remember an out of cycle, like obviously the, a lot of central banks would probably yield the same result, but I remember an out of cycle cutting cycle or out of the global cycle cutting cycle from Australia in 2011 and where, the, there was a bunch of 25s priced and they ended up doing a bunch of fifties and people tend to call that like the too much is priced in game. Like I’m playing the too much is priced in game.

And as your evidence shows, usually once they start, they just go bananas. But then obviously the start of this show was about how maybe some of these things are different this time. Because in those cases, most of them, they were responding to some kind of credit event or like massive unwind.

But then again, maybe that’ll be CRE this time, maybe it’ll be AI bubble and NVIDIA goes to 50 bursting or whatever. But it definitely makes sense because generally once you get the sniff that the cuts are coming, they end up historically coming faster, harder and faster than people thought.

Alf: I think we should talk about the Europe for a second as well. I live in Europe. We never talk about Europe. I feel like not being a patriot here at all. And so we just said the ECB today. And one thing to notice big times, this has been a massive news and a massive change from the ECB over the last three years, in my opinion, Brent is that Lagarde has finally lost her French accent.

That’s amazing. So now when I listen to her, I can actually, follow it. Of course, I’m Italian. Who the fuck am I kidding here? Because my accent is also very thick, but so she basically said, look, we did 25 bips. And we lowered our growth forecast. It doesn’t look really good from a growth perspective. Core inflation is going to go to 2 percent guys in 2025. We’re doing good there, but we’re not in a rush to cut rates. We’re not going to do 25. We actually think that like an in a quarterly base of cuts is correct.

And so what the market is going there to cut is basically– is going there to price– is a situation where the ECB gently cuts rates to around 2 percent in nominal terms. And that’s what seemed to be some sort of a lending point, the terminal rate in Europe. Now my point here, and then I know you have some opinions on Europe we should talk about for a second, but if I would have told anyone before the pandemic, say 2016, that the neutral rate in Europe was 2%, they would have looked at me like dude, what are you smoking?

We have rates at minus 50 and we can’t get any growth out of anything. And you want to raise rates to two, you think neutral is two, are you nuts? And now instead, if you go to someone and you say European growth doesn’t look very good. And so could it be the ECB is forced to cut a little bit too much?

Below neutral, like to one and a half or something like that, they will look at you. Now it’s already too much priced in Europe, the new neutral is two and a half. And I find this discussion quite fascinating amidst the growth environment in Europe, which doesn’t look particularly good, especially Germany.

Brent: I agree because if you think about the idea of what you said where, or what we’ve been discussing where the cuts tend to come more fast and furious than people expect, forget about the U S in Europe, that is going to happen. It’s going to happen faster if there’s a meaningful slowdown around the world, which maybe is already happening with China and the U S and all that, then the cuts are going to be way more fast and furious in Europe.

Like you said, they came from minus 50. But if you look at I think, I can’t remember if you put this out Alf, for I’ve seen it somewhere. The real GDP against trend for Germany is absolutely horrific. Like it was following the trend from whatever, 2010 to 2019, then COVID happened. And it’s like basically a flat line, like it’s so far away from trend, it’s scary.

And, inflation in Germany is 1. 9%. I actually think they’ll probably cut in October. That’s a little bit out of consensus. But I think playing for a cut in October is probably a good play. I think their risk management now absolutely has to be on the dovish side. There’s no real inflationary– yeah, there’s some sticky wages or whatever, but there’s not real inflation risk in Europe, in my opinion.

And then the news flow has been pretty bad. If you went back to pre 2008, definitely, but even post 2008, the big German export machine to China, Volkswagen, BMW, like all that stuff is sputtering, Volkswagen’s shutting down plants for the first time in 90 years, BMW’s warning.

So I think whatever dovish stuff you’re considering in the U S it’ll work twice as good and, twice as well, excuse me for that, twice as well in Europe. And I think even short term playing for a cut in October makes a lot of sense because things just are not very good there. Like whatever chart you want to compare Germany to the U S it’s just like the news flow, the politics too. Just everything is just worse in Germany.

Alf: So we have about 55 percent odds of a cut. It’s 50, 50, it’s not too bad. It’s not fully priced in, but it’s something people could try to play around with. So on, on Europe, I put up some charts on, on, on the demise of the European economy, because man, it’s a bit depressing over here. Like in Europe, you have a situation where the German business model is broken. Fertility rates keep going down. You have a situation where we produce the least amount of unicorns as a percentage of GDP.

So when it comes to innovation compared to India, China, or the US when it comes to producing innovative companies, we suck at it. And why? Because we bury them under regulation, man. It’s what we do over here. If somebody listening to this is working for a European bank, he knows what I’m talking about.

It’s a disaster. And that’s a bit of a shame, frankly, and Mr. Mario Draghi. It’s come with a, now that he’s free to talk and say whatever he wants, he’s come with a like a huge investment plan suggestion for reviving European growth. I think he’s right, but I think convincing the various 19 States to come up and, fiscally unite and do something that is really an investment plan in Europe, it’s just against the DNA of so many countries to do that, especially net funded, it’s just against the DNA.

So that’s, I don’t see really how Europe can successfully get out of it if we don’t really switch gear. Okay.

Brent: Now there’s a, just one more thing on Europe. There’s an interesting convergence of what you’re describing as some structural stuff, but it’s playing out on the cyclical side as well.

And then a weird kind of just a minor, more micro thing is that generally the narrative and the price are moving together, but actually the Euro has been relatively strong against quite a few currencies. I think there might be an opportunity to be short euros, not necessarily short dollars so or sorry, not necessarily long dollars, I’m agnostic on the dollar right now, but selling euros against other things I think probably makes sense as I, the odds of a very slow play from the ECB is probably lower than most other countries.

Alf: Yeah, I think I agree there too. So now for the last 10 minutes, I’d like to cover one interesting idea that we can work on. I’m writing something about it, but it’s not easy. And then a bit of a trading framework discussion. So you are the specialist here, which means I’m going to lean on you a little bit, and it has to be good. It has to do with the dollar.

So a very smart hedge fund client of mine said that when I was basically pitching last week or two weeks ago, when the dollar was weakening a lot and euro dollar was one 11, and this idea that cuts were going to translate into massive dollar weakness, I was pushing back against it simply by looking at recent history and saying, look, when the Fed cut rates in 2019 on weak global economic growth, The dollar really didn’t weaken against the euro, the sterling and other currencies because other central banks were cutting too.

It’s a global thing and the world is leveraged in dollars. There are liabilities in dollars. And so the dollar is a funder. And so when a funder of the world actually gets squeezed because of weak growth, then the dollar goes up. It doesn’t go down. And he said, yes, all good, agreed on the macro side of things.

But what if this time the dollar is an asset? It’s a carry recipient. not the funder. And I’m like, what are you talking about? And he said yeah, drop a chart over there of Asian yields versus us yields. And his point was, Asians are big exporters of capital, Chinese, Japanese people, they have excess, they have surpluses and they invest across the world.

And when you look at pre pandemic, Every time you had weakness, what happened is that domestic yields in Japan, in Asia, especially domestic yields in Asia, like in China, for example, were always higher than dollar yields before the pandemic. And so the dollar ended up being a funder currency, they, it wasn’t really a recipient of inflows, but look at it now.

Chinese swap rates are like 2% and 10 year rates in the US have been north of 4 percent for a while. So it was making the argument that actually money has been flowing towards the dollar as an asset. So what if you unwind these asset trades, these carry trades, basically in dollar, should this weaken the dollar this time a lot more?

Brent: So it’s so complicated. Like our clients talk about this stuff a lot because obviously it’s very important whether the dollar is a safe haven or not, because then it’s behavior is going to change depending on what happens with stocks in the Fed. The complicating factor is that Yes, there’s fewer liabilities around the world in dollars. But there’s still a lot.

So what you often see is even if it’s not great for the dollar because of outflows, like if everyone’s overweight US assets and there’s a recession and fed cuts, then in theory, that should be bad for the dollar because people are going to sell their US assets and get out of the hottest investment that’s, for the last 10 years. But then operating in the background is still this like corporate liabilities are mostly in dollars, even if it’s less and the sort of like Pavlovian reaction because of 2008 and other times is to buy dollars when things are going bad.

So I feel like almost like it’s, it becomes very complicated. It becomes this two stage thing. So if you look at 1999, which was similar where US, obviously money was crazy amounts of money were flowing into the U S dollar was overvalued. And then all the bad stuff happened in 2000, 2001, the dollar still rallied for another year and a half.

And then finally it lost steam. And then there was like a massive dollar downtrend from 2003 to 2007. So I feel like, It’s a useful discussion to try to understand, but then in the heat of the moment. When the shit’s hitting the fan, the market still buys dollars. So then you got to figure out, okay is it sustainable?

And I would agree with the thesis that there’s way less dollars to buy now because it’s not a funder. So like the investment side of the world is not short as many dollars, not nearly as many dollars as say, in 2008, every single human being, including my mom was short dollars. So that unwind was insane. Like cable went from two to 1. 3 or something.

But so I think in the end, if you created a diagram of it, there’s like arrows going all over the place. It’s just it’s not like a clear thing where you can say if money flows out of the NASDAQ, then you sell dollars. It’s just, ends up being much more complicated than that because of the sort of initial panic flows, then followed by the slower moving flows.

Alf: Yeah. I’m actually thinking, even if my hedge fund client is a bit right, because here it’s not about being fully right or wrong. It’s just about, marginal impacts of one of the variables we’re mentioning. And the dollar is not the main recipient of all the flows during a deleveraging environment.

The two Next in kin type of candidates are the Japanese yen and the Swiss franc. And when you talk about funders and safe haven type of thing at least that would be my initial intuition. And it makes me–

Brent: So, I’ll pipe in for two seconds. Sorry. Yen, I definitely agree because a lot of money has flowed out of Japan into foreign assets. Swiss is just weird because of the SNB can always intervene and they don’t be, it’s very deflationary when their currency appreciates. So I think you’re going to, you’re fighting the policymakers and you’re fighting like you’re long, a kind of overvalued thing. Whereas with the yen, you’re long an undervalued thing and you’re with the policymakers.

So if you want to hedge for like global unwind and stuff like that, I just, I think yen is so much better than Swiss. And I guess you could throw gold in there too. It’s like the all weather currency these days, right? China stopped buying, real rates are positive 1. 6%. Even like the other risky assets are okay, but not amazing. And gold is making new all time highs. As I look at the screen, it’s like the highest it literally has ever been.

Alf: And to be frank, I was about to go there. I think gold has a few important structural driver behind it and it has properties that work in this environment. The only thing that doesn’t work for gold is that gold remains an asset, which means that in a deleveraging environment, it might be subject to margin calls and the likes of it temporarily. So that’s a little bit the problem. It’s a numerator, not the denominator and the yen and the CHF are denominators, I don’t know whether I’m explaining myself now, but what I mean is it’s an asset.

And so as an asset, it can be subject to margin calls. When things go wrong. It’s the only thing that makes me worry a little bit about gold, but for the rest, I completely agree. And then on Japan versus Switzerland. Yes, you’re right. I think you’re right because the bank of Japan will not intervene to stem the appreciation of the yen.

It’s not something they are probably very attentive to right now. The SNB has been trying that for decades and they will come in to try and stop the bleeding. If if the Swiss franc appreciates too much, nevertheless, it will appreciate, it will. It’s just that you are capped on your maximum upside probably.

Brent: And your point on gold is interesting because I remember in 2008, for example, gold went down a lot during the crisis and it raised the question is it a risky asset or a safe haven? And I’ve looked back at that. If you look at like the worst days ever or the worst weeks ever for the S&P.

And then look at what gold did. Sometimes it goes up, sometimes it goes down. So it’s, that’s a good point that sometimes gold does trade like a risky asset during liquidity squeezes. Gold can often go down. Although, what’s interesting is what we’ve seen in the last like couple of years is that silver goes down, but gold just zigs around and then eventually goes back up. So like silver is basically flat lining and gold is exploding higher. It’s amazing.

Alf: All right. So guys as always, we have a few minutes. This time went a bit over, but I think it’s a very interesting episode on structural and cyclical and all these things, but we always like to talk about trading frameworks, risk management frameworks.

And so Brent, this week, you want to talk about something you have written extensively about, and I love, which is anecdotes and magazine front covers and stuff like that. So tell me a bit, what’s new from that front.

Brent: Sure. So I’ll keep it short, but the general thing that I want to say is that when I was like 25, 30, I was always fascinated by like behavioral finance and anecdotes. And the problem with that is that you can see anecdotes everywhere, especially if you already have a view. So confirmation bias is very subject to cherry picking of anecdotes.

So this week, for example, I noticed Ally Financial warned that the consumer their clients are struggling and the stock was down 20%. And most of the people that I read that are more bearish on the economy highlighted that as like an important indicator that it confirms that the consumer is weak. And same thing with dollar general and dollar tree have been collapsing. And so the same thing where people have looked at that and if they’re bearish.

The economy and said, that’s evidence that the lower end is in trouble. But then if you look at a chart of Walmart or Costco, which I don’t hear anybody talking about, those are making all time highs. So it’s not necessarily that Ally is a meaningless signal. It’s just more that you have to be really careful with anecdotes because very often what people do is just find ones that confirm their bias. Not on purpose, but because of confirmation bias, they see what they want to see and it ends up creating a lot of false signals.

So like the ideal scenario is you have some kind of framework where you say okay, Ally’s weak, now if Discover or Rocket Mortgage or whatever, I’m not an expert in that area, but whatever their competitors are also are weak, then I’ll treat that as a signal.

But I think identifying any one company and then trying to make like the leap from the micro to the macro. It’s just, there’s so much, so many issues. The primary issue is that maybe that business is just not being run very well. So that’s what you, there’s something going on with the dollar stores that seems idiosyncratic and has nothing to do with the consumer. Walmart and Costco are still ripping. Retail sales have been stronger than expected like 15 of the last 20 times.

So the point basically is that if you’re going to use anecdotal evidence, you have to be very careful, especially if it’s confirming your priors. Because then you’re probably cherry picking.

Alf: Yeah. And it’s also the control group problem in statistics, right? You have Ally Financial coming up with something. How do you know it’s not an idiosyncratic issue of Ally Financial? You apply a control group thing. So you go and look for all the peers.

So Ally Financial and try to see if they’re all experiencing the same problem. If they are, then probably it’s not idiosyncratic anymore. It’s actually a consumer problem, but you cannot just cherry pick one company and then say, Oh, from the idiosyncratic issue, this must mean it’s a big macro consumer confidence problem because you didn’t apply any control group, you didn’t basically checked against the peers, pretty much as simple as that, but it’s more about wanting to confirm your prior, really.

You can always find good news or good nuances or bad nuances about economic data that will confirm a prior. You can always find that. It’s all about having the framework and trying to figure out how to be… well, a friend once told me have strong opinions, but hold them very loosely. So strong opinion loosely held. I think it’s even some motto of someone. I think it’s a great way to trade macro. You can have opinions, that’s fine, but you should be very nimble. You should be able to change your mind. You should challenge your opinions the whole time.

One opinion I never challenged about myself is that cappuccino is not allowed after 11 a. m. No pineapple on pizza. These ideas can’t be challenged. I’m sorry.

Brent: You’ve obviously never been to Canada.

Alf: No, and given what I’ve heard, I’m not sure that I plan really. No, just kidding. I love Canada. Canada is amazing.

All the Canadian people I’ve dealt with so far are just amazing. Okay, guys, we have come to the end of the show. We have news for you not now, but in a couple of weeks, as I said, we’ll go on YouTube. So stay tuned. And for the rest you listen to this thing once a week and you have listened to us 40 minutes.

Congratulations. If you are not bored by now, I’m not sure what can bore you to death. So thanks for listening. You listen to this once a week. If you want to get more of Brent and I namely every day, you can, and how you can do that is you go to the show notes and you visit Brent’s website. You visit my website there, and you can figure out if you want to listen to us every day, you actually can.

Brent: Do it.

Alf: That’s the biggest pitch I’ve ever seen. Massive. Listen to Brent. Do it. Okay, guys. We’ll talk to you next week. Enjoy the weekend and ciao.

Brent: All right. Thanks everybody for listening.