Lead-Lag Live
Welcome to the Lead-Lag Live podcast, where we bring you live unscripted conversations with thought leaders in the world of finance, economics, and investing. Hosted through X Spaces by Michael A. Gayed, CFA, Publisher of The Lead-Lag Report (@leadlagreport), each episode dives deep into the minds of industry experts to discuss current market trends, investment strategies, and the global economic landscape.
In this exciting series, you'll have the rare opportunity to join Michael A. Gayed as he connects with prominent thought leaders for captivating discussions in real-time. The Lead-Lag Live podcast aims to provide valuable insights, analysis, and actionable advice for investors and financial professionals alike.
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Lead-Lag Live
Julian Brigden on Tech Market Sustainability, Small vs. Large Cap Dynamics, and Inflation Risks
Can the tech sector sustain its dominance in a volatile market? Join us as we sit down with Julian Brigden, co-founder of MI2 Partners, to uncover the secrets behind his innovative firm that mimics the strategic morning meetings of top macro hedge funds. Julian delves into the unexpected market shifts between small and large caps, and the intricate dance of CPI on macro trading strategies. He also sheds light on the pivotal role tech plays in fueling market rallies, questioning whether this momentum is truly sustainable amidst a backdrop of uneven productivity gains.
In this episode, Julian unpacks the potential for a dramatic rotation from growth to value stocks, drawing comparisons to the dot-com bubble burst of the early 2000s. We explore the dynamics influencing gold and silver prices amid market turbulence and the critical factors that could transform a harsh market environment into a more favorable one. Julian also highlights the looming threat of rebounding inflation metrics in Q4, the Fed's possible delayed responses, and the historical parallels that could indicate severe equity market declines. All this, while considering the looming influence of upcoming elections on inflation trends.
Dive deep into the global macro hedge fund thesis with an exploration of Soros’ concept of reflexivity and its profound impact on financial markets. Julian provides a detailed analysis of how US monetary policy divergence and global negative interest rates have fueled a hyper-financialized economy, leading to significant capital inflows into US assets. We wrap up by examining the structural shifts in the bond market, the impact of changing demographics on bond demand, and how Macro Intelligence Partners equips institutional clients with essential macroeconomic insights and actionable trade recommendations amidst market chaos. Don't miss this episode packed with expert analysis and nuanced market perspectives!
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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My name is Michael Guyatt, publisher of the Lead Lagrime Report. Joining me for the 40-minute time period, here is Mr Julian Brigden, who every time I see you, julian, my mind goes to James Bond, and part of that's also because your company is MI2 Partners, which sounds like it's some kind of secret service, I don't know, some kind of like intelligence agency, which it is.
Speaker 2:I want to play on that actually, michael. Look, I'm a Brit, I'm a huge James Bond fan, obviously, and if you look at the logo it's got the sort of overtones of Universal Export, which is Bond's company. That was kind of deliberate. I was just sort of riffing and playing around with that. But that was kind of deliberate, I was just sort of riffing and playing around with that. And then MI2 was actually a subdivision of British service up until the end of the First World War, like MI5 and MI6. It was actually in charge of geographical intelligence. So I kind of thought, hey, this is kind of a clever idea. There were two of us setting the damn thing up, so it seemed like a fun idea.
Speaker 1:I love it, man, I love it. So let's just do a quick overview of your background, what you've done throughout your career and what MI2 Partners does, aside from global intelligence.
Speaker 2:Yeah, so basically I've been in the market now since I was 19. I mean, I started before I went to university, started trading uh precious metals uh a long, long, long time ago. Um then switched over to fx. Um did some uh fixed income when I was at brothers, ran uh fx sales for lehman in london and new york. Um moved uh to ubs for a bit and then basically moved on to the sort of policy consultancy side with this group called Medley Global Advisors and that gave me sort of an insight onto that, because they were the smartest people on the street and then basically gosh 11, no, 13 years ago we set up MI2. And the objective was to essentially replicate the morning meeting of a macro hedge fund, so to go and kind of look through the world from a sort of 40,000 foot view, then look at positioning in the market and then kind of come up with objective traits. I'm not really interested in just pontificating about the economics or the outlook unless you can make money out of it. To me that's just a complete waste of time.
Speaker 1:Let's start with that morning meeting of macro hedge funds. How do you think the morning meetings for macro hedge funds went about a week and a half ago when suddenly small caps were having this immense what looks like short covering squeeze and large caps the crowded, long trade suddenly reversed?
Speaker 2:I mean I think, look, I think the trigger there was the CPI. That's really what the macro guys will be looking at. Generally there are exceptions Macro hedge funds don't take single stock bets. I think the macro guys have found the equity market quite frustrating. They've been trading sort of fixed income off the back of it, dollar, yen off the back of it, carry trades off the back of it, but they don't generally trade the equity market so aggressively.
Speaker 2:So I think the question was, was that CPI at a kind of an epiphany moment? I have my doubt, but I think the macro community has been in general looking at what goes on in the equity market and, while it's run longer than they think, looking at it from a quite contrary perspective. I mean, that's generally where macro comes into its own. It comes into its own turning points and inflection points and I think, michael, this sort of supposition in the market that Goldilocks has given, I think it's something that many macro guys in their heart of heart they're not going to be trading this way because it doesn't prove profitable. Question, and I certainly question.
Speaker 1:All right. So you used the word Goldilocks. I want to hit on that a little bit more, but first I want to share a post that you put on X, and the comment was I can't remember the last time I saw the market so singularly dependent on one sector infotech. This is from July 10. Even a month ago, we had four subgroups in the top relative strength quadrants. I've talked about and written about this before, but it seems to me that whether you're a solo bottom-up individual trader or you're a macro hedge fund, the only question that matters is can the stock market rally without tech leading it higher? Right, and I say that because the implication of that is value then outperforms growth international, then outperforms domestic small caps, then outperform large caps. How does tech sector leadership fit into that viewpoint of a Goldilocks economy? Can you actually have rotation in a Goldilocks economy where tech is not the only game in town?
Speaker 2:I mean you should have a rotation right I mean Goldilocks while I believe it's highly unlikely, essentially, you know and if the equity boys are to be believed and I think they're full of you know it is in a true Goldilocks scenario. You'd be looking at something like the late 1990s, right? So in that period what you get is you get a productivity induced period of very rapid, sustained growth where you get get a productivity is kind of a get out of jail free card right, and productivity because what it enables you to do is run very, very high levels of nominal GDP, which is great for the equity market because we earn nominal earnings. It enables you to lower inflation, which is great for the bond market, and it enables you to run strong employment and rising wages. So it really, really is Nirvana. And if the equity boys is to believe, that's kind of where they think we are. I think there's a couple of problems with that. There are zero signs of productivity gain If you look at it on a quarter-on-quarter basis, unlike the late 90s where it was steadily rising productivity. We've been falling in a straight line for three years. The second issue is set up in the equity market is set up in the equity market.
Speaker 2:So last week, for clients, I sent out a piece where, uh, and it was off the initial bounce so I didn't catch the load, but basically I said there's there's four times in history where we had, on a relative basis, been where we are in terms of the sp and the SPW. So the sort of more tech-heavy growth, if you want, equity market versus the SPW, which is the broad, equally weighted SPW. And those three occasions, michael, were the height of the dot-com bubble, the low of the GFC and the low post-COVID. And what we said is you are meant to be short tech, long value SPW okay, but there is a very, very significant difference between two of those rotations and the other remainder. So, in off the lows of the global financial crisis, off the lows of COVID, we had what I refer to as a nice rotation. So a nice rotation occurs where the economic expansion falls out, where value starts to outperform growth languages or doesn't perform as well. Exactly what you say you go and buy kind of international, you go and buy commodities. This is a broadening out of the economic situation. Lots of people are sort of pointing to that and I think it's absolute BS and I'll tell you why it's absolute BS, and I'll tell you why.
Speaker 2:Off both of those bounces. Obviously we've had a massive downturn in equity, so equity is cheap. The second thing we had is we had a vast amount of underutilized resources because we've just gone through swinging recessions, so we had 10% unemployment. So, the other words, the economy could expand without running into any constraints, most notably rising wages that would push straight through into core inflation, and so I think the setup looks radically different. I think this one looks more like 2000, dot-com bubble, where you had a nasty rotation. And in a nasty rotation what happens is growth does underperform, value outperforms, but in an environment where both drop, and I think that looks like the current setup. I think that's the risk. I think we're going to have a nasty rotation where tech sells off and drags the whole market down. Value doesn't underperform, it outperforms, but only on a relative basis.
Speaker 1:How much of that explains that scenario where it's relative outperformance versus the average downtrend? How much does that explain some of this bid in gold? I mean, I've argued myself that I think this run in gold. As've said, gold is sending a warning a few times. It's big money that is looking for non-correlation for a reason Right.
Speaker 2:Look, I think there are lots of stories that go behind the gold game. I think one of them is the lack of fiscal rectitude on many continents that we see now, but particularly most acutely here in the US, where there just doesn't seem to be the willingness to get to grips with fiscal deficit. I think that is pointing long-term to a scenario of what is referred to as fiscal dominance, where the central bank ultimately has to pivot from targeting inflation and employment to targeting to the solvency of their boss, where you'd expect to see something like QE or fixed yields in the bond market. That's a number of years out, but that would be highly, highly, highly negative for the dollar and obviously tremendously positive for gold. The other thing is that I have a chart where I look at the relative returns between treasuries and gold. I look at total returns for treasuries, so including your coupon and gold has just blown through like 35 years of support. So I mean, this is an amazing admittance, but you would have been better off being in gold earning nothing, than having your money in treasuries. Treasuries and bonds in general in the G7, I think, look increasingly like instruments of confiscation for increasingly insolvent and governments who are incapable of addressing quite significant needs. And I'm not capable of addressing quite significant needs and I'm not saying that those needs aren't required Like fiscal dominance actually occurs throughout history and has occurred throughout history at periods where it's societally necessary.
Speaker 2:Michael, right, you know, second World War, it was absolutely societally necessary to go. Sorry, bond market. Here's your rates now bugger off for the next decade, right, I think we are in one of those environments, but it just doesn't mean you want to own it, right, I mean. So I think there's a fundamental story behind the gold thing. What I would say is, if we are moving into a nasty rotation between growth and value, if you go back and you look at 2000, the sort of cycle high of the dot-com bubble, we did move eventually into a nice rotation between growth and value, but that really occurred between 2002 and 2008,. But that really occurred between 2002 and 2008, in that, between sort of 2000, late 2000, into 2002, by and large the rotation was quite nasty. And in other words, you know, once again, on a relative basis, you know gold might outperform, silver might outperform, but they may not go up, they can go down, and the reason for that is nasty rotations are very stressful and they cause pain across portfolios, so even the assets that you ultimately want to own, like.
Speaker 2:I know where this goes. The Fed has to print all this money again. The dollar gets trashed. I want to be long gold, I want to be long silver. But just understand, in that process to get there, you could get sideswiped by a bunch of professional fund managers who have gold and silver in their portfolios and have to de-risk their overall portfolios, something that we refer to as sort of a bar shock, a value risk shock. So, in other words, the volatility of their portfolios increase. They have to reduce the size of their overall holdings. So this is quite a tricky time, to be honest, michael, if I'm right and we're going into a nasty rotation.
Speaker 1:You mentioned the bar shock, and actually that's where I wanted to go. If, if it is going to be this nasty rotation which, by the way, I don't disagree with that at all um, what's sort of the optimistic scenario in terms of how long it takes to play out, and what's the pessimistic scenario in terms of it being more like an event? Right, is it a process or is it an event?
Speaker 2:so look I I think what typically creates the transference from nasty to nice, it would be rate cuts by the central bank and the beginning of dollar weakness. Dollar weakness is really key, particularly for those precious metals. I have a view on whether the Fed can actually deliver those rate cuts that are currently priced in. I think when they deliver them, they'll be too late and we'll be moving into recession. So there's a lot involved. Typically, the equity market sells off until the middle of recession. Recessions are not just transitory things. What's going to determine how quickly the Fed will respond is what's the driver of the risk downturn? Are we looking, and I'm worried about a rebound in some of these inflation metrics as we move into Q4, beginning of Q4. So if it's something like that, I think the Fed will have to be slow to respond, which will make the downturn worse. Look, I mean to put it in a second what would be a nasty one? I think a nasty one would see some of these equity bubble stocks. And Nvidia, to my mind, walks like a duck. It cracks like a duck as WebFee. It is a bubble. Mind walks like a duck. It cracks like a duck, has web feet. It is a bubble If you go back and look at history, some of these things drop 80%.
Speaker 2:That would be a nasty downturn. And given that they're not, you know, if you look at the dot-com situation, they're not minnows like they were back then. These things are behemoths, right. So you know, could you look at a? They're not minnows like they were back then. These things are behemoths, right. So you know, could you look at a 40%, 50% decline in the broad market?
Speaker 1:Yeah, I think that's possible, and there's plenty of precedent for that. I mean, that's the funny thing. It's not like that's some outrageous argument.
Speaker 2:No, I mean the average decline, michael. I looked at this, the average decline and it depends what you know. You can pick any of the averages, right, you know the average decline of the S&P and there's never been a situation where it's rallied right in a recession. Right, you know? Even in COVID and I think this is what some of the bulls get wrong they're like, oh, look at COVID, this is what happened. They forget the Fed. At the same time as we were going into the recession, the Fed was blowing out the balance sheet. They're not going to be able to do the same this time.
Speaker 2:There's lots of internal disagreements about, or contention around, qe and what it's done societally with the wealth disparities that it's created, the difficulties that they'd have had to draw this out. Folks, just take it at face value, please. It's going to take a shitload of pain to get them to do that. Okay, to get them to do that load of pain to get them to do that. Okay, to get them to do that. So the average decline of the S&P in a recession is 30%. Right, it's not 10. It's not 20. It's 30. And even if you exclude some of the big ones, right, gfc, you know 19. You know, 19, 20 times, and this is going back 90 years. I've taken these stats right. Then you're still looking at 20, 20 to 25, right? It's just not a flesh word, right?
Speaker 1:this is a serious event you mentioned, um, you're expecting a pickup in the inflation metrics. I'm curious if that has anything to do with the election or if there's other dynamics that, independent of whoever's president, that that pickup will happen. I think, look, I think.
Speaker 2:Here's what we need to know. Addressing the first starting point is addressing inflation is extraordinarily difficult to do because and you can see this in the utterances of central banks that I think are being more intellectually honest than the Fed I started the year off saying that I think this is quite a political Fed, not so much in that they're pro-Trump or pro-Biden, but I think they are scared of Trump and what he potentially means institutionally for the Fed, although I think this idea that he's going to ride roughshod over the Fed is farcical. It's not really how it works, but this is a Fed that wants to avoid a recession. But if you look at other central banks, they're much more honest. The RBNZ, the Kiwis, have been the most honest and they've come out and forthrightly said if people don't stop raising prices and they call them price setters, so companies and individuals asking for pay increases we're going to have to drive unemployment to the point that it breaks the back of demand. And that's just. And there's sort of linkage between this sort of labor market and service inflation. You can see from the back of England, which is B, and that's how it works.
Speaker 2:Michael, most of inflation is a function of service inflation Two-thirds, we'll call it, and service inflation has been bloody sticky. I mean service inflation. In the US, core service inflation is still sitting about five and for all this, oh well, owner equivalent rent is going to continue to fall. Sure, owner equivalent rent has fallen. It's down 200 basis points of its size and yet service inflation is down 100. So the feed-through is not one for one, but what has driven inflation lower has been goods inflation.
Speaker 2:Goods inflation, basically, up until COVID has gone nowhere. I mean literally the classic example of productivity globalisation. We hadn't seen goods inflation really for 20 years. It sort of meandered around zero. Oh no, oh no. Covid comes along. We give individuals an inordinate degree of money and the US corporate sector, being as effective as it is and highly uncompetitive in many sectors, reached down people's throat, right into their back pocket and took every red cent out of it. So the first time in 20 years we had goods price inflation.
Speaker 2:So that's dropping out, but at the moment it is running at the second lowest rate, the lowest rate being post the dot-com bubble. First In 65 years it's running at minus 1.7%. We believe our indicators suggest that's not going to continue and that over the next six months that could start to completely reverse, not that we go to a massively positive budget. We could go back to zero by the end of Q1 of next year. And so you're putting a lot of pressure on that service inflation to deliver, and I think, if it does deliver, that would be a sign of weakness in the labor market today. I think that would really be a sign of weakness in the labor market today and that's recessionary sign. So I think it's extraordinarily hard to deliver this sort of halcyon inflation. Just a back rate, it all goes away without really crushing demand and pushing the economy into recession and, as I said, the Fed just hasn't been intellectually honest enough to admit that. Whether it's a function of politics or their dual mandate, I don't know.
Speaker 1:And the unemployment rate has been rising and it does seem like that trend.
Speaker 2:I would say the labor market is softening, but the unemployment rate, I think, is giving us a bit of a dummy signal. Because of the immigration issue and you can don't get me wrong I think employment growth is softening, so I wouldn't be supposed to see a sort of weakish, not-well payroll. But typically what drives you into recession is rising is layoffs, and we have no signs of those.
Speaker 1:You had mentioned to me before that you thought we were in this enormous carry trade, that you thought we were in this enormous carry trade and I have talked about this reverse carry trade dynamic with Japan as the catalyst, as the risk, for a lot of reasons, largely because of oil price and yen. I've been wrong on that thesis, at least so far.
Speaker 2:But I want you to explain that idea that we're in this enormous carry trade, so it's much bigger than just Japan. This is truly a reflexive cycle I think we're in. We've been in them before, most notably the dot-com bubble and the GFC, although the funding instruments certainly the GFC were different Soros talks about, you know, economists, sort economists have a basic assumption that markets tend towards equilibrium, that they find their equilibrium. Soros came up with this thesis of reflexivity and said he utterly disagreed because otherwise you couldn't get bubbles. What he talked about was a concept whereby you can get this sort of positive feedback, positive or negative feedback loop, but in the kind of boom period which we're currently in, you get a situation where the purchase of the asset drives the fundamentals that underpin the asset. So as you buy it, you kind of improve its fundamentals and underpin its ongoing performance and you end up with this kind of virtuous circle. And I think that's where we've been, michael. You know, starting in sort of 2011, but accelerating materially in 2014,.
Speaker 2:Us monetary policy diverged really heavily from the rest of the world. The H-PAM was toying with negative interest rates, the ECB was toying the same thing because solving crisis in Europe, and I remember at the time having conversations with big real money accounts and I remember one particular Swedish guy and he just said to me look, I mean there's no yields here, there's nothing right and we have an obligation to our shareholders. We just got to pile money into the US. It's the only place with the liquidity that we can get those sort of yields. So I think what happened is money piles in, goes into the bond market, a lot into the corporate bond market. Corporate start to buy back their own stock. Us equity market outperforms more money piles in the interest rate differential at the same time is driving the dollar up. So you have this sort of virtuous cycle in the financial market. But it goes beyond that.
Speaker 2:In the US we have this thesis we call hyper-financialization. In other words, it's sort of very screwed up feedback loop whereby you would think that the real economy should lead financial assets, but not in the US. It's actually financial assets, particularly the equity market, that leads behavior in the US because of two things Firstly, it feeds discretionary spending for the wealthy, which is at unprecedentedly high levels because their portfolios have done extraordinarily well. And secondly, it feeds hiring and capex because CEOs already pay to be guardians of their equity price, and when the equity price is rising, they hire, and when the equity price is falling, they fire. So we've been.
Speaker 2:You create this kind of virtuous circle. So assets go up, ceos hire, people spend more money, the Fed raises rates, the dollar gets even stronger, but then there's a third leg to this, and that is that as the economy booms and the Fed raises rates and more money comes in, americans tend to suck in vast quantities of imports, and that current account deficit has to be funded by foreigners. We can't print euros, yen and renminbi, and so they have to fund it, and they fund it in one of two ways. They either lend it to us, and the overseas liabilities of US banks have switched, but what they really be doing is buying assets, treasuries, but they most recently 2020, bought a shitload of stock, and so you really get this mechanical relationship, michael, whereby asset prices rise and the funding that that leads to the requirement of funding to fund that current account sucks in more. So you get this very reflexive cycle, but it's inherently unstable, and this is what Soros talks about. Reflexivity he talks about, he creates this impression of equilibrium, but it's actually the antithesis of equilibrium, because if any of those factors that drove the uproot start to become unhinged.
Speaker 2:You can go from the boom to the bust, and so this will be a much bigger than just the yen. Don't get me wrong. I think the yen you know we've been short dollar yen since about 160 in our trading portfolio but this is much bigger. I mean the yen is emblematic of this, of a massive carry trade. We haven't had long yet we haven't had short yen positions. Long dollars, euros, whatever, mexican pesos, whatever. All of this magnitude is ahead of the GFC. But that is really just one element of this. This is much bigger, mate. This is truly the largest carry trade in global markets, which is akin to what we saw heading into the dot-com bubble. It is akin to what we saw heading into the GFC. Apart from that, was funded with debt, particularly housing-related debt, that blowout of the current account deficit. So this is big. This is big.
Speaker 1:But does that imply that you need something very big to start the deleveraging process, or is it more one of those? Because we're in a chaotic system? Any number of small things could just start this kind of global margin call reversal of that carry trade.
Speaker 2:So I think generally you do need something quite big, but it can start small if that makes sense. So you can have a series of cracks, like the Dutch boy with his fingers in the dike. At some point you run out of fingers to stick in the crack. So you could have a situation where US rates start to come off right. That undermines the dollar, that starts to cause outflows, because a lot of this strength is a function of dollar strength, because it's very enticing to foreigners to plow money into the US when the dollar is strong, because they get two for one, they're long dollars and they're long-term outperforming US assets.
Speaker 2:So you could have dollar weakness. You could have equity market underperformance, which could be a function of the tech bubble starting to start to underperform, and that rotation into the more value-orientated stuff and you could just have a recession, and in a recession we won't need to from that current account deficit because you've tricked and then the money goes home. So it can start small but truly to unwind it truly to create the conditions for the real outperformance of, say, precious metals typically takes a big sell-off in stocks, so something big ultimately is the death nail. But the cracks are starting to emerge and that's why I think that CPI was kind of interesting last week, because I think people want to think that it's causing nice rotation. I'm not convinced People want to think that it's causing nice rotation. I'm not convinced. I think that rotation we're seeing looks nice because a bunch of people with very short value and long growth and so what they're doing is covering, so they're buying the value in the long short equity space.
Speaker 1:But I think once that buying is done, I'm not sure it's going to look quite as sexy as people think. I'm going to share another post you put out on May 17. Oh, yes, you bought bonds right, but we believe bonds are in a structural bear market that absent intervention will see yields rise for the next 20 plus years. And you need a new hedge. Note that, on a total return basis plus interest, treasuries have broke a 35-year support versus gold. This is a topic which is near and dear to me, purely because, from my perspective, I think people misunderstand what treasuries are. A hedge to the risk that's off in the term. Risk off is ultimately default risk For a moment in time. It's what creates the flight to safety. Right Credit spreads widen money for a moment in time goes to US treasuries because they've got a printer. Even after inflation, you're still going to get your money back right to some extent, but that's for a moment in time.
Speaker 2:You can still have that happen within a broader secular market for bonds. So if bonds are going to continue to be challenged for lack of a better way of saying it and we're talking treasuries here but broadly, when it comes to the bond market, is it a duration issue or are we going to see credit stress be of a combination of that? I think if I look at credit, it's a bit like the US equity market it's mispriced, it's just mispriced. I mean triple Cs have finally started to get to a level, michael, where they look like they're fairly priced, but anything above that is mispriced. I mean, typically, credit underperforms in a slowing economy and the base case is that out of a tightening cycle you end up with a recession. That's set at this assumption of hyper Goldilocks assumption that the market's getting is statistically unlikely.
Speaker 2:The structural situation in bonds is look, I referred to this at the beginning. I've said that's the chart I was referring to when you broke the 35-year trend line. I think you know there are many assumptions that we make. We've spent quite a lot of time talking about this assumption that supply is the driver of high yields. Right, we're just issuing too much debt. You know, from a very simplistic perspective, which is often how I like to sort of think of the world. I mean, if supply was increasing but demand was there, then supply wouldn't be an issue. The issue is the demand isn't there. The demand and the pool of available savings that can drive that demand is actually shrinking. Demographics are dictating that, because if people are retiring and they're disgorging not just here in the US but globally and they're disgorging the assets that they built up for their retirement over the last 30 odd years and even worse, a lot of the purchases of our debt are no longer our friends. It used to be the countries that ran large current account services that were our friends Korea, germany, japan those guys. Now it's China, and so I think the structural bear market is something that I deeply worry about.
Speaker 2:Don't get me wrong. I mean, I think in a recession, obviously treasury yields fall to about 3%, but it ain't going back to the same, and then I think you go up and to the right for the next 20, 25 years. I think it's going to be a hugely problematic setup and that's why I think you want to kind of hold gold. And I think the other thing to bear in mind is that we've lived in quite an extraordinarily abnormal period. If you go back and look at history in the Bank of England to work on this I don't know how they got stats for this, but they looked at the risk-free asset through history.
Speaker 2:So treasuries essentially now occur, which is the current risk-free asset against the equity performance, and we've never had a negative correlation between bond prices not yields prices the opposite and stocks for 230 years. Never, ever, ever. It got down to like zero. But basically, when bonds went down, stocks tended to go down, and that's because you were in an inflationary world. And then Greenspan came along in 1998, and he flipped the correlation on its head, and because we got concerned about deflation.
Speaker 2:And when you're concerned about deflation, you solve for the equity market because you want to keep that demand going. So you're trying to constantly keep the equity market going and we saw that obviously in extremes during COVID and post-GFC. But now and that's when that correlation flipped negative and that's when disparity worked. That's when bonds were a brilliant hedge to assets. If we are going which I believe, we're going back to a more structurally inflation and we've been talking about this for six years now to a more structurally inflation, and we've been talking about this for six years now. Structurally more inflationary world, then bonds are just not as sexy a hedge. I mean, they work at some point to your point in the cycle, but overall they are not a good hedge.
Speaker 1:So wouldn't that imply that small cash will keep on underperforming because they're more lever than cash? Rich tech? I mean going back to that discussion around can the market rally with?
Speaker 2:that. Yeah, maybe until unless the bubble bursts in us tech. Right, this is a bubble. There is absolutely no question this is a bubble. I mean, look, I think people really need to understand this. You've seen and you can see it. You get movements. I mean, look at Tesla's bounce recently. Right, and I got a bit of a bug in my bonnet about Tesla, but nonetheless we see this bounce in Tesla.
Speaker 2:After they just released you know better than expected very poor sales numbers, musk comes out and in his usual sort of BS thing, says oh well you, the tax is coming, the cheap car is coming. Don't forget what we're going to do in AI, don't forget what we're going to do with the robot and the stock rallies. But the stock really rallies because a bunch of people were bloody sure right. So we end up of this narrative chasing the chastest price action.
Speaker 2:And if we go back, if I'm right about this big carry trade, then really what is driving AI tech boom is simply flow that has to come into the US because we are running a large current account and a capital account deficit and a budget deficit that foreigners have to fund. And then you pile on top of that domestic flows, which obviously, and the mentor trade, and this just becomes an inordinate virtuous circle which, all of a sudden, analysts have to go. Oh shit, why is Tesla up so much? Well, it must be because we're extrapolating these assumptions about fundamentals. Maybe it's just as simple as it's just price action driven by mechanics, nothing more. And Mike Green's talked about this from a micro perspective in terms of indexation, and my view is this is going on at a macro level at a much, much, much bigger level.
Speaker 1:As we wrap up, everybody that's watching and listening. Please make sure you track Julian on X and various social media networks. Let's talk briefly about macro intelligence partners. Talk about what type of service it is, and your tagline on the homepage is markets are noisy. We make calm out of the chaos. Part of the calming is probably your accent and fairness, but let's talk about what's involved in the service.
Speaker 2:So you know we have this as an institutional service. It covers a gamut of parts from the set. You know there's a lot of macros that are hedge funds to real money, to family offices, to very aggressive large individuals, family offices to very aggressive large individuals, um, and the purpose is, as I said to, to help people frame the world from a macro perspective but then very much sort of capitalize up that in terms of of traits and we do come out and and recommend traits. I'm not really interested in pontificating for the sake of that. Then we also have this product that we run with Raoul on Real Vision, macro Insiders, and you know that's a different and it's already taking two more retail type investors.
Speaker 2:You know, because some of the trades that we do in the MI2 crowd are quite difficult to replicate, you know, in the MI2 crowd are quite difficult to replicate, you know, in the resale space. So we try and sort of set them up in more that kind of way. And you know, I think you've got both Raoul and my view and Raoul's had some extremely good long-term views but I tend to sort of oscillate around kind of his view Because I'm, you know, just more. I've never said that trends are going to extrapolate. So if I see things turning I always want to be a little bit more cautious. So that kind of what we, what we offer.
Speaker 1:Appreciate those that watch this live and those who are listening to the edited version here. Everybody again, please make sure you follow, julian, and I will see you next time on Lead Lag Live. Thank you, julian, I appreciate it.
Speaker 2:Pleasure. Thanks, Michael.
Speaker 1:Cheers everybody, Thank you.
