A Massively, Massively, Massively Overvalued Market-Julian Brigden
What this covers
Macro Market Insights with Julian Brigden: Inflation, Interest Rates, and Global Markets
In this enlightening conversation, Julian Brigden, Co-founder of MI2 Partners, shares his perspectives on inflation, the overvalued U.S. equity market, potential rate cuts and hikes, and the dynamics of global geopolitics. He offers sharp insights into the nature of today's economy and its parallels with past scenarios. His analysis spans various aspects of the global economy, including the likely consequence of the 'Goldilocks' scenario— a rare economic state of moderate inflation and growth. Julian also zeroes in on factors affecting bond and stock markets, U.S. labor market dynamics, wealth underpinning factors, and the potential future performance of global currencies. Navigate the complexities of today's market with Julian Brigden in this compelling discussion.
00:00 Introduction to the U.S. Equity Market 01:40 Welcome and Casual Conversation 02:14 Discussion on Goldilocks Soft Landing 03:11 Exploring Inflation and Economic Growth 05:32 The Impact of Unemployment on Economic Growth 07:54 The Role of the Federal Reserve in Economic Stability 11:43 The Influence of Politics on Economic Policy 15:17 The Future of the Bond Market 22:05 The Impact of Trump's Presidency on the Economy 32:48 The Long-Term Inflation Trends and Their Implications 34:28 Understanding Financial Conditions and Market Dynamics 34:47 The Role of Janet Yellen in Financialization 35:26 The Impact of Politics on Financial Markets 35:51 Investment Strategies and Portfolio Management 36:33 The Performance of Gold in the Current Market 37:54 Analyzing the European Economy 38:09 The State of the UK Economy 38:42 The Impact of the Labor Market 39:36 The Role of Inflation in the European Economy 44:12 The Influence of Chinese Growth on Global Economy 45:27 The Resilience of Countries in the Face of High Rates 52:53 The State of the Equity Market 01:00:27 The Impact of Politics on the Japanese Market 01:04:30 The Potential of Niche Trades 01:06:08 Conclusion and Contact Information
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Brigden argues the market is pricing in an improbable 'Goldilocks' soft landing when structural factors—high unemployment, sticky wage growth, fiscal deficits, and reflexive equity-employment dynamics—make a return to 1970s-style stagflation far more likely, creating a bond market bear case and constraining central banks' ability to cut rates as much as markets expect.
- Soft landings are statistically rare (1 in 3 historically) and the current setup mirrors the dangerous late-1960s scenario, not the successful 1995 precedent
- Janet Yellen is explicitly supporting equities to maintain employment and win the election, which forces bonds to bear the tightening burden through higher yields
- The US equity market is 4 standard deviations overvalued vs. the rest of the world and trapped in a self-reinforcing reflexive cycle driven by wealth, employment, Fed policy, and the dollar—unlikely to break until a recession or bubble burst
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The Federal Reserve is pursuing an 'opportunistic disinflationary policy framework' similar to what Greenspan did in the late 1990s, where instead of deliberately killing the economy (as Volcker did), the Fed chokes it just enough to grind inflation lower over time without breaking it.
“opportunistic disinflationary policy framework and I think you know this is one of the ones that we discussed with you guys when we were last on the show and this idea of you that when you have inflation of this sort of magnitude there are trly two approaches you can take the first one is you do what vulka did and you you create deliberate disinflation so you kind of kill the economy and the second one is you choke the economy but to the point of death um just enough that over time you can grind inflation lower”
The Bank of England highlighted that goods inflation is always zero or negative (a structural fact), so the real focus should be on service inflation, which remains uncomfortably high and is the main inflation risk; this is an insight that U.S. commentators have overlooked.
“something that's got me thinking a lot is you know comment from the bank of England who have highlighted the fact that sure Goods inflation is zero or negative right but Goods inflation is always zero or negative and what's more important is service inflation right and you know the bank of England said you can just forget it cuz service inflation is still miles above from where where it should be”
The critical problem with accelerating growth from current 3.7% unemployment is that there are no workers available to drive 11-12% earnings growth; any attempt to find workers will trigger higher wage growth, which feeds directly into core service inflation—the very thing the Fed is trying to suppress.
“if you go from you know earnings growth being down 3% to up 11 or 12 next year which has to be driven by higher real growth in the economy okay the problem is is where you're going to find the bloody workers to do that with 3.7% unemployment unless you're willing to take the risk of higher wage growth which typically feeds straight into core service”
In the late 1960s, the Fed tightened aggressively in 1966, then encountered a mini credit crisis related to Regulation Q that caused a slowdown in housing, and prematurely eased into ongoing fiscal spending, allowing unemployment to flatline for 9 months before growth re-accelerated, triggering wage and core inflation spikes and another stock market cycle.
“they'd been tightening quite aggressively in '66 because inflation had broken out of a wellestablished range they then had a little mini credit crisis which was somewhat idiosyncratic in nature related to Red Q but it caused a big slowdown in housing and then they prematurely eased and the Eed into ongoing fiscal spending and unemployment never Rose it kind of flatlined for like nine months and then it started to go back down again as growth picked up and what you ran into straight away was average earnings took off core inflation went and the ball Market went again”
In the US, a 'vanishingly small fraction' of mortgages reset (most are 20-30 year fixed), so the US is a 'totally different case' from Australia, Canada, and the UK regarding mortgage reset sensitivity, making the US less vulnerable to rate shocks despite high debt.
“the US is a is a totally different case because only ADV vanishingly small fraction of the mortgages reset right because everything's at like 20 30y year fixed terms”
The vast majority of consumers spend every dollar they earn and do not accumulate savings; consumption is driven by income effects, not wealth effects, except for high-net-worth individuals.
“it's going to sound onpc but I don't mean it like this the vast majority of consumers don't count the vast majority of consumers spend every red Cent that they have yeah from from their income”
Two-thirds of rate increases have already worked their way through the global economy, meaning further marginal rate impacts should be diminishing; the vast majority of consumers spend every dollar they earn regardless of rates, so consumption is less rate-sensitive than assumed.
“if you look at some of the economic papers that people are writing some of these effects start to kind of wne right it's quite possible a lot of two-thirds of the rate increases that we've seen of essentially already work their way through the economy”
The Fed's central forecast, as reflected in the SEP, is pricing in 75 basis points of rate cuts, which matches exactly what Greenspan did between early 1995 and early 1996, followed by 30 months of unchanged rates during the tech boom.
“the so the fed's central forecasts um are pricing in 75 basis points of cuts and that's exactly what Greenspan did uh between the beginning of 1995 and the end of uh and the beginning of 1996 and these were kind of then fine-tuning and then what's remarkable J he left rates unchanged for the best part of 30 months”
Chris Waller at the Fed explicitly stated that 'in many previous cycles...the fomc cut rates reactively...by large amounts. This cycle...with economic activity and labor markets in good shape...I see no reason to move quickly or cut as rapidly as in the past,' suggesting the Fed may not cut at all if conditions remain strong.
“Chris Waller which I thought was quite interesting from last week so he said in many previous Cycles which began after shocks to the economy either threatened or caused causing a recession the fomc cut rates reactively and did so quickly and often by large amounts this cycle however with economic activity and labor markets in good shape and inflation coming down gradually to 2% I see no reason to move quickly as quickly or cut as rapidly in the past”
Banks are beginning to compete with private credit in the leveraged buyout debt market, with Bloomberg reporting banks 'juke it out' with private credit to fund LBO debt coming due; this reflects easing financial conditions but Brigden questions whether this easing is justified given labor market dynamics.
“I find it quite intriguing this morning to see the story that we got on Bloomberg about I don't know if you saw it about the banks starting to um Juke it out with um private credit to fund all this leverage buyout debt that's coming due right so the banks had all going been sort of squeezed out of this space last year and the year before and private Equity basically funded all these these deals right and now the banks are trying to get back into that space now that you know rates are lower and so on and so forth and to me you know this is indicative of this easing of financial conditions that we've seen right the question is is you know is that justified”
Every government is trying to loosen its housing market through policy (Canada's short-term rental taxes, similar efforts elsewhere) because housing shortages are pervasive, supporting prices and residential demand.
“every single government is trying to to loosen up its its housing market because there just aren't enough homes um so I think that the resilience of the house price thing”
The S&P 500 has gone nowhere for two years; last year it was down until Q4, when Janet Yellen 'deftly slewed all the issuance to the front end of the curve and drew liquidity back into the system' out of the reverse repo, triggering an 'everything rally' and setting the equity market level.
“if if you broadly look at the S&P it's gone nowhere for two years right last year it was down until the fourth quarter then Janet Yellen rather deftly slewed all the issuance to the front end of the curve Drew liquidity back into the system as a result out of the reverse repo into um the liquidity met which set the the level of the equity market and and we got this everything rally”
The dominant narrative of a 'Goldilocks' soft landing is statistically unusual and not the norm—since the 1960s there have been 12 tightening cycles, 8 recessions, and only 4 arguable soft landings, making the odds of another soft landing approximately one in three.
“the norm is we've had 12 tightening Cycles since the 60s we've had eight recessions we've had four arguable soft Landings”
Prior to 1998, bonds and equities were positively correlated (moved together, both up or down); from 1998 onward, after Greenspan shifted focus from inflation to deflation risk, the correlation became negative, with bonds and equities moving inversely, a relationship that has held until recently when it has begun shifting back to positive correlation.
“so prior to 1998 there's a bank England study that goes back and looks at 250 years of bonded pricing Bond and Equity pricing so prior to that period you'd never ever ever seen negative correlation between Bond and Equity prices so both assets either went up or down together so bonds rallied yields fell and stocks rallied or vice versa and from 1998 onwards that relationship changes you move to focus on deflation”
The UK economy is vulnerable due to Brexit (a structural 10-year headwind), mortgage structure (lack of fixed-rate mortgages makes households sensitive to rate increases), and loss of skilled craftsmen post-Brexit (who returned to Eastern Europe), which were keeping costs down.
“the UK UK looks quite vulnerable I mean it's really you know brexit was an enormous uh own goal uh it's been it's a structural headwind for the UK and it's something that we talked about for the next decade basically um the consumer is very vulnerable given the mortgage structure Y and the the lack of fixed rate mortgages is going to become increasingly vulnerable to these high rates she's got a structural problem to some degree uh because um we lost a lot of skilled Craftsman post brexit you know they went back to Eastern Europe um and they were keeping a lid on on some of these these costs”
The US is engaged in three expensive military/geopolitical conflicts (Russia-Ukraine war, Middle East conflict, and cold war with China) alongside climate policy spending, all of which are structural fiscal drivers unlikely to shrink regardless of political leadership.
“we got two kinetic Wars Russia and and Ukraine and the Middle East we've got a climate change war and we're in a cold war with China I mean it's hugely bloody expensive all of those things hugely expensive yeah so I I struggle to see how fiscal well the otheres doesn't continue expand let alone gets gets addressed right”
The unemployment metrics and labor market show risk of reaccelerating, driven by 'hyperfinancialization'—the relationship between equity markets and the real economy whereby CEOs fire workers when stocks fall and hire when stocks rise, making the stock market the leading indicator of employment rather than fundamental economic conditions.
“a lot has of that has to do with this effect that we call hyperf financialization so this relationship between basically Equity markets and the real economy whereby the equity Market in this bizarre Us world that we live in actually leads y because the only thing that CEOs care about is their stock price so so the Dy that we have is one it's very simple you know Equity wise they fire equities sorry equities fall they fire equities rise they higher”
There is an ongoing self-reinforcing reflexive cycle in the US equity market where stock purchases underpin wealth, which underpins employment, which underpins Fed rate hikes, which underpin the dollar, which underpins valuations of US stocks for foreign investors—a cycle that is difficult to exit.
“you've got this sort of ongoing self-reinforcing truly reflexive type cycle going on in the US equity market where the purchase of the asset in this case stocks underpins wealth underpins employment underpins Fed rate hike underpins the dollar underpins the valuation of US stocks for foreigners”
The US equity market is massively overvalued relative to the rest of the world—approximately four standard deviations overvalued—and this valuation dynamic will persist until either the dollar declines, the bubble bursts, or a recession occurs.
“when I look at the US Equity Market I think this is a massively massively massively overvalued Market versus the rest of the world right like four standard deviations overvalued versus the rest of the world”
Growth and inflation are likely to run 'considerably harder' than consensus expects, primarily due to fiscal policy, which is large and unlikely to shrink even under a Trump presidency that may preserve tax cuts while cutting direct spending.
“I think there a very strong case for why growth and inflation are both going to be run considerably harder than yeah consensus and you look fiscal fiscal is is a huge part of this right I mean it's just huge”
Companies do not lay off staff when the stock price is at historically elevated multiples; they take cues from the market about economy strength, so when stocks recovered in 2022-2023, all the weakness seen in layoff/claims data reversed, despite no fundamental change in demand.
“in this economy companies do not lay off staff when the stock price is you know at at these kind of multiples right they lay off when the market is telling them that the economy is weak they're taking their cues from the market if the Market's telling the economy is strong and earnings are going to be strong they're not lay off workers if they're not laying off workers how are we how are we slowing demand again with fiscal deficits in the six s% range”
Janet Yellen is 'doing everything' to frustrate the Fed's attempt to slow the economy by supporting the equity market; she understands 'hyperfinancialization' and the relationship between stocks and employment and deliberately uses her tools (debt issuance, reverse repo, treasury general account) to keep equities elevated to maintain employment before the election.
“Janet yelling sure as hell her behavior is she's doing everything to frustrate the feds attempt to slow this economy down by the equity Market you know I don't know but as I said you can do what you like but it just has consequences in that environment I don't want to be long the bomb Market”
Greenspan succeeded with opportunistic disinflation in the 1995-96 period only because of extraordinary productivity gains from the dot-com revolution; without a comparable productivity surge (from AI or otherwise) occurring in the next 1-2 years, the Fed cannot justify aggressive rate cuts while inflation remains sticky and growth remains strong.
“he also got extraordinary lucky and I'm not saying this couldn't happen and he got the the building productivity that we saw as we ran up uh into the dot uh Revolution and maybe over time we can get that from AI but the question is is is it this year right is it next year or is it the year after”
Because the US corporate sector 'whipped your bloody heart out' in terms of price increases, real disposable income fell by roughly 20%; wages need to catch up to rebuild this loss, or there will be significant political turmoil regardless.
“he's the economy is's in great shape right he's just getting the blame for that 20 20% haircut that you took in the real disposable income essentially yeah as the Us corporate sector Whipped Your bloody heart out in terms of price increases because we live in this highly uncompetitive economy yep and so what has to happen now is over time wages need to play catch up to rebuild back 20% or you're going to a shitload of political turmoil”
Continental Europe has a more competitive economy than the US, so corporates cannot price-gouge to the same degree; practices that are 'legal' in the US (vertical distribution agreements, dealer franchise controls) are treated as price collusion and illegal in Europe, resulting in better price competition and lower inflation.
“Continental Europe is a much more competitive economy so the ability of corporates in Europe to price gouge to the same degree that us corporates have done is just not there there are many practices which in the United States are deemed legal which are really price collusion that in Europe would end you up in jail”
The ISM Manufacturing survey chairman Tim Fiore called the economy 'okay' last summer when everyone was bearish, was bullish before the recent pivot, and now that the Fed has pivoted he sees PMI possibly rising to 52-53 by March; historically, you'd have to go back 30 years to find a time the Fed cut when ISM broke above 50.
“I love listening to the calls and the the PMI gu right and there's a couple of the there's a couple of C places you can sort of follow them online and um Tim fiori who's the current chairman of the ISM Manufacturing survey they did their sort of semiannual uh Outlook and it was you know reasonably upbeat but what was interesting it was done before the pivot...you know back in last summer when everyone was really bearish he was going I don't think it's gonna I think this thing is okay actually right it looks actually okay yeah um and he just came out and he went right I mean this wasn't a bad survey even before they pivoted now they've just given us the green light to just go for it and I think we're going to have ISM back at you know 5253 by March and what's actually interesting about that you've got to go back 30 years to find an occasion where the FED cut when istm came back up above 50”
Owner equivalent rent (OER) may come down somewhat, but overall service inflation could remain relatively high; this is a key risk that the market is underestimating in its dovish bias.
“when you look at the Dynamics versus the overall service thing it could still come down and overall service inflation could remain relatively High I'm not saying it's you know it's not going to come down a bit could it but it could remain uncomfortably High”
A Trump presidency would likely preserve tax cuts (not increase taxes) and potentially entrench isolationism, which mirrors the 1930s retreat and would worsen the geopolitical situation by removing the 'global policeman,' leading to a world resembling the 1970s with conflicts and proxy wars everywhere.
“he rolls over his tax cuts he won't increase taxes um so you don't address the fiscal problems I mean they could even get worse yep um I do think there is a risk that he entrenches us isolationism um which is exactly what we saw in the 1930s”
Tesla is 'a narrative that's been fit to a price action' created by quantitative easing; its performance started exactly when the Fed did not-QE in 2019, peaked at peak Fed liquidity during COVID QE, and has not recouped since—this is a 'hyperbubble' with some good companies remaining but overvalued.
“Tesla is a a narrative that's been fit to a price action and a price action that was created by QE uh and you can see the Dooms when when Tesla started to perform and it was exactly when the FED did in 2019 not QE if we remember that and then we went the covid QE and it Peak exactly at Peak fed liquidity right and since then it has not managed to recoup its thing”
Labor has been 'completely neutered' in this cycle with no self-reinforcing wage-price spiral, which is unusual historically, but Atlanta Fed wage data shows wages still running above 5%, and there is no reason wages won't catch up over time as workers rebuild lost purchasing power.
“we haven't even really seen any kind of self-reinforcing labor cost spiral right I mean they've no been miraculous how labor has been completely neutered in this cycle they had they haven't had any negotiating power at all they're you know no I mean you still but you have you have got Atlanta wages which I like you know still running above five and that's still pretty bloody brisk right”
Historically, when the US equity market is expensive, investors rotate into Japan looking for cheaper assets; this pattern occurred before the 2000 dot-com crash and 2007 financial crisis, and Brigden is watching for a similar 'final hurrah' setup in Japan before a global equity crash.
“if you go back and you look at history and you go and look at back like 2007 and the dot bubble you get this interesting Factor before the whole Global Equity Market goes right and that is it seems that Equity investors go yeah the US is a bit expensive lell have you seen how cheap Japan is I'll have me some of this and you get this major like final like Japan is the final like hurrah where you pile into this thing now that said I have a line I have a little chart that I'm watching we're not there yet”
With fiscal deficits in the 6-7-8% range and hyperfinancialization keeping the labor market strong (because stocks keep rising), there is no mechanism to slow demand, making it impossible to understand why everyone thinks the economy will weaken enough to justify any rate cuts at all; the risk is on the right tail, not the left.
“we've got an employment that's so low we've got inflation that seems to be sort of um have almost troughed and you know looks like maybe moving higher again and we've got a we've got fiscal deficits in the six seven eight% range as far as the eye can see right so what I don't understand is why everyone thinks that the economy is going to be so so weak as to prompt any cuts at all me the the risk is on the right tail not the left”
European wage growth remains sticky at around 4.5% (high by European standards), but shows signs of peaking; growth levels in Europe relative to rates suggest the ECB has the tightest policy (~100 bps), BoE is easy (~100 bps), and the Fed is very easy (~200 bps)—yet the economy that is growing the most (US) has the easiest policy.
“they've also got some labor problems wages have been sticky um and high by European standards four and a half percent so not as high as the as the us but pretty high but it does look to me that those have started to show signs of peing um when you look at growth levels relative to inflation sorry relative to rates relative to rates growth levels relative to rate you could argue the case that if you rank those three economies that the ECB has the tightest policy to the tune of about by our calculations about 100 basis points so they they could ease to you know 100 basis points the bank of England is Easy by about 100 basis points and the FED is Easy by 200 basis points so the economy that is growing the most has the easiest policy”
Marginal spending comes from the wealthy, who are 'locked in' to low mortgage rates (in the US) or have paid down mortgages (in Australia/Canada); the wealthy's spending depends on equity portfolio performance, which is being supported by Yellen, not on direct interest rate effects.
“what really makes the difference is how the wealthy spend right and the wealthy are locked in they've locked in their mortgage and their stock portfolio keeps going up well yeah Canada and Australia right I mean they're they l so far as you know the wealthy have already paid off you know such a substantial portion of their of their mortgage right”
Everything comes down to whether the labor market softens; if it doesn't, there's no demand destruction, no recession, and Goldilocks becomes impossible—making the labor market the key variable determining the probability of a soft landing.
“I think I think it all comes down to this whether we see it all comes down to me to this labor market right that's what will dictate Goldilocks right is this and I and it's also why I think goldilock is is so insanely difficult to achieve”
Japan trades won't generate independent equity returns until the US economic model breaks (current-account deficit shrinks, dollar falls, or capital allocations change), keeping Japan dependent on global capital flows driven by US dynamics.
“as long as the US is growing so rapidly and that means running a very large current account deficit we need all the world's Cas to fund it and so until those Dynamics change it's kind of tough yeah to buy other things I'd love to but you need either the dollar to break down and that makes you know Mr and Mrs wat and Ary go what what you know why am I not making money on my US Stocks oh because the Yen's going up okay or you need to go into recession in the US that current account deficit shrink and the money go home um or we just need to burst the bubble in US stocks”
Modern warfare has become prohibitively expensive and complex for traditional hegemons to enforce: the British and Americans struggle against Houthi rebels with $2 million missiles against drones, camels, and AK-47s, making hegemonic enforcement difficult and fueling longer-term inflation trends via geopolitical instability.
“we've just seen you know the difficulties of the the British and new Americans are found taking on these H HW Rebels right you know modern Weaponry at two million bucks a a missile against some bloody drone and a bunch of camels right and guys in AK-47s I mean yeah these are some of the longer term inflation Trends which really really do worry me”
Brigden gives a detailed example of US appliance pricing: when buying a full kitchen (dishwasher, oven, cooktop, etc.) from one manufacturer, dealers cannot offer package discounts and the price difference between brands is fixed at ~$50, which would be illegal in Europe as price fixing.
“I don't know when last time you did your kitchen up right but I'm sure when you did your wife said right there's three Appliance makers we're going to buy darling you know one of them is going to be wolf one of them is and Subzero the other one is going to be uh melee and you go to the the dealer and you go well I want the dishwasher and the oven and the cooktop and the extraction fan and the blah blah blah and the guy goes yeah 20,000 bucks probably 30 now and you say yeah but I'm buying all all of them from the same manufacturer so what's the deal and which one's going to be better can I get a bit better deal on the wolf or the Subzero or whatever and he goes no they're 50 bucks difference and I can't negotiate because if I do I'd lose my license right I mean that price cusion right when that's price fixing”
The Fed has done an 'absolute abysmal job' at explaining the opportunistic disinflationary policy framework to markets, which is why the market keeps pricing in aggressive cuts while the Fed is trying to signal patience and fine-tuning; other central banks (BoE, ECB) are doing a better job communicating this message.
“they've done an absolute abing job at explaining this to the markets for whatever reason so we you know they they keep saying things well you know the market can do what the market wants and we'll see which one's right we're right or they're right you know and I I just think it's so self-defeating and so I don't understand why they don't have and we discussed this on a policy call this morning internally where they don't have the balls basically to come out and say the sort of things that you see from other Central bankers where the other Central Bankers just go no it's too early”
Models suggest wage pressure will not drop significantly and will remain stuck at 5% and change well into 2024, providing no rationale for Fed rate cuts beyond perhaps a couple of 25 basis point cuts, which would either be justified because the Fed 'cocked it up' or out of fear of Trump.
“none of our models are suggesting wage wage pressure really drops all that much it still looks to me like it's stuck at five and change well into 2024 right which that's why I I struggle to find any rationale for the FED to really cut at all and certainly to go beyond you know a couple of 25s which are either Justified because you know they've cocked it up and they don't want to write it back and say oh no we were wrong again”
There may be 'another driving force' behind Fed rate cuts besides economics—possibly political fear or other considerations—and if the Fed cuts into growth that remains robust and equity prices hold, it would be very bearish for the long end of the bond market and bad for being long bonds.
“if they do it but if they do then there you know look they can do what the hell they like but as I always say you know this I don't judge people I just like to figure out what the consequences are of their action right so you know I could see them still in an environment where growth is still relatively robust still trying to justify you know 50 right but if they do and I'm my models are right and the equity Market holds up which is another thing we need to discuss um then I think it doesn't bur well for the long end of the ball Market”
Despite high rates, countries like Australia, Canada, and the UK have shown surprising resilience in household consumption and housing prices because: (1) accumulated wealth acts as a buffer; (2) housing shortages support prices; (3) two-thirds of rate increases have already worked through the economy; and (4) most consumers spend every cent of income regardless of rates or wealth effects.
“there's a lot of accumulated wealth you know even in they're less Equity focused than some of these other markets but people have got a lot of money right there's a lot of money that you can use to cushion some of this blow...it's quite possible a lot of two-thirds of the rate increases that we've seen of essentially already work their way through the economy...the vast majority of consumers don't count the vast majority of consumers spend every red Cent that they have yeah from from their income”
Brigden is a 'structural bond bear' because of geopolitical inflation risks, among other reasons, and believes it is 'very very difficult to address these problems in the west'; this is a major reason to avoid long fixed-income exposure.
“these are some of the longer term inflation Trends which really really do worry me and it's one of the one of the reasons not the main reason but one of the reasons why you know I am a structural Bond bear and I just don't I think it's very very difficult to address these problems in the west”
Currency analysts rank the likelihood of rate cuts as follows: (1) US should not cut and might need to hike more (dollar supportive); (2) Sterling likely to ease eventually; (3) Euro likely to ease most; (4) Canadian and Australian dollars in similar circumstances to Sterling, creating a weaker Euro and stronger Dollar scenario.
“if I rank them and I you know Australia I haven't done this uh but if I rank the big three currency pairs uh Yen doesn't really come break because the boj on it still on its different planet kind of thing but if I would look at relative growth relative to rates right and say who's running the tites where and given that growth is picking up who's where the biggest surprise is going to be the biggest surprise would be in the US where rate should not get cut and if anything do need to go up arguably more so that's dollar supportive then the better next one is Sterling and then the worst one should be Europe and I think there's a case to be saying that you could end up with quite a weak Euro I don't think it's as weak as you know necessarily some people think um because I do think growth is will pick up a little bit but the ECB can easily justify cutting rates”
Existing home sales have dried up because homeowners are locked into low mortgage rates and unwilling to move; this forces homebuilders to perform well, creating a supply constraint that supports home prices despite rate increases.
“no one's moving in the US existing home sales have dried up so by default the home builders have to do well in a very very unusual move”
China is a 'wild card' and 'looks kind of messy'; the Chinese equity market has broken a multi-year trend line on a monthly basis (back to 2005 on Shanghai composite) and could drop another 25-30%; China is trying to 'export her way out' of growth problems.
“China does look is a wild card and does look kind of messy um but you're actually what China I think is going to try and do um and you can see already she's going to try and Export her way out so you know of the part of the problems that she's facing and certainly when you look at the Chinese Equity Market I've tweeted this it's a bloody train wreck I mean there's a you know we just broke a Tren a multi-on a multi-year trend line on a monthly basis it goes back to like 2005 in the Shanghai composite and it looks like that thing could drop another 30% 25 to 30%”
If growth doesn't soften as the Fed's models assume, and the Fed keeps rates paused at three consecutive meetings (March, June, September), the real risk is that by then commercial real estate refinancing problems and employment market dynamics will have deteriorated sufficiently that holding rates steady will 'tip over the employment market' and 'the thing will become too cold,' creating a different type of problem.
“let's ass same let's assume that they get it wrong that that the data that they think is softening which they do doesn't soften as my model suggest is not going to be the case and then they turn around to us in March and they go no rate card and then they turn around to us in June and go no rate card and they turn around to us in September and go no rate card yeah then then the risk is then that at some point by holding rates here you'll actually will do more damage because as the refi come up and we know the commercial real estate problems etc etc and then the risk is that you'll actually tip over the employment market and the thing will become too cold”
The Fed cannot justify rate cuts even if it wanted to, because the Fed's own projections show unemployment rising to 4.1% and growth falling to 1.4%—conditions that aren't materializing, so none of the three pillars justifying 75 basis points of cuts are present.
“they have unemployment rising to 4.1% in the scps um and uh they have um growth falling to 1.4% this year and that's the reason to justify and inflation falling and that's the reason to justify 75 basis points but as I think see things setting up none of those happening right”
Japanese equities purchased unhedged (not hedging the yen) are the preferred approach, as buying Japanese equities currently is a yen play (currency bet) rather than a fundamental equity bet, and this is essentially a Treasury trade.
“I would be inclined to do them unhedged when I buy it I want to buy it unhedged and that's that's another reason why you know look we're still in this game where you know oh you buy Japanese equities because the yenis is weaker and they really just a Yen play at the moment and that is itself is just a treasury trade”
Japanese politics are 'a bloody mess' and could 'destroy' the LDP's political grip over the next couple of years; this political uncertainty delays the BOJ's normalization of negative rates (they probably can't move until July), which is why recent bank rally euphoria should be tempered—political risk is high.
“politics is a bloody mess right and so I think I mean a real mess a real real mess we write about this a lot with clients we one of the few shops I think that have anyone who really has experience in Japan of poos Japan and Jeff is is been very good on this one um and um the politics a real mess it could end up over the next couple of years really destroying sort of the the the ldp's iron grip over Japanese uh politics so that could get really quite interesting but the but the impact of that for markets is it probably delays the uh the boj's normal normalization of or the end of negative interest rates um we don't think they can really probably move until July”
The trough in rates for the year has likely been reached around 3.92% on the 10-year Treasury; rates will now move higher toward 4.25%, then 4.40-4.50% as financial conditions reset and offset any equity market strength.
“oh yeah you know um I think at least for the next 3 to six months I think yes we're sure you know we got shorted around 392 in ten year treasuries are kind of Target probably 425 first off and then sort of 440 450”
Q4 was characterized by a positive correlation rally (both bonds and stocks rallied together), driven by people getting excited about a reflationary cycle and rotating into value and cheaper assets; but this rotation has already stalled and growth has come back in, meaning the 'everything rally' was not sustainable.
“Q4 was all about a positive correlation rally right and everything rally now that got people quite excited by this idea of the reflationary cycle so we had people thinking about do I buy the Russell...you know do I buy cheap things are we going to rotate into stuff but the reality of the situation is um I struggle with that thesis I think it could pick up a little bit in Q too if we start to see these pmis come back but it you know but then you know from from you look at the growth value metric which is we've gone back to right so growth picked up in Q4 and into the beginning of of this year for the first week at least uh so Valu did value outperformed and then growth kind of underperformed Now growth is coming back”
The European manufacturing cycle may be at risk of reaccelerating in Q2 as inventory overshoots are resolved; Sweden (canary in the coal mine for Europe) has cleared its inventory problems and now has inventory running below orders, suggesting EU manufacturing could pick up soon.
“we we're dealing with the hangover now right in the US I think that hangover looks like it's partly addressed Europe it's still Germany it's certainly got more to do but when we look at one of our favorite kind of canaries in the coal minees Sweden it looks like she has totally got on top of her inventory opening and now her inventory are running under her orders and so that suggests to me that as we move into beginning of Q2 even in Europe you could start to see the manufacturing cycle start to pick up again”
Japanese banks in dollar terms are a 'chart porn' opportunity with a multi-year trendline resistance at $2; if they break above that, they could double or triple from there, but until they do, Brigden is not a buyer on the basis that the recent Nikkei retest is still just a Japan/Yen trade rather than autonomous Japanese growth.
“I have a line I have a little chart that I'm watching we're not there yet I'm looking at the Japanese Banks uh in dollar terms I think it's the best piece of chart porn that i' I've got and you can draw a multi-year line that comes in at $2 for the Japanese banking index and if we can crack above that and we haven't then I think it can double or triple from there but until it does I'm not would you be would you be a buyer of Japanese equities head edged or unhedged uh I would be inclined to do them unhedged when I buy it I want to buy it unhedged and that's that's another reason why you know look we're still in this game where you know oh you buy Japanese equities because the yenis is weaker and they really just a Yen play at the moment”
There is visible institutional fear of Trump among global policy elites, evidenced by Bank of England Governor Christine Lagarde's public criticism of Trump—a violation of protocol that shows the anxiety in policy circles.
“there is a large institutional fear in the fed and you can see it in all the global Elites I mean just look at what M know Christine lagard said about Trump I mean she broke every single protocol to come out and criticize Trump a central bank governor should not not under any circumstances certainly a foreign one say anything about a US president and yet she did”
Gold has performed reasonably well relative to the S&P 500 but has underperformed expectations because rate cuts were built into the dollar, and the dollar is now strengthening as some rate cuts are being priced out.
“gold has performed quite well right if you look at it against the S&P it's actually held its o uh for quite quite a long time but I think you know the big disappointments is when you look further down the kind of periodic table with and and and sort of peer periodic table and you look at things like silver right which doesn't look good um and it really shouldn't you know you you break much lower than this it could start to get look quite ugly and I think the big problem there is that we built in you know lots of rate cuts into the dollar right and the dollar is now starting to look a little better as we price out some of these rate Cuts”
Commodity prices remain elevated and are another area of inflation risk; oil and other commodities should be monitored as potential trades, but they are not 'really really compelling' at this moment beyond being indicators of inflationary pressure.
“the the oil markets this morning we were discussing you know crude kind of looks quite interesting um potentially for a move to the top side which would get a little interesting but not there's nothing much really really compelling outside you know all our all our CTO models”
The dollar-peso (USD/MXN) has declined to multi-year trend lines; after the recent run, the long setup may have been exhausted and traders should be 'a little bit long' at current levels rather than short.
“one of the ones that's had a big run you know is dollar Mech we've come down to like multi- multi-year trend lines uh on on uh the dollar against Mexican peso and down here if anything you're probably supposed to be a bit little bit long”
Brigden's CTO (Commodity/Technical Overlay?) models are long 'pretty much every stock market' except the Footsie (London Stock Exchange), short most bond markets, and see the dollar as 'quite interesting' for further strength.
“all our CTO models you know are long now pretty much every stock market with the exception of um footsy and um we're short you know most Bond markets and you know the dollar looks quite interesting um you know for further strength”
2024 was a 'tropy macro year' with less clear-cut directional trades than 2023 (when you could simply short bonds because inflation was accelerating); this year doesn't present obvious macro bets beyond being short fixed income, though positioning should wait for better technical setups.
“you know me the the risk is on the right tail not the left yeah I mean that's look that that's my view I think from an economic perspective I don't see how the FED can really any Cuts...it's not like you know it was easy in 21 you just shorted bonds because inflation was going way up you know last year was a troppy macro year I think this will show us it hand um but it doesn't look like this is a market where you're supposed to be betting big yet on macro outside poty fixed income”
Brigden expects ISM to reach 52-53 by March, moving back into expansion territory and contradicting the economic weakness assumption required to justify Fed rate cuts.
“I think we're going to have ISM back at you know 5253 by March”