NCI: Market at Crossroads: Trump Bump or Market Slump?

Market at Crossroads Trump Bump or Market Slump.mp4

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Speaker 1 [00:00:01] All right. Welcome to the next show Lumina non consensus investing. I am thrilled to be joined by Mike McGlone senior commodity strategist at Bloomberg Intelligence. I followed Mike for a long time. You should too. His Twitter is full of insight. We're going to cover a lot of ground today. We're going to talk about the effect of Trump and Biden on markets. Is there a Trump bump? We're talking about commodities including bitcoin, crude oil, copper and gold. We're going to talk about the state of the economy. What a rate cuts have do with this. You know commodities and macro go hand in hand. So I'm very much looking forward to this. Welcome, Mike. 

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Speaker 2 [00:00:43] Oh, thanks for having me. I'm looking forward to it, too. 

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Speaker 1 [00:00:46] Let's start right in. So, is there a Trump bump? 

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Speaker 2 [00:00:51] Well, if there is, I guess 17%, total return in the S&P 500 in the first half of the year, which is annualized, what, four times the average return is pretty good. I think the risk that people are underestimating about a Trump and bump is that we're going to have a definitive election and definitive president in November. Yet we've proven we've seen that that might not be the case. So I think the market at this stage is priced for way too much optimism. And maybe that we get the Trump bump. But it's so expensive volatility so low interest rates are so high. it's just the lessons I've learned. I turned 60 this year. I started in the trading pits in 1988, in Chicago, that when you lick your finger and everybody's really bullish and they all they talk about being bullish, you should look for alternatives. 

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Speaker 1 [00:01:40] Well I, I agree about everything you said there. Where do you see evidence that. Politics is influencing asset prices and markets. You know, you talked about the return your data in the S&P. But are you seeing that affecting other markets. 

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Speaker 2 [00:01:58] Yeah. Well that's that's a good question. You hit me with a hard one right away. I think it's indisputable that if we do have a definitive Trump 2.0, I'd say right away that's very bearish. For price of crude oil, it means drill. It will. I think overall it's going to be bad for the dollar. Most people have said it might be good because a terrorist, but to me it's a bad thing for the dollar because he's trying to help increase U.S. exports and he's pushed back in the dollar before. And pushing back in the fed is really bad for the dollar. Can you go the way of Venezuela? So those that to me some of the key takeaways. And I think the issue I'm worried about is from an equity standpoint, everybody tells me, oh, the fed is going to cut rates and Trump's good for equities. Well we've priced in that about the most extreme I've ever seen in you know in my lifetime. I just look at one thing that I like to point out is something that used to matter. Told him a $56 trillion, almost $57 trillion. That's a total market cap of US stock market. It's two times GDP on the way up. The last time we were on a similar trajectory on the way up was 1929. We all know how that worked out. So things are very expensive. And then I look at simple stuff like the S&P 500 versus housing. It's the highest in our database since 1977, since Bloomberg commodity versus the Bloomberg Commodity Index, highest in 25 years. So the thinking thing I'm worried about is where price are so much optimism realism, just normal normalization in markets is what we should expect. And typically that's, what most people forget when you get to these very lofty levels. 

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Speaker 1 [00:03:30] Right. So you cited two statistics there. One was, Tobin's Q ratio from our Nobel laureate, where you compare the market cap to GDP. And then the S&P 500 housing. What's interesting there is you're comparing a financial asset to a real asset in both time. And, you know, the implication is that, you know, these are bounded these ratios. And there's some kind of reversion at work. 

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Speaker 2 [00:03:53] Yeah, it's I see that's one thing I appreciate about you. You dig into the mathematics a little deeper than I did my kind of more in the 30,000 foot view. This is how things have been in the past. This is how are they all now? I haven't used that housing statistic for about a year. I just looked it up before we hopped on because I wanted to see how it is. And you know, I'm sitting here in Miami, I look around and you can just, you know, it's everybody knows what's going on. Real estate in the country. And this Miami, it's basically two X or three exit. It's a gamma here. And it's just so extreme and I'm sorry. 

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Speaker 1 [00:04:27] No. Go ahead. No. Go ahead. 

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Speaker 2 [00:04:29] Yeah, yeah, I just saw there was distortion, so, I just pulled that one out, but there's so many of them. The bottom line for me, I like to point out this is the number one statistic that got me really bearish in 2007, which means I had to suffer. We all know saw the movie The Big Short and I had moved from a hedge fund to work at around commodities. The S&P was just a simple measure of you take the VIX volatility index 52 week moving average, 100 week moving average. Subtract that the Thibeault rate. That's the lowest now since 2007. That was just an indicator. Lesson I learned in the trading pits was volatility is always mean reverting and it's just so low. It looks for excuses. Markets are just waiting for that catalyst to revert in terms of volatility in terms of price. And so I anticipate what will those catalysts be I don't know I mentioned one. There could be a little bit issue with election. We do have something that's changed completely in my lifetime. And this is a reversal of detente. The Soviet Union fell in in the late 1980s. And that's completely reversed. And we have a Cold war. It's getting heating up globally. And it's nice to see. On the tape the other day, the prime minister of Finland pointing out one phone call could than this from presidency to President Putin. But that's not happening. And it's part of the reason I've been very bullish gold too early. Could some people say wrong? But I think that's right. I think gold is going to be the enduring asset potentially, as we have some normalization, other very risky assets. So that's also part of being a commodity guy. At least I have to have something that's going on. And gold is one of the few commodities like the key point of. 

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Speaker 1 [00:06:04] Well, it seems like after, you know, the break that we saw last week, that commodity started to ramp and that markets are expecting more inflation, which is what you would expect under like a Trump administration where you have higher deficits, deficits and a renewal of tax cuts. And you've also seen, you know, Bitcoin respond to that, as well. But yeah, you pointed out that we are seeing a reversal of these major trends. And another one is the near shoring phenomena with that. 

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Speaker 2 [00:06:32] Can I ask you about that. Is it near shoring. Do you globalization or GMT foe China? Get me the heck out of China and kind of asking you the question. To me, the sense is it's just that every major country in the world that thought China was a reliable, safe partner that's not going to support wars in their backyard saying, okay, well, I can't trade with them anymore. 

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Speaker 1 [00:06:51] Yeah, I think it's all the above. Right. So Vietnam is benefiting from the move movement of operations from China. Mexico is also benefiting. So is India. So maybe you call it friend shoring. And then you've also got reshoring from Taiwan with the Chips act, although that's delayed. You know, these foundries aren't coming online fast enough. You know, TSMC, Taiwan Semiconductor building, another foundry in Taiwan, you know, the advanced three nanometer, production facility. So but overall, you put that together and it's a story that's consistent with inflation. Those are you know, China's a low cost production center. There's a reason why. These factors are domiciled there and you're moving to a higher cost, you know, area that requires training a new labor force. And, you know, that's going to have some consequences. Your point on picks, I thought was very interesting as well. I've noticed this, too. You know, it's it's almost like Vicks is broken, like, how come fixes. And even when you see these mild down days, we really haven't had a severe down days, as you know, we've had I think we've had a few percent down in like over 100 days. Right. But let me challenge you on this one. I'd love to get your perspective, which is that there is volatility but it's not in the max seven. The volatility is everywhere else. And as you know the definition of the VIX which looks at the at the money you know implied volatility for basket of securities. And then it weights them with some algorithm you know that was weighted towards its max seven names. but we are seeing volatility and downside volatility outside of that category with the Brant deterioration. So is it that maybe the volatility is there. But we're not measuring it in the correct way or the volatility. It's just an area that's outside the you know, the yardstick. 

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Speaker 2 [00:08:41] I think what you pointed out are early indications of cracks in the very low, low, very low complacency or high complacency market that I view as it's just a tinderbox awaiting the spark. It needs a catalyst. We get some normal, just a normal things that used to happen in normal markets and bull markets and say, I'm using the S&P 500. It's basically beta for the world and normal 10% correction. This year we've only had 5%. The bottom last year in October was 10%. And I want it to me I've been writing about that. Let me get through that test so I can really make decisions about being bullish Bitcoin because it failed on the 5% correction. So my my thing I like to point out is I compare everything to beat S&P 500. So you look at crude oil the number one commodity on the planet. It's been stuck in a narrowing wedge pattern for almost two years now. And it's on the back end which normally does in crude oil. It's very rare for it to go up to 90. And if it does, it makes a whole economy to lower. Its very normal since 1981 to go down to 40. For me, that's part of why I wanted to push back a little bit earlier. I think we're heading towards a normal, pretty severe deflationary cycle and the aftermath of yeah, thanks for that chart and the aftermath of the biggest money pump and liquidity pump in history. So let me just give you my macro that I was early and I'm pointing out it's and I can mention 3 or 4 books. I love your bookshelf that pointed this out. That is in the history of mankind and history of markets. And you have a massive pump and liquidity assets rise. They almost always come back down in hard. Price of time was one by William Chancellor. Boom and bust by Quinn. I forget the other offer author and it's just. And I've tested that in a system. So that's happened in some commodities. I think it's just a matter of time to happen and risk assets. So we're just getting past this period in unprecedented where we had zero to negative in and most interest rates. And most of the world. We pump the prices of all assets to where we are, which is logical now that prices that it's ending and it's just a matter of time. So from a commodity standpoint, I see nothing but deflation. So let's look at the number one measure of heat, electricity and fertilizer in this country. Natural gas partly because of the Russians invasion of Ukraine pumped up to ten. And it drops down to 1.4 this year. Now right now it's around two and change. It's an 80% correction. It's at the same price as it first traded in 1990 at least. Got to that level. You look at crude oil price of $83 a barrel. I mean that the high was was 130. I think it's going to 40. That's just a normal cycle because what commodities almost always do lessons of of Adam Smith is they have to get below their cost of production and cost of production. The US is 55, the world's largest producer, and we've done that partly of demographics, but mostly because of advancing and and harnessing that, that, that technology. And here's one thing that just happened last week. The number one measure of like like what crude oil is to energy corn is to food. It's the most significant food on the planet. And it's also energy. The price of corn right now around four was first traded in 1974. It's plunging because of one major reason. We had the biggest pump in prices, in 2022 to 8 in 10 years. And there's so much elasticity from that price of a price of tomorrow by Jeff Booth, that and Adam Smith that all that supply is coming on this year. Unless we get a bad year we're going to have mass. We have too much supply left over from last year. It's a normal cycle on commodities. And the only thing I think the thing that's holding everything up is this US stock market capitalization versus GDP. And the fed knows they can't really cut rates because I think Mr. Powell knows. He tilted towards telling Mark he's going to cut rates too soon. But all the data is starting to tilt. Tilt the other way. You look at unemployment our economic team thinks payrolls are not. It's unemployment's probably going to go to 4.4% this year, the lowest 3.4%. It's not. Ever bought him from that level without going to 6%. So to my whole macro thing is a normal cycle is going that way. And the key thing to watch is China. So I'll end with this. I bought a Chevy Volt. I it's ten years old now. That's a plug in hybrid 2014. I've got ten years on it. Over 80,000 miles. It's great vehicle. It cost me in dollars ten years ago. 3736 grand with subsidy is 29 grand right now. You can buy a bid. It's triple the mileage and it's a fraction of the cost. And it's a good car. And we have to have we have to have tariffs to keep that from coming in the market and in this country. Yet it's just a sign of significant deflation coming our way. And what do we stop it. And the one thing that's keeping us away from deflation is the US stock market remaining elevated. The way I see it. 

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Speaker 1 [00:13:21] That's I know really appreciate that. So your thesis is that hey we're going to see economic softening. This is yet another cycle. We've seen cycles before. Look at the ratio of financial assets to real assets. They're overpriced. Things are gonna roll over. And the Fed's behind the curve. And therefore you know, you know there be dragons. Let me challenge you in a few different areas. You know, what I would say is like the demand for energy has never been higher. The transition to renewables is going slower and longer than anyone thought. Solar isn't, reliable enough. You can get cloud cover. Same with the wind. And we need more old energy. We need more natural gas. We need more nuclear. More all of the above. And as you pointed out, a key import driver. We have wartime deficits. There's no war. We have, Chips act. We have inflation reduction Act, which doesn't seem to reduce inflation as far as I can tell. And we have infrastructure spending, and there's really no end in sight. We've got, a boomer economy. There's a lot of spending that's happening to, consumer disposable income. Still looks abundant. You know, they still have capacity to borrow on a credit card, period. And then, you know, household balance sheets are at record highs, you know, in part due to, you know, equity valuations, I think equities. Interesting conversations on. Right for sure. But, you know anything you add to that this French shorting phenomenon that's going to increase the cost of goods sold goods. Everyone wants to services where it's a services economy. Restaurants are packed. So I just I don't I don't see the, the deflationary impulse. You know, there's no credit bubble that's going to contract. There's commercial real estate which is taken on the chin. That whole area, is experiencing a recession, and you're seeing price deflation there. You know, home prices are still hanging in there are coming in softer, right? Multifamily starts are like horrific. You know, single families is doing okay on the lower end. And if and when the fed cuts and I think they will cut, I think we all think they they know that like they said, they're cut. They kind of have to cut now. I've never seen so much chorus around the fed cutting since Jim Cramer was on CNBC in August 2007, when he said they are nothing. This comes close. It's not at that level yet, you know. But when the fed does cut the change in psychology I believe will be significant or people that are on the sidelines that haven't, purchased the home are going to say, oh, I can buy now because I can refinance, even though, of course, the fed controls the short end of the curve. They don't control the long end. It kind of doesn't matter. This is all about your psychology. And, I do agree that we are seeing, you know, declines in inflation. It looks like, by and large, the battle against inflation has been one, but it may be too early to call victory given some of these other dynamics, any any quick reactions or rebuttals there? 

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Speaker 2 [00:16:30] Yes. We within a year, maybe two, we'll see problems with deflation. And that's only because of the normal cycles. When you raise the bar of the measure of inflation, you would just look at the number one content component. CPI equipment went rent based on the average in a home. It's gone from basically 200 to almost 400. Average price. That base is so high now it just needs to come back a little little a little bit. So you started with energy, which would start there with energy. There is yes. We are advancing economies. It's the essence of the human condition is using and harnessing energy properly. And we have significant tariffs against the number one new source and cheapest source of energy in the planet. Now is solar just getting there? Storage is just a matter of time. It's getting there too. I installed solar in my house ten years ago. It worked great. There's no moving parts and it just cut my electricity bill by two thirds. I've done there, I tested it's just going there. It's a question of what stops it. So I fully expect we use more and more energy, but it's just how we attain it and what sources we're using. And then storage. It's just getting the you just can't underestimate how fast that technology is going. So so my standpoint is let's look at the number one thing that's really keeping things, pumped up right now is we had the biggest liquidity money pump in history. We still have the repercussions from that. And of course, the largest one is its 6% largest fiscal spending of as of GDP outside of the funds. Yet with them. 

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Speaker 1 [00:18:06] And they haven't dispersed all the funds from those. Yeah. 

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