They didn’t disappoint.
We had one recurring complaint from viewers of this free webcast … It wasn't long enough.
- “I could listen to these guys for hours! It is rare to find two high level, generational level thinkers.”
- “Damn that was awesome. Gave just an honest view of today’s...well I will say it stupidity out in the market... Thank you thank you and thank you.”
- “Excellent discussion between @RaoulGMI and @HoweGeneration on @Hedgeye about where we stand in the business cycle and the financial markets. Take a look.”
See for yourself why people are eating up this special one-on-one conversation between two of the smartest people in the room.
Below we’ve transcribed key excerpts from this webcast. Click here to watch the entire hour-long discussion.
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Howe: So let’s talk about the business cycle.
Pal: This is where I spend most of my time because long-term secular trend don’t change that much decade to decade. So the business cycle is the key driver of asset prices.
Where are we now? This is the longest business cycle in U.S. recorded history. Of the indicators I look at, the most basic one is ISM, which is around 50, suggesting we should be growing around 1% GDP growth. Forward looking indicators – like the JOLTs survey or classically the yield curve – suggest we are at the point of recession or close to it.
Now, recessions come from a slowdown in the business cycle but they are actually crystallized by a larger event. I think the tariffs broke supply chains around the world. The Coronavirus on top of that really doesn’t help. My view is that we’re going into a recession this year. There might be some euphoria around the election as both parties spend a lot of money on fiscal stimulus.
You can see this playing out in bond yields. They’re falling daily. I’ve been a part of this trade for a long time. I’ve also been very interested in the dollar because as the world slows down and world trade slows down there is a global demand for dollars. The BIS put the dollar shortage at around $13 trillion. That’s driving the dollar higher.
We’ve got this issue that the U.S. Dollar is driving up because of debt dynamics and regulatory issues. That in itself lowers global growth, lowers bond yields, inverts the yield curve and the Fed has started to stop cutting. Everyone else globally is thinking about stimulating. The reality is at some point the equity market is the final leg of this. All of this dovetails exactly when the bulk of Baby Boomers hit retirement age.
Howe: And you remind people that financial markets don’t always bounce back from these issues. Look at Japan. Look at Europe.
Pal: Neil, this is a key thing. Look at the cult of equity. The cult of equity is dead. If you look at individual households, they don’t own equities. Yes, they own it in their pension plans but as you said it’s only the super-rich holding equities. So you’re killing the cult of equity off.
Much of the activity is corporates buying back their own shares. What is it that allows corporates to buy shares? Cash flow. Cash flow is correlated to the business cycle. When the business cycle goes negative, cash flow goes negative. We’re already seeing that in many companies already.
The other question is who’s buying all the debt being issued by companies that ultimately fund all this buy back activity? It’s the pension system. That’s also driven by corporate tax receipts and again, that’s driven by the business cycle. So tax receipts go negative, the buying of corporate bonds stops and corporations stop buying back their shares. So you end up with a situation where the two most widely held assets by the entire pension system come to a halt as soon as the business cycle goes negative. That’s a really key issue.
Howe: The last part of the equation is how all this influences the elections. If we are reaching a turning point in the business cycle you look ahead and people are voting.
Pal: We’ve talked about the debt cycle and corporate debt is probably the big issue here. The central bank bubble is at its peak. The business cycle is finishing. And you’ve got a shift from productive workers to net divestors. You couldn’t ask for a better Neil Howe tick list to create a Fourth Turning. That’s a recipe for polarization.
You now have a mighty polarized country and you have a potential for an political upset yet again. In your framework, the upset could potentially be Sanders teaming up with Elizabeth Warren and the whole progressive movement. That would change almost everything we know today.
Howe: I constantly remind Republicans of how delighted Hillary Clinton and the Democrats were when Trump was nominated. Do you remember that? They thought the election was going to be a cake walk. ‘Trump believes in protectionism and isolationism. He couldn’t possibly win in a modern day and age.’ I see all these Republicans saying similar things like, ‘Who’s going to vote for a Socialist?’ And then you look at head-to-head polls where Sanders is beating Trump. I think Sanders is a lock-up for the nomination.
It’s going to be a fascinating contest. Trump, himself, doesn’t want to run against Sanders. He would much rather run against Bloomberg. Trump says it all the time, ‘Bloomberg bought himself into the election.’ Bernie Sanders has real supporters. That’s the world Trump knows, a polarized nation with real supporters.
Pal: It’s easy for Trump to attack Bloomberg because of the zeitgeist out there now. Bloomberg is a centrist and an East Coast billionaire. Sanders looks more like Trump in many respects in his appeal.
Howe: Exactly. Sanders is the post-modern candidate for the Left. Trump is already the post-modern candidate for the right.
Click here to watch the entire hour-long discussion.