Interview: Forward Guidance with Felix Jauvin + EXTRAS.
I’m grateful to be invited as a first-time guest of the new host of Forward Guidance, Felix Jauvin. Macro is very tricky right now, as there could be some big regime shifts underway with Trump 2.0.
I’m grateful to be invited as a first-time guest of the new host of Forward Guidance, Felix Jauvin. Macro is very tricky right now, as there could be some big regime shifts underway with Trump 2.0.
There were quite a few topics I didn’t get to fully address during this interview, so the Show Notes this time contain quite a few Extras — please don’t miss them!
YouTube:
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Show Notes:
As usual, I include detailed references to my talking points, but there were quite a few topics I didn’t get to fully address during this interview, so the Show Notes this time contain quite a few Extras — please don’t miss them!
Felix: Let’s talk about your contrarian call from August that the Fed was “Too Early” instead of “Too Late” in cutting rates.
Me: Referring to my 8/31/24 piece:
In this piece, I cited a myriad of reasons why the Fed was about to make a Policy Error in a Premature Pivot. The two most important are:
Credit Markets were/are way too sanguine for the Fed to cut.
Confluence of Supply Inelasticities makes juicing Aggregate Demand dangerous.
The Sword of Supply Inelasticity cuts BOTH ways, and Pusillanimous Powell’s Premature Policy Pivot (PPPPP!) has right-shifted the Aggregate Demand curve:
We have not seen such a confluence of simultaneous Supply Inelasticities in decades:
The trough in LT Rates came on THE DAY of the PPPPP, and I thought that the experience of 1981 would be predictive of what happens next.
Turns out that the Bear Steepener happened exactly as predicted, with the dashed Orange Line showing the Yield Curve before the Premature Pivot and the solid Orange Line showing the current Yield Curve:
The difference then was that the Volcker Fed ACTUALLY had a conflict with its Dual Mandates. That is simply NOT the case now.
Felix: Why did he cut 50 bps?
Me: I’m still puzzled at the aggressive response given the lack of credible reasons.
That Policy Error is likely going to handcuff the Fed from much more easing:
Pusillanimous Powell’s Premature Pivot → Pusillanimous Powell’s Potential Pause?
It never behooved RoW’s CB’s to allow the Fed to Out-Dove them, and I predicted that this would lead to a Global Competitive Cutting Cycle in this piece from 9/28/24:
The unevenness of transmission of Monetary Policy/Fiscal Red Bull across geographies is what led to every major CB greenlighting similar cuts.
I was proven right a month later, but then posited that the Fed might be stymied from going the distance on its aggressive Pivot, which would lead to a Global Bait n’ Switch. As you can see, FX markets have already begun to price this in with the resurgence of the USD Wrecking Ball:
December Potential Pause → Global Bait n’ Switch?
Felix: Let’s turn our attention to the USD Wrecking Ball.
Once again, we are seeing the Twin Wrecking Balls of High Oil (yes, Oil around $70 is still high) AND High DXY, which can really hammer Procyclical Commodity Demand:
In the Vodka Red Bull Economy of the US, not only has the Fiscal Red Bull been relentless, the aggressive Forward Guidance by the Fed is tantamount to removing Monetary Depressant at the same time.
The December Rhetorical Pivot was the worst Risk/Reward trade because it goosed Inflation without saving the government any Interest Expense, and I castigated the Fed for it in this piece:
The second worst Policy Error was the ACTUAL aggressive 50 bps Premature Pivot in September.
The USD is an Equilibration Mechanism in that it allows us to Export Inflation and Import Deflation — a Zero Sum outcome. As I said in From Fed's Best Friend to Fed's Worst Enemy, the Global Competitive Cutting Cycle was the MOST Inflationary scenario, because it potentially “grows the overall Inflation Pie.”
However, if Powell is now stymied from further cuts and a Global Bait n’ Switch ensues, that makes the USD into an Equilibration Mechanism once again. Think of this as a return to the more Zero Sum outcome where we Export Inflation/Import Deflation vs. “Growing The Overall Inflation Pie” from a Global Competitive Cutting Cycle.
The Macro has become very confusing again, and it recalls this past thread I wrote last year, given different lag effects of FFR Cuts, Bear Steepening, and USD Strengthening:
I told Felix that I recently took off my TLT Puts, but I didn’t get a chance to really tease out the reasons. They are three-fold:
December Potential Pause by Pusillanimous Powell — This could see a reversal in the Bear Steepening/De-Inverting of the Yield Curve given the aggressive cuts.
The prospect of DOGE cutting Government expense — The question is whether even $500B in cuts + rolling back the Inflation Reduction Act will allow more DISINFLATIONARY Cuts?
The Scott Bessent Effect of incentivizing RoW’s CBs to buy our LT USTs if he wants to term out our debt.
With respect to #2 (DOGE), can less Fiscal Red Bull allow less Monetary Depressant (without Inflationary consequences) in this Vodka Red Bull Economy?
With respect to #3 (Bessent Effect), can Bessent incentivize RoW CB’s to buy our LT UST Bonds — especially if DOGE succeeds at #2?
Moving on to China, I mentioned to Felix that I’m keeping my long USDCNH/USDHKD, because I think Tariffs will leave China no other option but to continue to weaken CNH/CNY.
China’s growth miracle of the last 40 years has been through overbuilding its RE Housing Stock, and the CCP’s Eye of Sauron has turned from RE to its Runaway Assembly Line because it’s the only way it can keep its restive masses gainfully employed:
Speaking of the USD, Trump cited that he wanted a Weak USD early in his campaign but has since backed off on that rhetoric — likely because a Weak USD is incompatible with Trump 2.0’s bigger desire to use Tariffs and preserve the USD’s role as GRC.
Several months ago, I laid out 3 potential paths to a Weaker USD (the USD Pickleball), but only foresaw one potential “Golden Path” with less Inflationary consequences:
The 3 Paths are:
Overt Devaluation (a la Plaza Accords) → Imports Inflation
Premature Pivot → Global Competitive Cutting Cycle → Even More Inflationary
Lower Oil prices through Security Guaranty for Oil deal with KSA → Allows for Easier Fed With Less Inflationary Consequences
Path 3 is the only potential Disinflationary path, and it also accomplishes the twin Geopolitical goals of economically pressuring Iran and Russia.
That said, Lower Oil prices are a necessary but INSUFFICIENT condition for winning the Inflation Flight given the other Supply Inelasticities I mentioned.
There are two key Structural Supply Inelasticities I worry about the most:
Labor & Housing.
Demographics are at the heart of both, as this old thread explains:
Structural/Demographic Labor Inelasticity is driven by relative trough of workers for Gen X Wave.
Structural Undersupply in Housing is met by Demographic Demand Inelasticity due to “bulge” of Demand Inelastic Homebuyers in prime Household Formation Demographic of ages 30-39.
Mass Deportations could ease Housing Pressure but exacerbate the Labor Pressure.
I pointed to my West Point Paper from last year as a prescription for how to use “Financial Judo” against China:
US is the least Export Dependent country of the G5. We can stomach a Strong USD and not over-rely on Sanctions to pressure China.
Trump has backpedaled on his Weak Dollar talk, because he likely recognizes the Geopolitical Lever of a Strong USD.
Financial Judo = harnessing a larger adversary’s weight against him (China).
China is massively over-indebted and SHORT Commodities to boot.
We need to take off our artificial handcuffs (like restricting Oil & Gas Development) because we are naturally LONG Resources/Geographic Advantages.
The USD Wrecking Ball serves a dual purpose of Fighting Inflation and acting as Geopolitical Lever.
How to position amidst this Macro Confusion?
I focus on Idiosyncratic Alpha and try to immunize myself against unwanted Beta.
I didn’t have time to cover this topic during the interview, but this is where I have traditionally made my money. Ironically, I tend to get interviewed mainly on Macro, which I mainly use for Risk Management.
Here are three thought pieces I wrote about how I try to isolate/hedge out unwanted Beta Risks:
“Opening The Kimono”
In this first piece, I talked about Asset Allocation from a Family Office perspective but also wrote about some Case Studies of Idiosyncratic Alpha — namely an Event-Driven Special Sit (MBI) that paid an $8/share Special Dividend on a $6/share stock late last year. MBI was my largest position last year.
Interestingly, my big winner this year again is MBI, whose post-Special Dividend stub equity got so stupidly cheap in the last few months that I made it a much bigger position than even last year during the selloff of the last several months, concentrating 70% of my Trading Accounts in it.
Although MBI has rallied >100% in the last several weeks, I believe it can potentially double again, given the significant legal tailwinds that have developed in an obscure Puerto Rico bankruptcy that can unlock significant value and put the company in play.
It’s beyond the scope of this post to go into further detail, but I’m working on a detailed MBI Case Study that will delve into the complexities of this Special Sit — stay tuned.
“Alpha With Asymmetry”
This next piece details the Investment Philosophy upon which I built my Capital Structure / Event-Driven Arbitrage business both at Canyon and at Akanthos.
“Alpha With Asymmetry” is the name of the white paper I wrote to the founding partners of Canyon back in 1998 to pitch my idea.
“Is Alpha a Mirage in a Desert of Beta?”
Finally, this last piece demystifies the concepts of Alpha and Beta and talks about the risks of “Hidden Betas.”
With respect to “Hidden Betas,” Procyclical Commodities and Commodity Stocks worry me the most, because they can easily delude folks into thinking they are betting on Idiosyncratic Alpha when in fact they’re 100% dependent on Commodity Beta:
This is a good segue into why Commodity Beta is especially tricky right now in Oil.
Reason: I believe Macro and Geopolitical Risks to Oil are both the DOWNSIDE:
If you think Trump will close the Iranian Oil Spigot without opening an even larger Saudi Oil Spigot, you’ve forgotten about the Trump Rug Pull of Q4’18.
Refresh your memory here:
Why would MbS fall for this again?
Because he has no viable Exit Strategy from these Unilateral Cuts, and KSA alone can make up what they lose in PRICE with additional VOLUME. I can foresee him ripping the proverbial Band-Aid off if he is properly incentivized by Trump.
Here is the piece from last year where I predicted that the Fed would win the fight against OPEC+:
Finally, watch out for Declining War Premiums in certain assets that have been pricing in continuous conflict if Trump 2.0 is able to de-escalate various conflicts around the world:
With that, I’d like to wish you all a Happy Thanksgiving!
May your Osturducken turn out well!
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