Welcome to trade ideas. I'm Alex Rosenberg here with Michael Purvis of tolbukhin
Capital Advisors, and before we get into everything we're gonna talk about today. What's a what's a tall Bakken I tell you
Thank you for asking. Thank you for having me back Alex. So yeah tall bakit is the name of my new firm
It's an obscure Swedish phrase referring to sort of a knoll with with with large
Pine trees on it. Actually. It's a slightly obscure reference
But when I'm fond of as you know, I've been you know for the last several years. I've been we at whedon company broker-dealer
The way the sell-side is changing is that it's it's really kind of bifurcated. There is either trade execution over here if you will
Which is increasingly favoring large scale
heavy technology or there's just content right and there's a there's an unbundling of of how
you know content and
Trade execution is happening
And so for me just looking prospectively looking at some of the trends in Europe was myth it and so forth
it just made it was eminently clear that just going to a
Pure content model that where the we're clients institutional clients are just paying a monthly or quarterly fee
for
High-quality advice and let's get some of that advice here
Last time you were on was in June you talked about this
Divergence between what the bond market and what the equity market seemed to be looking at you said it was almost like they were looking
At two different sets of economic data with the bond market looking for much slower growth
maybe even recession equity markets much a lot more sanguine and
A lots happened this week. We've gotten the Fed statement. We got powell talking about how its insurance cut
We got another tweet about tariffs from the president and then today friday
we got a jobs number that you know pretty good overall pretty
Substantial wage growth that at least so given all that who's who has the upper hand who's winning this fight between stocks and bonds?
I think one of this enduring things is this sort of
Enduring gulf between the the bond market when I say the bond market bugging me about the Treasury market
On the one hand and then the equity market and I'll put the credit with that as well
You know high-yield investment grade credit over here, right and you ask me who's winning?
Well in a sense
I guess they're both winning because the S&P is up twenty percent year-to-date and if you went long Treasuries, you've been doing great
but within that sort of both or winning condition
the question is is what what is the story between this two because still
okay, a Powell gave us 25 basis points and and
It would seem to be a little bit more of a nudge that hey we're not at the we're not starting a cut a cutting
cycle but
You know, we could easily do more than just this one cut, right so sort of between those two areas
Trying to thread a few different needles which was you know quite candidly
You know for all the criticism that Powell gets he has a very hard job
when on the one hand
There's an enormous gulf between where?
the rates markets the bond market the treasury markets decided to go over the last several months on the one hand and where his
Economic forecasts are which are pretty much by the way right aligned with Wall Street consensus forecast as well in most other
Institutional forecasts whether it's IMF or world bankers so forth right there, you know, there's variances
But they're usually marked by 10 or 20 basis points in terms of 2020 GDP and inflation
Right and then on the other hand Powless all has to fight this battle in a sense with the white house, right?
Because sure enough, you know right after the powell came on wednesday
There was you know trump was out there commenting that hey, you know, look he's not playing ball here
Right and this morning larry cudlow was in the media discussing how look you know?
We've had highly restrictive monetary policy for the last two years
There so, you know, he doesn't have an easy job, right
he's fighting a war on two fronts the white house and the markets and with a with a huge gap between
between that I think it's how this gap gets resolved is a gonna require a lot of
Finesse from powell right finesse that he'd a lot of people would say you hasn't actually mastered yet
there but frankly, you know, you could have the most articulate and
nuanced
Fed, share ever in this role
It's a hard job to sort of navigate that
right because on the one hand if he does say he doesn't give us a cut in September because the economic data is strong and
The bond market is still
Heavily bullish rates meaning they're expecting yields to be lower for longer
Across the curve. Well, that's almost
You know, like giving a rate hike in a sense to the markets in terms of it's jarring and therefore he drives up the VIX
and he's and he's gonna
Put you know a little bit more financial stress and it's a little bit circular, right?
Because then of course financial stress is one reason for him to to to cut right so it's a very difficult condition
There and I think there's another dimension of this whole REITs rally here, which is really important
I've touched on it in June, but I think it's worth talking about again, which is that the global rates market
Has been one that's been even more extreme, of course, right? And
Look at the bond market where 10-year bonds are, you know minus 40 basis points. They keep somehow making fresh lows
No, we can debate the economic rationale of buying a bone with a for 10 years with a negative 40 point yield on it
But nonetheless that's where the markets are are actually pricing that particular security, right?
so
One of the things that I think is a real conundrum for Powell is that he's talking about the rest of world
issues rest of world weakness
The eurozone China and so forth as being this principle
Rationale for the insurance cut. We just got our for and effectively for any dovish
policy we get prospectively
But my question would to Powell would be but sure but a lot of that stuff is already
Reflected in these foreign bond markets, right? So what buns are crazy low?
That's reflecting real bad
real persistently weak economic condition and Germany and Europe and so forth and
Those bund yields have been dragging down our Treasury yields with it right now. Clearly there's a
the Treasury market the Euro dollars market the Fed Funds markets are very focused on
What Powell's policies going to be with respect the Fed Funds rate nonetheless?
The correlation between the buns and the 10-year Treasury yields has been spiking
Hugely, as both fields came lower together, right?
You know, there's always some correlation, but the correlation got really really strong here. So play out a scenario into
later this summer or fall
Where you know it sounds hard to imagine right now, but what if there's a big economic?
Uptick in some of the eurozone data what if those bond yields?
Start climbing back to zero or up to positive 10 20 30 basis points where they were
For a lot of the last several years, even though the euro zone data never got that great right in 2017
It was ticking up but it it never really got back up but still from minus 40
60 basis points is a scenario
You have to consider and given how strong the correlation has been with rates coming down together
Is that going to lift that certainly at least the ten-year back up and also not only re steep and our Treasury yield curves?
but also sort of throat yet another monkey wrench into how
Powell is processing all this data and all this market data
Economic data and the market data. So if it seems like the bond market and the stock market are looking at different things
Perhaps is because they are maybe maybe earnings and the economy in the u.s
Is strong enough for for equities to remain bid while the bond market, you know?
That's a pool of investors were thinking do I want to buy US Treasuries, or do I want to buy bonds at negative rates?
So I guess if you're thinking about the chance of improving economic data in Europe
Leading those rates to go higher obviously negative for the bond mark in the US as well
I guess how correlated do you think that global economic data is especially we're in a world with with you know
deep increasing trade tensions increasing
divergences between the political outcomes
I mean just look at brexit in and all the other things that are happening in Europe that are not necessarily related to
What factories are producing in the US I guess?
Know, how does that?
Correlation play into that market correlate. Yeah
It's a great question and thank you for asking it but you know look the stock answer about the US is that we're relatively
Insulated relative to certainly economies like China
the eurozone and so forth that it's just we're a lot more self-sufficient and
That's true. Having said that if you look talk about the US equity complex, that is not insular, right?
I mean that is if you
You know for discussions, they just pretend the SP is one giant company, correct?
It's a global multinational company where nearly 50 percent of its revenues come from overseas
Therefore right. So even if our economy is more like 25 for some the SPS more closer to 50 percent, right?
So there's a doctor
you know when you talk about the US economy and you talk about the US stock market you have to
first start with the you know appreciating
That difference there. The other thing you were touching on is is that is that these?
They're this economic correlation across countries and and look clearly the US has been the performance story
Relative to the rest of the world still is that's sort of saying on the face of it that there's correlations are relatively weak
but there's also things that kind of
you know tend to tend to lag the correlations have been remarkably strong between
Eurozone particularly a lot of the German manufacturing data and a lot of the Chinese
Economic data, right those correlations pretend to be really stickier and stickier
So in the midst of this this global situation where stocks and bonds are maybe looking at different things, of course
You know all part of the global economy as we discussed
Where is the greatest pain trade do you think is it in stocks is and bonds and you know
Or is it in some other asset and which way does that go?
It's hard to figure out how people are you know, when so many people are looking at different things
It's not like everyone's on one side of the boat necessarily, you know
That is a great question like you several minutes ago
You asked me like so who's winning bonds or?
Equities and I said both I would say though in terms of where the pain trade is and I think that's a really good question
a way to sort of frame this discussion
Where's where's the asymmetric risk to the downside and I would say
Candidly, and it's a tough call to make given how strong this bond market rally has been right but to my mind I think
There's still a very good case for rates in the United States to be going higher here, right? We talked about some of those
Scenarios where what if the euro zone data gets better?
But if the China stimulus starts taking hold in that ricochets into the euro zone data and that lifts
Yields higher that will be exported into our market over here and then you'll see you know it quick rise up higher
here and I'd very least there's a lot of sentiment pulled up on that whole Treasury notion right that you know,
10-year yields are going to 1% and all that and some people were even saying
0% I'm not quite convinced
That's that's the case and then when you talk about where are people how are people positioned, right?
well
Look at the euro dollars positioning, right?
If you look at the net speculative positioning relative to the total open interest there at seven-year highs, right?
I mean, I mean basically post great financial highs
So basically in the money markets everyone and their grandmother seems to be long euro dollars right now that to me is a risk factor
That that people are heavily on one side of the boat
equities on the other hand
We've had you know, year-to-date rally 20% We came off those December lows, you know was supposed to be this
Oh my god, you know we're gonna be you know
There was part of that whole like we have trade and we're gonna Powell is gonna hike us into a recession, right? And
When we had that, you know, we've had a really solid risk rally here
But I'm not convinced that it took everyone with it, right? I don't see a lot of
sentiment gauges that are where we're like, oh my god, like, you know
It's not like every taxi driver sort of screaming about like, you know, you get long Amazon right that condition. I don't see it
Either in the retail space or the institutional space right now. I think there's a partly because of this bond market bid
There's a healthy skepticism about oh my god. Well, geez, you know, do I really want to play here?
do
Be buying the market 20% of year today when the bond market is sort of seems to be telling me is there's a recession in
2020 so I don't think you know, there's I think a lot of large-scale allocators have been
De-risked equities
Last year thinking it was sort of
topped the eighth-inning of this economic cycle and
a lot of some of them have come back in like the Norwegian self the sovereign wealth fund was
Public about you know buying that dip on late December, right which obviously wasn't brilliant rate
But I don't know how many of them are there. I think there's a lot of people that are still being very careful
with
with risk right now
Which means that there's room for the market
to rally further or at least that if it does sell-off that maybe perhaps then those guys will come back in and
And be dip buyers
So I think right now my landscape is is that is that if there's asymmetric risk to the downside?
it's more in the bond market than there is in the
equity market
I think people are really gonna appreciate this perspective because we've had a lot of people
Come on, real vision to beyond what it sounded like is the consensus side of the trade, you know
John Burbank coming on talking about buying call options on Eurodollar futures for instance, which is you know,
Sort of his way play this potential
Recession lower rates even going down to negative raise potentially outlook. So it's it's first of all really great to hear the other side
I think this is really useful just from from a high level if you were to advise anything tactical to kind of play off of
this this allocation that and this idea that people are playing for these lower rates that if
David turns around especially in Europe. It could really turn the other way fast. How would you think about that tactic?
Well, I think look if you're using ETFs just simply speaking
You can look at the TLT and shorting that or buying puts on the TLT would be sort of an obvious way of
rates going higher in the United States play
I think I think with in equities I think if rates do go higher or utilities have been extraordinarily
Aggressively bid right just like euro dollars have been aggressively dead. It's sort of effectively the same trade
Those have a lot of torque to the downside if rates do in fact break
They're getting long banks would probably play as you know, if particularly at the backend
Increases higher and and that you see those yield curves, you know ranging a little bit more dynamically to the upside. Very good
Well, Michael, thank you for sharing this contrarian perspective
I think the way you look at the world and make sense of the way acids are correlated and the way
Economies make sense together. It's gonna be really useful for folks. So Michael, thank you so much for joining us, Biba
So Michael fears bonds may be overbought and specifically he thinks the potential for an uptick in global economic data
Could drive Treasury yields higher in bond prices lower
He recommends playing the set up with put options on the TLT
That was Michael Purvis of tall Bakken Capital Advisors into real visions. I'm out with
You