07/10/2019 - The Roundtable Insight: David Rosenberg, Yra Harris & Peter Boockvar on Global Risks to the Economy and Financial Markets

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FRA: Hi, welcome to FRA’s Roundtable Insight .. Today we have David Rosenberg, Yra Harris, and Peter Boockvar. David is the chief economist and strategist at Gluskin Sheff. He has a focus on providing a top-down perspective to the firm’s investment process and asset next committee. Prior to joining Gluskin Sheff, David was chief North American economist at Merrill Lynch, in New York, for 7 years during which he was consistently ranked Institutional Investor All-Star Analyst Ranking. Prior there too, he was Chief economist and strategist for Merrill Lynch Canada based out of Toronto. He is the author of “Breakfast With Dave” and “Espresso With Dave” publications of the economical financial market insights. Yra is a hedge fund manager and a global trader in foreign currencies, bonds, commodities, and equities for over 40 years. He was also Seeing Me director from 1997 to 2003. And Peter is chief investment officer for the Bleakley Financial Group in advisory. He has a newsletter product called Bookreport.com that is spelled b o o c k r e p o t dot com which has great macroeconomic inside and perspective with lots of updates on economic indicators. Welcome gentlemen.

All guests greet Richard.

FRA: That would begin with that discussion on the economy recession views, corporate leveraging cycle. David, your thoughts on that in terms of what is happening overall?

David: Well, I’d be happy to start that off since my call for the year was a corporal led recession. Also it is typical to know which week, month or quarter could line up, and I never found an economist that was actually a very good market timer because if we were we be managing money for a living, but I thought that you know what time we hear, is that this week the New York SAD published its model-based recession odds metric for the coming year and it rose to 33%, which is a at 12 year high. This time last year was 12%. Two years ago it was 10%. 3 years ago was 8%. So, we’re up to 1 in 3 odds on this metric. And what’s interesting is that when you go back in time, you’ll see that once you cross above 30% more often than not you actually get an official recession, of course, nobody receives it at the time, but I think we’ll all look back and say oh yeah, guess what, when yield mean-reverting towards the end of last year, the yield curve got it right once again. You know, we layer on a lot of geo-political and domestic-political constraints on (inaudible) corporate spending right now. You know, the tariff for has yet to really been resolved. So we have these other nagging concerns, but the recession that we’ve had in the post-world War II period – there has been 10 of them. They all were precipitated by the FED Rate hike and cycle. We only had three soft landings. The odd are already 5% that we’ll have a recession this year. The New York SAD model is truly pointing in that direction. I know that people say to me “will how on Earth can you be talking about a recession when, you know, real GDP in the first quarter was 3.1%?”. But remember that GDP is really about spending and it’s the measure a country’s standard of living by income. And a very little-known well fact that we just got out of the past week was that Real Gross Domestic income, which includes profits, and we know that were in a proper to session right now in a good personal income, rents. And that combined income, as well dividend income, but Real Gross Domestic income was 1% in annual rate in the first quarter and that was after .5% in the fourth quarter of last year. So, I would say, already, we are one run away from seeing economy turn into the recession, that we still haven’t seen yet form all the lags from all the typing that has been put into the system, including the policy misstep last December that we going to see in real economy, quarters out. But make no mistake, when you looking at the real income side of the economy, it’s barely growing above zero right now. And that is what the (inaudible) has been telling you for the past voice recorders.

FRA: Yra, your thoughts on that and tying that into that into yield curve indicator is in implications?

Yra: Yeah, I will listen to David. But it brings you the point. So tomorrow, I know I’m jumping ahead a little bit, but we get Powell’s testimony on Wednesday and Thursday. And to make it on David’s point, I would like to hear somebody asked all directly about what he thinks about the yield curve. Cause, you know, I wait for the minute and I know that minutes are always sanitized for whatever view they want to push out after the meeting and I know those minutes are reconstructed. But I know Peter, but I’d like to hear him and his views, and because I’ve been doing these for 35 years out of the time I’ve been trading, the yield curved has been very important and it was very important for me to watch for many different reasons on a Google macro basis. (inaudible) even though my favorite is to trade the 2:10 but it’s been an anomaly. But, I think that David’s right, and what is this telling us and, you know, what’s the time in it, we are going to soon find out, and it won’t all results in the fact that they are more chewy and more liquid. The system is not going to be the cells that many people think and I think that’s (inaudible) right now anyway,.

FRA: And your thoughts Peter?

Peter: Well, just to add them, you can just look at different parts of the economy, I mean, you can argue that the that the growth slow down really began in manufacturing and whether that was trade and tariff related or something else. The problem right now is that it’s now spilling over into the service decide which makes up most of the US economy. So, if the service I didn’t know I was getting infected by the slowdown of manufacturing since obviously a lot of service companies are service manufacturing, there really isn’t much left to lean on since those are the two main areas of the economy. You look at construction, looking commercial real estate, you with the residential, and that’s been softening as well. So, they really aren’t places to hide. So, to speak in terms of growth you can argue. Okay, maybe the consumer with the help of labor market is is one area keeping things up, but then I guess you to the jobs picture and job’s picture is also showing slowing. So, each of the key supports of the economy are now getting infected by a general slowdown. And I don’t see that reversing anytime soon. And I’m sure that begins to accelerate and the next key in sort of quantifying outside of the GDP numbers and other economic statistics will be what company, say, over the next month with respect to earnings  and I’m amazed Phillies today that the people sort of blowing off in the US state to be a SS news in Germany yesterday when they lower guidance. And this is not just some fly-by-night industrial company in Germany. It’s one of the biggest chemical companies in the world. You can argue that the products that they make these chemicals going to pretty much everything and they have customers all around the world and that it should have been too much of a surprise that a chemical company in a mixed up a global manufacturing fluid on would have disappointing earnings, but it wasn’t disappoint, you know, if people didn’t assume it was disappointing enough to have it in their estimated and that the stocks would fell short today. So, to me, that is the canary for what we’re going to see with respect to earnings over the next month. Companies want to protect their earnings and that means by not spending as much because it’s cost to send expenses you so, it’s not hiring as much does it cost to do so, and these companies going to do what they can to salvage their profit margins, which also means slowing economic growth. We’re seeing it clearly in small businesses, which sometimes it typically starts at because they are less able to deal with slow down. So, the small business optimism index falls today in a lot of key sectors. We’ve seen that in two months in a row the ADP is reporting that there is an outright decline in small business hiring. This happens in progression and you can just see how the set of dominoes are lining up and how this is playing out and people that are going to rely on the police that somehow, the FED rate cut one or two or three or four somehow going to matter. You won’t because cost of capital is not the binding constraint on any of this. It’s just a general slowdown. It really been affected by tariffs and trade uncertainty, but now once you get a trajectory of growth doesn’t just end immediately, it’s going to continue and once you get to the corporation’s pulling back and let’s just say the stock market somehow begins to respond to this production and learning, and you get a yourself in the market. So that’s going to further once on a consumer spending. So again, dominoes are lining up and I think people should be broadening out there, their perspective on things to see how this is going to be playing out.

Yra: Peter, you’ve been so good at watching the Cast of Freed Index. Where are you on that now?

Peter: Well, I think it’s down to six months in a row year to year. You know, they like to say that it in the beginning that it’s okay. Maybe it was at a rest after strong 2018, and then it continued month after month but that’s just a direct effect from this point on the manufacturing. I mean, it’s measuring, you know, every single good that gets manufactured ends up on a truck to its final destination. But whether it’s a destination to a warehouse, distribution center, or if it’s somebody’s house and you know that slowdown in manufacturing which is making these goods, making these products, before they ship, it’s just a natural by-product for shipping weakness to follow the softness in manufacturing.

FRA: And David, what do you make of the trends and the FED policy? Your thoughts on what Peter mentioned, do you see monetary policy with rates going to zero, more QE and more potential for debt monetization in the future?

David: Well, you know, this is where can I just had dinner with Peter in New York a couple of weeks ago, and we keep in regular contact, and we know each other’s views. I suppose I look at it from a slightly different lens. There’s no question in my mind that interest rates are determined by a wide array of factors, but there is a cyclical component to them. And you know, I would just say, you know in response to Peter that we’re seeing all these signs of economic slowing, there is a real interest rate component to normal interest rates that are going to follow the business cycle. And the business cycle this year has been turning the other direction. We’re in a very intense economic growth slowdown. Now on the stock market is on a completely different orbit. We can talk about that but the relationship between the stock market and the real economy has (inaudible) for most of the cycle. In fact, you know it’s the weakest economic cycle on record in terms of magnitude, and one of the best stock market so that we can talk about some of the factors behind that but when push comes to shove, it’s really the FED who brought (inaudible) the man aid is about the real economy. I think growth is slowing, inflation is low with no apparent upside pressure even with these tariffs, and it would make sense to me that the FED will be cutting interest rates, and I got the question, and we’ll find out more on his testimony and then in the end of the month more in terms of the ton in the press statement is to how (inaudible) any further rate cuts there are going to be. There is quite a bit already priced-in to the curve even with Friday’s employment report. From my lens, you know, I don’t rely. I look at what FED’s telling us. But I do my own research too. I was saying for a long time that the FED made their first critical mistake when they stop cutting their estimate for neutral fund’s rate several years ago. They got as low as two and a half percent. It’s hard to believe actually. Just eight years ago that the FED thought that the neutral fund’s rate that, you know, the fund’s rate that equilibrates the economy full employment price stability that Nirvana States it’s hard to believe that just eight years ago that the FED thought that was it was four and a quarter percent. Imagine if we actually went into four and a quarter, we’d be seeing a lot of tweets of the White House. So that were to happen and then they took the neutral fund’s rate spread over time because they realized that the forces, any inflation forces, from technology, aging demographics, the fundamental constraint globally of too much debt. So, over time for a variety of the structural factors, they took down their neutral fund’s rate, got the two and three quarters percent by the time Jerome Powell took over. And the first thing Jerome Powell does is rise the interest rates in his first meeting in 2018. But he weights the neutral fund’s rate and then took it up to 3%. Look where they are today. There is two and a half as of the last meeting. But you see my work on the on the neutral rate. It’s not two and a half. It’s more like one and a half. So, my contention has been all along with the fat over tightened. Not once not twice even talked about last September, last December, Donald Trump likes to talk about, but the FED is the one thing I will agree with the president on – the FED overtight. And actually, you could see it in the real money supply numbers which slowdown percipiently heading into the latter part of 2018. And you could see that the yield curve you saw on the prior dollar strength, you saw the weakness in the commodity prices – this is all is the stuff by the way that (inaudible) used to see all the time back in the late 80s and early 90s. So, if I had to say that I think that the FED have to take four hikes out just to get to neutral. That’s what that’s what my work shows and then on top of that we’re going to have all the lagged impacts that the Feds already done in terms of their tightening. There are lags that are two to three years long. We have not seen all the full impact that the FED is already done and then we layer that on top with what Peter was talking about the general level of uncertainty. And of course, what was happening abroad right now the Asian economies, the European economy. It looks like the UK economy is going to be contracting in the fast quarter. And what’s interesting to me is when Jerome Powell gave his comments, you know, before the Q&A during the press conference at the last FOMC meeting just after it. You can talk about how great the (inaudible) market was. He talked about global economic weakness three times and he realizes that the only thing separating the weakness abroad to the US economy was just the time lags. So, my sense is that you got to move at least four times for the market to get that price stand. If I’m right in my recession call, we know historically, in recession, the FED’s cut the price rate at least 5%. The starting point this time is about 2.5%. So not only will they go to zero, and we can then talk, and then I and Peter we will debate and I’ll probably be with them as to the efficacy effect it’s going to have on the economy, but I’ll tell you that if we go into the recession, this fund’s rate is going back down to zero probably more quickly than people think and yes, they will do more QE and Peter and I (inaudible) about how crazy this is but please call Tim Akers, he  actually believe with all their interventions, and incursions, and balance sheet expansion and all the rest of that. They think that things would have been far worse. So, they live in a counterfactual world, but they’ve already told you when you scan the research of the FED of the different federal reserve banks – they’re already talking about how they going to fight the next recession. And when you think about every single cycle since the (inaudible) balance sheet recession starting a late 1980s. With these dead assets and super cycles, you kind of find out that when we go into the recession, the debt expands more and more and more firepower to get to the recovery phase. So yeah, we are going to go to zero, they’ll try to find some way to generate the FED’s negative interest rate through marquee and they might do more radical things down the road as well when you consider that nobody before 2008 had a clue what’s a QE was. You know, my sons know what QE is. So, anyway, I think that in the recession, that is soon going to get really aggressive, the rate will go to zero, the yield will sweep and it’s going to melt, and there is going to be a lot of other things, perhaps including debt monetization before we climb to the other side of the mountain and get through the next recession.

FRA: Your thoughts, Yra, on that and especially in coordinated Central Bank monetary policies involving other central banks like the European Central Bank, Bank of Japan Bank of China?

Yra: Yeah, there’s no, it’s all done within the week. I guess I could go look at the G30 cuz I always go up to see who sits in that group and there’s no question and all out of his given take takes place. Now that we have Christine Lagarde, who that that’s a whole new phenomenon that’s going to play out there. But David captures the history of it pretty well and where we’re going and again, I had this discussion today with a few people. Has been so many mistakes have been made but to me the most recent the sake of gigantic proportions was Bernanke’s fear of the temper tantrum and then he backtracked all that process to go in that market begin to better reflect what the reality was underneath, which is what David was just speaking too, because you know, I look at the world and I go – what is the Central Banking want to do? They are not about allowing markets to work. We’ve gone from George Kennan concept of containment of the Soviet Union to Ben Bernanke’s concept of the containment of markets by central banks cuz they don’t get on one of those markets really signal to them what needs to be done. They want to contain markets from having episodic reaction that they feel are negative to their control of the business cycle. And that’s the world in which we live in. We all had to adapt to it and change, and we know that it’s there. So, people ask me when is it all going to end? I said, I don’t know when it’s going to end but I know that it’s historically, and I don’t need a model for this, is that when debt expands far greater than economic growth and you’re supporting it through artificially priced interest rates, then how is the market ever going to clear? I’m not talking about Mass liquidation of assets. I’m just talking about allowing the market to do some of its work and clear some of the tender from the bottom of the forest so that it doesn’t ignite into a massive fire and they will not allow it because they are just terrified. And again what we saw with Jerome Powell, what scared Jerome Powell in this late December to make that pivots so quickly and I can’t it’s a binary effect because we had Munching calling them. As it was reported, you know over the Christmas holiday making sure that they were okay or what was bothering these different groups of official. What was it that they were afraid of that causes, but here we are again and every time you undermine the ability of markets to do what they’re supposed to do in send signals, you destroy it and you wind up having to cover yourself over and over again to the fact that monetary policy has become meaningless accept the pain from it is going to be real so, you know, I don’t know what this call was but there are certainly people sitting there who believe that the FED need to go negative, and I will tell you if they will tell you if you look at the European banking sectors, you look at the Japanese banking sector, do you really want to go there? Is that what you want? Okay, then when banks turn them into the utilities. I was just a parking spot. You don’t even have to do that anymore. Because if we actually bank, what’s the name of that you’re trying to put together, then we take deposits and to put everything into the deposit it all at the Federal Reserve, you know, there’s if there’s people working instead of trying to block it from happening because then they could just take my money pay me 2.15 and get 2.35 in interest on excess reserves and you make a 20 basis-point point and you and you are in the safest investment in the world. So, this is where we are at and they’re trying to control the whole thing and they can do it on a day-to-day basis, but I don’t really think that they can and after Peter talks and I want to throw something out on the table for discussion. I’m going to stop there.

FRA: Peter, just wondering on your thoughts on that and you’ve spoken a lot on negative interest rates in Europe and with 64% of sovereign government that they’re being negative yields. What are your thoughts there? Will that trend continue? And what are the effects on the economy and the financial system?

Peter: Well, the effects are obviously is the evidence that was mentioned it on bank profitability on one hand the banks own a lot of these European Sovereign bonds that there are benefiting on that end.  But the actual business of banking which is how at least in Europe, these Banks make their money as opposed to being more reliant on Capital markets, where are the U.S. Banks profit from just the standard business banking is obviously impaired by the oak curves disappearing in that area and internally it was a case in Japan and that’s why the Japanese Bank stock indexes down 90% from its top in 1989. I think that we’re not going to negative interest rates here because of the experience they are but also the U.S. has a very large money market interest rate of, I think, it’s 3 trillion dollars of money market money that would essentially disappear if we went to negative interest rate. So, who’s going to finance their commercial paper market, who is going to finance a lot of the overnight tight money. If you blow up the money market industry, which negative interest rates would do. So that’s why I don’t think it will happen here. And what David said, when he mentioned that, and of course, accurately, that each incremental easing cycle is Chiron horsepower than the one prior has same time. Also there is that each of them are less attractive because you come you become sort of desensitized to the changes in the cost of money when they are already low to begin with. So, I agree to also with both that the FED will fight this tooth and nail because that’s just ran, so there is always a pressure to do something, and they still having two models at lower rates are good high rates are not good, lower rates are stimulants, higher rates are anti-growth and it’s very black and white. And they can rely on a low inflation is giving them license and then make him give whatever reason they want for cutting but that is always just their (inaudible) reaction and they’re sort of default setting and we’re going to see it again this time around. I think what separates the next downturn from others and we certainly seeing it in Japan and Europe is we are not going to respond like we have in the past to that easing cycle and that instead of seeing sort of a 12 to 18 months, you know, slow down and gross or a couple of quarters and service V bottom in economic activity and markets. This one is going to be more drawn-out because we’re not going to really respond to the easing and then it’s this, and I refer to his monetary Quagmire. This is Vietnam type mentality when there is not enough troops. Okay, it’s not working. It’s not working because we don’t have enough troops. We need to send more troops and we have to send more troops in more troops in and we have to do more easing, we have to do more easing, we have to do more easing rather than any form of introspection to say, you know what this is not working. Maybe we should try a different tact. So, this economic downturn is any more drawn-out again because we’re not going to have that sort of monetary stimulus that we can react to and certainly there’s not going to be any fiscal stimulus because the U.S. government was already blown. In terms of that, it’s loading as they did last year. So this is going to be more of a, as what I refer to, it would be more of a bathroom type, sorry, I should say a bathtub type recovery that you’re going to do a lot of bouncing along before you going to see any strong growth because we are at credit dependent economy in a credit cycle. And if the cost of money is permanently low, you don’t get the impetus to act and that’s the whole point of lowering rates on taper is to make you buy that car today instead of tomorrow make you buy that house today instead of tomorrow make you invest in that plant today instead of tomorrow, will the rates be constantly low forever? Well, there’s no interest in doing today what you can just wait till tomorrow to do. And I think that’s the experience of what we see overseas and we’re certainly now seeing it here and I think it argues more not just for a higher RPM multiple just because rates are low you look at look at the PE ratio in Japan for the past 30 years. It’s been a steady decline downwards. So, people can confuse their dividend discount model with the present value of future cash flows and discounted whatever they want. It hasn’t worked in Japan you seem compressed valuations for 30 years and I think that people are basically putting their chips on the stock market table here, assuming that multiples at worst will stay where they are and I can possibly expand If the FED starts cutting without really understanding or looking at why is the reason the FED is cutting and what is that going to do to future cash flows.

FRA: Yra, you wanted to comment.

Yra: Just to throw this out there about recession, cause the more you think about it, President Trump uses his tweeting account. I’m beginning to think that if you would stop tweeting and actually use back channels? He can get what he wants out of the FED. You desperately would like, I think, a 50 basis-point cut 25 won’t do it cuz he wants to coerce the massive headlining to look at that controls. But he actually controls this game because if the FED stays on hold in the president’s responses, what the hell, I’m not going to receive any support from the FED. That’s going to throw in some terrors, it’s going to scare everybody into doing the action that I want. Are we on that pass to the collusion and would Jerome Powell be smart enough to head that off, cause the president can certainly throw it out there, and he doesn’t even have to act to tariffs. But imagine, if after the FED meeting or after the testimony this week, when there a bit more a steady course, then the president would like to see, then does he come out and say, well in 45 days or 30 days that will certainly take place after the next FOMC meeting. You know, I’d plan on going ahead with the increase and all those three hundred billion of Chinese products with the 25% tariff. What do you think the impact of the markets are going to be? So, you know, (inaudible) is this another way to see it? And I love, I mean, I love David telling about the yield for what it’s going to happen with all this debt cuz I’m a believer in that too for all the people who think they were into a two ten inversion. I don’t think we’ll see it because I think there’s other issues of play here even with the easy bank. I would like to have the bank that I talked about which the FED is actually going to court. The block is called the Narrow Bank was put together by a previous The Shed Santa Fish on New York Fed and the FED is trying to block it from happening because they just want to collect deposits and put them on reserve, at the side, because the interest reserves are so high, (inaudible) but I’m waiting on other comments from Peter and David.

FRA: David, just first your thoughts on Yra and Peters commentary.

Davie: Well, I mean, just to further the conversation, I guess on the FED. Firstly, I think that’s the problem is that the president has boxed in the Central Bank. And so, Donald Trump is not going to get what he wants by doing that. I know people like to talk about how previous presidents pressured FED chairman, they did it privately and people only found out about it years after the fact. So, this is actually a story State of Affairs. I actually think that the FEDs over tightened enough that they should take the funds rate down 50 basis-point. They’re not going to do it. I thought that for an instant at the press conference after the meeting that Powell sounded so diverse that I thought they were going to go 50. He walked out on that, and of course, we know that Jim Bullard who was the only FOMC border at 12 dissented we find out that supposed that he just wants to cut 25 basis points. So they’re going to cut 25 basis points minutes in the market, but I think that’s what they’re going to do. They’re not going to cut 50. I think that this whole FED bashing and, you know, this is an institution that is run by human beings and they make mistakes and I already said that they are over tightened, and they’d have to walk that back. It’s not the first time that we would have had the sad over tightening rather than over ease. That’s what I told her all about. But I think that if Powell were to get the newest orders demoted. I think that’s going to have a deleterious impact. See, I just don’t think that Donald Trump fully understands the wool and the benefit that the US has globally by being the reserve currency. I think he has absolutely no appreciation of what that means and actually historically the country with the reserve currency status tends to have trade deficits and tends to their core to have a capital account surplus. This whole economics team at the White House, I think, has to go back to school, I’m actually totally missed at the level of economic thinking that goes on today at the White House. I hear Larry Kudlow today talking about how well Powell’s job is safe for now. I’ve never seen a fair chairman so craft, but people have to understand it’s not one man. He might be the chairman, but he has one vote. And it’s a whole committee. So, what happens if Trump fires him and remotes him, and everybody gets up and leaves? Because this is a team, it’s not one person. And then it comes down to who is he going to, you know, put in charge of the FED? I mean he wants to nominate even more previously. And then can you imagine, the trashing that the U.S. dollar will take in that sort of environment. And I know the president was criticizing (inaudible) and here you have Europe, much closer to the recession than the U.S. and (inaudible), of course and then being accused of currency manipulation, which doesn’t even make any sense in the world. Will you do have some semblance of floating exchange rate? We don’t have fixed exchange rate regimes anymore or you actually did write the value and now apparently Europe is devaluing, which is this nonsense, but the risk here is that if there’s a force change at the FED, I’ll tell you this much –  you do not want to be long the DXY, the day before that happens. But you do want to be a long goal, that how much I’m telling you.

FRA: A final question for today is what do you see as the biggest risk? So, Central Bank risk, trade risks, Market risks, credit risk, geopolitical risk, to the economy in the financial markets for the rest of the year going into next year, and how do investors and traders protect themselves or look for opportunities in this environment. Maybe we’ll begin with Peter.

Peter: Well, it is a confluent the risks that are all occurring at the same time. I mean it I think if the U.S. economy was strongly be able to handle another spot on the other hand circular because it’s the straits that the FED is made the economy grow slower and to David’s point – I agree that it will always tighten too much and I’ll always he’s too much because they don’t appreciate the different lags that are inherent in any policy in that what you do today may not be sold for another 6 months from now to yeah, they were double tightening shrinking their balance sheet and raising interest rates. They were double tightening because they have this delusional thought that shrinking the balance sheet wasn’t a big deal as watching a paint dry. That had a cumulative impact on economic growth and then I believe also a big risk is going to be there this is falling and possibly declining the earnings story. Because it’s going to feed into actual corporate behavior as companies try to protect profit margins which are at record highs. So, a major risk is that you kept finally for the first time in the cycle mean reversion with respect to profit margins, which means lower hiring, which means lower spending, which means slower earnings growth potential, means lower stock prices, which ends potentially with a problem with consumer spending. So, they all sort of feed into each other and it’s now happening all together and no amount of rate cuts are going to offset that it’s a cycle has begun and it’s going to play itself out notwithstanding all the monetary firepower that will be thrown at it. But at least in the short-term, I’d be very focused on earning season and what companies have to say. We’ve already seen CFO and CU conference members that are getting impacted and then you just put yourself in their feet if they’re worried about the outlets, if they think there’s going to be a recession, or you can be sure that they’re not going to be aggressively expanding their business and then I have to wonder, and a point that I’ve been agreeing with for a while, is that going into this year companies were going to start focusing on their balance sheet because it got over levered and they were going to start making that a priority and we’ve seen a slowdown in corporate buybacks in the first quarter and I believe that that the fourth quarter of 2018 with a peak and in stock buybacks again as a way for companies to try to improve their balance sheet, sort of cord the cash this time around, check the profit margins and deal with what is it when leasing earnings recession that is potentially going to be an economic recession, which will then enhance the downside of the earnings for sale.

FRA: And your thoughts, Yra?

Yra: Peter covered most of what needs to be said. Cause all those events that you talked about, you know, I put it in (inaudible) terms. And it only takes a single potential. I tried (inaudible), you know, geo-political, certainly the economic (inaudible) zero. You got instability throughout the Middle East and you have a lot of the actors out there who would like to like that start because, because of Peter, David, and I had extra most I’m not trying to put words in her mouth. I think it was from what they said today is just huge amount of debt goes up and makes this system, the Global Financial system so vulnerable to this. An then, bottom line is this – the position that exists in the financial community and I’ll tell you this, short volatility plays we should do the backbone of many head private Equity Groups profitability cuz as long as they believe that FED has their back, they sell value and I’m not talking about just selling the value in the equity markets, I’m not talking about selling the value in debt values, (inaudible) currencies are short cross the border because the FED has set this up and I believe that it’s one of the things that I’m your call back in the late December because he had gotten window. The phenomenon that we saw in December partly because of the changing the USA crags under what type of liquidity we need (inaudible) with these enormous amounts of short valve positioning really that’s the biggest pile of drying (inaudible) on the global financial system. And I’ll tell you this – on the CME Forum with the huge option, (inaudible) option groups, there has been a lot of pain for the last three weeks, and they say how about three of the big five trading groups of blowing out that they’ve gotten crushed because I don’t feel they exploded since the Powell’s press conference, mid-June 19th.They really got fractured by that. I think there’s mega amounts of this around the world, but I want to add one more thing because I’m not letting David of the hook. Bank of Canada meets tomorrow. I want I want to know what his, especially he is the Canadian dollars trust and care now. Is there a chance, you know, that this will be the end?

David: Well, I think the if the Bank of Canada does nothing tomorrow, I think it’ll be just a “steady as she goes” press statement because they are lost in this type of war between some of the recent positive economic data flow in Canada, which suggests that second-quarter GDP growth could be a two and a half to three percent. Of course, that comes after 6 months of almost no (inaudible) at all. And of course, we’re caught between that and the duration we’re seeing in the global economic outlook. So, I think they’ll be some improvement in domestic demand. A lot of that is when the gas related from the trop, but of course acknowledging that these global economic and political (inaudible) has gone away. In terms of, you know, some of the things I think that we have to be really concerned about and I say this because you don’t actually towel luxury policy report, the FED’s monetary policy report. You know, not the speech that we are going to hear tomorrow, testimony but the report came out over the weekend and the word risk showed up 34 times and I none of them were high risks. And the word uncertainty showed up 34 * 2. So that’s 68 references to either uncertainty or risks in a 46-page document. And so, I think that you know for me, you know, the retreat that we’re seeing in global trade volumes is a big concern. We have a very fragile trade truce right now between the U.S. and China. But right now, Japan and South Korea are locked into a trade war which is acting is a big impediment to the Asian technology space over the past few weeks. I think that the situation in Iran I mean to me this is really big what Iran is doing and pushing the envelope on its enrichment caps to me as a huge source of potential instability. I’m concerned about the debt globally and primarily, but how about the extreme fragility in China’s financial system? I would add all that to something we didn’t mention but will certainly be making the headlines through the fall which is Boris Johnson and his bravado above his willingness to put his own envelope on a no-deal Brexit coming into the October 31st deadline. I think once again, that Brexit will be on the front pages of the paper that will be alongside these trade issues in Iran and just ongoing source of instability that leaves me with this portfolio recommendation of having the bond bullion Bar Bell in an ongoing search for refuge in trouble times. I think that another risk is the FED dragging its heels and that’s in my heart goes out to Jerome Powell. What do you do certainly cannot be seen to be kowtowing to the president? And I think he should go 50. I think that it’s the risk for me and the risk for the market. The FED tells the market on July 31st that this cut is only an insurance cut. If they can’t see the decay in the leading indicators, then I think they’re going to fall further behind the growth curve then it’ll be much harder to get out of the recession that I think is inevitable. It just a matter of which quarter is going to land in and then I think that you know, once we get through all this, and it was interesting that Peter mentioned, you know, the NFIB small-business 7 index today cuz there’s a component that measures uncertainty. It’s called  the uncertainty index and boy did that thing shoot up in the month of June, interesting enough at the same one that the stock market takes off and the uncertainty index took off as well and you kind of start to wonder if businesses are starting to pay attention to the 2020 election. And if you’re looking at Donald Trump’s approval ratings at 40% and you looking at this lineup of democratic candidates – you don’t know, what post 2020 your tax rate going to look like anymore. And that alone is going to cause business at the margin to put money aside for a rainy day. And that just adds more credence to the capex LED recession somatic and I’ve been talking about this year.

Yra: You know, those are really great points and I’m going to throw in one more element that we haven’t discussed but there’s a guy who’s sitting (inaudible) in Moscow, who understands the vulnerability of the global system. I think you see it regularly. And he wants those sections lifted. So, if you want to see somebody who’s potentially could like that start. Vladimir Putin is no fool and he sees the vulnerabilities at hand. So I would think you’re going to see a more aggressive Russia just in an effort to get some of those. He wants those sanctions removed in the worst way. And actually, Russian assets have been holding up very nicely here, but I think it’s one more major element in the in the global instability that exists and it’s not even far below the surface. It’s on the surface.

FRA: Well, great insight gentlemen! How can I learn more about your work Peter?

Peter: For asset management and for wealth management at Bleakley and my daily notes on boockreport.com.

FRA: And, Yra?

Yra: Well, I’ve been a little quiet for a while, but Notes from Underground is my blog. You can also sign up for the yragharris.com and you’ll get an overview of my thinking of potential global macro base trades. It’s discretionary, there is no (inaudible) of trades, there is just the concepts and you have to go do your own risk analysis and do your own work to see if they should.

FRA: And David?

David: Okay, well, for anybody who’s interested in looking at my research – feel free to call me 416-681-8919 or 647-802-4146. Feel free to email me to email is Rosenberg@ Gluskinsheff.com. And you can actually also follow me on Twitter – David Rosenberg (@EconguyRosie). A lot of people think it’s more like Wiseguy Rosie by you can follow me on EconguyRosie my daily snippets on there, too.

FRA: Great. Thank you very much, gentlemen. And we’ll end up there.

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.