Opto Sessions – Invest in the Next Big Idea

US Economy Reality Check with Julian Brigden

• Haydn Brain & Ed Gotham

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In this week’s OPTO Sessions, Julian Brigden, Co-Founder and President of Macro Intelligence 2 Partners (MI2), shares his insights on the US macroeconomic landscape as the country adjusts to a second Trump presidency. He examines key trends and challenges facing investors, including the outlook for bonds, equities, employment, and inflation.

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Welcome to the show, Julian. So how are things? Very good, mate. Very good, yes. We're pushing on into winter, got through Thanksgiving here in the US. Didn't have Turkey this year, which was good. I'd to save that for Christmas, keep my British roots. But had beef Wellington instead, which is actually very nice. mean, possibly better than Turkey, to be honest. Lovely. All right, well, as we were discussing off air, the intention of today's interview is basically to have quite a general macro discussion. We'll focus in on the impact on US markets of that macroeconomic landscape, and we'll try and do that broadly through the lens of Trump too and his upcoming presidential term. The reason I want to do it through that lens is I've heard you talk really interestingly about the three phases of the presidential term. So perhaps if we can try and take those in order, let's start with the first one. I think you call that the assumption phase. this is. so, yeah, so Hayden, I sort of broke it down into sort of three, as you said, into three phases. So those three phases are assumption, confirmation and reality. So we have had remarkably from both candidates, we had incredibly little detail and for markets, minutiae is very, very important. So we have these sort of broad concepts, lot of You know, mudslinging, very little detail. So what the market did, which was the logical thing to do, was to run on the assumption that 2.0, Trump 2.0 would look very similar to his first term in office. So a very pro-growth kind of environment. So bullish for fixed for equities, broadly, slightly inflationary, bearish for fixed income, bad for the deficit and bullish for the dollar. So those were kind of the broad three themes that kind of got played in there. Obviously we have the crypto thing, which is a new wrinkle this time. He was not a fan of crypto in his first term. He seems to be converted. Whether that actually pans out, we will see. I think some of the claims that are being stated by people about the US moving a chunk of its reserves into crypto, I think would be lunacy, but we can touch on that if you want to. We did that kind of knee-jerk reaction, little information, we ran with those trades. Now, those trades look a little played out, to be honest here. We've run a long way. We've come up to some technically big, big, big levels in all of those kind of trades. So now we need confirmation, phase two, that our assumption was correct, right? That we made the right guess. And so What are we looking for? What we're looking for there is, is in particular the sort of soft data which tends to tend to turn quicker. So confidence metrics, purchasing manager index, CEO kind of surveys, those sorts of things, because you won't get the hard data for a while. That that is moving in the right direction. And there were definitively signs when you go through all the sort of purchasing manager surveys. And these are the sort of surveys where they ask industry or companies, you know, how are you feeling about the world? What are you doing with your inventories? What are you doing with your orders? What are you doing with your production? So when you start to go through those, particularly the forward looking metrics, so there's lots of surveys which ask you, what do think your order book will look like six months from now? And a lot of them are a little negative at the moment, right here, right now, because I think people were not quite our view, certainly when we looked at lot of the data heading into the election, is things were much weaker than people perceived, particularly around the labor market. kind of pared right back. We described it to our clients as we standing on the edge of the cliff. We hadn't fired anyone, but we really stopped hiring completely. And so it was very much a binary outcome. So if Harris had won, our fear was you would have killed animals. In spirits and you'd gone over the cliff and you'd gone into recession because you defied people and then with trump we think you kick off these animal spirits, but Think things right here right now are not great. But when you look at these forward indicators, they're all looking Fantastic, right? So they're saying their orders are going to pick up their employment's going to pick up The worrying one is their pricing is going to pick up as well, right? Which brings you back to the inflation story again. So That but that's your confirmation. So you're confirming that you're right to be you know betting on that growing Stronger economic argument now we can play out what that quite means for asset prices Next and then the final stage and I think this stage runs Probably into the inauguration so late January Right or at least until we start to get very clear detail on the minutia of the policies. And I say that because my concern is, is that people are laboring under misapprehension and partly it's created because what happened in Trump 1.0 was not really what Trump intended. Trump's intention all along has been to, since his first term, has to bring, is to bring back manufacturing and production back to the US to ensure the jobs of working Americans, but also to create the strategic control over industries and ensure, you know, the sanctity of your kind of defense, right, because you can't rely on, you know, parts coming from China, you know, or from other parts of the world if you want to be secure. And The way that he approached it in 1.0 was that the plan was that he was going to offer a tax cut to corporations who had large pools of un-repatriated profits sitting in Liechtenstein and Luxembourg and Ireland and all these sorts of places. And if you brought the money back and you invested it in the US, you'd get a cut, right? But you had to invest it. The trouble is, It went to Congress and the lobbyists got involved and the lobbyist ripped all the conditionality out of it. And so everyone just got a tax cut. Now Trump's a capitalist. So he was like, okay, I'll go along with it now, but it didn't achieve what he wanted to do, which was to bring that manufacturing back on shore. Now he has a different tool and it's less of a carrot and more of a stick in the form of tariffs. And our belief is that tariffs are not a negotiating stance. Some of it may be, you know, he may threaten Canada and Mexico because he wants to close the border or deal with the fentanyl problem, right, which is a real problem. But nonetheless, but this is a definitive strategy to force come to make it uneconomic to produce abroad, force those companies to come back. for all the myriad reasons that we just laid out there. But that has a cost, Hayden, right? People just look at this and say, well, you know, it'll be good, it'll be good for growth, but there's a cost here. So if you just do the simple math, let's say you were producing a good in China, it was costing you a dollar, right? Suddenly you have a 50 % tax tariff on it, it costs you $1.50, right? Maybe that still is What it would cost you if you manufactured it in the u.s. So maybe you'll go i'll just leave it there And then trump will go well, i'll give you a 15 tax card If you come and produce it here and you go, okay fine that that sounds right. I can produce it for a buck 35 But it isn't a dollar anymore. It's a buck 35 and somewhere that 35 cents has to get a portion So it's either going to get pushed through the consumer via higher prices or it's going to get eaten in terms of margins by the corporation. And this is what I don't think people realize. They don't realize that this is not such a pro-corporate agenda. This is a pro-American, pro-American worker agenda. And I think that's very different. Yeah, no, and you touched on that point by the end there that it does seem that the unintended kind of consequence, or maybe it's intended, I don't know, but at least the consequence of this policy decision that isn't being talked about is the negative impact it has on margins balance sheets for corporations. So yeah, really, really, really glad that we kind of got that point out. I mean, to move on then, because I guess, well, as part of your confirmation phase, we'll be looking to US. to the US government, to the US administration for policies in terms of tariffs, terms of American reshuffles. people realize this, but there is there's an existing clause in the current tariffs. So it's called the de minimis clause. And so nothing. So if you import from China, we know there are tariffs on Chinese imports, but not if they cost less than 800 bucks. Right. So if you go to Walmart, and some ridiculous proportion, I can't remember, it's 40 or 60%, but it's a huge proportion of their Products come from China, but very few of them cost more than $800. Right. So they don't get caught in this tariff loop. My understanding is that loophole may go away. Right. So what does that do to margins at Walmart? Right. So, and I think people forget this. I think they forget that globalization was not a decision by the Chinese and the Mexicans. They look at this and go, This is anti-Chinese. This is anti-Mexican. No, the Mexicans and the Chinese were the recipient beneficiaries of decisions made by corporate America or corporate UK or corporate Germany to outsource to cheaper production. So the target are those corporations, not China and Mexico. China and Mexico may suffer as a result, but so does the corporate sector. Yeah, yeah, absolutely. I think then we've essentially covered off in kind of one foul swoop the assumption phase, the confirmation phase. There's a few things I want to dig into later on, but I guess I'm keen to spend the bulk of the interview talking about kind of what's ahead, the reality phase, as you put it earlier. If we start with a conversation that will be close to the hearts of most of the listeners watching today. that current rally in risk assets that we're seeing as a result of the initial kind of Trump euphoria, the Trump news. Do you believe that can be sustained through to the end of the year and perhaps even into early January? I mean, it looks like it's running out of little bit of oomph right here, right now, as I said, you know, that, and I think my concern is, is that certain assets have ran quite far ahead. You're at some really big technical levels on stocks, right? You know, if you want to have your sort of chart fund, you know, you can run trend lines going back to 1929 that we've touched like three or four times and we're right sitting up at these kinds of levels, right? here. And so I think we're beginning, we're obviously beginning to see the rotation, people are moving out of some of these very tech heavy names, which would run quite far ahead, they're moving into some of the more cyclical stuff on the anticipation that we're going to re on showing and more, you know, movements into sort of industrials and so on and so forth. I think the big challenge for the equity market is what the bond market does here. Because the bond market to me in the scenario going forward looks quite vulnerable, right? So we've already seen some dialing back of rate cut assumptions. Those were ridiculous. think the Fed, the Fed has got this cycle wrong. I mean, this would be like the fourth, fifth time in a row in this thing, you know, where they assume that they can start cutting, that things are going to slow down and they just don't slow down. And I think the problem that we've got is re-accelerating growth, which is what the market, the equity market is factoring in. If you look at the rate of change of the S &P, it's quite a decent proxy for the rate of change of GDP generally. Well, it's discounting 5 to 6 % real GDP growth, real GDP growth, right? That's extraordinary, right? That's extraordinary. And I would pretty much guarantee you if that's the case, then the Fed should be hiking, not should not cutting, right? Because how are going to grow at five to six percent when we have four percent unemployment? These are essentially post-second world war lows in unemployment. And there's only one other time in history where we try to re-accelerate growth from these levels. And it was the late 1960s. And there's lots of analogies that are comparable. But inflation came surging back in the late 1960s. It became the second wave of what ultimately were four waves of inflation that ran into Volcker's 1980s high. And so I think there is a real vulnerability here in terms of the bond market. So I think, can this thing keep going? Yes, it probably can. I want to see some technical levels breach before I recommit. But I'm watching this bond market really closely because if it starts to get concerned again, that things are really picking up, I for one don't believe the inflation problem is really solved. I think the tariffs could be highly inflationary because I think they'll add to goods prices, which has been the main source of disinflation. So I think the bond market is where there is a risk. There is a real risk. Yeah. Let's talk about the bond market now, and then we can discuss more about how that affects the inflation question and whether I suppose we're likely to feel any short-term pain or at least try and kick that can down the road as we have been doing, it seems, for some time now. But to focus on bonds specifically, I think I saw you point out a chart. It was possibly in your conversation on Real Vision. from about a week or two ago where you pointed out that Treasuries versus Gold has broken through a 35 year support level. mean, talk to us about the significance of that and what's going on there. I look, I have loved the precious metals trade for a long, long time. It's sort of why I started my career many, many, many years ago in the late 1980s, trading precious metals for a couple of investment banks. They have just outperformed bonds, particularly US treasuries as an asset. I look at it just purely on a spot basis. I don't even try and figure out, there some way of developing a carry? But when you even look at the total return of treasury, so you include yields and your coupon payment, these things, gold is just massively outperformed. And I think, look, We know that Western governments are running far, far too much debt, right? And they're essentially, there are three options. You can default. That's not a good one. That's not a good one. We don't want to do that. And you shouldn't do that if you can print money, right? You can financially repress, which they're doing a pretty decent job of doing. mean, nominal GDP is running, you know, Five five and change in the us and bond yields are 100 basis points less. So you are losing money every single year in real terms or the other solution at some point is you'll have to come in and you'll just have to You know, my name's the fed 10-year treasury yields are two percent now Sod off for the next five years, right? But that would have dramatic consequences, too. So I think they're doing a pretty good job at financially repressing them. But in that kind of environment, it's not a great time to be an investor in that, right? You have to understand what you're getting into. These deficits are not going down. You know, we saw obviously in the UK, the list trust moment where the bond market went, I don't think so. No, you think you're spending all that money. don't really think you are. Right. And the US has got away with it because It is the reserve currency. The French are getting away with it right here, right now, because they have the ECB has got their back. But we shouldn't assume that that's a given. We shouldn't even the US can run into problems. And I just don't like I don't think bonds offer you any really positive return outside just going into recession. Right. And then fine. then you can extend down the, you can take your 30 year duration risk at that point. Fine. It'd be a good trade, right? It'd be good trade. I don't think it's a good investment even then, be a good trade. But right here, right now, outside parking some money in, you know, one or two year treasuries for cash that you want to have if the market corrects a little bit, or you want to reallocate to other bits of the market. I see little to no reason to be structurally invested in Western government debt and it and certainly not in us treasuries, I mean the growth is too strong here, you know if you wanted to do it buy bonds of A central bank that actually gives a shit about tackling inflation And clearly the fed isn't that central bank right here right now They are the worst Right. I mean the rba the the so the rbn said the reserve bank of new zealand Mm-hmm. As said, if you don't stop raising wages or raising prices, we will push you into a recession. That is a central bank that you want, right? If you own their bonds. The Fed is not that central. They're not that central bank. what is the end game? So we're unlikely to see a shift in monetary policy. that what we're saying? I think, look, I think they will struggle if this jump in animal spirits, which we're seeing in these four indicators actually manifests itself in concrete activity first half of next year. Hey, then I think you're done with rate cuts, right? At bare minimum, you are done with rate cuts. Now it might come to a point that the bond market starts to yield, start to rise enough that the Fed is forced to hike again, conceptually, right? Conceptually. I think they'd be really reticent to do that. I think they try and talk the talk rather than walk the walk to begin with. So they try and hang tough. But I think we're getting to the point where maybe we've got two more cuts as things are stacking up right here right now. So we get a December cut. Maybe we get a spring cut. then I mean, they should not be cutting. Not with growth where it is. There's just Absolutely no logical sense for them to be doing it. So, you know, as I said, how many you actually get will depend on the policies of the of the the new administration, how the market reacts to that, all those sorts of things. But this concept that we're going to get all these stimulus policies, we're going to get this unleashing of animal spirits. and and we'll get lots of rate cuts to. No. No. Yeah. OK. Makes sense. So we've covered off the bonds and inflation kind of question. I want to revisit the economic narrative that you were spelling out towards the start of the interview, specifically that question of labor. mean, largely, I guess I'm keen to revisit that question largely due to the prospect of AI and its potential impact on productivity. Keen to get your thoughts on that. It does seem, sorry. you're absolutely right to bring that up because productivity is the get out of jail free card, right? If we get productivity of sufficient magnitude, you can run an economy hot, which is great for the equity market. You can run very strong nominal GDP. So real GDP plus inflation, which is what? Equities trade-off. That's what their earnings are in nominal dollar terms, right? You can keep inflation contained even reduce it if you go look at the late 90s Experience late 1990s experience. That's great for the bond market and you can run the labor market Strongly which gives consumers purchasing power, right? Which is which is which is great The question is and it's not that I don't believe at some point AI will kick in the question is is when Right. So I've read some great work and I do believe in a lot of the story that it's, you know, 2028 that we'll really start to see the true benefit, right? That we'll have, you know, enough of the, of the, the power grid sorted out that, know, the investments in the, in the nuclear power stations, you know, Rolls Royce and GE will be running their little, you know, nuking your back garden kind of idea, right? And we'll be able to do all that. In macro terms, that's a long, long way away, mate, right? That's a long, long, four years, might as well be an eternity. You know, I can take the bond market to 10 % and back to zero in that time, right? And so I think that's the $64 trillion question, right? That is really the $64 trillion question. I think, you know, that, The equity balls, and I know this is common, you know, did a trip going to see a bunch of clients in Europe a couple of months ago. And the one that would always come up from the equity guys is, yeah, but this looks like the late 1990s. This just looks like that sort of Goldilocks, Halcyon period where, as I said, we ran GDP very, very strong. We had the beginning of the,.com personal computer story really starting to really accelerate and build out that drove the productivity. It was great for equities, fine for bonds. Everything was halcyon. And I think there's a couple of things that I would just draw attention to. Firstly, multiples in the S &P were in the low teens, not in the low twenties. Right. So there's a very different starting point. Secondly, we were just coming out of a recession in the early 90s and unemployment was six Not four and it fell to four So over the next five years even allowing for that productivity. So what are we going to do this time? We're going to take it from four to two What the fuck a wage is going to do in that environment, right? So I think there are some inconsistencies here with this sort of halcyon daydream that the equity boys want to believe in. And I'm not saying it can't happen. I just don't think it happens immediately. And even in the late 90s, I think it's important to remember that the Fed cut three times from, there's late 90s, no, early, Sorry late 95 into 96 They cut three times then they left rates on hold for two plus years so this concept that we're going as I said that you're going to get exploding equity markets great growth and rate cuts Will not happen No. So with that in mind then, I completely agree. think AI obviously has the potential to deliver that productivity boost that those tech and equity analysts are hoping for, but it's not going to happen immediately. And as you say, four years is a long time in macro. So what happens in that four years in terms of the economic landscape? we looking at a recession as a result of that? I mean, think it's, it's, look, as I said, I think there's an underlying fragility in the system. but we didn't certainly on the employment side. I also think there's an awful lot of. Fragility in this concept of us exceptionism, right? We keep hearing this thing. It's exceptional exceptional. Well, you know, running a deficit of close to 7 % of GDP ain't exceptional, right? A drunken sailor ain't exceptional. He's a drunken sailor, right? So spending money like it's water, it doesn't is not my definition of exceptional. Okay. So, you know, we've heard things Scott percent has his three arrows, right? He's talked about. And one of them is 3 % deficit, we're running a 7 % deficit. Mm. Elon Musk has talked about short term hardship. Right. And this concept that, you know, the markets just run straight to the omelet and gone, we don't have to break any eggs to make said omelet, I think could be quite problematic. Scott's on the record for saying that he thinks this is probably the last opportunity the US has basically. to get the deficit under control and prevent itself sort of essentially seeing a list trust kind of moment. And if they're serious and I don't know that they are, Hayden, but let's say they are, and this is why I say it's difficult to forecast these things until we know exactly what is definitively coming out. And they're going to take that deficit from almost 7 % of GDP to next year three. Where's that 4 % of GDP going to come from? Maybe it comes from those animal spirits But what if those animal spirits are delayed? Six months or a year What if the equity markets first response to higher tariffs is shit what happens to corporate margins? Right. These are the things we just don't Know yet. So there's an inordinate degree of uncertainty In a market, which is certainly in a risk and equity market, which is very richly priced Interesting. My final question is probably an impossible one to answer, because as you say, there's just kind of this almost unprecedented level of uncertainty. But against that very uncertain backdrop, what is the kind of big macro trade, the next big macro trade that our listeners can think about? Or is it simply just too early to say, we need more data to make? right here, right now, our view is that you have to, like I said earlier, the disciplinarian of this, and there's certainly been the case since this sort of US exceptionalism has started, right? We've seen, since COVID, we've had numerous occasions where the bond market has gone, or the macro boys have gone, and that equity market's bloody overvalued, right? It's got to correct. shit, not correcting better sell small bonds then right because something has to try and balance, apply some sort of break to the system. Right. And right here right now, I think that's probably the game again. It's watching this is watching this. You know, for those of you who don't live in the US and actually drive a car with clutch, it's balancing that clutch between risk assets and the bond market. You know, if risk assets go too far, then the bond market has to offset that to some degree, right? Because we cannot grow at 6 % GDP, which is what the equity market, you know, because then if you start putting inflation on top of that, which last three months has been running at over three, then you're at nine nominal. Or bond yields are supposed to cover you in nominal terms. So where are we taking 10-year treasury yields? I mean, even allowing for the fact that you're getting financially suppressed by 100 basis points at the moment, what are we going to take them to? 8 %? There is a real economy out there that would just implode at that level. So I think it's this kind of yin and yang. And right here, right now, I'm quite focused on the bond market. Perfect. A nice insight to end the interview on. I mean, as ever, Julian, it's been properly enlightening and hopefully we can speak again soon. Pleasure. Thank you very much. And look, as I said, if anyone wants to find anything out about us, we've got our new product, MacroCapture, which has been launched for the retail community because we've really only been focused. We did the thing with the Real Vision guys for a long time, we kind of went in our, Raoul and I went in our own sort of different directions. He's been very, you know, correctly, but very focused on the crypto side. And it really sort of lost some of its macro focus. So we've launched our own product. And if you're interested in that, You can find it on our website, MITWOpartners.com or reach out to support at MITWOpartners.com or follow me on Twitter at at Julian MI2. Great. Yeah, we'll put all those links in the episode description as well. Great. Thanks Julian. Bye bye. bye.