- Rotation among asset classes in 2024
- Bear market for U.S. Dollar in the offing?
- Implications of falling crude and yields
Niraj Shah in conversation with Macro Mosaic Investing's Maneesh Dangi on 'The Talking Point'. #NDTVProfitLive
- Bear market for U.S. Dollar in the offing?
- Implications of falling crude and yields
Niraj Shah in conversation with Macro Mosaic Investing's Maneesh Dangi on 'The Talking Point'. #NDTVProfitLive
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Thanks for tuning into Talking Point.
00:12 I'm your host, Nidhat Shah.
00:14 The case for a chat today are the views
00:17 expressed by Manish Dangi, founder of Macromosaic Investing,
00:21 on a few things around various asset classes worldwide.
00:27 So we're going to be talking to him about rotation
00:30 amongst asset classes in 2024, arguably not just for '24,
00:35 but also beyond, but what will happen in 2024.
00:37 So that's part one.
00:39 Is there indeed a bear market for the US dollar in the offing?
00:43 It's something that for a lot of people is unthinkable.
00:45 Now, Manish talks about the possibilities of the same
00:48 and the implications of the same and the implications
00:51 of falling crude prices and lower yields in 2024.
00:58 He joins us in our studios today.
01:00 Manish, so good having you.
01:01 Thanks for taking the time out, and a happy new year to you.
01:03 Happy new year.
01:04 Thank you so much.
01:05 So you are talking about some very interesting aspects,
01:09 which for a few people might be imponderable.
01:11 But let's start off with what you believe
01:13 would be the base case, because I presume the base case as well
01:17 for both bond markets and equity markets
01:20 has shifted from what they believed to be the base case
01:23 for '24 back in June.
01:25 That's true.
01:26 So in terms of various asset classes
01:31 had pretty divergent views on the evolving macro and policy
01:37 conditions.
01:38 And there has been a convergence there.
01:41 So base case of equity throughout 2023
01:45 was to write the 2022's mistake that it believed that there's
01:52 going to be hard landing.
01:54 Whereas throughout '23, bond continued
01:57 to pile on that trade, that there's
01:59 going to be hard landing.
02:01 So what has given--
02:04 as of right now, equity seems to have won
02:06 that first or second round of the trade,
02:08 if you were to say of this macro evolution, in which bonds
02:12 have converged with equity.
02:13 And they are saying that, yes, there's
02:15 going to be soft landing.
02:16 There's going to be no recession.
02:18 Fed is going to pivot, as it did a few months ago,
02:22 and would, of course, cut rates.
02:24 Dollar also has sort of moved it with this gang,
02:27 and saying, well, yes, it seems that US will be the first to cut
02:30 rates, and therefore, the case of rate differential
02:33 does not exist, and therefore, let's weaken now.
02:36 So in some sense, there is a barat here now.
02:39 There's a full party of all asset classes.
02:42 After a very, very long converging
02:44 to a single narrative.
02:46 Did anything that's happened in the last three to six months
02:49 surprise you particularly?
02:51 So basically, the convergence and the momentum of it,
02:56 that how convinced the bonds were to a hard landing
03:03 initially, despite the data.
03:08 And that is when we started to talk
03:10 of a big rally in US rates.
03:13 The thing is, the bonds are being very fickle
03:17 in the last three years.
03:19 In a sense, how quickly they move from,
03:22 or they're moving from one narrative to another.
03:25 The quickness of it is very surprising.
03:28 Generally, it takes time to move from one regime to another.
03:33 Within a same regime, bonds are oscillating
03:36 like stuff that typically is a business of equity.
03:42 So it's in terms of when history will be written of 2020s,
03:47 I think the villain of would be bonds,
03:49 that it just got everything wrong throughout '20s.
03:53 Initially, in the whole of early '20s,
03:56 it thought that it's a new old normal of low inflation
04:00 and depressed neutral rates, very low real rates.
04:05 Suddenly, and then resisted, resisted, resisted.
04:08 And then Powell comes and says, no guys, wake up.
04:11 So it wakes up, and then goes and goes and goes.
04:14 And even though economy slows sharply,
04:18 it continues to believe in higher real rates, and then turns.
04:22 So it's almost like a-- I believe in like a tame dog,
04:26 that it will only listen to the master here,
04:30 which is a central banker.
04:32 Market is a business of its own to figure out
04:34 how things will shape up.
04:35 If you're going to only listen to, let's say,
04:37 I'll be a governor and prime minister as to how to behave,
04:41 then what's the point of market?
04:43 It's an aggregation of various forces
04:45 thinking of what should be.
04:47 So that is a bit of a disappointment
04:49 with respect to asset class, but also a general surprise.
04:53 But any thoughts-- you think a lot--
04:56 any thoughts about why is it that this could be happening?
04:58 No, because see, whenever a regime change happens
05:01 in a manner that it did with respect to inflation and Fed's
05:07 view, in some sense, it wasn't anticipated for most people.
05:13 We did talk about high inflation in 2020 also, if you remember.
05:17 But it turned out to be much more.
05:19 And Fed was 2 lakhs.
05:22 Central bankers generally were 2 lakhs.
05:24 And then they sort of moved the cams.
05:28 And to that extent, when you have such big macro and policy
05:32 surprises, the market's ability to actually function
05:39 actually breaks down.
05:40 Because market in the end is a lot of participant-- mutual
05:43 funds, pension funds.
05:45 Suddenly, if your rates are moving from 1, 1 and 1/2
05:47 to 5%, everyone is held as skelter.
05:50 Everyone is busy managing risk instead of forecasting.
05:54 And so management of risk doesn't
05:59 have the essential properties of exploiting future profits
06:04 or exploiting potential moves which could be favorable.
06:09 So everyone sort of moves in a direction that essentially
06:13 leads to this devastating outcome of big oscillations
06:16 from one end to another.
06:17 Got it.
06:18 And if I'm not wrong, you believe that the market--
06:22 or is the market already pricing in more aggressive rate cuts
06:26 than what the Fed might be projecting?
06:28 Because even there, the jury's still out,
06:31 wherein some people are saying, hey,
06:32 we'll start seeing rate cuts from maybe even Feb.
06:35 CLAC is on record saying that.
06:36 Some people are projecting June.
06:38 And some people are saying, hey, hang on.
06:41 Because the Fed has not said anything,
06:42 what if come first half data, the Fed might be forced to--
06:47 or the Fed might actually do the rate cutting thing only
06:50 post-June?
06:51 So I'm trying to understand how you are thinking
06:53 about the quantum and the pace of cuts in 2024.
06:57 And what are the investing implications of the same?
07:00 So on the first part, markets are cyclical.
07:03 So I do not believe in secular narratives in terms
07:07 of that it's a new normal and the high inflation
07:10 for very long.
07:11 Higher inflation to a certain extent,
07:13 but it's not going to be 3%, 4%.
07:15 Maybe 25, 50 basis point higher inflation
07:17 versus what we've had over the last 25 years,
07:19 in the next 10 to 20 years.
07:21 That's all you will get, because there
07:23 are many forces at work which actually depresses inflation.
07:26 Demographics one, debt another.
07:28 So deglobalization and many others will lift inflation,
07:33 but to some extent.
07:36 And to that extent, market cyclically
07:40 actually moved to an extreme for the cyclical reasons.
07:44 That inflation was very high for the last two, three years.
07:46 I think that will subside.
07:48 And to that extent, I agree with markets
07:49 that there's going to be substantial rate
07:51 cuts in next 12, 18 months.
07:56 There was a fear that Fed to reclaim credibility,
08:00 it will sustain hawkish stance for longer,
08:03 because they are going to look at average report
08:06 card of theirs, right?
08:08 In 2030, if someone were to write a biography of Fed
08:12 of 2020s, it wouldn't say that, look,
08:14 inflation came back in 2024 at 2.
08:17 People will still accuse that you got that wrong,
08:19 that it got to 6%, 8%.
08:21 And so to some extent, an unwind of that
08:24 is what Fed would like to see.
08:26 Would that come now naturally, given
08:29 that finally the rates in the US are much higher
08:32 than the nominal GDP growth?
08:34 So if the rates in, let's say, 4% US treasury,
08:39 whereas the nominal GDP growth will likely be 3% next year.
08:42 So it's after very long, briefly on COVID,
08:45 but otherwise very long, the rates
08:47 are higher than nominal GDP, which is very disinflationary.
08:50 And to that extent, it will slow economy very sharply.
08:54 And that will mean that Fed will likely pivot,
08:57 because inflation is delivering on its own,
09:01 given what all Fed has done.
09:03 And by the way, Fed and ECB and many other central bankers,
09:08 not so much in India, but have tightened quite considerably.
09:11 And its impact is seen with a lot of lag.
09:13 So I think next 12, 18 months, I am of the view
09:16 that Fed will slow fast--
09:18 sorry, the US will slow faster than what market equities
09:22 and bonds are anticipating.
09:24 And to that extent, there could still be more surprise
09:26 in terms of rate cuts, higher rate cuts
09:28 than what markets are making in.
09:30 So therefore, just a rounding of this piece on bonds,
09:34 therefore, one would then think that being long bonds
09:38 is a great trade, is a great structural or other positional
09:42 trade, without 12-month, 18-month perspective,
09:44 or thereabouts, both US bonds?
09:47 And would you extend it to other markets as well?
09:49 So US bonds, clearly.
09:51 I was telling your colleague just a few minutes ago
09:54 that had you bought US bonds, 30-year bonds in the '90s,
09:57 for a good 20 years, it ended up delivering as much as--
10:00 20, 25 years-- ended up delivering as much as US equity
10:04 markets.
10:06 So if you get the cycle right, and then
10:09 get structural tailwinds or headwinds right,
10:13 even otherwise a meek asset class, so to call,
10:17 bond end up delivering risk premiums
10:19 that you do not anticipate.
10:21 My sense is that if six months ago had you bought US Treasury's
10:24 30-year bond, a likely outcome for the decade
10:28 would be that it would deliver as much or more than S&P 500,
10:31 in dollar terms.
10:33 So I agree that there is a lot of structural tailwind
10:38 for bonds over the next couple of years.
10:40 But the cyclical tailwind is more significant right now.
10:43 So my sense is that, let's say, 10-year Treasuries are already
10:46 380.
10:47 And a few months ago, I was forecasting
10:50 they will head to 3/2.
10:52 But then it's very close.
10:54 And my sense is that there is a reasonable probability
10:57 that it can pierce 3% on the lower side,
11:01 and thereafter even lower.
11:03 So I am thinking that it's a likely old normal reclaim
11:10 as far as bonds are concerned over the next one to two years.
11:12 That's a tall call.
11:13 My final question before we take a break, and that is,
11:18 because you've told me that crude is a deep insider,
11:20 so on and so forth.
11:21 There are other factors at play.
11:23 Can higher crude prices, though we
11:24 know that 2023 was a narrative around crude prices being
11:29 very high, which came off as well, with reasons, of course.
11:32 But can anomalies like maybe a higher crude price
11:35 due to geopolitics or otherwise impact
11:39 this thought of even the cyclical inflation being
11:42 lower?
11:43 We know structurally it's lower as per you.
11:45 But cyclical inflation being lower in 2024,
11:48 can that thesis get impacted by crude prices
11:52 or some other factors?
11:53 Yes, yes.
11:54 So in a sense, forecasting business assumes base cases.
11:58 And then there are such big tales
12:01 that once we start to talk of it,
12:04 people will lose interest in what we are discussing on.
12:08 But yeah, if you were to tell me that crude were to be $110 year
12:13 out--
12:14 Is that a possibility?
12:16 It is.
12:17 See, crude typically is, in terms of spurts,
12:21 it's a geopolitical proxy.
12:23 So we're already in the midst of two major wars.
12:26 But if you were to tell me that there's
12:28 going to be a blockade of Taiwan, let's say,
12:32 in this year or a year later, its implications
12:35 will be significant.
12:36 And so to that extent, or the Hamas war actually--
12:41 it accelerates and gets escalated, so to say.
12:45 And at the Strait of Hormuz and places like them
12:49 actually do experience disruptions
12:53 in terms of flow of crude.
12:54 Then yes, it's possible.
12:57 Typically, in absence of geopolitical risk,
13:00 crude is a decent global growth minus 1.6% kind of a volume
13:07 growth forecast you can do.
13:09 And so to that extent, because global economy is slowing,
13:13 so therefore the global demand is slowing.
13:16 So if you absence what you call geopolitical risk,
13:19 crude has a tendency to disinflate.
13:22 So that's how I would look at it.
13:24 So can you forecast a war?
13:27 Very unlikely.
13:28 And which is why--
13:29 and you know that there are already two major wars.
13:33 I wouldn't be surprised if--
13:34 I've been of a view that Ukraine war is a forever war.
13:39 But I wouldn't be surprised if there is a ceasefire in 2024
13:43 as far as Ukraine is concerned, because for a variety
13:45 of reasons.
13:46 I'm not an expert in it, but I want
13:47 to believe in something that I listen to with respect
13:51 to some of these people talk of, is what's
13:53 happening in Russia, Ukraine.
13:55 There could be some positive surprise there.
13:57 And that could potentially mean that some more disinflating
14:01 crude.
14:02 In your LinkedIn post, I saw that you've given--
14:07 like there are four aspects to the post, which
14:09 is the three setups and where each of these asset classes are,
14:12 and then the 2024 joysticks.
14:15 I'm just trying to understand.
14:17 You reckon both equity and bond markets right now
14:21 have gotten married to the setup one, which
14:25 is that there will not be a dramatically lower US economy
14:30 performance, but more in line with what
14:33 is a normalized deflationary, not recessionary move.
14:39 And therefore, markets will get ample time to adjust to it.
14:42 Yes, so as I said, they've converged.
14:45 But I'm not agreeing to it.
14:47 In a sense, market is a little bit of a probabilistic game.
14:50 Whenever markets are too certain and cross assets,
14:54 everyone agrees to something.
14:56 There is no discord in them.
14:58 But it also means that they may be missing a few things.
15:04 As a matter of fact, the economy is slowing in the US.
15:07 As a matter of fact, the SAM rule,
15:09 which is a 50 basis point increase in unemployment,
15:13 and you're almost sure of recession.
15:18 So it is likely that unemployment has risen there.
15:22 Rates have been very high.
15:24 And with respect to last 20 years, very elevated.
15:28 So it's not unlikely that US enters into deeper slowdown
15:32 than what market believes in.
15:33 And hence, the pace of cuts will be faster.
15:35 Pace of cuts will be faster.
15:37 So what is interesting is, from an asset allocation point
15:40 of view in both setups, in which one economy slows,
15:44 or in another, that economy falls into recession,
15:49 US Treasuries rally.
15:51 So that's a convergence trade.
15:53 So to that extent, from a payoff point of view,
15:55 it's a good trade.
15:57 But the equities outcome is going
15:59 to be divergent in both, right?
16:00 Right.
16:01 Which is what I wanted to ask you.
16:03 So typically, if it's the setup one,
16:07 then equities might also not have as bad an outcome.
16:13 But if it is setup two, wherein the rates come off much faster
16:19 than anticipated, your argument seems
16:21 to be that equities might not have a great run.
16:23 But my question to that is, that typically lower rates
16:31 would mean the discounting multiples
16:33 are in favor of equity markets as opposed to against it.
16:36 So could that negate or blunt some
16:38 of the negative impact that could come in
16:40 by a recessionary US equity market,
16:43 or recessionary US economy, if we get to that?
16:47 Surely.
16:47 But in a sense, not at the preface.
16:51 I mean, markets rarely bottom at the instance of first rate cut.
16:56 Markets bottoms much after it.
16:58 So we are at the peak right now.
17:01 We've unbound the entire 2022.
17:03 And let us say if there were to be a historical template
17:06 playing out in June, there is a cut.
17:09 Historically speaking, markets will
17:12 have to prize an earning slowdown of 20%.
17:15 If we have a recurrence of what has happened historically
17:21 in US, that the earnings go down on average by 20% or percent.
17:26 And therefore, market may have to embrace a historical P
17:30 valuation, which is 17, instead of where
17:32 it is right now at 19.5.
17:34 So at $250 odd earning expectation on S&P 500,
17:39 may actually move to $200.
17:43 And therefore, at 17 times or 18 times, it's 34, 3500 S&P.
17:47 So that's almost like a cut of 20%.
17:50 So if there were to be a recession,
17:52 and a typical template of recession with respect
17:54 to earnings were to play out, there
17:56 is a significant downside in US.
18:00 You write that after a few rate cuts,
18:03 markets would begin to then reprise the earnings
18:06 by elevated P/E ratios.
18:08 So there are two joysticks.
18:09 One is a recession-led, what do you call it,
18:12 earnings falling, which is depressing for market.
18:16 And the other is Fed-led market reprising lower interest rates,
18:21 which is inflationary for market.
18:23 Both are actually fighting with each other.
18:25 But that is after the recession call
18:28 has been called out by markets, so a few months later.
18:33 Which is why that's how typical markets function.
18:35 Frankly, we don't have much data.
18:37 We have a data of 10 odd recessions in US.
18:39 And this is what it tells us.
18:41 Not statistically significant, though, because 10 are too few.
18:43 If Taleb were to be told this, he would laugh at me.
18:47 What do you mean?
18:48 Does data point, and how does it matter?
18:51 But this is how recession templates do play out.
18:54 And to that extent, we have to be careful if set up
18:56 one, which we discussed, in which markets were
19:01 forced to price recession, it will
19:04 have to take cognizance of lower earnings.
19:07 Right now, after two years of earning recession in US,
19:10 markets are pricing an 11%, 12% increase in earnings.
19:13 But that cannot happen in recession.
19:15 Because recession essentially means more unemployment,
19:18 more inventory buildup, general slowdown, and therefore,
19:20 lower earnings.
19:22 So base case might be, as we wrap up this conversation,
19:25 base case might be that both equities and bonds give a rally
19:30 as things stand.
19:30 But if the recessionary pressures
19:32 are even more stringent or strong,
19:35 then bonds may have an even more great time,
19:38 but equities might falter.
19:39 So the base case is that bonds have good time.
19:43 It's a good force now, day and night, either case.
19:50 Equity has a discord.
19:53 The outcome could be divergent in both the setups.
19:57 Can I just do a quick 30-second answer, Manish?
20:00 Another big call that you made is
20:01 that the US dollar might have a reversion from what
20:06 it has done in the past.
20:07 I know 30 seconds or one minute is short time.
20:11 But can you quickly tell us what's the thought behind it?
20:14 Currencies tend to have these cyclical bull bear markets,
20:19 7, 8 year.
20:20 We've had a very long 15-odd year, 2018 to date,
20:25 a bull market in US dollar for a variety of reasons,
20:27 primarily crude and recurrent crises.
20:31 I think, and from a valuation point of view,
20:35 dollar is exorbitantly valued, almost 30%, 35%
20:38 in my assessment.
20:39 I think we are entering in a good 5, 10 year bear market
20:42 in dollar, because a lot of the forces, which
20:46 is growth differential in US vis-a-vis rest of the world,
20:48 mostly developed world, and the rate differential,
20:51 both will be reverting to mean.
20:53 And therefore, the tower that dollar is sitting on today
20:58 would unwind.
20:58 So I have been extremely bullish for the last good 10 years.
21:01 Every time you would have spoken to me,
21:03 I think we are entering into a other side of oscillation
21:06 where dollar will enter in a big bear market.
21:09 OK, well, let's see how that unfolds.
21:11 But Manish Dangi, thank you so much for joining in and giving
21:13 us this wisdom.
21:14 Much appreciate your time.
21:15 Thank you.
21:16 And viewers, thanks for tuning in this edition
21:17 of The Talking Point.
21:18 [MUSIC PLAYING]
21:21 (music)