Marko Kolanovic: Might is Right & The New Economic World Order
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Welcome to the Risk Reversal Podcast. I'm Dan Nathan. I'm joined by my friend, Marco Kalanovic. He is the former chief market strategist at JP Morgan, and he's my texting buddy as it comes to the markets here, because not only are you and I texting, but you are becoming a prolific tweeter. Marco, welcome back to the podcast. Thank you. Thank you, Dan. You were last on...

November 15th. So we're about a week and a half outside of the election at that point. You had a lot of really interesting things to say about policy. You had a lot of really interesting things to say about concentration in the MAG-7. A lot of that stuff has played out over the last few months or so. You and I had been chatting maybe two weeks ago. You were not feeling particularly great about the S&P in particular, and you thought that there was risk to

to 5,500 in the near term. Well, Marco, last week we got down to, what was it? 5,505 or something like that. So let's just talk. We're going to hit a whole host of things. We're going to hit politics, policy, geopolitics. We're going to talk about rotations in the S and P, but rotations out of us into overseas. And,

and basically what you see for the balance of the year. I know that's very early this year to get there. Let's talk a little bit about how you thought in the near term we were going to go from 6100 the S&P down to 5500 and why we would stabilize there for a little bit. Yeah. So so I mean, the move down has been pretty much a straight line, you know, like and and then so first you had this concentration

starting to sort of weigh down on index, you know, as people started getting out of, you know, stocks like Nvidia or Microsoft, so on and so forth, Mac sevens, basically.

The trigger really was the smaller speculative momentum names. And we talk a little bit like names like Palantir, Apploving, Hymns, those types. So that was the first crack and then it kind of pulled down the tech, the big tech concentration. But it was pretty much straight line and somewhere...

After a few days of sell-off, you then start having a pile-on of all the sort of quants. So those would be vol targeters and risk parity funds. When the vol goes up, they start selling. And then we broke the 200-day moving average. So then you have the CTAs who are very long, then go short. So then you have this technical pile-up.

So I was a little bit looking sort of dynamics of that technical purge, you know, like and, you know, and, you know, everybody has its own models and stuff like that. But I think it was pretty much agreed that that has run largely its course, you know, and then, you know, so-called fundamentally improved.

it's still not clear that we are going into recession. So there's still good number of people out there who thinks, "Hey, this is just a scare. This is not now basically recession." So then you started seeing people coming in and maybe sort of two, three days before the bounce,

you would see attempts to bound, the market to bound. So let's say a market would kind of open up lower in the morning and then you would see, try to rally, but then in the afternoon you get again the residual of these, call it calling quants, so CTA, Volt Targeting, they would slam it down. But you could see some dynamics that it's kind of like a slowing down, right? And that told me sort of that,

Once when the quant selling wears off, you will have these people will be able to lift the market a little bit at least.

You could also see the VIX. VIX at some point kind of stalled around 30. And then we had this bounce. I'm still of a view that we are far sort of not, we are not out in a clear. So I see it a bit more as a- So we're recording this Monday afternoon. The S&P is up 75 basis points. And on Friday, we rallied like 2.1% or so. So we're nearly 3% off the lows. We got down 10% at those lows. Talk to us-

Talk to me a little bit about the speed in which we sold off 10% because I've been reading this was one of the fastest 10% declines. When you look at all the data, you just talked about vault targeting and, you know, whole host CTAs and all that sort of, how important is the speed in which the market sold off? So, I mean, the...

I look at the sort of amount, sort of theoretical amount of how much needs to be selling, kind of billions of dollars. And it's a little bit of a guesswork. Everybody has a model, so it's not exact number, no way to know. But I was more looking at, okay, how much kind of...

amount was sold. But the speed was, it is a factor. Technical analysts, they look at the sort of RSI's, they look when things get oversold. So in S&P it was fairly orderly, but Nasdaq had some disorderly days. There was like a 4% day and then attempt to bounce and individual names had some pretty disorderly selling.

It's always a little bit of a guesswork, but it was pretty fast. The amount that was sold was pretty high based on these call it vol targeting models. And then, now as I had that like a 4% down day, which could maybe indicate a little bit of some sort of capitulation. We never had like S&P proper crash, but NASDAQ, I think you could say that it was almost a bit of a crash.

crash. And that's where a lot of the euphoria was. You mentioned, like, let's say some of those meme stocks and you and I were talking offline a couple of weeks ago, like Palantir became a $300 billion market cap company. Applovin became like a $200 billion. Those stocks nearly got cut in half. And, you know, on a day like today, it's kind of interesting to me that Palantir is barely rallying right here. So

For some reason, it kind of got put in this Mag7 sort of environment where, you know, folks were rotating out of it. So when you think of just, you know, going back to 2021, for instance, so the Fed was late to kind of recognize inflation, not transitory. They started indicating they were raised interest rates. Some of the first stuff that got hit were basically meme stocks, were, you know, unprofitable tech, were SPACs, was crypto, you know, and all the whatever, those meme coins and all that sort of stuff were NFTs.

So this time around, it's kind of interesting because Treasury Secretary Besant talked about how they want to target the 10-year. They're not worried about some froth coming out of the Forex stock market. Now, I agree with that. I just don't agree that they're not worried about it.

Okay. So that's one thing. And so what did you make on the last two Sundays? It was first Trump. And then it was Besson saying that, you know, the stock market doesn't concern them. A few weeks ago, Besson had suggested that they're going to target the 10 year. Talk to me a little bit about this lack of worry about the stock market, because again, you know, I don't believe that they don't care about the stock market, but tell me what you believe. No. So, so,

You know, I'm a little bit surprised with this message, which is very uniform across administration, you know, from Lutnik, Bess and Trump, pretty much everyone there kind of we don't care about markets, we don't care about markets, you know.

I think it's almost you gain nothing by saying that, and you actually do lose something by saying that. So I don't understand that strategy. And you can sort of contrast the strategy that Chinese are having. I mean, Chinese are doing everything and anything to talk up their market. And what you see is basically US capital going to China and the US capital leaving US.

And hey, we didn't even have these April 2nd tariffs, right? So what's the point of that? What's the point of sort of beating down your own market and letting that capital flee to China, right? So I don't understand the logic.

It's a bit like a bravado kind of, "Hey, don't bother us. We really don't care." Kind of, "Hey, you're not going to be able to coerce, to kind of twist our arm into changing policy. We don't care." You don't have to say that. You can just proceed with your tariff policy and just say nothing about market. Or frankly, you can say, "I really do care about markets," and then slap big tariffs.

Like, so I don't understand. Well, that's logical. But so let me ask you this. So I don't understand the logic of it. Did they start saying that once the stock market started topping out? Like that's one of the things that I'm not saying they're watching tick by tick. They don't stare at fax set machines like you and I do all day long. But I don't think we started to hear that until the S&P was down at least 5%. And then some of the stuff, that's why I brought up 2021. Some of that other stuff had already been correcting in a meaningful way. Yeah, I mean, look, I think it's

In the first term, Trump was sort of always claiming it's a scorecard, it's a scorecard. He took tremendous pride when the US market was outperforming Chinese market. He was kind of saying, hey, look at that, where's Chinese market, where's US market, right? So I think kind of he brought it up on himself, right? So he now need to sort of a little bit disassociate

from that, right? So that's why they started talking. But only, of course, look, if the market went up, I'm pretty sure he would say, hey, look, this is a very successful policy. And he did start by saying this is the greatest markets or something like that, right? So, you know, I'm not sort of conspiracy theories, but people, I mean, the different sides of the world, different parties in this geopolitical stand got prepared in different ways into this.

Chinese clearly got prepared. The whole deep seek, the whole Alibaba rally, the whole stimulus support, embracing back Jack Ma, all these things, it's not a coincidence it all happened basically at the Trump inauguration. And then you have also European, right? Europeans announcing this like a massive, massive stimulus. And hence you have European stocks going up like 20%, right?

And Trump was kind of like, he was first praising the markets because it was up. And then he said, "Hey, it's not my fault. It's Biden's fault because it's going down." And then, "Hey, we don't care that it goes down." Right? So, you know, it seems really like geopolitical, markets are a little bit geopolitical battleground here.

and it's not going all that well for US. - Well, more so than any time I can remember in as long as I've been in the business, when you think about picking a fight with your two biggest trading partners, three biggest trading partners when you throw the EU in there and three of your biggest allies and using the EU as a block and then,

finally getting around to your biggest adversary, which is China. I mean, think about how much more time and energy they've spent talking about, you know, Mexico, Canada and the EU. What do you make of this notion? And again, listen, I'm not an economist. I've

I've never been a strategist like you were. And I know when you were at JP Morgan, you probably talked to hundreds of brilliant clients all over the world. And you probably had a really good sense for where sentiment was, right? But this idea that they are trying to tank our economy near term

in an effort to, it's no different. And Guy and I use this analogy. You get a new CEO, comes into a company, they kind of throw the kitchen sink at forward guidance and they set the stage so they can start beating. Do you believe that's what they are doing? Because to me, it's one thing for them not care about the stock market because they always come back, right? It's another thing about playing chicken with the US economy and thus the global economy to get an agenda through.

So, look, I think there is definitely element of that, right? And a little bit in the defense of the administration, multiples were high. You know, fiscal support for market was abnormally high, right? And they were kind of dealt that card, right? You know, like, and now they could either kind of try to perpetuate that.

you know, to appease the markets or they could try to push forward with their policy, which would ultimately upset the markets and upset all the sort of, you know, global dynamics as well, right? So they decide to kind of openly says, we don't care. We're going to kind of like, we're going to detox the economy and the market if there is a recession kind of so be it. So they kind of like a bluntly, like, so on one side, I can understand that they were dealt a pretty bad hand, right? Like market at the top, multiple at the top, fiscal spend at the top,

But then on the other hand, as I said, I don't understand why you need to... You can say, hey, look, we obviously care about capital staying in the US. We care about this company. We'll do our best. You can still do the agenda, right? But nominally, you can say that you care. So that part, I don't understand, right? So maybe they realize there's going to be no way to avoid capital.

the downturn. So it's better than to have a downturn early on. Yeah, but you believe, I just don't believe that that's what they're doing. I just don't, like for instance, Trump is kind of this low interest rate guy. Remember how he kind of browbeat Fed Chair Powell back in 2017 when they were raising interest rates in '18 and right up until the end. And I go back just thinking about 2016 when Trump took or won that surprise election and then took over in '17, they had a good economy.

They had a stock market that was all time highs. You know, they had unemployment at low. I mean, it looked a lot like here. They also had a very accommodative Fed for the most part. And there was a lot of fiscal stimulus in the market. So like to me, I don't believe that Trump cares about a budget deficit. I don't care.

think he believes about national debt. I don't also believe that he is willing to let Scott Besson and, and let Nick take controls of the U S economy. You know what I'm saying? Like, I just don't believe it. I, I, I, I, I agree. I think, I think like opportunistically, you know, he, he,

he can maybe believe in what is the most convenient at a time. So I don't think he is a hard set on certain things. He did these tariffs and I also don't understand, because every probably CEO, every probably market indicator is telling you that it's not going to work out the way... But he might not care because it maybe is politically beneficial.

Clearly, he is set to go forward with these tariffs. It upset the market. It's not the only thing that upset the market. I mean, if the multiple was like of S&P 15, maybe it wouldn't react this way, but multiple was high. This was a trigger. They really didn't even start properly this trade war. Market already corrected.

the worst, I think, kind of egg on the face is that like a Europe and China rally at the same time. So it's not that everybody's doing worse, it's actually US is doing poorly and sort of that's where now. And we'll see April 2nd will happen. And I don't think April 2nd magically is going to be like a great global peace deal. So that's why even this market bounce,

It's hard to have a strong conviction that it's going to go through. So you mentioned 2022 and the potential for a recession, 2023. So into that bear market, I think that the market was sniffing out a slowing economy. It was sniffing out a lot of euphoric. There was a lot of misallocated capital, we could say, across the board. And I remember you coming on Fast Money and you were pretty surprised

steadfast of that into it. You might've been a little early, right? But a lot, yeah, but a lot of stuff that you were seeing under the surface, you know, Guy, myself and Danny, you know, we were talking about it every week, at least on our podcast or on Fast Money. And it led us to believe that there was going to be, you know, a difficult,

return profile ahead. So going into 2022, everyone thought there was a recession. The market acted like that. The sell off, at least in the S&P, was very orderly for the most part. We didn't have too many panicky sort of things. But then going into 23, everyone was still convinced of a recession and then the regional banking crisis. So my question to you now is like, OK,

we're not really flirting with the recession at all. You know what I mean? And so do you think a protracted trade war is is there a strong likelihood that that like our allies have become emboldened? Right. And who knows how long there is to do you think that we could go into a recession? Finally, we haven't had one since 2020. I do. I do. You know, and as you said, you know, like, you know, 23, we had the, you know, Silicon Valley, we had the commercial real estate.

Fed was not basically cutting at all, although they did patch the problem.

Which, by the way, the liquidity that maybe you or me or some of these other didn't anticipate. Correct. Exactly. So that was a surprise. I think Fed very forcefully backstopped it. So there were a lot of these sort of things that look like it could dip us in recession. They didn't, right? And the reason is there was a tremendous wealth effect. All these stocks like crypto stocks, everything went up.

then basically you had a very, very big fiscal spend as well. And it was, I guess, not a time of recession. Now, why I do think the risk is now, because all of the problems are still here. Back then we were talking about consumer being tapped out, credit cards being maxed out, interest rates on credit card being so high.

real estate issues around interest rates. But it was too early. And we know, I'm surprised that real estate market got frozen for so long and nothing bad apart from that, the whole Silicon Valley thing didn't go down. But interest rates are still high. So that problem persisted. Consumer basically

the whole low end of consumer, the one that has a lot of credit card debt and is struggling did not get better much. And now then you have this wealth effect hit. And fine, maybe on S&P it's 10%, on crypto is a short period of time now more. So I think it's very much also tied into that. If the market drops another sort of five

5% to 10% might be really self-fulfilling. People just say, "Okay, we freeze and we stop spending." That's even before talking about tariffs. That's even before that. And then you add all the sort of tariff issue whereby corporates may stop spending. If the corporates were massively expanding for be it tech upgrades or hiring or any kind of capex, they may now say, "Hey, look, there's a hell lot of uncertainty, so let's just wait a bit." So you have that additional thing.

So all the problems we had before, they're still there. They didn't cause recession, but they didn't get better. And then there are some new problems. And then you have this sort of wealth effect that I think can tip the scale, right? So it's hard. It's very hard to say like, hey, I forecast recession six months from now. But I do think like now is probably the...

Highest chance we have it. Yeah. Do you think, though, let's assume April 2nd they go into place. Let's assume that now they kind of really turn their focus towards China and that goes back and forth a little bit. You know, what are what are the conditions in which that consumer is?

You know what I mean? Holds up because that's the thing. So when you have this lower end consumer kind of fall out, given all the things that stacked against them, isn't some of the data suggests in the direction that, let's say, the employment market's going, consumer confidence that we had on Friday. There's some other piece of data suggests that, you know, the economy really hinges on that consumer. And it seems like some of the pillars of that story are kind of being, you know, kicked away.

They're definitely being kicked away, right? And again, sort of going back on the wealth effect, on sort of psychology of consumer, it's also very, very sort of bifurcated. So the surveys, like Michigan survey, half of people think it's horrible, inflation is going to go to the roof.

Yeah. And then half things actually not that bad. It's okay. And they're independent who thinks like actually things are marginally getting worse, right? So there is this also a division, but sentiment is sentiment. If people don't feel... But that division is really interesting because I wonder how long it lasts.

If we have the jobs market slow, if we have CapEx and stuff like kind of be tamped down, that's obviously a huge driver of growth, right? And if you think of red states and if you think a lot of these places or a lot of the turns that we've seen politically over the last, call it 10, 15 years, these are folks that are not likely to benefit from a trade war. If you go back to Trump 1.0, when they put all those aggregate

agricultural tariffs on, they took in like $60 billion and they had to give that 60 billion right to farmers. Right. And if they don't do that, they're going to lose the midterms. You know what I mean? Like the Republicans could lose, you know, the white house in 2028. And those are just obvious sorts of things. But let me ask you this because I,

I've never really heard this in my career from a central banker or from the Treasury that they are more focused on fixing or working on the ten year yield than they are worried about that sort of wealth effect that comes from the stock market and housing is targeting the ten year yield, trying to get the housing market unstuck a little bit. So in theory, that could be OK, like, you know, if you do something is going to upset the market from a sentiment perspective, right? Like, you know, the the

you could expect 10-year to drop. There's a little bit of risk of rotation. So maybe they are saying that, "Hey, look, we're going to do something that we're upset, but hey, this is a benefit. 10-year is going to drop and it might have some second order benefits in terms of mortgages and so on and so forth."

Now the problem is it's not working, right? What we saw because basically China is responsive with a massive stimulus, and Europe is responding with a massive stimulus. So like a 10 year boom went up, like showed up like 30 base points of that announcement, right? And actually 10 year US went up as well, right? So you basically have a...

news, a sort of negative macro news around tariffs or geopolitically issues that we have now with Russia and Europe, that you would expect that yields drop, yields didn't drop. So even that benefit- Yields have been stuck right here. They've been stuck, yeah. Just 425, 430. They would be lower, I think, if there was not a...

If there was not like, because you have Japan, you have China and you have Europe, right? So if all of your trading partners are gonna use fiscal measures and there is gonna be direction of their yields going up, I don't think US yields in isolation is gonna drop until it's probably too late. If there's a recession, they'll go down for sure.

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You know, the 10-year is right where it was a year ago. It's right where it was at the highs in 2022. And it's basically almost at the midpoint of the range if you go back to September when it was 3.6 and as high as 4.8 or so. Where do you think... All right, let's make some assumptions. Let's just say the trade war, you know, lasts a bit longer than folks think. So there's no big deal. Let's say China continues to stimulate and their economy gets better. The Europeans, let's say they remain emboldened, but they kick up the spending and they, you know, they kick in the fiscal...

Where do you think the 10 year shakes out? And let's assume all of that slows the global economy, at least as it relates to the US, because we're the ones opposing, you know what I mean, the tariffs. Does the 10 year, does it just stay here? Because that's where it's been for the last three years? - Probably, exactly. Plus minus, you know, 20 basis points, you know, stays in this range.

I think for 10 year to meaningful go down, we either have to have a recession, basically Fed cutting growth long term forecast being a revised lower. So you need to have that risk off bid and maybe central banks action for meaningfully to go down into sort of- All right. So the risk off bid, if you look at in January, the 10 year kiss 4.8%. And since then, it's gone down to 4.3%, like we just said. But you know what also went down was the stock market.

which went about down about 10%. Talk to me a little bit about how many times you've seen that where yields have gone down and that was a big move in a short period of time. And then the stock market got hit. - Well, it used to be always like that. It used to be always like that. Like market goes down, yields go down, right? Bonds rally. - Because of the flight to save. - Correct. That was since probably 1997,

And it was also conditioned on the Fed, right? Because basically markets would tank, people say, "Oh, Fed is going to cut." So yield goes down, right? So it was almost like a muscle memory of market participants to trade it that way, right? And then things changed a little bit when the market goes too much hooked up on a monetary stimulus, then basically, "Oh, okay, QE, market's going to rally, right? Yields are going to go lower and market's going to go higher, right?" So then really the opposite relationship, right?

So, the right sign of relationship is basically stock markets go up, bonds go down. Since the old activism of QE and where basically the economy were being propped up by central banks buying bonds, relationship flipped. And then came inflation. So, that was another issue, because if then yields go too much higher, that would kind of tank the market.

We are now in this a little bit, I think we're going back in that old regime really where there is a recession risk. Maybe in that case, inflation is not going to go through the roof, right? And then Fed

Fed is more likely to cut the rates, right? If there are problems, right? So if there are problems, market will go down, Fed is more likely to cut. Again, so I think we're back in that old school regime, which was the regime- - All right, well, let's talk about this. So if, again, this goes back to the stimulus that's happening outside the US, let's say China starts to stimulate, their economy has been so bad for so long, okay? Let's say the Europeans keep spending.

aren't we likely to see inflation kick back up a little bit? Because then if you put the trade and tariffs in there too, then you say to yourself, well, crude oil is 68, maybe it goes back to 80. Maybe like a lot of prices of eggs never go down and stuff like that. - I think there's gonna be that stagflationary risk, right? So I don't think we will go into hyperinflation, right? But I think it's gonna be basically inflation that's kind of stubbornly high,

while actually economy is slowing down. But ultimately, if economy is to really slow down, I think the rates will go down and inflation will go to zero perhaps. It's funny, Tom Lee of Fundstrat, he was on the pod a few weeks ago and he said actually tariffs and trade war could actually be deflationary. And I didn't understand it at the time, but the whole notion was that if you have slowing growth, then you have folks who are going to kind of pull back on spending, whether it's consumers, whether it's companies.

the risk there again is that things go, you know, horribly wrong in a pace in which that a lot of folks didn't expect. And then it becomes that much harder. Does that make some sense? It does, but I don't think it's a good thing, right? You know, I think for for for trade war and tariffs to become deflationary, that means actually things are really bad for stocks.

Which was the case for China over the last few years, right? We haven't talked about the dollar yet. So the dollar sold off fairly significantly over the last, call it, month and a half or so, almost two months. The Dixie was at 110, and right now it's trading at 118.

103 and a half. And, you know, this was a point I kind of made on Fast Money. It was like a few weeks ago before the market really topped out. And, you know, everyone was pretty bearish and that's great on the desk, you know, ahead of that. And I tried to take the other side of it for a second. I was like, well, like, let's think about this. The dollar has been coming down. Yields have been coming down. Commodity prices have been coming down. Maybe that's really good for S&P earnings. So thoughts on that idea here, because it almost looks better positioned for that too, if you think about it. You know, if

With some delay, eventually it's better, but I think it's more of a sort of symptom. For instance, for commodities, the risk of economy slowing, you know, economy being slowed down, right? Dollar going down, it's really mostly against Euro, Euro rally on this announcement. You know, that was like, I think, you know, 3%, 4% in 24 hours.

in a 24 hours move. So yeah, on a margin it does help earnings, but hey, if a Canadian start removing US products from shelves, if Europeans do the same, it's not going to help the dollar is weaker. If they slap you 25% tariff or worse, they actually say, "We're not going to sell your product at all."

5% weaker dollar is not going to make a difference. So yeah, on the margins, if it stays that way and things normalize, it's eventually better. But I think now it's more of a symptom of worse things to come or bigger risk or bigger imbalances, bigger geopolitical sort of

tensions and flux, which is generally not good, I think, for all businesses across the world. - Let's talk about that for a second, because what's interesting to me about this time around, Trump 1.0, they really were focused on China at first, but then they started targeting like steel and some other stuff with our trading partners, right?

and you know right now when i think about geopolitics so let's just talk about the eu let's talk about our wavering commitment to nato let's talk about a shooting war obviously in ukraine which the president refuses to admit that um the russians did not start and he's trying to kind of negotiate um some sort of ceasefire without ukrainians involvement right so that has emboldened the eu um

they are you know for the first time maybe in a long time which there's a certain sense of irony because trump has railed against nato's spending by the eu for a very long time and they're doing it now but let's just say those geopolitical tensions from the eu from canada from mexico

let's just say that we get stuck here. You know what I mean? Like that, you know, so you have a few different things. You have, um, you know, geopolitical tensions, you have economic tensions. There's a whole host of other tensions. I got an email from one of our listeners, you know, today is a Canadian. He's like, when I tell you I'm dropping all of my subscriptions to us companies, I'm not buying us products. You know, Canadians hate America right now, which is insane for us to think Canadians are the nicest people on the planet. It's, it's like, uh,

It's bizarre, right? It's bizarre. I mean, let's start with the Canada, right? This talk about basically making Canada 51st, basically abolishing Canada as a country, right? It's kind of bizarre, right? And I was for a long time struggling. Is it a joke? Is it a negotiation tactic? Is there actually real...

attempt to do something like that, right? But let's say if it's a negotiation tactic. What kind of negotiation tactic is that? So let's say I'm asking for promotion, right? Then I go and I start cursing you, right? I say, like, you know, whatever, I'll kill you or something. It's not a negotiation tactic. It's not going to do well in any way for me, right? You know, now you can say, well, he has an upper hand over Canada, right? So he can do that. But again, what's the point, right? Like, I mean, yeah, if you want to actually...

roll the armored division in Canada and take it over, just do it. What's the point of offending them and insulting them? I don't get it. But it's certainly not something that I think helps sentiment or helps even that negotiation process. So it's a little bizarre. Now, if you look at the European Union, European Union, as you said, yeah, they rallied. I

I'm not convinced that that's also a good thing overall for Europe or for the world. And let me tell you, people now say, okay, they'll spend in the next 10 years, trillion euros,

And there's going to be a lot of gravy around, a lot of sort of green energy and weapons, green energy mixed up with weapons and stuff like that. But reality is, look at the Germans election, youth, 18 to 25 year old Germans, they either vote AFD or communists left. That's going to be... So who knows what may happen in three or four years in Germany? The best you know might be internal crisis political between...

right back in 1920s. So I'm not buying that Europe is set for the next 10 years. So that's even within countries. And Germany is not the only one, but now look between the countries. I mean, look at Hungary, look at Slovakia, look at Romania, what's happening in Romania. There is a candidate who's a pro-Russian candidate who's got banned. There's another one who's also pro... He got banned as well. It's not going to end up well. Europe doesn't have cohesion between countries.

And even within countries, they don't have a cohesion. So for me to think that somehow Europe now is the leader of a free world for next 10 years, I just don't buy it. And I come from there. I have passport as well. So it's crazy. And Trump on the other side is basically saying,

sort of you guys created European Union just to screw over Europe and US and stuff like that. So it's not a good dynamics and it didn't really start. We'll see. I mean, we saw a little bit with alcohol, with spirits, right? The France wine, but we'll see it in a few weeks, right? And then Russia and Ukraine,

I'm also scratching my head a little bit, but there is some thought that is coming to my mind. Look, Trump clearly has some affinity towards Putin, towards his style, towards... And I'm not saying this in any condescending way. It's just a fact. I'm just stating a fact. It is a fact. So he probably believes that kind of might is right.

And again, not going into history of a problem of, let's say, Crimea, right? It's a very complicated history. It's not black and white. But he thinks might is right, and I'm going to take it, right? And look, Trump might do that to Greenland. Again, he said, again, yesterday or day before, he said, hey, look, some ships came there 200 years ago, and it's not even sure they came and blah, blah, blah, blah, blah.

So he might actually strike some deal with Putin and say, hey, look, this is a new world order. This is a new philosophy. Might is right. You have your own sphere of influence. I'll have my own sphere of influence. I'll kind of circle around North American continent, including Greenland, and you circle your Eastern Europe. And if you want Moldova, take Moldova. If you want Baltics, maybe take Baltics as well, right? So it's not clear. I'm not saying maybe it's a crazy negotiating tactic. Like, you know, like you have this negotiation, like,

I'll make it sound really dumb, right? Like you have like a drunk guy in a bar who wants to pick up the fight and then he takes like a ball and breaks on his head, right? He said, hey, I'm crazy. Who's gonna touch me, right? So maybe it's that type of negotiating tactic

But maybe it's not. So in any case, we live in a world of uncertainty, so I don't find appropriate European stocks rallying 20% on that. It just feels also a little bit weird. So are you inclined now to take the other side? You just mentioned that you don't think it's appropriate.

So we've run too far, too fast. Also in China, as far as equities are concerned? Yeah, on both. And so would you favor now if we were to go back towards 5,500? And I think in the interview that you did maybe a week or two ago, I think it was March 11th with Bloomberg, you suggested that if we were to go recession, we'd go through 5,000 and we'd probably have somewhere with a four handle on it.

So let's just talk about the things that kind of get the market sniffing that out. Okay. So right now we have an S&P again that, you know, went down 10%. The NASDAQ was down 13%. Let's talk about S&P 500 earnings. You know, coming into the year, they were meant to be up 13, 14% or so. That was consensus. That's come down a bit over the last, call it two months or so. So here we are having an S&P with, let's say, consensus EPS at $270. That's

puts you at the current level. Does that sound about right? At about 21 times or so. Again, people only start talking about valuation when the markets start heading lower. Where do you think the S&P, assuming that this generative AI capex boom, you know, doesn't get hit dramatically hard in a slowing economy, where should the S&P 500 multiple kind of bottom out if you go back to 2022 and think about that as a bit of a guide? So,

So first on the CapEx, I do think CapEx will be cut a little bit. That's my view. But where the multiple should bottom, you can look at sort of historics and see where historically that could be. And that could be like 16, 17, even without recession. That could be some just a lot of hair in the sentiment. So that could be the multiple.

So that's why I think S&P could go to 5,000 relatively easily, right? You know, relatively easily. Now, you know, Europe is... I don't want to say all-time highs, but let's say recent all-time highs, right? You know, same thing as China, right? I mean, there are points in time when China tech was trading higher, but these are not anymore times. And I think if you look at the last four years, three, four years, it's at all-time highs, right? So I don't think that...

Alibaba should be trading at $150 up 100% from 70 to 150 in a few months. I think that's nuts. And most of it's just a multiple rerating or same thing for DAX. Because if there is no recession,

the rally there played out and then US can catch up. Like, you know, you can have some of the, you know, things that derated may rally from here 10% or so, right? Go back to where they were, right? If there is recession, then I think, yeah, sure, US will go down, but then these foreign markets will also need to acknowledge there's a recession, right?

So that's why I do think that probably trade is here that you fade the rally internationally. If you want to, to the extent you feel positive about no recession, you may then buy US here at 55. If you do think there is a recession, I do think S&P will probably go lower to like over around 5,000, right? Or hit significant hit on earnings, right? You know,

So I think it's the balance. The fact that, let's say, you know, China tech rallied like 30% and US Nasdaq dropped like 15%. So this gap, like I call it 40, 45%. I would play the reversal of that gap. It's just not clear. Do you want to be net short? Do you be net neutral? Or you want to be net long Nasdaq here and over these? You know, so I do think that trade is starting to set up now. It's called 55%.

So, we were basically playing, okay, if there is a recession, these things will tank. If there's no recession, Nasdaq will rally and this thing already rallied so much by various metrics that it's probably topping out somewhere here.

On that recession, right? Because people say, well, isn't the whole point the world is being deglobalized now, right? Maybe that's a sort of end goal, but Trump started deglobalizing the world like two weeks ago, right? So world is actually very much global still, right? So I think it's illusion to think that suddenly US will go in recession, but Europe will do extremely well, right?

Again, if Trump kind of de-globalized the world five years forward, maybe that's going to be the case. But right now we still have the world as it was two weeks ago, right? Or three weeks ago, right? Which is very much global world. So if US get a recession, Europe is going to go in recession, you know?

Yeah. So you've probably been asked this a thousand times over a couple of decades. What do you think the probability of a recession is? Now, I'm not going to ask you that and I'll tell you why, because over those last two decades, I can't remember a time where the future was so uncertain. And I want to make one point about that because you just suggested this deglobalization that's just become a thing over the last month or so.

For Scott Besson, and let's say there's some like brain trust within the administration that agrees about the detox and really wants to reset the stage from a deficit standpoint here and figure out how to do that and then basically have better engagement with the globe on the trade perspective.

It can't be done. I mean, this has to be bipartisan. It has to be something where both parties come together and they convince their constituents that this is going to be a 10 to 15 to 20 year sort of thing. Right. So when you hear about this all in the near term, the market's going to have some problems, the economy, it's going to be a transition. I just don't buy any of it because it can't just be one party because this party is likely to lose the house in a year and a half. And then you say to yourself, nothing gets done again. Yeah.

No, 100% agree. I would even, again, take it step further or maybe make it even more sort of with this Canada 51st trade, right? Like, yeah, get a Canada 51st trade and then next election, well, they're going to return back Canada and apologize for it, right? So you need to have a little bit of, as you said, consensus if you want things to stick and not revert back or not get a backlash.

So yeah, it's chaotic, right? It's a little bit chaotic. And look, I think 10% drop in S&P probably reflects some of that chaos. It doesn't reflect yet recession. And yeah, it's a world environment which is...

which is highly, highly, I would say uncertain. And Trump won, it was a little bit different. And we talked here in November about the difference of Trump 1.0, 2.0. Now this is a little bit different. Its risks are higher and yeah, I don't recall...

COVID was a period of uncertainty, right? When like, look, you didn't know what's going to happen. Like, is this real? It's not real. Are we going to die? Are we going to be just fine? Are we going to reopen, not reopen? Like, so I think there was a lot of uncertainty there for a few months, right? Like, so I would say there were probably worse uncertainty now, but this is probably second biggest uncertainty now. Call it, you know, GFC 2008,

a lot of uncertainty as well. But I would say like, okay, GFC, COVID, and this now, it's somewhat comparable, the level of uncertainty. And that's why one needs to be, I think, careful sort of jumping in with both foot in the markets right now. And then especially, again, I find it very bizarre people buying Alibaba today up 5%, right? As

as like China is our new best friend and they're going to do just well, like fine. So I think there is complacency. There is complacency still. What are a couple of metrics that you would kind of suggest to our listeners that they focus on if they are, as you are, as I am, uncertain about the path of our economy and worried about the potential for a recession? If you think about austerity and Doge and you think about uncertainty around trade and tariffs, that sort of thing.

What are a couple of things that you are tracking that would lead you to believe? And I'm assuming we haven't even talked about employment. You know, what are some of the things that folks could keep a close eye on that could kind of give them a sense that we are going, that the economy is weakening in a meaningful fashion?

Yeah, I mean, look, employment, I think looks not too far for in a few weeks we will start to have earnings, Q1 earnings. Some of these, again, some of these sentiment indicators are definitely needs to be watched as they are a little bit now partisan in some ways. It's not as clear and tracking the layoffs, the job cuts and those type of things from the sort of

you know, fundamental, macro fundamental side, you know, and then on this kind of geopolitical side, look, it is not impossible that Trump basically goes and I don't think it's not my base case, but it's possible he say, hey, look, I think we're going to have a great deal with Europe. We're going to have a great deal with Canada, right? You know, he's not going to do it with China, you know, but with Europe and Canada and Mexico, he should be able to do that, right? Because you can't fight this thing

kind of alone against everyone, right? You need to at least have someone on your side, right? So if he would say, hey, look, we're going to resolve issues with Canada, we're going to resolve issues with Europe, right? So far, not looking like that, but, you know, one could develop some level of optimism, you know, some level of optimism, because then if the world can somewhat, somewhat, you know,

take a similar position and then negotiate with China, maybe that can be modeled through without recession. So I would look at that rhetorics. Maybe he does come on April 2nd and is suddenly a lot more conciliatory towards at least call it our allies or former

All right. So that solves possibly the market problem, but it doesn't solve the economic problem. So I guess my question is, what is the things in which you could foresee to cause the U.S. economy to inflect higher? Because, you know, again, we look at GDP last year. It was better than expected. I think consensus was like two and a half percent. It might come in 2.8, 2.9 or something. But now it's expected to be

a bit lower than that. And so I'm just curious, are there a scenario where we could just see growth accelerate under some- I don't, hard for me to see that. Hard for me to see that because it's going to be less government spending or maybe same amount, but it's definitely not going to be more. It's hard for me to see more governments. People question how much of this Dodge thing actually is real, how much is not real, but I think it's going to be less government spending. Not clear how much, but less, right?

Yields are where they are, right? Mortgages are where they are, credit cards are where they are, right? So that's not getting better, right? And then like, look, I mean, you saw those job cuts, they kind of tripled, fine. One third was a government employees, so it's actually Dodge thing is a little bit real, but the two thirds were not, right? So I don't see that getting better, right? I can see stabilizing or getting worse, right?

And then the whole CapEx, again, I think people got burned. People thought NVIDIA is just going to go through the roof. Palantir is just going to go through the roof. Now they got burned, right? So now they're like, hey, look, maybe they're not going to, you know, maybe they're not, right? And I think these people are smart. The CEOs like Microsoft, they'll say, hey, look, we're going into this uncertainty. Do I really need this extra data center there? Like, you know, why don't I actually pause? Why just pause until this kind of air clears out, right? So there I don't see even better, right? So I don't see scenario where things change.

Again, people do far fetch. I don't believe in it either, but people say, "Well, in China it's going to get better," or, "In Europe it's going to get better." But that's such a stretch. I mean, you're responding, China and Europe are responding to bad situation. So in my view, that will just maybe stabilize situation rather than dramatically improve it. But in US you don't have even that. You don't have even some hope.

So a lot of talk yesterday from China, right? I don't know, 30 points or something. We're going to do this and this and that and that, no numbers attached, a lot of talk, right? So even there, I think you have a lot of talk, not really remains to be seen, does it really translate into something? But US, you don't even have a talk, right? They just say, "Hey, look, we are okay."

with things being kind of, you know, slowing down, right? So it's interesting you mentioned Nvidia. So by the time folks are listening to this, it'll be Tuesday. And tonight, Tuesday, Jensen Wang, the CEO of Nvidia, is going to be doing the keynote at their GTC, their big user conference. And it's interesting to me because we have that on Tuesday and then we have the Fed on Wednesday. And I'm hard to press to think which one is going to be more significant because to me,

The way they're obviously save something from their earnings or a handful of things. We know how companies are meant to do this, that they're going to say a lot of potters of stuff. They're going to map out the roadmap. You know what I mean? That sort of thing. And if the stock can't rally after that, that would make me very nervous. So speak to, again, like let's finish up this conversation on concentration of the MAG7 because the trade is stalled out.

And if it can't rally on a good quarter in guidance by Nvidia from February 26 and then on whatever they say here, then you have to say to yourself, the trade is probably in the toilet for a bit. Look, I was always a bit cynical about Nvidia and that may be my bias. You know, I'm not an Nvidia analyst, you know, like, but

The issues there are, if we go in this environment of corporates being a bit more sort of cautious about what's going on in the world, I think that translates into less capex, right? I think if you go in a trade war, I mean, all these Nvidia trading via Singapore to China and those type of things. If we go in a more strict trade war, I think there you also had issues. I mean, stock has rallied sort of.

now a little bit, right? Like, you know, from 15% off. Yeah. Yeah. So it's not it's not it's not sort of quite it's you know, clearly it's not as expensive as before, but that's all conditional also on the level of growth inflectional growth. Nobody believes that capex could be cut by the hyperscalers and meta, which is fascinating to me. It makes me and I know you're a contrarian as a contrarian. I almost want to take the other side of that because I go back to, you know, in 2022 at the lows in October, the S&P

was down, I don't know, 25%. The NASDAQ was down 37 or so percent. And Nvidia and Tesla and Meta and Netflix, they were all down 70% at their lowest. Think of that. That's insane, right? But it wasn't until we started seeing those companies cut costs like Meta, where they bottomed out.

And so that would be the equivalent. They've already called down their numbers since COVID dramatically. So the equivalent now would be cutting capex. Yes. Yeah. That saved like Meta, right? Meta went to what? You know, $100, $200, right? And then rallied to $700 when they say, okay, we're not going to waste any more money on this, right? Now, if you go back to that recession risk, and I'm not saying recession yes or no, just probability going high, right?

probability of going higher, it's gonna be less advertising, right? You know, like, so you have like Meta, you have Google, right? You know, it's gonna be also less or it's gonna be delayed CapEx, okay? Like, you know, might be more directed to buybacks if there's a pullback in stocks, right? And those type of things, right? So all of these things on the margin tell me that probably there should be less or more cautious. And at some point market may actually start rewarding. Up until last year, January this year, market was rewarding. Hey, we're gonna spend so much money,

Great. Please do spend because this whole thing, I mean, I heard it so many times, you need to spend because you don't want to left behind because you left behind. There's no way you can catch up, right? So you need to be spending like a drunker sailor. So for the future that you can even grow even a lot, lot more, right? A lot of it was to me sounded like a little bit sales pitch, Nvidia sales pitch, right? Now I think companies might start

at least be neutral if they say, "Hey, we're gonna be a little bit prudent with our cash." Or if things really turn ugly, they'll be rewarded for actually. - Yeah, so they wanted to ask for forgiveness, not for permission from their shareholders. And it is amazing that Google, Amazon, Microsoft, and Meta were all trading at all time highs into their earnings reports. This is late January, early February,

all of them raised CapEx to a point that should have been, or maybe six months or a year earlier, you would have had investors cheering that, but they had a deceleration in revenue growth and they had an acceleration in CapEx and that was it. And now they're all down 20% or so. Listen, Marco, you and I could do this all day.

I know that you probably have more important people to sit down next to than me, but I really appreciate you. - Just my kids, no? - Yeah, well, that is much more important than me. I appreciate you coming back. I hope we'll do it again really soon. - Thank you so much, Dan. - Thanks. - It's always great to be here.