The Fed Will Choose Inflation Over Recession | Vincent Deluard
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The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this f***ing door.

Welcome to this special edition of Monetary Matters. I'm Max Wheatley, sitting in for Jack Farley, who is on a much-needed vacation in the Ionian Sea. Today, I'm speaking with Vincent Delouard, Director of Global Macro Strategy at Stonex. Vincent, it has been far too long. Thank you for joining us for this special episode. Very happy. I only wish I was in Corfu with Jack, but

I'm super happy to be here. Yes. All right. It's not quite the same, but I'll do what I can to make it as pleasurable as maybe one of the lesser Greek isles. So I read a couple of your pieces before we got started. You had a couple of different calls, but I want to start with the macro. And you wrote a piece about why recessions have been canceled.

looking at 2025, but also these really the past decade or two of recessions. So why is it that you think recessions have been canceled?

Well, the first one is just an observation. If you look at the 19th century, we had recession about 40% of the time. Then we had a change in the way we thought about policy with the New Deal, and that started to drop, drop even further in the 80s, 90s, very few recession. We had one big recession in 2008, and that's kind of it, right? I mean, I don't count COVID because COVID was entirely made-made. So we had about 16 years without recession.

um we had a lot of recession scares uh we had the scare in uh that after the kobe stimulus the economy we will call turkey and the fed was hiking too much we had the scare uh

After the regional value bank crisis, we had the Samuel scare. And then more recently, we had what I thought was a more serious scare, which was the Trump-Doge tariff scare. And by the way, I was in that camp. If you remember, I had this interview with Jack called Beware the Eyes of March. I got pretty lucky with timing. But part of my idea was that the economy was stagnating.

soaring in Q4. People underappreciated that. They overestimated what Trump could deliver. They underestimated the execution risk and they underestimated many other things that below the surface were weakening. If you look at consumer credit, if you look at the housing market, if you look at the cyclical sectors, autos, all that was slowing down. And indeed, we started to see that, as I expected, in January, February, March, the economy was slowing. It was coming from a very high base, so it didn't fall into recession.

But it was slowing. And then something happened in April. All the indicators that I follow, tax collection, treasury general account, started to pick up. And first I thought, well, you know, maybe it's the tariff stuff, right? People are front-loading their purchases. This is creating an economic barrage, a burst of activity. I think there is some of that. And I worry that when that reverses, we'll start to freak out again. But I think it's more than that.

It's so widespread. And I have to go back to my theory that there is something structurally changing about the nature of the economy that makes it so much harder to get into recession. If you'll allow me, I'll get into what I think are the three drivers of this recession for Europe. One is technology.

Going back to the 19th century, most recessions came mostly because the economy was either agrarian or industrial. So you'd have an adverse weather event or you'd have something like the capex cycle, the inventory cycle, and then that would cause the economy to fall into recession. Well, now the economy is about almost 80% services.

So you have a lot less cyclicality. See that also in what is it that we use to produce. When you buy the NASDAQ index today, 97% of what you buy are intangible assets. So if you were to, you know,

just try to sell the entire index and try to get your money back, you get $0.03 on the dollar. And intangible assets are very different from physical assets. First of all, very often they don't need to be financed. Intangible asset or something like brand, network effect, reputation. So you don't really need to take a loan to buy that. It just grows out of the business. You don't necessarily need to write it down.

So it's a lot less, it consumes a lot less capital than before. And it means that the economy is much less sensitive to the things that use the cold recession, credit cycle, inventory cycle, etc.

and the investment cycle. The second reason is really policy. This has been really the big idea of the past century is that governments should try to prevent recession. That was not a thought in the 19th century. Remember Hoover's speech, prosperity is just around the corner, right? You just let things heal and the economy will bounce back. And then we have this paradigm shift with FDR

It's like, no, the job of the government is to avoid recession. Then we amend the Federal Reserve Act. We ask the Fed to start intervening. And it seems that every crisis we added more arrows to the quiver, more tools to fight recession. And we are more and more willing to use these tools in a hyperactive way.

Like you see, for example, the Samuel panic last summer. I mean, it was clear to anyone in their brain that this was due to immigration. But still, the Fed cut 50 basis points because of some made-up measure of the unemployment rate crossed on made-up moving average. So hyperactive policy.

And we keep seeing that, like same thing with the trend tariffs. The moment that we saw the stock market start to fall, the bond market start to worry, why do we get the big, beautiful bill? And the big, beautiful bill has all the bills and we saw all the tax cuts.

So, yeah, to me, it seems that every time you have an outside shock, which is something that, of course, is going to still happen, right? We still have war, pandemics, weather events. Policymakers have a choice to make. And that choice boils down to a trade-off. Either I'll accept the way things are and I'll let the economy heal and I'll accept higher unemployment for a couple of quarters, or I'll fight back with stimulus at the risk of creating inflation.

And it seems to me that that trade-off almost actually all the time is moving towards that we prefer the inflation risk over the recession risk. So policymaking has become structurally more inflationary, if you will. And then the third reason is demography. So I was looking at health and human services and social security spending. So that's basically pension and entitlement.

It has grown by 10% a year since 2022. Now, that's after COVID. I'm leaving COVID out. I don't want the COVID disruption. This is structural growth in basically healthcare entitlement by 10% a year. Now, we spend about 10%, a little more than, well, altogether, that's half of the government budget. That's about 20% of GDP that we spend on these two sectors.

That's growing at 10% a year. So it's 20% of GDP is growing at 10% a year. That gives you a growth baseline of 2%. Now, normally the economy grows by about 2% a year. That's productivity, right? So you add these two together and you see that you have such a high growth baseline that yes, we can have shock. And I think we will. I still think the economy would slow. We have many things that are looking quite recessionary, like consumer credit,

housing sector. But because we have this high baseline, the best we can manage is kind of a stagflationary drop. And I still think it's going to happen, but a recession where the unemployment rate goes up, where GDP declines for several quarters, we're probably not going to see it in 2020s.

Do you think any of it is like there's a fourth reason, perhaps it's behavioral, that it's been so long? If you have bet on recession, it has generally hurt you that the sort of nothing ever happens crowd has infected not just market participants, but also the corporate executives who can make decisions that lead us into recession to like layoffs or. 100 percent. I think we've seen that right now.

One reason why it felt so scary in April was how are corporations going to respond to this? It's a huge shock to the cost base. Are they going to fire a bunch of people? And no. You see the labor market

So I track it for the benefits paid by the Department of Labor, which you can see on a daily basis. And it gives you a little bit of an edge over the unemployment claims. But the weekly claims are not budged. The job reports, I mean, yes, I know there are all these issues about, you know, birth, death and then revisions. But I mean, generally, you know, it's pretty solid at about 150 a month.

And yeah, it seems that we went from the great resignation to the great stay. We had this abnormally high turnover after COVID. And that turnover was not because of corporation, by the way. It was because of workers, right? The Gen Zs were quite quitting, acting their wage, all that stuff. But the corporations, I think they got scarred by this. And then they're reaffording onto labor in a way that somewhat reminds me of Europe.

This is a way where the U.S. is kind of turning German. The German model famously is, you know, they have this super-cyclic car economy, right, because they're export-driven. They have a lot of heavy industry. So...

They're very dependent on exports. So they have pretty deep recessions, but they usually don't last all that much. So when that happens, what the German companies do is that they keep the workers on payroll. Maybe they do some part-time. They tell people, hey, maybe take your vacation. But they don't fire people. And that means that when demand comes back, they are ready to operate. And the U.S. is moving to that model in large part, I think, because of labor quality and labor shortage issues.

Companies have seen in 2022 how hard it was to get quality labor to stick around. They fired people way too quickly during COVID.

And they don't want to repeat that. And I think they're right. At the end of the day, it looks like this dairy thing is maybe overblown, taco. Instead, what we'll get will be a huge, big, beautiful bill that will stimulate demand. So probably it was the right decision not to fire people in April to rehire them in August.

Yeah. So you are calling for no recession in 2025. What if the tariffs do come through with a little bit more teeth than the market is pricing in right now? I would be in that camp. That's one of the reasons why I have this call for a July correction. I think right now we're all high on the

on the pause, but the pause ends and the deadline is July 9. There are something like 200 countries in the world, including the ones that have penguins on it. That free trade deal has been in the paper for five years, something like that. So the notion that Trump will be able... And it's not like

other countries are rushing rushing in to to get something right i mean all we had so far is the uk with whom we already had a free trade deal and we had the surplus so it was not not such a big w for uh for the administration so yes i agree with you the tariffs are going to come back um and that yeah i think that's going to cost the market for the city i think there are other factors in july that would mean that stocks are vulnerable um

Now, your question was about recession, right? And my answer was about market impacts. And I think that's how we're going to leave it. I think when that happens, the impact will be on the stock market.

But the economy will probably still be okay. I mean, there might be a little soft bash between, you know, when the tariff hits and the fiscal stimulus kicks in, right? Because the big beautiful bill applies mostly to next year. So there might be a couple months. But again, I kind of trust now this foreign U.S. consumer to just power its way through and just keep putting in the credit card, knowing that the fiscal relief is coming in 2026.

Well, that squares nicely with what you said about entitlements and just how big that is for pushing the economy forward. I mean, that is definitely booing the U.S. consumer. But tariffs, as you said, are going to hurt the market. They're going to hurt corporations perhaps more than the economy. And I think that's a nice segue into one of your other big calls, which is MAGA's war on corporate America. So maybe we could start with the tariffs and then move into some of the other areas that you think –

are really going to be tough for corporations to deal with moving forward as this policy continues to unfold. Yeah. So the idea behind that piece was that what we are facing ultimately in the US, but pretty much every Western society is a game of hot potato. The hot potato is this demographic problem that we have, is this bulge of boomers that, you know,

greatly contributed to this kind of disintegration and growth when they were working. And now they all retired more at once. They have very high expectation. They voted themselves very generous entitlements. And there is not a big generation to support that. And none of them haven't saved enough or they haven't saved the value of what they've been promised. So there's a question of who's going to pay for that. And

In the background, I think we all know that there is only two ways we can pay for stuff, either we tax corporation or we tax income. I mean, we could tax sales. That's what the Europeans do. But in the U.S., we don't want to do it. So for the U.S., it's corporations or personal income. I mean, this is the only way you make money. You raise money as a government.

And I think the reason Trump won is because he authored a third option. And he said, no, no, no, guys, we don't need to take it from the companies. We don't need to take it from your paychecks. We don't need to cut government spending. We can take it from foreigners. So the plan was to do it with tariffs, with the big, beautiful lie that foreigners pay for tariffs.

or to do it via some sort of grand Mar-a-Lago accord, the idea that would convince all the central banks in the world to willingly forego coupon payments on about $8 trillion in dollar reserves. Yeah, if we could have done that, we'd have saved $400 billion a year. Four months in now, it looks like both are not going to work. I mean, tariffs are going to generate money,

Let's say we have about 15% tariff rate on imports of about a trillion. So goods import are $3 trillion. So we're going to get about $300 billion in tariff revenues, but that barely covers the increase in spending that we already have.

from the Trump tax cut, the growth in entitlement spending. So that really just keeps you where you are. And then we add all that new stuff. So tariffs are not going to significantly contribute to the reduction deficit. And also tariffs ultimately are not paid by foreigners. They are paid by corporations. So there's that.

So we are figuring out that, yeah, that promise of getting foreigners to pay for it was always a lie. And I suspect a lot of people, the smart people in the administration, the kind of populist side of things like the Bannon, the Miller, the JD Vance, they knew that it was always going to come back to this fight between, okay, are we going to take it from labor income

individual income or are going to take it from corporations. And I think now we are at the pivotal point where we see that MAGA's loyalty is with labor, not with corporations. If you look at that big, beautiful bill, pretty much everybody gets a tax exemption, right? No tax on tips, no tax on overtime, no tax on social security. We get the highest state and local tax deduction. We get the child tax credit.

All of that is basically to protect workers from the inflationary shock of tariffs. On the other side, there is nothing for corporations. The only tax rate that doesn't get cut is the corporate income tax rate, even though Trump had promised to take it down. That's the one promise he stepped back on. And I think that is a clue as to the direction of Madara.

which is as we realize that we cannot just single handedly rewrite the rules of the global trading system and we have this financing crisis, we'll have to fund it via a mix of inflationary policies, which we certainly are seeing that with the budget blowing up and

a mix of taxes on profits, which is what it should, by the way. If you look at a long-term chart of corporate profits to GDP in the US, it was very mean reverting. For 100 years, that thing just bounced around 5% of GDP. And then in the mid-90s, it started to take off, go to 14%.

So if someone can pay, it's probably corporate profits. And ultimately, yeah. I mean, you know the thing about like robbing banks, like why you rob banks? Because that's where the money is. Well, if we look at the US economy, where is the money? The money is in corporate mortgages.

Yeah, I think it was Besant who made the comment about, you know, Wall Street has had it well for however many number of years. It's Main Street's turn. And I think people looked at the taco walk back on tariffs as sort of running away from that. And there is another way to perceive it, which is it was less about the corporations and more about, you know,

Foreign relations, it was not about whether the corporations were upset. It was about dealing with our allies and other countries around the world and the bond market, which is what this is all for, to fund the debt. So do you think that corporate taxes are going to go up this year? Do you think it's something that he's going to want to get the big, beautiful bill through and then move on? I don't think he's going to try to move the rates so much.

But I have faith in the miracle of inflationary growth. And we are seeing that now. If you look at receipt, corporate income tax receipts in 2025, they're up by 20% over last year, even though the rate hasn't changed. And that's because, yeah, you keep...

kind of stimulating the economy, some of that comes back to you. Uh, and it comes back. Yeah. Yeah. Yeah. Taxation. Uh, so if you increase spending and you don't touch a corporate income tax rate, uh, and you cut every other taxes at the end of the day, you are more reliant on, on, uh,

corporation as a source of your funding. So instead of getting, let's say, 10% of GDP for corporate income tax, that goes up over time. I would add tariffs to that. I mean, at the end of the day, I think tariffs are a tax. I mean, effectively, they are. Corporations are paying their taxes. So if we just look at who

It's paid by the importer, so it's paid by a corporation. And then in terms of the incidences, economic impact of tariffs, it's now being borne by the currency. That was one of the hopes of the pro-tariff crowd. It's like, no, the dollar is going to go up. So effectively, the exchange rate is going to be at the cost of the tariff. But that's been the exact other way. The dollar has gone down.

And it's really not going to be borne by the consumer because the consumer keeps getting this relief. Like that's, that's the bargain in Japanese days. Like, yes, I know it's going to hurt, but trust me, I got you. I'm going to cut your taxes. So at the end of the day, it's going to fall on, on, on corporation. And then another way it's going to fall on corporation is, yeah,

Yeah, we let the deficit grow, financing costs go up, and that eats up the actual margin, corporate margin over time because of higher financing costs. So, I mean, do you think that's enough to cover the other cuts that he's making or are we still in a state of fiscal profligacy? Hard to tell. In general, I think people underestimate...

the power of inflationary growth and how long that can last. I do believe that we have a fiscal balance of payment crisis, which

In a sequence, it's very similar to what you see in Latin America, in Brazil, in Argentina, in Venezuela. We really see all the playbooks short of the maturity of the debt, get the banks to pay for it, try to get foreigners. I mean, we're following the Latin American populist playbook. But there are two things that I think the market misses. One is...

The first effect of that is growth goes up. You should remember the Lula years, we were talking about that, right? When you were selling Portuguese at university because you thought Brazil was going to take over the world. That happened, right? When it had the Bolsa Família and the Brazilian economy really surging when that fiscal spend took off under Lula. Yeah.

And it works very well, by the way, in a large economy that is highly unequal. If you transfer income to...

Poor people, they spend a lot and they spend domestically. So your multiplier is actually working quite well. I think the U.S. is quite similar to Brazil in that way now, in the sense that we are a very large economy. We are still mostly domestically oriented because of our size. And yeah, if we give money to poor people, which is what we do in COVID, I mean, you have a huge impact on growth. So that inflationary growth dynamic can last quite some time. Yeah.

I think since COVID, the U.S. nominal growth has averaged 7%, about basically 3% real, which is very good, and 4% inflation since COVID. If you grow by 7% nominal, you can have a $2 trillion deficit. I mean, $2 trillion is exactly 7% of GDP, so your debt-to-GDP ratio doesn't go up.

So I think that that period of inflationary growth is something that the economic gas and rather one that, you know, CBO scoring maybe misunderstand how long that can last. And then the other thing that people misjudge is just the U.S. is not Brazil.

We are the world's hegemon. We have resources that other countries do not have. We can squeeze foreigners. We can change rules on a whim. We can tax foreigners. By the way, we are seeing this happen. Like in the big, beautiful bill, there is this notion that we can tax interest income or dividend income

to be received by foreigners from countries you don't like. I think initially it was made for Europe. The idea that if Europe puts a digital service tax on our tech platform, then we're going to take... But it can be applied to anyone. So that's an example of the measure that the US can take to make this last for longer. So I feel like with a lot of the bears here,

They have the problem of the good student who has read the book before the assignment. You know, he knows what happens at the end of Harry Potter. I know, I know. At the end, he... Well, yes, but you have to go through the seven books before you get to the end. And I'm not sure we're at book number seven yet. The... Yeah. Okay. So I guess... Look, I think there are a couple of calls I want to hold your feet to the fire on, which is...

All right. So where do you think inflation is going to be? Where do you think growth is going to be? Where do you think bond yields will be as a result of that? And then, you know, if corporate profit margins are the target here, what does that mean for stocks? Wow. The big four. Well, okay. So the big four are inflation, growth, margins, and what's the... Oh, the rates. Okay.

Short term, I mean, I've done hours of podcasts with Jack and other talking about inflation. And I've toned it down in the past six months, partly because I remain in the long-term inflation camp. And I would have no problem giving you the answer. I think over the long-term inflation, average is 3%, 3.5%, 4%.

Short term, it's a lot more difficult because I do see some disinnovation retail in the economy. I mean, you know, that's... If you look at shelter, shelter is decelerating. We have, you know, if you look at inventory of household homes, even in California, it's really picking up. And shelter is about 33% of the CPI and it feeds through other expenses like insurance. So...

Now, I would argue that this is not that relevant to people's lived experiences because you buy a home maybe twice or three times in your life. So I think ex-shelter inflation is reaccelerating. That's the easy answer.

And it's hard to make a precise forecast because we don't know what the tariffs are going to be. But inflation is going to be a tug of war between a shelter that's driving it down and then cold goods is going to push it back up. And my guess is, yeah, it's going to be in the high threes, but it's a low-permission gas. I need to see what the tariffs are going to do. On the margin, I think companies will pass it through. This is what that...

Fed study, they studied the impact of tariffs on a bunch of things in New Jersey, and they found that 80% of them pass it through to consumers. And I think that's just a product of two things. One is the cartelization of the U.S. economy. For 40 years, we've merged industry after industry, consolidating everything. We had this big change in the antitrust doctrine in the early 80s. Before that, we were going out of the Sherman Act,

Any merger was bad per se. And in the early 80s, we changed it. You only have to actively prove that the merger is going to raise prices. That opened a huge loophole that allowed companies to merge. And we're four years into that process. And if you look at, for example, the food industry, there's only two companies. If you look at healthcare products, three companies, toothpaste,

I mean, you can keep going. Cable company in New York. Basically, we live in a very oligopolistic economy, and that means that corporations have pricing power. And yeah,

If there's a shock, I think their instinct will be to raise price just as they did during COVID. So that's the first reason why I think-- - Even companies that aren't affected by the tariffs have been able to pass-- - Correct. Yeah. - Price increases through. - Yes, yes. We had this mimetic inflation, if you will. "Oh, that guy is raising prices. I'm going to raise mine." And you see, I mean, the justification is that, well,

You know, if you have a portfolio of product and then your conglomerate and your margins are getting hit on one side, then you raise on the other side so that you make up for it. But yeah.

inflation contagion, if you will. So yeah, I believe corporations are going to pass it through. I also believe that by and large, a consumer will be able to take it. I am concerned about consumer credit. I know you're going to have Mike Green there. He's a lot more concerned than I am. And there are some stats that are quite scary about consumer credit. I think it's getting worse, but it's not

at the crisis point yet. If you look at the Fed, the New York Fed report on household credit, you'll see that these issues are growing indeed, but they are concentrated in the top bottom percent of the income distribution, which is not, unfortunately, a big share of consumption. So yes, my idea is that COVID prices are going to go up significantly as a result of tariffs and also as a result of the weaker dollar. So my guess is that inflation is going to pick up

And then over the long term, I cannot tell you what it will be, but I am almost certain that once the tariff shock passes, there will be another shock. And that's, I think this is where my disagreement with the disenfranchisement comes is they're not wrong when they keep telling me, Vincent, this is just a one-time adjustment in the price level. You know, this is,

And, you know, that's what Besant says. Oh, tarot, you know, just one time and then, you know, it's gone.

My problem, my point, my counterpoint to that is that, yes, but how many one-time adjustment price level do we have and how many do we need to have until we agree that what we see is a forest and not a collection of trees? You know, it started with COVID. Oh, that's just a one-time thing, right? The supply chain, oh, that's just a one-time thing. The Biden stimulus, just a one-time thing. The green, I mean, this is the,

And all these things, by the way, they were the product of policy. They were not acts of God. Even COVID was not an act of God. I mean, I'm not going into the conspiracy theories here, although there's probably something to be said there. But the reaction...

was we could have just done nothing about it. I mean, there's a reason why politicians kind of freaked out and overreacted and why they keep doing it again and again and again. And I think the next shock that we have, whether it's a war or whether it's a commodity price spike or a pandemic, we'll have the same story. So that's why I think over time, that 4% number is going to be like a magnet for inflation. It's going to... 4% is the new normal, 2% is the floor,

And then we'll see this inflation of a bounce around it. So that was a long answer to your inflation question. Then you had the question on rates.

Yeah, I think rates are probably the natural place to go. So, I mean, there has been a lot of talk about the Fed sort of moving the line on what their inflation target is. They just I think they just scrapped average inflation targeting now that it's looking like it's going to go the other way for a while. So I think that's pretty funny. So do you think that rates are going to stay where they are despite inflation maybe coming up to three, four percent?

yeah i think over time rates rates go up and that that's a healthy process uh if we think we have you know three four percent inflation and and two three percent real growth in the new normal yeah you you think you know rates have to be long-term rates have to be six percent and that's without even a term premium um so um uh yeah over time i think we are in a world of higher rates higher growth and then higher inflation

And do you think some of that has to do with the boycotting of U.S. debt from the rest of the world? We haven't talked too much about how the rest of the world is thinking about U.S. bonds at this moment in time. Right. So the rest of the world hasn't bought many U.S. bonds for some time. I think the

capital repatriation story is mostly an equity story at this point, because foreigners have already done that switch. I mean, if you look at foreign central banks, at least if you read the tick data, they haven't bought since 2014. That boycott started when they imposed sanctions on Russia after the invasion of Crimea. So that's the main reason why we had so many problems in the US and why we had to take care with the

capital rules for banks, why we are so reliant on the basis trade and basically hedge funds financing the treasury, why we are so excited about stablecoins as a way to absorb some of that issuance is because foreigners are not going to buy, they haven't been buying for a long time. The question is, would they actively sell? I guess would be a way it could play out.

I think it's a bit costly for several banks to do that. Typically, you see them sell FX reserves when they are under stress, i.e. when the dollar is too strong. Not right now. So I don't quite believe in the notion that, oh, China and Japan are just going to temple their treasuries to get what they want from the trade deal. These treasuries have a purpose. So I think they're just going to sit on them and not touch them.

Well, if they move the price down, it's going to hurt their reserves, too. It's not like Soros calling up the desk, like, get me flat by Monday. Like, Japan can't unload their treasuries that fast. Exactly. It's like they would be shooting themselves in the foot in order to hurt the U.S. And I think there are other things they can do that will achieve the same result.

Okay. Now, my final question was, what does this all mean for stocks? If you think margins are going to be hurt, maybe they'll be able to pass on some of it to the consumer. You called for no recession, but some weakness in July. Yeah. So let me start with the big picture and then I'll go to the July outlook. The big picture really is,

There are two offsetting factors in my theory. The no recession thing, which means that the valuation should be higher. And then the Mad-Di versus corporate America, which means at the end of the day, corporations are going to have to pay, which means margins are going to be lower. So on that, it's kind of hard. It's neither bullish nor bearish for stocks. I think we end up in a world where valuations are structurally higher, but margins are lower.

So you pay more for earnings, but you have less of it. So at the end of the day, the P may not change all that much. Let me start with the valuation part. So when you have a true bear market, like something like...

2008, 2009, you really have two things that happen at the same time. One is a re-rating of the multiple. People are like, oh, we were too optimistic. Stocks are not worth as much as they are. And that's how we say that that's your first 20%. It's the most, oh, we got too excited. Okay, that's the first 20%. And then you have, oh, the earnings is falling. So you have both the multiple and the earnings that are falling at the same time. That's what gets you from 20% to 50%.

If my theory is correct, we can still have the first part. Oh, the multiple is too high. We got carried away. We got to correct that. I think we're still in July, by the way. But the earnings doesn't fall. So if the multiple falls enough, you get to a point where you're like, hey, I'm going to buy stocks. So I made some calculation using the discounted cash flow model of what combinations of...

of multiple and rate of return on equity capital can we have if we keep EPS growth at about 6%.

And it seems hard to me to see that multiples would fall significantly below 16 in that new world. Now, typically, in secular bear markets, you see multiples fall in the low teens, sometimes even below, right? In many foreign markets, you have single-digit multiples. So to me, that's a hard stop. So I think, to quote Fischer,

and maybe at the risk of looking like a fool for multiple generations, I would say that multiples have reset to a permanently higher plateau. That plateau is somewhere between 17, 18, and 30. Right now, we're in the middle of that plateau. We're at about 23, 24.

So yeah, my idea is that in July we'll have a correction that will bring the multiple down to 18. But then I would buy the dip. So that's the valuation argument. Now, if we move to the margin argument, that goes the other way, right? If we normalize profit margins, I think a lot of the U.S. profit margins

are due to this excess government spending, excess immigration, and cheap foreign capital. These are the three main reasons why we've seen margin take off since the mid-90s. And as we're fighting all of that, I mean, at some point, we're going to have to slow down the spending, although it's not happening yet. At some point, it will. Immigration, we've already cut down. And then the flow of foreign capital is slowing. So U.S. margins will slow.

all this US exceptionalism, this view that the US is so much better than the rest of the world, that US business just by virtue of being incorporated in Delaware are superior to the other 7 billion human beings on Earth. I think that's kind of going to go away. That was an illusion. So we have a normalization of margin. So maybe we have higher multiple, lower margin. That's why I'm not a long-term investor

I'm a lot more worried about bonds than I am stocks. I am probably more bullish on things like alternative assets, commodities, crypto, gold, that stocks. But stocks, I'm in the middle of that view. So how do you square the end of US exceptionalism with a permanently higher multiple compared to the rest of the world?

Well, I think the first step, and we are seeing that, is a reallocation, capital repatriation.

And I think we barely started that process. I think for the past, we basically ran a capital account surplus. So that's almost 50 years now. But really, I think the capital surplus of the U.S. used to flow back into real estate, into treasuries. And then the big change in 2015 is that it went into stocks. Basically, the rest of the world massively invested in

in U.S. stocks. I mean, 90% of all trade surpluses were invested back in the U.S. So a country that accounted for 10% of the world GDP received 90% of the world excess savings. That's more like 15% GDP. I mean, that's clearly unsustainable. You can see that, for example, if you look at the asset allocation of European pension funds, which a lot of them are client, 52% of their equity allocation is U.S.,

Just five years ago, that was 35%. That's a huge shift. And given that Europe, yeah, Europe may not grow very fast, but we're still very wealthy at about close to a trillion dollar in excess savings every year. If we put half of that in US stocks. Yeah, just going back to benchmark, just realizing, hey guys, maybe we should not invest

put all our savings in seven stocks of a country that threatens to attack us physically. The US is still making claims on Greenland. And I take the example of Norges Bank, which runs the Norwegian pension fund. They have all this own wealth that they reinvested. They have about 100% of their GDP invested in the max seven stocks. And that just strikes me as completely insane. Like you are going to,

Put 100% of your GDP in seven stocks of a foreign country that is threatening to attack an island off your...

I think people are going to look back at this in 50 years and think this was completely insane. The same way today we look at the Japanese real estate bubble and we tell all these stories about the Imperial Palace being worth more than California. This is going to be with the US. So yeah, I'm a believer in this idea that for the next maybe five, 10 years, the US will underperform as a result of capital just moving back to Europe, to Japan, to Southeast Asia, to Korea.

So you think it'll be more of those multiples expanding, approaching the U.S. than it is a contraction? And even going back to what you said like five years ago, the percentage of U.S. pension fund assets, the multiples were already very high at that point in time. So it's not like by going five years back in time, suddenly the U.S. multiples are going to look like European multiples. Yeah. I mean –

I think at some point, maybe we'll see multiples come down. We'll see that when we have the bull market vigilantes moment. And we had maybe a little bit of a preview of that in April when bond yields started to reach 5% and equity is selling off. The moment we step away from this inflationary growth,

process. I mean, I look at it, it's gone too far. We've had to take the medicine, kind of the Volcker moment, right, in the late 70s. Same story, I mean, in the 70s, like, stocks don't do so bad because earnings are growing quite rapidly because the economy is growing quite rapidly. Really, what killed them and it's only at the end is when the, you know,

10-year yield goes to 16% and multiples get destroyed. But we are quite far away from that. So for now, I think we can still have decent earnings growth because the economy is growing quite well. We can have a fairly high multiple. So that means we have these brief and shallow corrections that are driven mostly by flows.

And I expect one of these corrections to take place in July. Okay. Now let's move to maybe some of your other more high conviction views. You mentioned other assets like commodities, gold, digital assets being places where you actually are more bullish. So why don't we start with energy? I know you wrote a piece there and maybe we can get into some of the other asset classes you like. Yeah. So the reason I like energy...

is because it's the only sector that still bears the scar of this imaginary recession. For much of the past five years, we had this tug of war basically between the bond market that was seeing a recession around the corner every time and the equity market that was just whistling by. Yeah, that's fine. 24-time earnings. I'm cool.

And by and large, the equity guys were right and the bull market was wrong. Typically, it's the opposite. People say the bull market is smarter and the equity guys are dumb. Well, the bull market has been really dumb for five years. So that growth trade has been hard to express with an equity view because equities never really priced or not. I mean, there were dips, but the dips were bought very rapidly. You didn't really see the recession in the equity multiple.

You could see, I think the best way to play my trade was with Sofa Futures. You just bet against cuts. So, you know, when the market was pricing like seven cuts and we had like one, that was a fantastic trade. Or you could do it with inflation break events. But equities were, you know, they weren't always in my camp, if you will, with one exception, the energy sector.

If you look at the valuations of the energy sector, they are really pricing a world of pain. You can buy really good names for six, seven times free cash flow. These are companies that have used buybacks that pay very generous dividends, very good balance sheet. And part of that had to do, I think, with the OPEC story.

I think that the market didn't want to pay too much for the future earnings of energy companies because they thought, oh, OPEC is just going to increase its supply and there's this gap on prices. Well, we already had the OPEC event.

I think the market kind of misread that. I think the OPEC event is actually not that bullish. They're not really increasing production. They're just acknowledging that production was increased before. And they said in the press release, there was a temporary adjustment that's going to be reviewed. I also think there is a, maybe there's an OPEC cap, maybe there's a China put. Every time we see oil prices fall below 60, you see Chinese buyers emerge. So,

And yeah, so valuations of energy companies have been trashed. And if I'm right, that growth is going to be better. I mean, this is the most, energy is the most growth sensitive asset. I mean, that's what growth is. Growth is the consumption of energy. And in general, yeah, I think the,

it's not just the us by the way where i'm bullish on growth i'm actually more bullish on growth outside of the us um i think a lot of the internationalization um banks uh really hate trump they hate tariffs uh so whenever they had to come up with with growth forecasts they really take took that down to kind of make a point you saw that in the uh the imf on their world economic outlook i mean they knocked down like global growth by uh

If you convert that in number, it's more than a trillion. The tariffs are not... There's going to be, what, $300 billion in tariffs. At the end of the day, we're talking about how can that knock off a trillion dollar in growth? $300 billion, which you're going to spend, by the way, right away. I mean, we're taking the money, but then we're spending it in tax cuts. So it's just a transfer at the end of the day from one price to another.

And also, there's dramatic reaction to these tariffs. We see Germany rewriting the debt breaks, deciding to spend a trillion dollars on building an army and infrastructure. They just announced a 50 billion euro tax package. In China, I think we are going to see that stimulus. Of course, you see how the Chinese war plays, but we are going to see the Chinese consume more. And in general, in the Asian region, we have a reverse currency crisis unfolding.

It's like 1998, but backwards, right? 1998, it was just one country after the other, right? So with Thai Baht and Indonesian Rupiah, then the Korean Won, and they all went down together. And they had to go down because they compete with each other. Now, the exact opposite. So the Canadian gold mine was Taiwanese dollar. Then we had the Malaysian Ringgit, the Korean Won, and we see all these Asian currencies go up. Now, what do they have in common?

is that they are all islands that import 100% of that energy. So if Taiwanese dollar goes up by 10%, suddenly the Taiwanese are richer, so they're going to spend more, they're going to take vacation. So global energy demand, I think, is going to be much stronger than people think. And yeah, it's one of those rare assets that you can buy for a very reasonable price.

And what about just the realignment of trade routes if tariffs do come into play? Is that energy intensive? Yes, yes, yes. I guess I'd say realignment of supply chains. Yes.

Yes, and I think for two reasons. One is just, you got to build it. It's the same story with the green transition, right? The green transition ended up being quite positive for fossil fuels because the first step is you have to build a solar panel. You have to build a windmill. You have to bring them to where they're going to be located. So you need more fossil fuel to do that. The same is true with supply chain. I mean, I remember being in...

in Monterrey, Nuevo León, north of Mexico, two years ago. This was right when they opened the big test agilia factory. And the place was insane. You'd see cranes everywhere. I mean, it was like the earth was being tore apart because, yeah, what we're trying to do, we're trying to shovel, shove,

half of China into a tiny state in Mexico. So as you do that, it's very, very intensive. Now, maybe over time you could say, well, it's going to be better because the production is going to be French, it's going to be closer, blah, blah, blah.

I'm not even sure, by the way, because land transportation is very energy consuming. It's very efficient to move stuff by boat. I mean, China has world-class infrastructure. It has world-class river. So you can move things from Chongqing, from Chengdu on the river and then off to the port for very little energy cost. I mean, I ran a little experiment on Shab-GPT, which I thought was fun. I used a pair. I was like, okay, what consumes the most oil? Is it getting a pair of...

So, I mean, San Francisco, is it getting a pair from Oregon where they have a lot of pear trees or Argentina where they also have a lot of pear trees? And it actually takes more oil to get that pair on Highway 5 from Oregon to California than it takes from Buenos Aires to the Port of Oakland because, yeah, containers, all that is very efficient. So I'm not even sure that this kind of

new age of our shortage supply chain is going to be that much more energy efficient. The world we had was the world of maximum efficiency. So do you think oil is the way to play it? These energy equities, is there an optimal expression of the trade in your view? Either way, I mean, if you look at the oil price chart, I mean, if you compare it to all commodities this year,

Oil is the only one that's in recession, right? If there's a global recession, you have to tell it to platinum prices or palladium or copper prices that are all holding up. So oil has been a bit laggard. So it would make sense for it to catch up. It's probably the most immediate one. For longer term to medium term, I think the energy companies are really cheap. As the share of the S&P 500, they are that cheap.

maybe a record low. But if you get a share of earnings or dividends or buybacks, I mean, even though they're like probably less than 1% of the S&P right now, they probably pay 3% or 4% of shareholder payments. So I would definitely, in an equity portfolio, I would be very heavy on energy companies, both in the U.S. and abroad.

Is the dividend yield above the roll yield right now, or are they pretty close? By roll yield, you mean the- The backwardation. I think so, yeah. I think it is, yes. I mean, the curve is backward-aided, but it's not usually backward-aided asset checks. And the dividend yields are pretty high. In some of these names, they will pay like 7%, 8% a year dividend. Okay. Now, what about any other asset classes beyond energy that you think you have a higher conviction view?

I mean, I know it's preaching to the choir here, but the world that I'm describing is a world where gold and crypto assets do well. If we are talking about secular inflation, if we are talking about kind of inflationary booms, and seems to be the case, kind of fiscal dominance story, at the end of the day, that leads to

financial repression or printing away the debts. So things that cannot be printed away generally should do well. Okay. All right, Vincent. Well, is there anything else I missed? Yes. Let me try to do the thing that no one should ever do on a podcast, which is a short-term verifiable forecast, which is my view that we're going to have a correction in July, mention the tariffs,

We're going to have, I think, monetary policy is going to be some uncertainties coming back. Some people still expect a cut in July, but really it's going to be about the full guidance for September. We're also, I think, going to start seeing the impact of tariffs, maybe not on earnings, but in terms of the guidance for formal quarters. I think some of the issues that we'll discuss with migraine and the consumer may start popping up also.

And then I also worry just this very first week of July because companies will be reporting earnings. When you report earnings, you're in blackouts. You cannot do buybacks. I think one of the things that really helped the equity market in April was companies coming back, buying on their own stocks. Now they can only do that after they report earnings. So the stock market will be vulnerable. And also we'll see the target date funds having to sell stock

or at least allocate new money to bonds, but not stock. Since April, stocks are at about 22%, bonds are flat to down. So target date funds, which need to go back to their policy weights, will not be buying stocks. So you won't have your buyback bid, you won't have your target date fund bid. You'll probably have some chaos from Tariff Man. I don't think the talks with the Great French Sea are going to go so well. Earnings season is going to be okay, but not as good as last one with possibly negative guidance.

And Fed policy, I think the Fed is probably going to disappoint the market again when it comes to the path of rate cuts. So you really have all these forces. Oh, and I forgot to mention, since we had the debt ceiling lifted, now the U.S. Treasury will be allowed to issue debt again, which will tighten liquidity. So all of that is converging toward early July, which is my forecast for a double-digit correction in early July.

All right. Wow. That's quite the call. One final call I'm going to ask for. Do they cut in July? No. No cut. So you're saying no cut and disappointing forward guidance. Yeah. I mean, unless the market is really taking a dumb, I think that's sad. The first, if I'm right about the July correction, I think they'll cut in September. Okay. All right. We'll leave it there, Vincent. Thank you so much. Thanks, Max. Thank you. This closes on North.