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Bearish Indicators Abound, With Downside Risks for Stocks: Ayesha Tariq (Szn 4, Ep. 15)

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Ayesha Tariq of Keystone Consulting joins the Contrarian Investor Podcast to discuss her bearish views on the global economy and on stock markets, what investment options she prefers right now, and why work-from-home will not persist (or at least not at current levels).

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Nathaniel E. Baker
Ayesha Tariq of Keystone Consulting in Dubai: Thank you so much for joining the contrarian investor podcast today. We have been trying to do this for some time. And I am very happy that we’re now finally able to do this because you have some contrarian views here, on markets and on the economy. And to quickly kind of introduce them: There has been some talk now resurfacing, about a Fed pivot, or at least this idea that the Fed will not be able to raise interest rates are very much longer, that there’s too much pressure from the markets. But you’re not buying that. In fact, you see a continued bear market here as we record this on Thursday, May 26, 2022. And in addition, you are not completely buying this rally in commodity prices, either. Are you saying there’s no supercycle for commodities coming? So that’s a whole bunch of contrarian ideas I just threw out there. So start whichever one you like, maybe give us a background on how you came to one of these views. And we’ll take it from there.

Ayesha Tariq
Sure. So what we’re seeing right now, at least this is everything that I’m saying is all in my view, of course.

Nathaniel E. Baker
Yes

Ayesha Tariq
So what we’re seeing right now is the triple bear market. Right. So we have a bear market in cash. We have a bear market in bonds. And we have a bear market in stocks. Right? Well, technical bear market in stocks, because because the NASDAQ has fallen below that but the SPX I think we’re still not there.

Nathaniel E. Baker
Yeah it got there briefly but never closed in bear market territory.

Ayesha Tariq
But in general, we know which way it’s going.

Nathaniel E. Baker
Right.

Ayesha Tariq
And most people seem to think that the Fed will not raise rates to break the markets, or that there may be some kind of a pivot, or what was before called a Fed put, or a Powell put. They stopped raising rates, and they go back. And this all comes from the fact that we’ve seen this play out before, right? So in 2017, 2018, 2019, when the Fed started raising rates, they had to stop at some point, and they had to reverse course, and it wasn’t just about reversing course on rate increases, but as well, the tightening of liquidity, which is quantitative tightening, if you’d like. But at this stage, I don’t think that’s what’s going to happen. I mean, I know there’s a lot of talk about, you know, he’s not. And when I say he, I mean, Jay Powell, the Fed chair will not go all the way to raising rates to a level where it’s going to break the economy, and it’s going to break the market. But the thing is, the state of the economy right now is not what it was in 2018 or 2019. The simple fact was that at that point inflation was really, really low. And inflation is a bigger killer than most other issues in the economy. It’s worse than raising rates. So he has no choice, or they (the Fed) have no choice. They have to raise rates, and they have to tighten, because of the amount of liquidity we’re seeing in the market right now: It’s fueling asset bubbles, it’s fueling price increases, it’s fueling all sorts of speculative assets. And this can’t go on forever. I mean, the debt to GDP right now is enormous. And all of this comes from the same source. So something has to be done.

Nathaniel E. Baker
Right.

Ayesha Tariq
Powell has always been seen as a little dovish, or a little hesitant. But I think things have changed. Now. I don’t think he necessarily holds that view. He realizes that part of the reason that we’re looking at a high level of inflation, and possibly even stagflation, with economic growth, slowing GDP growth slowing is their fault. And they know it. Okay? He might not say as much. But he is saying that inflation is no longer transitory, at least he’s made that very clear. But he also realizes that all of this has been created, in part, because of them. Sure. It was also because of the fiscal stimulus. And you know, the packages, which had to be done to a certain extent, perhaps, more than required, but it had to be done. But now they find themselves in a pickle, and the way inflation has increased. I’m not sure if you listened in on some of the conference calls this quarter from the retailer’s and various other companies reporting.

Nathaniel E. Baker
Yes.

Ayesha Tariq
One of the things that most of the companies have been saying is the rate of change of inflation. So everybody was poised for inflation with, you know, the supply chain issues. And the general level of price increases. I mean, this is something that people probably expected to a certain extent. But what was unexpected was the rate at which inflation increased — it was so fast in such a short period of time. And this is what is killing most of the companies in terms of margins, in terms of wages, in terms of cost. And the Fed knows this, and they have to get it under control.

Nathaniel E. Baker
Yeah. What do you what do you make of the argument that inflation has peaked? Because if you look at the CPI and the PCE, the Fed’s preferred gauge, both of these have kind of I mean, it’s not by much, but they have kind of crested, right? And second of all, you have the low base effects. If you look at a year over year, you know, back in 2021, early 2021, we didn’t have much inflation at all. So the year over year was going to be huge. But now as we move on into 2022, the year over a year comp, just isn’t that or it’s much higher. So the difference isn’t this big. What do you make of all that argument?

Ayesha Tariq
So the thing is, yes, we did see the numbers come down ever so slightly, and perhaps it has peaked. But how fast will it go down? This is something that we need to consider, I mean, the amount of liquidity that was in the system, if you try to rein it in at the same speed, we might not get the same effect, right. So the way inflation went up, it might not come down at the same speed. And I don’t think the Fed will stop until they see inflation somewhere around the two and a half, maybe 3% level, their long term target inflation rate is 2%. And I understand that that’s like a far, far away, you know, target and all of that. But I think they’ll want to tighten until we reach at least at least 3%. Because otherwise, this economy will be eroded.

Nathaniel E. Baker
Yeah. So you also do have some slowing demand, what would that that would also kind of lower the inflationary pressures, wouldn’t it?

Ayesha Tariq
Of course. No, of course, I mean, part of the reason that they are doing all of this is to destroy demand to bring the level of demand down. And I think another thing that will happen due to rate increases is unemployment. So I think unemployment is going to go up, for sure. Right now, what we’re looking at is sort of a wage spiral playing out. So this will sort of keep the inflation level slightly higher than expected. So what will happen is, people will try to keep up with the general level of inflation, they will want more wages, they will want to be paid more. And this in turn will create a spiral which will keep inflation sticky to the upside, which is why I say that it will come down, but it will probably not come down at the same speed as it went up, right. So as a result of which the only way for companies then to control costs is to layoff people. I mean, we’re already seeing this play out. A lot of the large companies have already said that they’re going to stop hiring. Some have said that they’re going to start layoffs, smaller ones, but I think it’s only a matter of time until we see more layoffs and unemployment rising.

Nathaniel E. Baker
Yeah, I mean, employment still looks pretty good. But when do you see that rolling over?

Ayesha Tariq
I think employment looks great right now. I mean, this level 3.6% unemployment. This is amazing. It’s much lower than, you know, it’s been in a very, very long time. But I think we start to see it rise progressively in the next couple of months. And I don’t think that the Fed will stop because employment increases. I mean, one of the things that they they’ve always said is that they have like, two goals, right. One is inflation and one is employment. And they want to keep the unemployment level low. And everybody thinks that yes, did you know, if unemployment starts to increase, the Fed will stop? I don’t think so. I think they are able to take on a much higher level of unemployment. So if you look at the time, I mean, if you look back to the 1970s, or late 70s, early 80s, the unemployment levels went all the way up to seven, eight percentage, and the Fed was okay with that. They still increased rates at you know, massive levels, all because they needed to control inflation, because the level of inflation is much more alarming, much more challenging than unemployment.

Nathaniel E. Baker
Okay, now, let’s talk about how this plays out in asset markets, because we’ve seen here that basically, we’ve had a bear market. Bear market plus for tech stocks, I mean, some of these tech stocks are 80% off their highs. Now, just recently, one could perhaps, make the argument and I have in the morning briefing, if you’ve listened to it, that maybe sentiment has not that sentiment has turned, but that sentiment has gotten bearish to the point where it means that it’s about to turn and the markets now what we’ve seen this week, very small sample size, admittedly, but we are seeing a bit of a recovery here in stocks, at least for this week, and some people saying that this has been the bottom, I take it you don’t buy that.

Ayesha Tariq
First of all, I’m not sure why everybody’s so concerned about putting in a bottom. I mean, there’s a lot of talk around that I understand. But we need to stop looking for it. I don’t think that we find a bottom just yet. I think this bear market plays out. For a while, we might not have a very deep bear market. But I think we’ll have a more prolonged bear market. And this will go hand in hand with the rate increases. And Qt which is still about to begin. I mean, we’re seeing all this erosion and price, even before liquidity is meaningfully pulled from the economy. So imagine what happens when it starts to get poor. And this is not even close to what happened in 2018. I mean, the the acuity or the level of acuity that they are proposing. Right. So no, I don’t think that we are done yet. We may not go much further down. But I think we will stay in a bear market for a while. However, you want to describe the bear market, but I think prices will remain depressed for some time yet.

Nathaniel E. Baker
Fair enough. And now commodities. What’s your view on that? I guess it’s further with demand. Because we I mean, we you know, we do have structural issues there the whole Russia supply coming offline. And yeah, what do you make of all that?

Ayesha Tariq
Sure. So I think for commodities, the structural issue goes back much further than anything that’s happened this year. I mean, if you look back to the last maybe five years, 10 years, you’ll notice that there’s been under investment in commodities for at least a decade now. At least, okay. And this is not just in oil and gas, but as well in, you know, salts in precious metals and various base metals even. And all this money has actually gone towards technology. And it’s only when we hit the supply chain issues, and that we realized that oh, we haven’t actually been investing enough in say, for example, semiconductors in you know, oil refineries and you know, gold mining and so on and so forth. So, it’s sort of all come to a head now, but this under investment has been going on for quite a long time. So given the supply chain issues, given your Um, what’s happening in the markets? Sorry, what’s happening in Europe, with Russia and all of this? This is all just, you know, exacerbated the situation, for which reason, prices have just soared. And part of this is demand, yes, but part of it is also supply side issues as we’re seeing. And I think prices continue to remain high for a while. So that could actually be a good place for us to park our money for a while if you’re talking about investments. But I don’t see a supercycle per se. So when we talk about the supercycle, we’re saying that, you know, prices remain extremely elevated for the next for a decade. So we’re only seeing prices go up for maybe the last two years, right. So we still have eight more years, seven, eight more years to go, let’s say, do we see prices stay at this level for seven, eight years? I don’t think so I think they will start to roll over, I think they will start to come down and ease. But the fundamental issue of underinvestment will still stay. And I think there’s something that we need to do about that as well. But in general, I don’t think we will have a supercycle per se, I think we’re just gonna forget about all of this all over again in the next two to three years. And we come down again.

Nathaniel E. Baker
Is that also due to demand, though? I mean, you have China kind of slowing now we’re certainly not buying as much raw materials as they were for the previous bull market.

Ayesha Tariq
So I think the China situation, again, is very temporary. And it’s fueled mostly by the COVID situation, their housing market was in trouble. So it’s factors in the economy. Sure. But I still think it’s somewhat temporary, when you’re talking about the demand side, they still have a huge population, they are still sort of the manufacturing hub of the world. And they will continue to consume. So I do think that demand will go back to you know, previous levels, it may take a little bit of time, but it will go back to previous levels. So in terms of demand coming out of China, I think we will see previous levels but I don’t think that will be enough to keep prices at you know supercycle elevated levels.

Nathaniel E. Baker
Ayesha Tarik, very interesting conversation so far. I want to come back and ask you some more about yourself and drill down a little bit if you’ll pardon the pun, seeing how we just spoke about commodities, into your views and how these translate into where investors should put their money now. So we’re going to do that in a minute when we come back. If you’re a premium subscriber, don’t go anywhere. Don’t touch the dial. We’ll be right back. In fact, we already are.

Nathaniel E. Baker
Welcome back, everybody. Ayesha Tariq, Keystone Consulting in Dubai. Great having you on, Ayesha. This is the segment of the show where we ask our guests to tell us a little bit more about themselves and how they got into this stage of their career. And I know that Keystone Consulting is your firm. So yeah, curious how you how you came about this? And, yeah,

Ayesha Tariq
sure. It’s a very simple story. Actually, I’ve been a corporate banker for most of my life. I started out in corporate banking, mainly because it was one of the best jobs out there at the time. So I started with Standard Chartered Bank. And then I moved to the UAE two years into my career, been working in corporate banking ever since. So I’ve worked with you know, government, large corporates, large companies. And then for a while I moved to a family office, where I was their group treasurer, if you’d like and I manage their real estate investments, hospitality, listed equities and private equity as well. Spend a bit of time there made a lot of context and then I decided I wanted to do something on my own. So I started my own company consulting with family offices with banks with various other counterparties. What I basically do is I help them raise that structure, their debt, restructure their balance sheets, they review their investments, acquisitions, more of that. And so over the last two years, I think once COVID started, you know, business started to wane a little as usual and you know, I started getting onto Twitter and looking at you know, trading and it was like a beautiful bull market. Well, why not? Yeah, so I started getting More and more involved with trading. And, you know, writing and in writing has always been my passion. So I have a substack as well. And, yeah, so here we are now.

Nathaniel E. Baker
That’s really interesting. Okay, so now as far as as markets are concerned, yeah, we’ve talked about a bunch of concerns you have with the economy, and with various asset classes, which doesn’t leave much room for where people should go. So what should people do? In your opinion, seeing as this is not actual investment advice? This is just your opinion.

Ayesha Tariq
So look, I think what I see most or what I hear most is that this is a traders market. People tend to trade whatever’s in front of them, whatever the charts are telling them, whatever, you know, the sector rotations are and things like that. So I am somewhere in between, I do like my fundamental investments, and looking at company’s balance sheets and income statements and all of that. But I also look at taking shorter term positions. So I do short, as in short stocks, and I also, you know, look at indexes and various other things. But if you’re looking for long term, longer term investments, my view would be, you know, you could buy companies right now, but I think it would be a better bet to buy some of the stronger companies. So I would say, Apple, Microsoft, Google. Having said that, I don’t think that we’re done with prices coming down. So if you’re okay with averaging somewhat, then that’s a good bet. I also think healthcare is one area, which is something that could be of interest. But also, again, some of the larger healthcare companies, not biotech, I would stay away from speculative assets completely, I would stay away from what they call, you know, high beta assets, which you know, don’t have a lot of cash flows, growth assets, there are certain, I would say second tier growth companies that aren’t so bad. So for example, if you look at snowflake, if you look at Shopify, some of these companies do have a future, and the prices have come down a lot. But I would still say be careful, if you’re taking positions, even for the long term, I would say take smaller positions, so that you can average out if need be. And if you are in the red, you’re not too much in the red, because your position sizes are smaller, I would say diversify. And for now. I would also say real estate is a good bet. Okay. Energy plays, maybe although they have run quite a bit, there are a few energy companies that you could possibly look at, but I do like REITs a lot. And I know this is really funny, because rates have come down a lot. And you know, the housing market is in trouble. You saw the housing stats this morning as well, I saw your email. So but I would say commercial real estate, and warehousing industrial real estate, we still have some hope over there. And the reason being they are dividend paying companies, number one, number two, they can actually increase rentals. So during the pandemic, what happened was many of these real estate companies, they actually had to reduce rentals, give rental holidays, so there are way below the market. So over the course of the next couple of months, I think they will start to come back to you know, market levels. As the economy starts to open, even though we’re going through a difficult period of time, I still think that they would be able to increase their revenues by increasing their rentals. So that I think real estate is a good bet. If you look at some of the larger players in the market.

Nathaniel E. Baker
Don’t you think that the commercial real estate has more secular problems with office space being less in demand with the whole work from home thing?

Ayesha Tariq
So look, I think work from home was a phase. I don’t think that this will continue as much as we would like for it to continue. I do think that 80% of the workforce will go back to work

Nathaniel E. Baker
That’s a contrarian view, also! Even though they don’t need to, and even though companies have been printing record profits with people working remotely?

Ayesha Tariq
look, being a banker, I know it doesn’t work when you work from home. I mean, we made it work because we had to.

Nathaniel E. Baker
Right

Ayesha Tariq
Okay, but who who were the first companies to ask people to come back?

Nathaniel E. Baker
The banks

Ayesha Tariq
The banks. Yeah. And don’t forget, even Google said the same. Apple said the same. I mean, if you’re thinking about super connected technology companies, even they want their people to come back. So we’ve worked in a certain way, for decades, centuries, I mean, it’s not going to change very much, I don’t think that people were as productive as you’d like to think during the pandemic. I think a lot of the excuses have to do with, you know, getting sick, and all of that, which I understand. But at the same time, I don’t think you can have the same level of productivity that you could have in an office. And there is also the thing of connectivity. So you know, the social element of being at work and being face to face and, you know, meeting people and all of that. So, I do think it might take a little bit of time, but I think people will get back to offices. However, I do think they’re, they might have flexible hours and more flexible working arrangements, where people can maybe work from home one or two days a week or you know, part of the time, but we’re going back to offices. I’m sure.

Nathaniel E. Baker
You guys have started to as well?

Ayesha Tariq
Oh yes. The UAE actually has been back to normal for almost over a year now.

Nathaniel E. Baker
Oh, wow. Okay. Yeah. Whereas here in New York, it’s basically just starting. But yeah. Cool. And a lot of people aren’t, but yeah, awesome. Very cool. All right. I actually, thank you so much for coming on the contrarian investor podcast today. Maybe in closing, you can tell people how they can find out more about you. I will put this in the show notes as well. I mentioned you’re active on Twitter. So yeah, how do we find you there?

Ayesha Tariq
Sure. So my Twitter handle is my first name. And my last name, AyeshaTariq. Yeah, my substack is the same as well, AyeshaTariq.Substack.com. You can find me at commonstock as well. Same handle, I should say. So I think if you go to my Twitter, you’ll find all my links. Absolutely.

Nathaniel E. Baker
Very cool. Yeah. Check it out. I really like reading your substack as well find out very insightful. And your tweets, of course, as well. Great. So thanks so much for coming on. Thank you all for listening. And we look forward to speaking to you again next time.

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