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Tag: recession

A Global Economy Beset by Discrepancies, With Joseph Politano (Szn 5, Ep. 3)

Joseph Politano of Apricitas Economics joins the podcast to discuss his views on the various discrepancies in the global economy — and how the whole thing may play out.

Content Highlights

  • US home prices could be due for more declines, based on how housing starts and interest rates have been trending (2:15);
  • How much of the strength of the labor market is due to interest rate hikes not having taken full effect yet? (4:09);
  • Expecting a ‘mild recession’ may be as naive as anticipating a ‘soft landing’ (8:44);
  • Traditional leading indicators are out of synch, with manufacturing employment dropping precipitously but the services sector going from strength to strength (13:30);
  • The Fed may have already overdone it with interest rate hikes (14:57);
  • The ‘best case’ scenario may be akin to what happened in 1995-96 (18:15);
  • Background on the guest (22:23);
  • What to (possibly) expect from Fed policy the rest of 2023 (27:29);
  • Watch Japan’s monetary policy as well (34:17);
  • What about cryptocurrencies as a systemic risk? (39:08);

More on Joseph Politano

Quick Highlight From Our YouTube Channel


Nathaniel E. Baker 0:35
I’m here with Joseph Positano of a Apricitas Economics, which I probably just mispronounced after going through it three times with Joseph here about how to pronounce it. It’s been a long time since my last Latin class, but so bear with me. But anyway, Joseph, thank you so much for joining me contrarian investor podcast today.

Joseph Politano 0:54
Thank you so much for having me on.

Nathaniel E. Baker 0:56
Yeah, great to have you. Very excited about this conversation. And I wanted to jump off on some research that you’ve done and some posts on your website, which I will not try to re-mispronounce. But it’s an regarding housing. And your points here are that I’ll let you talk about more. But the idea that housing has not really come down as much as it is going to, and it’s not, and that maybe that is being underappreciated by the market, and by investors, that housing could basically have a bigger fall and take a bigger effect, negative effect on the economy, if I’m phrasing that, right. But tell me, tell me about it. Tell me what your what your take is here.

Joseph Politano 1:42
So what I would say is, I think we’re at this really interesting point in the housing market. And I’m not without making like a price forecast here. What I would say is, if you were to look at like, you look at where interest rates are, where mortgage rates have moved, and you look at where housing starts, so you know, new housing has moved. And if you just looked at those two data points, right, ignore everything else that’s going on the world. And they showed you so you’d say, oh, you know, there had to been tons of layoffs, there had to have been a really big impact on the sector, economically, you know, and we know this is one of the biggest sectors through which the Federal Reserve affects the real economy is through the housing market. And so far, there really hasn’t been that big of an impact. So if you look at like, employment example here, so he’s saying you raise interest rates, people get less mortgages, they start new, fewer houses, people in the construction industry should lose their jobs. If that happens, so far, we’ve really not seen that. We’ve seen that like, decelerate so that the jobs have stagnated, but they’re not going down actively. I think part of that is definitely like a lag story. But it’s also like, mortgage rates have been going up for almost a year now, you know, as a recording. So at some level, you have to say, it’s clear that there is some pent up demand, I think something has been underappreciated is, even though starts have been really strong, because of all the supply chain issues, because of everything going on in the overall economy. completions have been really weak. And the amount of housing under construction is still a ton. And that’s meant, you know, the Fed raising rates hasn’t had, like the perfectly expected impact on the housing market. I think a lot of people will looking for going into this year.

Nathaniel E. Baker 3:37
Interesting. Yeah. And I was just looking here about some of the data that came in today. And we had initial jobless claims, to your point well below forecasts. So yeah, it doesn’t look like the employment picture has really changed. Yeah, so how much this is a lag because they say that the the once the Fed starts tightening, it takes about it can take up to a year or more before this works its way through the economy. And the first rate hike was in March of 2022. We’re now January, so we’re it’s only 10 months in. So could that be that we’re just waiting, we just it just hasn’t worked its way through yet.

Joseph Politano 4:12
I think that’s part of it. So especially with housing, you have this like, two headed coin with interest rate hikes, because on the one hand, obviously, interest rates go go up, you know, if you’re just doing your discounted cash flow model, the value of assets are gonna go down and expect housing prices to go down. But the same side of the coin is that mortgage rates go up, that means less new housing, which means in the very short term, you know, supply becomes more constrained. So it’s actually expect prices to go up. But I think that’s where you can see a lot of these weird lags where sometimes the Fed raises rates and in the near term, you actually see rents increasing, right because of the supply effect. But it seems like we’ve seen a pretty robust fall in housing starts are down like three If you look at single family homes, which obviously are the ones most affected by rate hikes, it’s down like 30%. And, you know, mortgage rates have at the moment As of recording, kind of stabilized off their highs. So at some level, I think the big question is, okay, if mortgage rates are stabilizing, if we feel like the Fed, even though we expect them to hike a bit more, their path, at least feels a little more set. It feels a little more clear than it did throughout the rest of this year when they’re constantly updating the forecast to be higher and higher interest rates. Does the housing market stabilize? And because housing is such a big part of the business cycle? Does it mean the US economy kind of stabilizes?

Nathaniel E. Baker 5:42
Yeah. And your view on this is that it may not does that right?

Joseph Politano 5:46
My view, like I said, I don’t want to make a strong forecast either way, but I think my view is that that’s like underappreciated, yeah. Factor. In the US economic outlook. That’s what I say. That’s what I’ll say.

Nathaniel E. Baker 5:58
Fair enough. How what do you what are your anticipating in terms of a drop? I mean, home prices? I’m actually not fully aware of the data. I know the Case Shiller is pretty bit of a lag there. But they’ve dropped they haven’t dropped that terribly after they.

Joseph Politano 6:13
Yeah, it was mostly a case, Shiller has been down, like, a couple months. And usually they’re the fastest to react. Okay. But I think, you know, same thing with these indexes, lag, right market conditions. And so I think that even just mechanically from how, from how the market looks right now, they’re probably going to go down, even if that’s not technically housing prices going down. But I think mostly, this is manifested in like, a lower higher base rate. That doesn’t make a lot of sense to me. But it’s like, compared to 2020, everything’s still more expensive. But compared to like the mania, a year or so ago, everything looks cheaper. So if you look at like, the Redfin data that I saw this morning, and don’t quote me on these numbers, but I’m sure you can look them up. Was that like, the share of units, selling for below listing price was back to pre pandemic levels. Okay. Right. But think about that needs, the listing price is high. So the prices are maybe, right, the listing prices are rising so rapidly over the last few years. So the share going for below listing prices back to normal. So you don’t have this like bidding war, overtaking the housing market, but it’s still a market where prices are a lot higher than they were a couple years ago.

Nathaniel E. Baker 7:35
Okay. I mean, I guess a lot of this does depend on the Fed, and we’ll talk about the Fed in a little bit, because of interest rates. And yeah, once interest rates come down, people can start buying homes again. I mean, not that they really stopped. But I guess doing more of it. And yeah, and to your point, interest rates have kind of stabilized. But how much of a trough do we see here and housing prices? Do you have any any expectations of that?

Joseph Politano 7:59
I don’t have a expectation now.

Nathaniel E. Baker 8:02
I saw this speech that the JP Morgan’s chief economist Mike Feroli and he says that 10% drop in home prices is what they’re anticipating. So, which doesn’t sound like much, and we’re already maybe down a couple percent from the high self a couple more percent. But I guess that begs the question, if we do have an economic slowdown, and you hear a lot of these, this talk now about mild recessions. And I threw this out on Twitter just today, is there ever really a thing like a mild recession when we’re going through it? Because I know, it’s been a while other than the 2020 recession? But I mean, is it kind of maybe naive to expect that we’ll even have a mild recession, and that there won’t be pain felt throughout the economy?

Joseph Politano 8:50
Yeah, I think that that phraseology, also kind of bothers me. Because, you know, like, the the point of calling it a recession is to highlight the magnitude of the economic downturn. Yeah. Right to, uh, you know, to call it a mild recession is a little bit contradictory. It’s like a jumbo shrimp situation. But I think, you know, we’re definitely in a weird period, I don’t think given what we have right now that you could call us period, a recession 2022, a recession, but definitely a really big slowdown. And people are feeling that. And people can feel a really big slowdown in localized ways. And more broadly, like 2016 2015 2016 is a good example where you had like a pretty serious global slowdown. You know, right before the pandemic is arguably an example of like a pretty serious global slowdown. Neither of those are recessions, but at the same time, those were vastly different periods. What we have right now, my thought process when I talk to people about this, is to say like, Listen, if you go look at the Feds projection As right now the FOMC members projections, what they say is that over the next year, the unemployment rate should go up about a percent. Right about 1%. So it’s about three and a half percent right now, they expect to be about four and a half percent next year, that to me would be a recession. You know, that’s a significant amount of people that are losing their jobs, that only is going to happen in a recession. In fact, like a 1% increase in the unemployment rate is exclusive with a recession in like the post war economic period for the US. Now, you know, if you’re, if you’re going out there and saying, I think there’s two ways you can disagree with that you can disagree with it and say, the Feds wrong, it’s really hard for people to hire still, even though interest rates are so high unemployment rates, not going to, you know, go up by that much. And we’re gonna have this soft landing where you don’t have a recession because unemployment rate doesn’t move. The other view is like the worst view where it’s like, okay, if they put all this momentum in the opposite direction, all this kinetic force to say, when you slow the economy down, and then the unemployment rate goes up, 1%, it usually doesn’t just go up 1% Stop, you know, usually goes up more than that. So I think it’s like a weird period. I saw someone at Bloomberg, I apologize. I think we both have this thing where you catch so much information on where it comes from. But he talked about a rolling recession, which is kind of a weird framework, but I kind of, I think it’s worth thinking about where it’s like, okay, if you’re in housing construction right now, or over the last year, that was definitely arguably recessionary environment just because of how much new starts fell. Right. If you’re in tech right now, I think it feels like a recessionary environment because of the weird amount of layoffs compared to the historical norm, even though you know, on net, it’s not like, this is a ton of people compared to the entire economy. If you’re in manufacturing right now, so you look at like the the PMIs, those are very recessionary. But if you’re like a hotel or restaurant right now, I don’t think it feels recessionary. And so the whole point being that like this, we had this weird sectoral impact in 2020. So hit people differently hit parts of the economy differently. Maybe same thing happens here. You have this like weird sort of rolling slowdown that hits different parts of the economy in different ways over different periods of time.

Nathaniel E. Baker 12:33
Right, which would kind of be unprecedented.

Joseph Politano 12:36
I think so. I think unprecedented, though, unfortunately, it’s been like the most use Word of 2020. Yeah. So fair. I don’t know. But like, I think genuinely. So one of the most frustrating things for me about analyzing the economy right now, is that like, the best thing to do, pre pandemic, if you wanted to say, like, what’s the most leading indicators for economic strength, looking at like manufacturing industries, because they respond quicker, they’re much more discretionary. And they’re, you know, the employment is much more volatile. So example, if you look at overtime hours, for manufacturing employees, that’s important labored indicator, you know, because if there’s no overtime, then eventually people start laying workers off. Right. And right now in the US, like the overtime numbers look like, almost as bad as the 2008. Recession.

Nathaniel E. Baker 13:34
Yeah, it’s like coming into it, right?

Joseph Politano 13:36
Coming into the recession, like it’s serious fall, over the last year. But at the same time, you have all these, you know, if you talk to anyone who’s working a service sector, industry job, they’re saying the exact opposite. They’re saying, you know, I can’t get enough hours out of a lot of my workers, as you’re saying this is these things that used to be leading indicators are kind of getting strained. Motor Vehicles are another one, just because cars have been in such a bad shortage recently, that data is not representative of the strength of the economy. It’s representative of like specifics in the car sector.

Nathaniel E. Baker 14:16
So it sounds like there is some still some slack in the economy, from what you just said. But is there maybe a concern that the Fed has already overdone it? Because the I mean, the number of rate hikes and the rate of them was kind of me again, here we go unprecedented, although it wasn’t in this case. It because you know, Volcker, I think, but it was a pretty severe reaction. Now, granted, they were caught with their pants down on the whole transitory inflation thing. But is there a chance that they’ve already overdone it?

Joseph Politano 14:50
Yeah, I think so. If you would talk to me. So we’re recording in January now. If you will come to me like six months ago in July or August. cuz I would have said that like, the on balance, they’re tightening so much like the financial conditions are worsening so much that there’s a very likely chance of a recession. I think because of like the supply improvements we’ve gotten since then to date we’ve gotten since then. And like, you know, talking about housing as example earlier, but like some sectors were surprisingly resilient to the amount of rate hikes that we got, you know, we haven’t had that yet. But it’s still, you know, a pretty sizable chance. I think it’s a weird thing where people are like, saying, if the best forecasters are saying there was an 80% chance of a recession in the summer, now, they’re saying there’s a 50% chance. And I think sometimes you can look at that, like 20 to 50% growth in the software and a chance to say, Oh, well, things look a lot better. forgetting that. Like, if, at any point, you know, previously, you said, oh, there’s a 50% chance of recession next year that will be looked at as a really bad economic outlook.

Nathaniel E. Baker 15:58
Right. There’s also the Feds track record on this, let’s not forget, and somebody that I’ve had on the podcast was just last year, actually. And he had the numbers, I forget what they were it, it’s something like three out of 16 times, the Fed has been able to engineer a soft landing. So where people just say that it’s unprecedented is not true, actually. So they’ve been able to do it most recently, actually. Powell did it back in. Was it 20 18/4? Quarter? Yeah. But that’s still that’s not a good batting average. So Right. And there’s also the fact that the number of times that they have overdone it on keeping rates too low for too long. Right. So

Joseph Politano 16:38
I think it’s really hard, especially, like you said, given given the Feds track record, when you get to these like crunch points, when they’re tightening rates really aggressively. The A lot of times the like breaking points aren’t known. Right. And part of that is because at some level, they’re unknowable, because the economy so complex, but at some level, it’s because of, you know, how the Fed forecasts what’s, what’s their objectives, and how those can change really rapidly. I think 2018 like to today is a good example of the fact that the Fed is a lot faster than moving than they have been historically. But at the same time, it’s like, right, the right now their base case is, you know, it’s not going to be a soft landing, it’s at least going to be kind of bumpy. And the track record, in the US at least is hard to look at, I think the best if you’re looking for like the idealistic example, maybe it’s like 9596. Okay, where you had, so you have economic slowdown, very clear, pronounced, slowdown and employment growth, but on a GDP growth, slowdown in production, but it’s not nowhere near anything that would call it causes a recession, or especially compared to like this one 2008. I think if you were to look in like a weird historical example. I don’t people point to like the 1920, like Spanish flu and the recession that occurred afterwards, like good comparison, but I still think he just because of how much the economy changed. Maybe the better comparison is something like the Korean War, Korean War World War Two period, where you have this big surge of inflation as the economy shifts from, in that case, war mode to peace mode. And that comes down after a year. So by

Nathaniel E. Baker 18:34
and large on its own. So we’re going back going back to the early 50s.

Joseph Politano 18:38
Right, that’s like the historical, that’s a sort of best circle example of like, I guess, the transitory narrative, or I’m saying you’re looking at like some combination of the two, obviously, the Feds hiking, they think they need to do something to stop inflation. But at the same time, you know, some of it is like food and energy stuff that’s out of your hands that they think is renormalizing off in the corner without doing anything about it.

Nathaniel E. Baker 19:02
Sure. All right, good. That gives us a lot to talk about in the second half of the show with the Fed. But I want to first take a short break, and come back and ask you some questions about yourself, and how you got to be to this station in your career, how you got started in the whole thing. And we’ll do that in a minute. But We’ll first take a short break. If you’re a premium subscriber, do not touch the dial, you will not get the break. We’ll be right back. In fact, we already are.

Welcome back everybody. Apricitas Economics, again, probably mispronounced it, but you said you started this thing a little while ago and you made this year basically day job. You’re very active Twitter. Joseph Positano, I believe is the Yes. And so this is the segment of the show where we ask our guests to tell us a little bit more about himself or herself and how he or she arrived at this station in his or her career. And so yeah, curious how you got your star Hear your origin story and investing to put things in Marvel terms, and how you wind it up where you aren’t today. So tell us about that.

Joseph Politano 20:08
Yeah, it’s, it’s a pretty winding story, I think.

Nathaniel E. Baker 20:12
Don’t get too winding, we don’t have too much time to go on too much.

Joseph Politano 20:14
Before the pandemic, I worked in the Peace Corps. So I was abroad, wow. In Uganda doing economics work, obviously COVID happened. And so I got bounced back to the States. So I was, you know, I got a job in the States, but I wanted to, you know, do more econ work. And especially as time you know, that conversation was happening online was happening on Twitter. So I started the sub stack, it’s just kind of a way to participate in that conversation. And as a way to, like, build up my own communication skills. So let’s keep into it for about a year, as at that point, where I was like, actually, people like this. Yeah, which is a great privilege when, when people want to read the things that you want to write. And I had a big enough audience where I thought, you know, I could write a whole lot more if I made this my full time job. And so as of September of this year, or of September last year, oh, my goodness, 2020 through September of last year, the newsletter is my full time job now. And it’s been going really well, I’ve like, caught up to the amount of income I was making beforehand. So I’m very happy with that. I really enjoy writing, trying to keep to a schedule more. But yeah, it’s been a really exciting journey.

Nathaniel E. Baker 21:35
Wow, that’s wild. So is it still on substack? Or now? You took it off? Right?

Joseph Politano 21:39
It’s still I have my own domain name. Yeah.

Nathaniel E. Baker 21:45
Okay. I’ll have to link to it. And for sure, I didn’t. I wasn’t even aware of that. And you. So how did you before that? How did you get interested in economics? Did you study it? Did you? How did that all come about?

Joseph Politano 21:55
It’s funny because I, so I went to college, and I wanted to political science. And I had the like going into law or government or stuff. But I think this is like a generational thing of like memories of today’s a recession. This is thought of like, if you’re gonna go do artsy fartsy thing in college, you should also have like a serious backup plan. Econ was my serious backup plan. And by sophomore year, I was like, You know what? This poli sci thing. It’s not actually that interesting. I really liked the Econ stuff, I should focus on that more. And at the time, it was a lot of focus on the kind of econ work that I would do in Peace Corps. But obviously, that also was like a base knowledge of macro and things like that. But I use shorthand in my day.

Nathaniel E. Baker 22:41
Oh, so you were actually doing economics work for the Peace Corps? I thought you were like, around in the in the jungle there or whatever. Yeah.

Joseph Politano 22:48
Yeah, it was. I wasn’t there for very long because of the pandemic. But the idea was to work in like, youth entrepreneurship, like women’s empowerment and like, earning market incomes outside of the household. But yeah, it was it was definitely a really crazy experience. And I’m very thankful because it’s a great country, I implore people to visit.

Nathaniel E. Baker 23:14
Yeah, I’ve never been in South Africa is the closest I’ve been. And that was for the World Cup. In 20. Oh, wow. dating myself here. But yeah, but wow, that’s, that’s really interesting. And so the interest ended, but you didn’t actually work for not that this is any kind of disqualification, but you didn’t work for any for any kind of, you know, bank or research firm or anything like that, before going into the Peace Corps.

Joseph Politano 23:38
Know, when they’re ready to college, I read that read I call it was a pretty, that’s not unfortunately, a normal thing to do. But I think especially nowadays, like the environment is, if you can prove yourself, you can get a job more than credentials, specifically, you know, proving itself online has its own biases. But there’s a ton of people I know who have like, tweeted their way into jobs, especially. Especially during everything that went on with crypto over the last couple of years.

Nathaniel E. Baker 24:10
Yes, yes. That’s that’s absolutely true. Yeah. That’s really interesting. I mean, yeah, that’s cool. That’s great. I mean, I’m always happy to have younger people on I’ve had a few on, but yeah, most people tend to follow the traditional, you know, college, business school, sell side by side, maybe, or whatever. But so yes, it’s very cool to have people who break the mold. So good luck to you with all of that. So let’s move back here to the Fed, basically, telegraphed a 25 basis point rate hike, which begs the question, what they can do to kind of supply any kind of positive surprise at this point, but probably more interesting than what they do at this meeting. And probably most of you are already listening to this after the meeting anyway. But it’s more it’s more interesting of what they’re going to be doing the rest To the year. And the there if you look at the fed fund futures, it looks like the market is pricing starting to have rate cuts. So what are your What are your What are your thoughts on that? And where the Fed will be going this year?

Joseph Politano 25:15
Yeah, it’s kind of interesting. It’s an interesting historical conversation. Because the post 2008 period, the Fed put a lot of emphasis on trying to set market expectations for future interest rates really directly. And this was the, you know, QE periods. This was like the lower for longer periods. And this whole time, they’re saying, we’re not meeting the employment side of our objectives, the growth is still pretty stagnant, we think we need to keep stimulating, and we just can’t, we can’t communicate that we’re struggling. So they set up all these institutional, institutional things to communicate that then like the thing about like, the dot plots, as an example, was saying, Okay, this is what we think interest rates are going. And now they’re in this really weird, like opposite situation where they’re trying to communicate, hey, we as an organization, are very worried about inflation, we as an organization think that interest rates need to be higher for longer. And everybody keeps thinking that there’s going to be a recession, or we’re going to cut interest rates, we’re not going to do that. So it’s like this weird headlights moment, because obviously, from their perspective, if the Fed if markets are pricing in cuts, you know, one that’s communication failure to that could be, you know, that’s lower interest rates at the future. And they view that as maybe worsening inflation now, so it’s, you know, exasperating today’s problem, but at the same time, like the market is the market. And if they see these pretty serious recession risks, they’re going to price for it supporting that going as well. The like deer in headlights situation is, is there enough of a slowdown that induces the Fed to cut faster than they want to? That’s the other interesting thing is because they they are pricing in cuts, but their pricing and cuts Berg in the future, you know, much later than markets are and they so they come out with like the one that was like the the speaking brigades come out there saying actually, we’re we don’t quite agree with these pricings. We’re, we need to convince market. So I think I think the most blunt about it was like I don’t know what these guys are doing.

Nathaniel E. Baker 27:38
Yeah, right. Right. Yeah, that’s, that’s interesting. But I wonder if a lot of this is maybe, you know, we’ve had this fed pivot hopium. I mean, it’s been a story for about a year, right? Most of 2022, especially the back half of the year, it seemed like there there you would get these little bounces in markets because of hope that the Fed would pivot, right. And Powell came out with a very forceful statement at Jackson Hole was in late August. And that kind of did a good job of communicating that they were serious about inflation for a little while, and then fed hopium started coming back. So is this maybe just another period where we’re having this fed hopium bounce?

Joseph Politano 28:17
I think so. It is a weird, it was a weird dynamic, because especially early on in the year, you would have this like, you have this hilariously in retrospect Doomer pricing, where people were considering like, Oh, they’re going to they’re going to raise rates 1% Each meeting for the next six meetings or whatever. And whenever the actual meeting would happen, you’d have, by and large, what the telegraphed outcome was, so Marcus would calm down, like rather immediately. So I think we’re kind of getting like the inverse of that, where, instead of it being markets are pricing in this like, serious risk of a overcorrection of like, much higher rates and the Fed is wanting markets pricing in this like, period of the Fed might actually cut here, maybe they’ll need to look at here, the Fed says, what they’ve kind of been telegraphing markets react accordingly. Like I said, I think the the big the big counterpoint to that. And I always try to like, I don’t want to play both sides. But I was trying to give a holistic picture, more than trying to toggle on up is like, what I said earlier about employment. If you think that the Fed can’t like kept falling knife that unemployment rises by 1%. And then it keeps rising. Like that’s a serious thing where the Fed might be behind the ball again, and they’d have to intervene and they’d have a cut faster than they want to faster than they’re telegraphing right now. Right.

Nathaniel E. Baker 29:55
Yeah, right. And then we have all kinds of other problems, but I mean, they wouldn’t they wouldn’t do that though. Unless there’s a major collapse in the economy, would they?

Joseph Politano 30:04
I think, I think part of it is like, you know, you’re going to have to get some cuts, because just as inflation comes down, you know, to keep real rates constant nominal rates have to go down. Yeah. But yeah, I think that’s the kind of like, aggressive, really aggressive cutting would only happen if something, you know, really boil over a crazy amount. And it’s actually like, remarkable, historically. So we’re in almost February right now. But it’s weird to remember that, like, when the the Russian invasion happened, you know, that was when they were talking about half basis, point heights, and they went with a quarter, or, you know, half a percent hikes, they went with quarter percent hikes, because they were worried, you know, because of one of the largest wars in recent memory. So if that only moves them a quarter of a percent, you got to think about what would move them? You know, more than that this point?

Nathaniel E. Baker 31:04
Well, yeah. But, you know, having remembering the Greenspan fed from the early 2000s, and how long he kept interest rates at zero, after 911. I mean, a couple of years there. And that basically created the housing bubble. So, um, they you would think they’ve learned from that, but I don’t know. Any, any other surprises that you’re expecting for this year?

Joseph Politano 31:28
I would say, I think the most interesting stuff is going to come out of Japan. So I’m sure people have been tracking like they. Japan, you know, has very lagging economic growth over the last 3040 years at this point. And boj has been pulling out all the stops historically to try and fix that. And they have this point where they’re the odd man out. Everybody else is raising rates, and they don’t want to. And so I think the big there’s a big question mark there about the longevity of yield curve control, I think people have been a little too quick to say that they’re going to abandon it. You know, because VHA views this as a really important thing. But I think at the same time, it’s clearly a very awkward position for them to have to be buying, like, every robot, they could do it, but it’s becoming like onerous, to them. And so I wouldn’t be surprised if I think you’re starting to see it’s already like they’re experimenting with different policy tools, and trying to figure a way around this. I think that’s a big deal. And I think, also, it was like the the refrain from ex ante data, which is another subject that that I recommend, but they were talking about, like, central bank divergence, as like a theme to look out for in 2023. I really liked that idea of saying like, okay, 2022, everybody had this, you know, big inflation problem, everyone’s behind the ball, everyone’s raising rates. Now, the question for 2023 is, you know, we know that, historically, these countries don’t often have every, you know, these these movements all at the same time. So who cuts first, who hikes the least? You know, there’s going to be this big shift where different central banks are talking about their local problems differently.

Nathaniel E. Baker 33:29
Hmm. Normally off to kind of follow the Fed though.

Joseph Politano 33:33
They all kind of do. I think that’s that’s part of the thing when he’s talking about like, global credit conditions, that’s very fed driven. But at the same time that like, there’s obviously some variation there.

Nathaniel E. Baker 33:47
Yeah, I mean, the BOJ, but they’re basically the Fed of the East, right? I mean, the Yen is kind of the reserve currency on Asia, I guess, are the safety gauge. So but what what would that do globally? If there is a divergence, or even if the BOJ does, right, if they if they like, what if they keep, you know, zero, or below zero, or whatever it is, as the Fed keeps hiking, you know, what would that do other than make the yen even less expensive in terms of dollars?

Joseph Politano 34:24
I think that’s part of it. But I think the example I always try to point to is like the Australia example, in the 2008 recession, where they had this this central bank divergence, both before and after, and as a result, they had like a much stronger much, they were hit much weaker, and they recovered much stronger than most other high income nations. Okay, so I’m saying I think you might start seeing this. It’s possible that the situation central banking diverge, their policy responses diverge. So you could have this like, you know, selective vergence in economic outcomes.

Nathaniel E. Baker 35:02
Hmm, that will be interesting. Because yeah, hasn’t happened in a long time has it? I mean, the global economy has been lockstep since certainly the century.

Joseph Politano 35:12
I think. I wouldn’t quite agree with that. Because you think about, like the European economy in the 2010s. So to resonate, very synchronous hit, but like, the 2010s was a much worse period for your friend, it was for the United States of America, of course, you know, Australia. And so I think you could see, you know, stuff like that starting emerge. I’m not trying to say another Euro crisis, but I’m saying you can see this this divergence in economic outcomes.

Nathaniel E. Baker 35:40
Yeah, that’s a that’s a good point, actually. And China also, exactly, that’s another great example here. Yeah. Although they right, and that you could actually argue that that was why Australia as a main exporter to China did better during our way than just might all have like, just one. And then then others. And that I was didn’t do more than that, and interest rate policy. But that’s another topic for another day that we don’t have time to debate. So would you see that as an opportunity? And? Or what are the chances here that somebody screws something up, royally beat a central bank or something else? And what do you think of the whole crypto implosion I guess Kryptos have recovered. And the general textbook response is that this is not a very large part of the economy. And that basically, Bitcoin could go away, and it would not leave much of a dent. What are your Do you have any views on that?

Joseph Politano 36:33
I think it’s a really interesting question. The first part, I would say is like we you have had this. I like to describe it as a financial crisis in the crypto space, you know, and in a lot of ways, is like a new version of very classic, like, financial panics, but hasn’t so far had any serious impact on the material economy, because most people aren’t borrowing the money. They don’t take take up mortgages from FTX. And God help anyone who did yeah. But I would not say that that’s, you know, I would not say there’s that exclusivity. So the stuff I always point to is like the the stable coins now, a lot of them make up significant chunks of a short term, you know, narrow parts of short term funding markets. And I think you saw in the, like the crypto inclusion a couple of months ago. You saw like this big uptick in a lot of measures of bank stress. And so I think there’s some of this room saying, Okay, it’s not, you know, one to one, or even the worst things that something that would tear down the traditional financial system, it happens in crypto, and that’s Tuesday. But that doesn’t mean that it’s like just a fire in the corner that we can all ignore wholly, it does have some spillover effects that are worth taking seriously. I think. I think it’s interesting, I think, if you’re, if you’d asked me to revise what I thought where I thought crypto was going a year ago, to now, I think a year ago, I was much more. I was much more of a thought process that this was going to become that sort of institutionalized is not the correct word here. Maybe more like, cleaned up. Right? You had all this big push by governments to say, Okay, this is a big enough thing. Now we have to take it seriously. And we have to, like put it into the adult financial world. And now I think the view has shifted in large way to be like, Oh, that’s kind of the dumpster fire. And we should kind of, you know, control it as it was dumpster fire. And that was maybe not the best idea to try to hook this thing up to other parts of the economy.

Nathaniel E. Baker 39:04
Yeah, I mean, I’ll say anybody who thinks it’ll just be something in the corner that can be ignored. I pointed to 1998 long term capital management, and what took them down and what, by default, and almost took down the entire financial system was Russian bonds. And Russian bonds were this tiny at the time of this tiny little illiquid thing. And they had to levered up so much that it caused a systemic issue for the world’s banks, and they had to like engineer a bailout. You know, there’s a book that’s been written about it by Roger Lowenstein called when genius failed, which is incidentally, what I would make all the junior hedge funds reporters read right when they started their jobs, but anyway, that’s another story. But But yeah, but that is so people say, Oh, it’s only so and so much. Well, yeah, nominally right. Ever it off and you have, you know, you never know where the bodies are buried. Right. So that’s maybe the word of Caution from Hong Kong Kryptos. Yeah, but maybe that’s

Joseph Politano 40:05
because I, I don’t I don’t pay myself as a crypto expert. But this is a good example where if you’d asked me six months ago, like, where’s the most trustworthy place in crypto to put your money? I would have put FTX in like, really? Because I like I said, I don’t know. But I think your average Joe, user by term thought that they were normal, trustworthy organization, you know, they’ve Superbowl ads or whatever, and then they fell apart on a few months later. So I think that, you know, that kind of stuff is always where a even if it’s just in crypto, yeah,

Nathaniel E. Baker 40:42
yeah, exactly. Anyway. All right. Cool. That’s all that’s all very interesting. Uh, Joseph Politano. Thank you so much for coming on to the contrarian investor podcast today. Very interesting conversation. In closing, maybe tell our listeners where they can find out more about you, and about your research, and how to go about finding signing up. And I will then put that in the show notes as well.

Joseph Politano 41:04
Sure. My My name is just Paul 10. Oh, my Twitter account is just my name. So it’s pol ITA. No. It’s my last name. And then some stack is a predicate toss the IO. Now that sounds like a K sound, but it is a C because it’s a Latin. If you just look up the Joe’s fault, no sub sec. Also, we’re going to talk. So

Nathaniel E. Baker 41:26
okay, cool. All right. Got it.

Unknown Speaker 41:28
The unpredictability is a core part of the brand

Nathaniel E. Baker 41:31
Very cool. And this is a free substack?

Unknown Speaker 41:34
What I do is I publish once a week free on Saturdays. And then I usually have two other posts a week that are for paying subscribers. Very cool. So it is how I put bread on the table. Nice. But if you if you don’t want to pay to.

Nathaniel E. Baker 41:51
Very cool. All right. I want to talk to you offline about that because I’ve have my own sub stack as you may have heard. But for now, let’s close this. Thanks all for listening. And we look forward to speaking to you again next time.

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Fed Pivot Hope-ium Lives, Even Without Much Pivot Proof

Stocks are rallying even as the Fed sticks to its hawkish tone on interest rates…

The following is an amended version of the Feb. 2 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. To subscribe, visit our Substack or Supercast.

The Federal Reserve yesterday raised interest rates by 25 basis points as expected and didn’t materially change the language in its policy statement, causing a brief dip in stock prices. That promptly gave way to buying even as Jerome Powell didn’t provide anything in the way of Pivot Hope-ium either. At the end of the day stocks had rallied significantly, with tech the major winner. The Nasdaq was up 2% and S&P 500 up 1%.

So much for that set up for a disappointment… Right, well at least we weren’t the only ones making that assessment

What Dovish Commentary?

It’s hard to find anything particularly dovish about the FOMC statement or Powell’s press conference. No matter. For whatever reasons investors have decided that the Fed is not going to break stuff or hurt the market anymore. That is what yesterday’s (and last month’s) activity tells us at least. How else to explain the massive rally we’ve seen in tech stocks in particular?

Whatever happened to ‘don’t fight the Fed’? Are we missing something here or is this a massive game of denial going on right now? Or maybe the mother of all dead cat bounces?

Maybe Powell’s comment that only “a couple more rate hikes” are needed “to get to that level we think is appropriately restrictive” was enough? Perhaps this removes any uncertainty of further hikes beyond this year from the hearts and minds of investors? But then you have to ignore a ton of hawkish commentary including a line in the policy statement that “ongoing increases in the target range will be appropriate.”

Okay, so maybe investors figure this is all hot air and the Fed is going to be data dependent? Great, but what if the data forces the Fed to hike rather than cut? Is that possibility simply off the table now?

Anyway, RIP Don’t Fight the Fed. Long live Don’t Fight the Tape.


Don't Fight the Med MaryJane meme


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China Reopening: Underestimating the Impact on Global Economy, Markets (Szn 5, Ep. 2)

With Mike Edwards, Weiss Multi-Strategy Advisers

This podcast episode was recorded Jan. 18, 2023, with a short clip of actionable highlights distributed to premium subscribers the following day. The full podcast episode followed a day after that. To become a premium subscriber and take advantage of this and a host of other benefits, visit our Supercast or Substack and sign up!

Mike Edwards, deputy chief investment officer at Weiss Multi-Strategy Advisers, joins the podcast to discuss China’s post-Covid reopening and why its impact on global markets is not being fully priced in by investors.

Content Highlights

  • China’s abrupt U-turn over ‘Zero Covid’ is unquestionably one of the biggest changes to take effect in the global economy over the last few months (2:23);
  • There have been reservations about this reopening, but it is happening with authoritative force and will have a major positive impact (5:08);
  • What about the US de-coupling from China and the embattled real estate sector? (11:00)
  • Where this will be felt most is in markets that have exposure to the Chinese consumer. It also points to Europe and emerging markets outperforming the US (17:54);
  • Chinese consumers were far more restrained than their US counterparts during Covid and have been slower to return — especially tourists. This is not just a one-off in terms of the resurgence of Chinese travel and services (24:20);
  • What to make of the latest economic developments in the US, especially with the consumer? (27:31);
  • Weiss’s house view is that the US will avoid recession this year (34:02);
  • Background on the guest (37:49);
  • China can re-emerge without the US as a major partner (51:36);
  • After some consolidation, the US economic and market cycle is marked by investors seeking to put money to work — slowly (57:18).

More on Mike Edwards

Not investment advice!

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