Things Fall Apart (in the Markets), Gartman Says

They bought and literally, let me say, what did they bought? It? A redd oh keeper of the MX boy. They could not have been happier. They could not have been happier after Global Macro has been smacked around for like five, six, seven years. For these guys, they're hoping this is regime change all of us and it's a trader's market with a time arising of like two minutes. Get in, get out, get back in again, get out. James Sweeney, is this is this a change? Or is Global Macrow just got

a break for a week. I think this is a change. I think we're going to have more volatile interest rates and exchange rates than we've had for a while. I think we could have some new trends, including a downturns in the dollar, which which we think can continue, and you can have real conversations about inflation and central banks like the b o J and the ECB in terms of actually doing something in the in the years ahead.

So I think that's why this is This is a really important conversation for our listeners who have been conditioned by the by hold, by the e t F by hold passive strategies for the last decade. Do they need to start rethinking that? Because if the global macro guys are right, if we're shifting into a trader's market where active is really going to outperform, I wonder what our listeners need to do if they've been passive by hold as much of the last decade. That's right. Like two

facts about the recent week. The the US equity market was the worst performing thing, and within the US equity market there wasn't a great deal of sector differentiation. Basically everything went down. So to a stockpicker, that's great. That's I mean, basically to a macro guy or to a stock picker, this is the kind of thing that's going to create opportunities, and and you're seeing volumes and activity levels and interest in different markets. Pick up on this,

James John said two words this week. One is whippy and the other is regime. And we're here in this John fer a lot, aren't we? Regime change? And a huge debate Thomas to whether we've actually got one or entering on in your world. This goes to James Bullard of St. Louis and is important short non academic paper on how it FED needs to work with regime change. Is j Powell going to enjoy a regime change? Well,

so the regime change. Actually I wrote something on this last year, and I think the critical thing about the regime from a policy perspective is the inflation regime. So what is the inflation regime? So, since since the early to mid nineties and the developed market countries, you've had essentially trendless core inflation with very low volatility, with very low correlations to the previous year's growth, wages, credit, all these things that the precursors to inflation in the past.

And this has been that this has been the inflation targeting central bank era. And and so you know, you can't really find equations math econometrics that forecast next year's inflation on the basis of this year's unemployment rate, wages work, it used to work, it used Could that change? That's the regime change. That's that's the most regime change here is to go mathematically to jump conditions. How do our listeners adapt to a world of jump conditions. Well, there's

there's you know, there's different types of regimes. So the regime I just mentioned in terms of inflation is a is a longer term thing, and I don't think we've had a big inflation regime change at this point. It's just something worth speculating. But volatility in equity markets has regimes, and volatility can jump from a low volatility regime where basically things aren't moving around that much, suddenly jump and then be much more volatile for several months, even a

year at a time. So that's regime is a little bit of a kind of over over glamorous word and something like that can change over a shorter period. I think a twenty five year inflation regime is more regime e to me. But but I think, you know, I think the clustering of low volatility and then the clustering of high volatility within a market is of the essence. At this moment, maybe it looks like that might have

just happened. Maybe we should use the word paradigm. Um, the current paradigm that we've been in for such a long time. The FET reaction function has been pretty clear. That doesn't like vol if, that doesn't like draw downs, that doesn't like corrections. Um, something's changed because apparently the FETE doesn't care now. Well, I think the causality is

running a little bit differently this way. I I think what's happened recently is that the market has been pricing in more policy, and not just from the US but the rest of the world. And and you know, you know, there's this big uh, there's gonna be this reduction of QWI. The ECB is gonna stop purchasing later this year, the FETE is reducing its balance sheet. People are actually even talking about bo J policy change over over the next

over the next few years. I think, really what's happening is this is sinking into the market and and and so the market has to adjust to those James Sweeney, thank you so much, barely appreciate it. With credit sweez very valuable. Uh this morning and Jeff Curry joins us from Goldman Sex. Right, Now here's the number one question. Is commodities part of this party? We talk about modern correlations,

f X correlation. Is there a commodity correlation to equity upset? Well, there was one exception, Jonathan, that was Bulks iron Ar, and that because there are a pure e m play and they didn't have as many investors in it. So I like to point out the greater the trend, the more the investors that were in these markets, the bigger to sell off like x, like the short sellers. And in fact, I like to point out in commodities world had to this. We had it all last year, exactly,

it all last year. But Monday you have to publish for Goldman Sex. What will be the tone of that report to your clients, One in which most of this is driven by trend following, short sellers, systematic trading strategies, and that the underlying fundamentals are very much intact. The transmission mechanism between this weakness and trading and the fundamentals

is through financial conditions. Yes, financial conditions have tightened, but they were at the highest ever, the best ever recorded last Monday before the sell off, so you have it's the underlying fundamental situation deteriorate enough for us to change of views. Absolutely not. In fact, there's not even one data point that you can point to that suggests that

there's a fundament something wrong fundamentally. Is this a period of deleveraging that's going to take a little bit more time to play out When you sit around the table with the committee at Golment Sacks, it's that the view of of you guys right now, Jeff, there's financial de leveraging happening, but there's not fundamental de leveraging happening. Fundamentally. The market still re levering. So you know, we look at you know, commodity prices. You still have very high

commodity prices. You know, you still have brand at sixty four dollars a barrel um, you have iron r at seventy seven fifty, you have copper nearly at seven thousands. So yes, we've seen a five point two percent correction in um commodities altogether, but that's not the end of the world. So, you know, we look at the underlying fundamentals re leverying on the demand side. In fact, that's

the core of our three rs. Reflation leads to re levering, re Levering leads to re convergence of global growth, and it cycles back over. That story has not changed. So the equity market pain, you think it can the main contained to the equity market. So it was so far it appears to be the case because again the underlying fundamental story, even on the equities is still rocks. And this is critical, John, I was so busy today, folks,

I didn't have a chart out in TV. You'll see it first on Bloomberg Radio, which puts in perspective the Dow of where it is versus nine. You mentioned the c T as the commodity traders with an alternative investments, and they're all trend based. Good morning, Monroe Trout, Good morning John, Henry and everybody else had invented this act.

We're just back to support on too many charts, aren't we to be clear, Jeff Curry, we haven't broken support thing after thing efter thing three absolutely, which just goes the point that the bigger the up word trend, that the bigger the sell off has man because you're just bringing yourself back into a correction where you're finding these normal support levels. Have they cleared markets? And this is something that John Farrow would ask, do we have one way bets on live cattle? Do we have one way

bets on copper? Do we have one way Ben's on burnt crude? Right now? Is the market stacked or is it flat ready to go? At this point, You've cleaned up a lot of the markets, particularly in oil in the last and that was the one that was the longest. In fact, if you ask somebody to tell a bear story in oil two weeks ago, it was positioning. Now the positioning has been cleaned up, which again reinforces the

fundamental story going forward. Jeff, I want to talk to the economist in you, not just the market participant um. A big discussion of bloombags avance throughout the whole of this week has been whether we're breaking into a new regime, Whether this is regime change? Is it for you? Is that what this is this price sanction a symptom of

the beginning of a regime change. I would argue we had the regime change last year, and so in terms of thinking about you know, the underlying fundamental story that that came out of last year is you know, you see that the correlation between oil and the dollar resurfacing a lot of you know what, you know, the process asset correlation you're referring to the lynch pin to that really is the dollar. So from our perspective, that regime change, it happened last year. Um, we're in it. And then

part of it reinforces that bullish story. We've seen what happens when you have this whole three rs reflation, re leveraging, and re convergence, UM, and the lynch pen that keeps the cycle going and creating the upward pressure and commodity prices. Really is the dollar. Let's be clear here the reflation story, this is reminiscent of this time last year. A lot of people very bullish on inflation and a lot of money made over the preceding months by fading the reflation trade.

Why is this time different? It isn't. As you know, if you look at this this story, it really began in April two thousand and sixteen. The reflation story, and you know is my boss likes to point out, if you go back to the nineteen sixties, a reflation story took started in nineteen sixty two. It didn't finish until nineteen seventy eight. Um, it takes a while for these for the fundamentals to create these inflationary pressures. It doesn't

fundamental markets are not like finance to markets. They just don't happen overnight. Um. You know, it takes years for you to get these pressures to develop. So talked to me about the transmission. We've got the market pain. It's financial market pain. Let's be clear about that. It's not economic pain yet. Um, when do you start to see it bleed into the economy if it's all there any concerns, and if there are, there is a transmission mechanism, what have you got your on? What is it? It's it's

the financial conditions that the financial markets create. And you know you have you have a drop in equity prices that creates a drop in wealth. You have rising interest rates? Is which which what's what you see with the ten your treasure? But even there you look at the rise and you know interest rates what you're still two point eight two versus two point seven seven? Shun we talk about non crisis stuff. The vix in a stick, futures

negative five down futures negative. How's oil demand spectacular. That's the thing is, if you look at all of these markets, demand is solid across not only across geography, across product. So I'm talking to Rio Tinto CEO yesterday. He's taken a victory lap and allocating financial I know you've got people at Goldman follow individual stocks. You don't want to comment on that. I get that. But is the industry gonna make the same mistakes or are they like the

airline business where they finally wised up. This time the financial participants won't let them make the same And the key here is we had a theme that we talked about in the late nineties and early two thousand. It's called revenge of the Old economy. It's the same dynamic here. The new economy, the fans the bats are printing great financial numbers. Capital is being redirected towards the new economy

at the expense of the old economy. And I know, I know Jean Sebastian Jacket, Rio sin so very very well. In the shift after Walsh left, Rio was to get away from the volume story and get to value. They got punished by their investors for what they did over the last ten years. Tom and I think it's a real discipline amongst the private companies at least to respond in the way they were done, to stay disciplined. I think the key question it's not in iron all, it's

not in copper. It's not these big companies riot inside HP bulletin. It's way whether the governments of OPEC can remain disciplined. It's whether Soundi Arabia can remain disciplined. It's whether some of these big Opeque participants that have capped volume can remain disciplined with crewed. Getting back towards when you talk commodities and you talk iron or in copper, with the British accent, it sounds better do a London

medals aluminum aluminium exactly. But to John's important question, if they learned the lessons or there is the Middle East going to make the same lessons again failures again in oil. But but even you take take Saudi Arabia, they're focused on their their vision, which is diversification across the economy.

They need to make investments in other things. And I guess it's the point here is the attractiveness of the rest of the world outside of commodities is much better at this time around than it was a decade ago. Jeff Curry, thank you so much. I get some sleep this weekend, and never an Tom Jeff, That's true. I always feel that way. Nobody knows the minutia of how you actually spend it. Like John Hugh Deck at Brookie's Institution. He has made a cottage industry of what you do

with the billions and trillions. John, wonderful they have you with us. What's different now in how a given department spends a given marble building in Washington, how they spend the next marginal new billion. Well, these UH agencies have a couple of choices. They can either continue to fund the existing programs that they have under their authorization, or where they have discretion, they can start to build out

new programs. And I think there will be some agencies that are going to want to do that under the new spending visions of the bill that was passed this morning. At the same time, though a lot of agencies had had hiring troubles, and hiring people back just to man these agencies is something I think you're going to see a lot of agencies doing out of the gate to review. President Obama was am I right? Fiscally prudent on discretionaries spending?

What portion of what was wrought overnight is you know, bipartisan catch up with the frugality that we've had over the last X number of years. So so you're right, we had sort of two different Barack Obama's. We had Barack Obama early on, right after the recession began, where he passed the stimulus bill, and that wasn't necessarily fiscally prudent, although I think it was economically prudent at the time. And then later on, under Republican pressure from Congress, you

had a more fiscally frugal President Obama. But now what we're seeing is the Congress pass what is a massive increase in spending, or rather the authorization for a massive increase of spending, which is more than a third of the size of the stimulus that many of these same Republicans have railed against for years. How do we define fiscal responsibility? John tweeted six hours ago, Make no mistake, I will always stand up for fiscal responsibility. What does

he mean? Well, I'll say I think if you're a member of Congress, you define fiscal responsibility by whatever you happen to vote for that day. But I think what we're seeing right now is a Congress that likes catch phrases. But when it comes down to the actual business of governing, the actual business of funding our government, there's a very effective way to build bipartisan support, and that is not

to be fiscally prudent. And so you see Republicans who are screaming about deficits olding twice now in the past couple of months to expand deficits in a massive way, first through the tax bill and second through this budget deal. So important question for me, John It doesn't seem to

me that it matters what your political colors are. Once you empower, your fiscal responsibility dissipates rather quickly when I have the Democrats out of power, and I wonder whether they inherit the position of the Republicans before them, where they also become the fiscal responsible ones, the deficit hawks. Now, if they do one, that's the first question. If they do. The second question is whether that actually resonates with the

electorate at all. Well, Jonathan, there's certainly some uh, there's certainly a lot of truths to that. Rather, the depending on whether you're in power, helps determine how fiscally responsible you are. When Democrats are in power, they don't care that much about death, deficits and debt. When they're out of power and Republicans are trying to spend money, then all of a sudden they become fiscal hawks. And so yeah, the the system ends up being turns upside down essentially

depending on who is in power. But it's important to note that there are a lot of fiscally responsible individuals who did vote against the legislation this morning, on both sides of the eye. But John, the second pound of the question for a fiscal conservative, For a conservative, being a fiscal hawk resonates with most of your electorate, your core electorate. So if you're a Republican and you're a deficit hawk and you're out of power, you know that

will win your votes. If you're a Democrat, can you make the same argument. So you can't make the same argument with your base if you're a Democrat. But what I think Democrats are trying to do in the next ten months is to start to appeal to moderate voters, independent voters, and a lot of independent voters. They might be liberal on social issues, but a lot of them are physical talks, and so I think it's reaching out

to them. Well, John Farroll doesn't understand. He just stumbled in the Democratic Party history here, whether it's John Fitzgerald, Kennedy or Scoop Jackson, etcetera, etcetera. I believe I can identify former fiscally responsible Democrats. Are they out there or does the party have to invent them? Well, in a lot of ways, the party has to invent them. There are a lot of Democrats now who don't look like

those same figures who you just mentioned. There aren't a lot of Kennedy Democrats left in Congress, even though we still have a Kennedy left in Congress. You really see a party that is committed to expanding social programming and not thinking about necessarily the long term fiscal health of the nation. Very good, January, Nick, thank you for the quick briefing here in the fiscal policy. We're gonna do much more on this in the coming day forward. Right now,

A romantic conversation with Dennis Garbon. People. I got a lot of emails. Old Garbon is going to be and it's very important this. We spoke to one Douglas cast of Florida earlier today, he is eighty percent in cash and has applied long trades off the Catharsis yesterday. Did you go along yesterday. I'm actually short, have been short for the past two or three weeks, and I'm probably going to get just a tiny little bit shorter. I own a few things. I own some ball bearings manufacturers,

I own a bank here in in southern Virginia. But on balance with derivatives, I'm I'm a little bit net short. Probably gonna stay that way. I got eight questions. John Farrell has twelve questions. But we're gonna go to a clinic here right now. What you heard Mr Gartman say, folks, is exceptionally important. You're in a trade, the trade is successful, and you add more to the trade. That's called na

Martin Gale theory. Explain to me why you're adding more shorts now, if you're looking pretty well, I think that the simplest thing to understand about trading is is this in life and in trading, the best rule to follow us do more of that which is working and less of that which is not. Why do you buy a stock at twenty and buy more at fifteen? And buy more at ten when the market is telling you you're wrong.

That's just illogical. If you bought a stock at twenty and it goes to thirty, you should be buying more because the market is telling you that you're right. For whatever reason, you're right. So do more of that which is working, do less of that which is not. If you do that in life, if you if you take flowers to your girlfriend more often, you're probably gonna get lucky romantic. You think he was talking to Mrs Keane. I think he was talking to Mrs Kane West. You're

talking to my lovely bride. Were you were? I think when Tom takes out vet bills, some flowers are arriving from Mrs Kane, from Kennis Government. Um, Dennis, you said you sure, okay, I want an idea. Just give me sort of lift the lid on the options market at the moment and tell me how expensive downside protection has got on the SMP. Well, if you're using options, it's

gotten ridiculously over expensive. There are other cheaper methodologies. There's futures that don't get more expensive, there's no they They they fall, but they don't go and value higher than an option does there are derivatives that that are I think reasonably usable. UM I would avoid at this point the options market just because of the expansion in premium. So talk to me about the best, the best way of expressing that trade at the moment, Dennis, what is it?

The easiest way, in the best way, in the cleanest way is to use the the S and P futures. And that's that's no question about that. The second best way is to use the STS, which is a double E T F and there are some problems with the double ETFs. But the cleanest and best way is to use the SMP futures. I think a big topic of conversation for us on this program, Dennis through the week

is how elevated volatility has remained. If we look at the term structure of volatility, the vix curves, so to speak, incredibly inverted as well. Are you looking for that to normalize anytime soon? It will normalize probably in the next month or two when you have this kind of fever that has broken upon the market. So it takes a while for those sorts of exogen of circumstances to to to fix themselves. Will will the market go back? Will the Vics go back to a contango. Of course, is

it going to do it today? I doubt that at this point, Dennis, do you see this as a technical correction or something more fundamental that we need to start listening to. All bear markets begin as technical corrections. Let's let's understand that first of all, and they only become bear markets after they've fall on what and they get everybody's attention. So let's call this for right now a correction. But I fear, honestly, I fear that something worses ahead.

This is really important, folks. Mr Gartman disagreeing with others like Mr cass is short uh this market on a trading basis, the technical construction of less six or seven days agrees with you, Dennis Gartman. For those who want to be brave and step in there, explain the resistance that exists on the dour SMP chart right now. Oh, there's there's just so many things that have happened. One of the this is gonna be a little less eric Tom.

But take a look at what at the at the cross between the europe between the British pound sterling and the Japanese yenn sterling has been gaining upon the Japanese yenne for months and months and months, and in fact for for for years since the since the excitement over breakfast had sent the British pound sterling down sharply. In the course of the past two years, however, as the stock markets of the world have risen, that spread sterling

has gained upon yen yesterday, that spread broke yesterday. Any trend line that you drew broke that when correlations such as those begin to falter and fall apart, you have to pay attention. I know that's a bit esoteric, but some of that there are things that are falling apart within the interior the market that I find this may Dennis Gartman, thank you so much, greatly appreciated. Thanks for

listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio