[00:02:51] Alfonso Peccatiello: 97% of the transactions that happen in the real economy is not cash anymore, but it’s rather transferring bank deposits from a bank to another. That’s how we move money between households nowadays. So bank deposits are one form of money, but what are the other forms of money that we can own as households?

[00:03:07] Alfonso Peccatiello: Well,there are a couple, especially in the US who can decide to allocate to a money market fund, which nowadays is a very, is a highly regulated, relatively liquid instrument where you park short term cash and these money market funds can only buy treasuries effectively, which means you are parking money effectively in treasury investing vehicles that are highly regulated.

[00:03:28] Alfonso Peccatiello: That’s another way to park your money. The third way would be directly to invest in treasuries. Now, When you think of money, Trey as a household, and you think of the safety of your money and the liquid form of this money, you move along this to access and you need to ask yourself every time, whose liability is your money?

[00:03:47] Alfonso Peccatiello: Now, if you park money in a bank, this is the liability of the government up until the F D I C insurance, right? Because effectively up until a hundred k, I think in the US or 250 is the level at which the government basically would guarantee a potential default of the bank, which means that inherently that money is the liability of the US government above that amount above the of F D I C threshold.

[00:04:14] Alfonso Peccatiello: The money you park in a bank, it’s the liability of a commercial bank. It’s an unsecured risk that you’re taking that bank doesn’t go belly up above the F D I C insurance. Now, alternatively, you can buy treasuries or invest in a money market fund who buys treasuries basically, and there you are directly having your money, your form of money that you own as the liability of the US government.

[00:04:35] Alfonso Peccatiello: You might want to argue that the US government is a better credit than an unsecured. Bank exposure, commercial bank exposure, which means as a household, of course, the bank deposit is more liquid than a treasury, but it also comes with some additional risk, a layer of risk. But obviously if there is a return that you can generate there, you will also put that into the equation when you decide how to allocate your money, and you are correct when saying that today, if you’re a household, a bank deposit exposes you to some risks, especially above the F D I C insurance, and it does not reward you.

[00:05:10] Alfonso Peccatiello: The alternatives are money market funds and treasuries that basically are the liability of a government. So a safer form of money, perhaps a tiny bit less liquid than a bank deposit, but they’re yielding much, much more today. So money market funds is yielding roughly almost 4%. And the treasury, especially even at the Shortt deal, six months, one year exposures will give you a 4% return against bank deposits.

[00:05:34] Alfonso Peccatiello: It will give you a 0.5, 0.6% return. So one of my thesis is that quantitative tightening itself is already shrinking the amount of bank reserves in the system. By definition, the Federal Reserve shrinks its asset side, and with it shrinks its liability side with bank reserves being one of the liability items that gets shrunk as.

[00:05:54] Alfonso Peccatiello: But those bank reserves will shrink even faster than in enormous QT process if households decide to take away deposits from banks, which also shrinks the amount of reserves they own, and to allocate these deposits elsewhere, which can be buying a treasury bond or parking money in a more market fund.

[00:06:13] Trey Lockerbie: Now, is the impact of that, simply that the velocity of money slows way down and that, loans are not generated as frequently and the economy just tightens up that much faster.

[00:06:25] Alfonso Peccatiello: So what we would be doing in that circumstance, if my thesis is correct, is that real economy money will be destroyed alongside with financial money. So you need to think about money as two different tiers, two different channels, two different buckets, right? So let’s talk about real economy money.

[00:06:43] Alfonso Peccatiello: What I define as real economy money is the money that Trey of corporates real economy actors actually use. And that money is mostly bank deposits. But as we said, if we household actually withdraw our bank deposits from banks and go and allocate and buy treasuries on exposure to money market funds, we are basically eliminating a source of real economy.

[00:07:06] Alfonso Peccatiello: Those deposits could be used to buy a car, to buy a house to boost nominal spending. And what we would be doing is withdraw them from these real economy money bucket and parking them in the financial sector, which means allocating to money market funds or buying treasuries. So that will be a form of destruction of real economy money and transfer, changing the composition of this money back into financial Type of money that cannot be spent and used in the real economy.

[00:07:34] Alfonso Peccatiello: Now, remember Trey that we also discussed about quantitative tightening. And what quantitative tightening does it is that it shrinks the amount of financial economy money on top of the change of composition we just discussed. Why does it do that? Because it removes the amount. It reduces the amount of bank reserves in the system, and bank reserves are money for banks.

[00:07:56] Alfonso Peccatiello: They are a financial form of money that banks use to exchange transactions between each other, settle them repo against each other by securities from each other. You need to think about it as the lubricant of the financial system. Now if households also withdraw deposits from bank and turn that real economy form of money, they destroy that.

[00:08:18] Alfonso Peccatiello: Basically within this operation, you will be basically destroying both forms of money. The FED Reserve will take care of killing reserves, of draining these reserves from the system of basically stop the lu modification of the financial sector and stop the flow of this financial form of money. And on top of that, households will be taking care of withdrawing real economy money from banks to allocate the money market funds or treasuries and governments, which are the other producers of real economy money.

[00:08:50] Alfonso Peccatiello: They also stopped the tap. The last time that the US government sent checks to some people has been April, 2021. It’s been one and a half years since we have seen the fiscal stimulus that boosts the amount of disposable money for us. Which means the real economy is getting starved of dollars and the financial sector is getting starved of financial dollars as I call them, which are bank reserves.

[00:09:13] Alfonso Peccatiello: And when these two happens at the same time, actually, you have to expect either liquidity, systemic events, or economic slowdowns or both at the same time.

[00:09:25] Trey Lockerbie: So speaking of bank deposits, the European Central Bank, the ECB just hiked raised by 75 basis points, which brought the deposit rate to 1.5%, and they’re acknowledging that inflation might stay higher for a lot longer and that probably further interest rate hikes are on their way.

[00:09:41] Trey Lockerbie: Walk us through what happened though at the most recent ECB meeting and why you suggest that Central banks sound like they might have a change of heart related to their current monetary policy.

[00:09:51] Alfonso Peccatiello: I think what we are getting here is a non-ED pivot, which means that all other central banks, which are not the FED, seem to be much more willing to be nuanced right now than the Federal Reserve is nuanced about its monetary policy.

[00:10:05] Alfonso Peccatiello: The European Central Bank was appointing case. We have seen them coming, especially Lagar, coming to the press conference and telling us that yes, of course they’re still serious about fighting inflation, but they also see a sharp economics slow down ahead and therefore that they are going to be more than once going forward.

[00:10:22] Alfonso Peccatiello: We have heard that not only from the European Central Bank, but also from the Bank of Canada, from the Reserve Bank of Australia. So what do all these jurisdictions have in common? And the answer is inherent fr. Now think about Europe. What would be European in air FR is it’s its own architecture. Its own infrastructure, which is built on 19 different jurisdictions being under one umbrella when it comes to monetary policy, but not under one umbrella when it comes to fiscal policy, right?

[00:10:50] Alfonso Peccatiello: We all know that creates in air FR is within the system. Think about Canada or Australia. What are their frs? It’s very simple. It’s the housing market. It’s private. Just to give you statistics about Canada. Canada, private debt to GDP. So that’s not the government, that’s citizens, that’s corporates.

[00:11:07] Alfonso Peccatiello: Private debt to GDP in Canada is now higher than it was in Japan at the peak of the real estate bubble of the nineties. Back then, private debt in Japan had grown so fast that the Imperial Palace of Tokyo was worth more than California, the entire state of California, that’s the level of private debt injection that in Japan led to the real estate bubble in Canada.

[00:11:30] Alfonso Peccatiello: Today we have a higher private debt to GDP than in Japan at the peak of that bubble. Now, that makes raising interest rates a very complicated exercise for Bank of Canada, and we have seen, therefore, bank of Canada Reserve Bank of Australia, European Central Bank, and all. Policy makers in jurisdictions that having err and fr being much more than once about their ti path ahead because they’re now looking at financial risks, financial stability risks that are coming looming on the horizons and they go hand in hand together with their mandate of fighting inflation.

[00:12:04] Alfonso Peccatiello: When it comes to the Federal Reserve, the story is different for two reasons. The first is the US economy is in general in a much better shape than anywhere else, and that’s basically the byproduct of a stimulus that the US true edits economy in 2020, 2021 as a percentage of GDP that’s unparalleled in any other jurisdiction.

[00:12:24] Alfonso Peccatiello: And so the US is still basically living off that aggregate demand boost that we saw in gigantic amounts being thrown at the economy in 2020, 2021. The labor market is still relatively strong. Balance sheets are still relatively healthy, et cetera, et cetera. The second reason is that you need to think about our monetary system as a dollar centric system.

[00:12:44] Alfonso Peccatiello: So it’s a pyramid basic. And then at the epicenter of the pyramid sits the dollar, despite being only 10% of GDP, the US being only 10% of GDP and dollar representing roughly 15 20% of world trades. The dollar basically takes a lion share between 60 and 80% of all FX volume, fX transactions, cross border payments, trade invoicing, so and so forth, which basically means that the dollar sits at the epicenter of our system.

[00:13:10] Alfonso Peccatiello: Now, when the system becomes shaky, the first. Impact. It’s not at the epicenter of the pyramid, but it’s at the very top and at the fringes of the pyramid and the top, at the fringes of the pyramid, there are all other jurisdiction that basically leave off and benefit from this dollar centric system we have created until there is stress being thrown into the system.

[00:13:31] Alfonso Peccatiello: The US sits at the very center of it, which means it feels the stress late in the cycle. While the peripheral parts of this system actually tend to be stressed first, including, and especially the ones that have in our fragility, like Europe or Canada or certain emerging markets, and that’s why these central banks and not the FED are the ones that are looking like ready to pivot earlier the FED itself.

[00:13:55] Trey Lockerbie: So interesting. Back in August when you were talking to Preston, it was the Bitcoin episode 89. You highlighted that 70% of the CPI components were running at over 4%. Eurozone inflation recently soared to a new record, and prices have jumped by a record of 10.7% in October, and far exceeding the expectation of 10.3%.

[00:14:18] Trey Lockerbie: Core inflation also accelerated to a new record of 5%. So I’m curious, how will this impact the current ECB policy?

[00:14:27] Alfonso Peccatiello: Yeah, so we are talking about the soft pivot stance from peripheral central banks, which are not the FED and the European central bank can be effectively qualified as one. Now, if the solution would be a symbol as to say, Hey, instead of only focusing on our inflation mandate, we also want to take into account financial stability risks that we see on the horizon.

[00:14:46] Alfonso Peccatiello: Therefore, we are going to be much more gradual from now onwards. When it comes to raising interest rate, yes, you can do that Trey, but the problem is that you will be sending a signal to markets that you are not overly serious about inflation. And what happens then is that real interest rates start to drop all over again.

[00:15:04] Alfonso Peccatiello: And as real interest rates drop, actually investors up that come back and they start buying houses, buying equities. Borrowers have an easy life again, they can borrow, the economy starts to run hot again. And we run the risk of basically feeding this inflationary mechanism that we saw being very vicious in the seventies under the vo tenure.

[00:15:24] Alfonso Peccatiello: And that led basically voker to be overly aggressive later on to be able to actually bring inflation down once and for all. So there is always a release valve in this process when reio rates drop very aggressively as the central bank is not that committed about fighting inflation anymore. The currency.

[00:15:38] Alfonso Peccatiello: Can be one release valve. We have seen that happening in the UK. We have seen the sterling actually drop. We’ve seen the euro drop against a dollar. So it’s not that easy for a central bank during a period where inflation runs way beyond their mandate to simply say, Hey, all of a sudden we also want to take care of our financial stability risks.

[00:15:55] Alfonso Peccatiello: Because bond vigilantes affects vigilantes. They will come back and actually haunt policy makers by going after the release valves, be there, the bond market, be there, the effects market, or whatever other release valve they find. So in this setup, I think there is no easy policy that the central banker can implement.

[00:16:15] Alfonso Peccatiello: A SP was very clear about. One very coherent monetary policy take will be to just be very strong and committed in fighting inflation. That means that households will need to go through some pain. That means the housing market goes basically to a halt house. Prices have to go down, stock prices need to go down, and households need unfortunate to feel the pain For this monetary tightening exercise, there is this idea of a soft lending, this idea of a nuance.

[00:16:42] Alfonso Peccatiello: This idea of perfectly navigating a gradual interest rate increase in a world that runs at 400% that GDP, summing up the private sector and the public sector in a world that is highly leveraged. It’s really a complicated concept to unfold and to successfully land. I think.

[00:17:01] Trey Lockerbie: Well, we have a, another FED meeting coming up this week.

[00:17:04] Trey Lockerbie: I mean, this episode will probably drop a couple weeks after this, but tomorrow the FED is meeting again and you know, I’m hearing lots of different narratives or lots of speculation around whether they’re going to ease up on their rate hikes now or if they’re going to go ahead with 75 basis points and then kind of talk about maybe slowing down the rate hikes moving forward.

[00:17:23] Trey Lockerbie: I’m kind of in the camp of the ladder, so I’m kind of, that’s what I’m predicting. What are you predicting about this week’s FED

[00:17:29] Alfonso Peccatiello: meeting? I think they’ll do 75 basis point, Trey, and of course this episode will be released after the FED meeting, so I’ll make a fool of myself by calling this wrong.

[00:17:38] Alfonso Peccatiello: We’re honest man, but the most important part of the FED reserve meeting is not necessarily 75 or 50 basis point at this meeting itself, but whether and how Powell will to the market demands for a FED pivot, the market is basically asking questions very loud about when and if the FED reserve will slow down the pace of hike.

[00:18:00] Alfonso Peccatiello: Where will determine the rate be and what is the hurdle for Powell to stop tightening the screws that much and it needs to come up and answer to these questions during the press conference. And I think that will be the most interesting part of the FED meeting. And I think those answers will be still pretty clear.

[00:18:17] Alfonso Peccatiello: Powell’s mandate is to bring inflation down and because he’s been so wrong about inflation for so long now, for like maybe nine to 10 months already, where the Federal Reserve was very late in I interest rates and tightening, he lost a fair amount of credibility. Credibility. Trey is the strongest asset and basically almost the only one that the central bank has.

[00:18:37] Alfonso Peccatiello: And so as inflation is still running way beyond Powell’s mandate and especially being very widespread, as I said to Preston a couple of months ago, it’s not only used car prices that are up, but it’s now services inflation. It’s the stickiest component of the inflation basket that are pointing up, up and up.

[00:18:56] Alfonso Peccatiello: There is no reason, no evidence in the data whatsoever that would allow power to coherently and credibly slow down and let alone pivot. So I think it would be very clear in his press conference that unless some serious progress has been made on inflation front, he can’t validate any demand from market participants to pivot towards a more doish stunt.

[00:19:20] Trey Lockerbie: I agree with you there. You know, instead of quantitative tightening, the ECB has been leaning towards what they call targeted longer term refinancing operations, otherwise known as TLTRO’s and those are loans. Please explain what TLROs are and why it makes more sense.

[00:19:37] Alfonso Peccatiello: For the ECB. Trey, let’s go back to the pandemic times in Europe.

[00:19:43] Alfonso Peccatiello: So that will be early 2020 when we got the first wave of pandemic. The European economy is very fragile. It’s an economy with a very bad demographics, with poor productivity trends. It’s an economy that needs credit to try and grow, at least at a decent level, decent, namely being roughly one and a half or 2% real growth a year.

[00:20:02] Alfonso Peccatiello: It needs credit, it needs the flow of credit to be ample and available to economic actors, so that can leverage their balance sheet and grow more than the poor demographics and productivity trends alone would allow. Now, during the pandemic, you wouldn’t expect banks to be very happy to lend money to the private sector because they would expect major defaults, right?

[00:20:22] Alfonso Peccatiello: So the European Central Bank came in and designed a program that effectively allowed banks in Europe to get an extremely cheap funding rate so banks could borrow directly from the European Central Bank through these TLTs. And these borrowing rates would be extremely cheap all the way up to minus 1%.

[00:20:44] Alfonso Peccatiello: Now think trade, you’re getting paid as a bank to borrow from the European Central Bank itself, but the lower rates, negative 1% on the borrowing side would only become true if you as a European bank would at least. Keep your loans books stable, which means you would at least lend some money back to the private sector without shrinking your lending book.

[00:21:05] Alfonso Peccatiello: So there were some criteria. It was a targeted long-term refinancing operation in Indeed, and the target was to make sure that some flow of credit was directed to the private sector even during the pandemic. Now, obviously, again, the central bank didn’t ask banks to lend more. It asked banks not to shrink their lending book.

[00:21:22] Alfonso Peccatiello: So the harbor rate was very easy to achieve if you ask me, which meant that the conditions was were extremely favorable. And European banks borrowed 2 trillion euros from the European Central Bank and ended up keeping their loan book stable and simply making an arbitrage by borrowing at minus 1%.

[00:21:41] Alfonso Peccatiello: And parking back these reserves back at the central bank and negative 50 basis points. So there was an easy arbitrage that banks could run. Now they did so for a while, basically the European Central Bank wrote a check to European banks. You could think it this way as well. Now comes the post pandemic period.

[00:21:58] Alfonso Peccatiello: The European Central Bank with inflation at 10.7% in Europe does not want banks to lend aggressively to the private sector and feed additional aggregate demand pickup. So it wants European banks to actually pair back some of their lending activity, and for sure it doesn’t want them. To gain a free carry, a free arbitrage by continuing to get these reserves at minus 1% and parking that back at positive interest rates at the European Central Bank.

[00:22:24] Alfonso Peccatiello: So they announced that the conditions would change, and this changing conditions basically almost forces European banks to repay back the loans because the borrowing conditions are not favorable anymore. So what you’re doing from now onwards for the next year basically is, yes, you are rolling over this borrowing from the European Central Bank, but not at favorable rates anymore.

[00:22:45] Alfonso Peccatiello: So where is the sense of that? Why would you lengthen your balance sheet if conditions are not favorable anymore? Now what the European Central Bank is hoping there is that European banks would repay back. A good portion of these tier thes to the central bank. But what it does, Trey, is it shrinks the balance sheet of the European Central Bank.

[00:23:02] Alfonso Peccatiello: These loans, which were created against reserves, which are created on the liability side, will both shrink as European banks repay these loans, and the reserves are destroyed as well, which means the balance sheet of the central bank will come down and reserves in the banking system will also come. And if you remember about what we discussed before, that means that money for banks will be less ample will be scarer.

[00:23:26] Alfonso Peccatiello: The amount of reserves in the system will go down, which means the lubricant of the financial system in Europe too, and not only in the US, will actually become scarer, which also means that banks will become less prone to engage in liquidity, providing activities in repo activities, in transacting with each other in facilitating liquidity in markets, which, if you ask me, is an additional reason also in Europe to be very conservative when it comes to taking risks and allocating assets in a risk prone way going forward.

[00:23:58] Trey Lockerbie: Know, you introduced me to a new ratio actually, which is the one year, one year inflation swaps minus the US year over year CPI. And what this, I guess is telling us is a prediction of where the US CPI, or how much the US CPI, may or may not drop or raise, right? So right now it’s predicting a drop by over 5%.

[00:24:17] Trey Lockerbie: Now do you use this metric or buy into it? And if not, or if so, what are your expectations for future inflation prints?

[00:24:26] Alfonso Peccatiello: So Trey the reason why I came up with this indicator on the macro compass, the reason why I looked at that is the following. I hear a lot of investors that are saying, Hey, I think inflation will full of a cliff and therefore I’m going to do X, Y, and Z with my portfolio.

[00:24:41] Alfonso Peccatiello: Now, if you have been a professional investor, like investor like me, you understand trade that having an opinion is not a good enough reason to invest because the market as an opinion too. So you need to basically weigh your own subjective assessment of probabilities and what will happen against what the market is pricing in.

[00:24:59] Alfonso Peccatiello: So this ratio that you just mentioned is my attempt at displaying to people, what is the market expecting when it comes to inflation going forward? So what I did is I looked into the corners of the fixed income market, came up with forward expectations from fixed income participants for inflation in 12 to 18 months from now against where inflation is today.

[00:25:19] Alfonso Peccatiello: Now the market expects inflation to drop by five percentage points. In 16 to 18 months from now, from 8% all the way down to 3%, it’s already baked in fixed income participants’ expectations. Now, we should dispel this theory under which the bond market is omniscient. It can predict everything on point.

[00:25:41] Alfonso Peccatiello: Well, that’s not always the case, but knowing at least what’s priced in what’s expected by bond market participants can inform you when taking risks. So if your thesis solely relies on inflation will come down, well, guess what? The market is already pricing that in to a large extent. Now, a lot has to do with the pace of this low down.

[00:26:00] Alfonso Peccatiello: And the extent of this low down trade. So there you can have a different opinion from markets. Basically, there are a lot of people that expect inflation never to drop to 3% and to stabilize in the four to 5% camp. Am I in that camp? Well, not really, especially on the cycle. So we shouldn’t confuse long term trends with cycles.

[00:26:19] Alfonso Peccatiello: What I think we will be experiencing right now is as we had a very strong cycle of inflation going up very rapidly by the end of 2023, beginning of 2024, we’re going to have a very vicious cycle of inflation dropping very aggressively. And my expectations is that it will also drop below this 3% implied by markets.

[00:26:39] Alfonso Peccatiello: So why do I think inflation by 2024 will be back in the 2% area, if not even below is very simple. The amount of real economy, money of credit being thrown to people in 20 20, 20 21 was gigantic. I built a series called the G five Credit Impulse series that tries to measure across the five largest economies.

[00:27:00] Alfonso Peccatiello: How much real economy money are we pumping? How much money is it reaching? The private sector pockets, the one that actually can be used to buy goods to boost nominal economic activity basically. And that serious Trey in 2000 and late 2020, beginning of 2021 had the fastest increase on record on my series.

[00:27:21] Alfonso Peccatiello: It was really tic the amount of money we drew at real economic actors, not financial money, real economy money. Now, if I look at that series, it leads inflation by roughly 18 months. Why? Because it needs time. You need time. You need people to get more money on their bank accounts, reassess their spending pattern than you need people to spend, which will drive up earnings, economic growth, and later on also, inflation.

[00:27:46] Alfonso Peccatiello: Now very punctually inflation, 12 to 18 months later actually started to rise. But in order to understand what will happen in a year, 18 months from now, we need to look at that series today. And where is that credit impulse series today, Trey? It’s at the lowest levels over the last 45 years. And why?

[00:28:04] Alfonso Peccatiello: Because we have stopped throwing money at the private sector. We haven’t had any fiscal stimulus in one and a half years. Actually, some jurisdiction are doing fiscal tightening. They’re taxing the private sector more than throwing money at the private sector. Look at the tax season in the US in April was very good for government, which is bad for the private sector.

[00:28:22] Alfonso Peccatiello: It means we are paying more taxes and yes, banks are trying to lend more as normal in the late cycle, but you are not creating money anymore for the private sector. You’re actually draining some money from the real economy today, which basically means that after every sugar rush, there is now a sugar cliff.

[00:28:41] Alfonso Peccatiello: And the sugar cliff. Inevitably in 18 months, 12 to 18 months will also translate into lower inflation. There is no good reason for which the big stimulus, we have seen cyclical stimulus in 20 20, 20 21, which led to a sharp pickup in inflation and the subsequent gigantic withdrawal of real economy money we’re experiencing now shouldn’t lead.

[00:29:01] Alfonso Peccatiello: To the same extent, slow down of inflation into late 2023, beginning of 2024. That’s a different story than discussing long term trends where people might say, yes, Alf, but we are de globalizing. Yes, Alf, but the labor force is not expanding anymore. Yes, but commodities, yes, but alright. But these are a long term trends.

[00:29:23] Alfonso Peccatiello: They take five, 10 years to unfold and be visible in inflation trajectories. In the meantime, we will have cycles and those cycles in growth. Those cycles in inflation are dictated by large swing in monitoring fiscal supports. And as we have seen a large tailwind in 20 20, 20 21, we are seeing now a gigantic headwind in 2022, which will inevitably turn out to slow down economic growth and inflation in late 2023 and 2020.

[00:29:52] Trey Lockerbie: So maybe there’s a clarification here around kind of timing, but you know, earlier this year you were more of a proponent of sitting on cash and it seems like lately you’ve been shifting into more of a proponent for going long treasuries and maybe even shortening equities. So I’m kind of curious what has shifted for you, especially with the expectation that inflation may be coming down over the next, let’s call it a year.

[00:30:14] Alfonso Peccatiello: So basically the macro asset allocation models in November, December were signaling that both forward economic growth would slow down and the policy makers will become more aggressive. And the combination of the two is toxic for assets. And we have seen anything actually being beaten up this year apart from energy.

[00:30:34] Alfonso Peccatiello: Anything that is Bitcoin, equities, bonds, anything you name has been beaten up apart from the dollar and energy. So back then, the asset allocation tilt was to effectively hoard a bunch of dollar cash, which isn’t a very attractive thing to say. But ultimately in cycles, in macro cycles, there are periods to be long periods to be short and periods to go fishing, as my mentor would say, which means just be defensive and not try to get sucked into very complicated situations.

[00:31:00] Alfonso Peccatiello: Now that has played up very well for the first seven to eight months of the year. Now, when you start having a lot of damage or potential damage being displayed into economic growth damage that is caused by fiscal tightening and monetary tightening, there is a point at which there is a dichotomy that happens.

[00:31:18] Alfonso Peccatiello: Earnings growth and economic growth will keep falling into 2023 because, well, we are trying basically to slow the economy down. So being long assets that benefit from cyclical growth is a very bad idea. Now, what becomes a good idea or could become a good idea instead, is to try and long assets that benefit from a disinflationary trend.

[00:31:39] Alfonso Peccatiello: If you think that this inflationary trend is coming while earnings growth and economic growth will still disappoint, then historically, one of the best assets that perform in this environment are bonds and gold to a certain extent as well. Those are defensive assets that perform relatively well when real interest rates are dropping.

[00:31:57] Alfonso Peccatiello: And there are these inflationary trends. So I’m not saying it’s time to pile up into a bond allocation, but I’m suggesting as you can read on the microcom, but that the times might be ripe for a moment where like in early 2001. Bonds could start to do well while equities still struggle. And let me elaborate for a second on this 2001 analogy.

[00:32:19] Alfonso Peccatiello: So I think, and this is one of the pieces I released on the macro compass as well, that we are looking at the period which is very similar to late 2000, beginning of 2001. And now think with me Trey, when it comes to the similarities. In 2000 we had the.com bubble, which was an expression of excessive risk taking in animal spirits in financial markets.

[00:32:39] Alfonso Peccatiello: Does it remind you of anything? In 2021, we have seen unprofitable companies being validated a hundred times earnings. We have seen debatable al coins being thrown to the roof in pump and pump schemes, et cetera, et cetera. So there have been a lot of animal spirits and irrational risk taking experiences in 2021, which pretty closely remind of the dotcom bubble in 2000 inflation in 1999 and in 2000 was at four and a half percent for five quarters in a row.

[00:33:08] Alfonso Peccatiello: Now, today’s even higher. But to get the gist of what I’m going where I’m going is that inflation was much higher than the FED Reserve target, which limited the FED ability in 2000, like in 2022 to actually intervene and be doish when the market was actually, you know, showing some stress or the economy was already decelerating.

[00:33:26] Alfonso Peccatiello: The FED’s hands were basically tied and they are still tied today. So that’s another similarity. And then in late 2000, you start seeing a bit of cracks appearing in earnings. While we have seen some cracks appearings in these earnings season, have you had to look at Amazon or Meta, for example, very large cup companies that have suffered an earnings disappointment compared to expectations.

[00:33:48] Alfonso Peccatiello: Now, let’s say the similarities are there. What happened in 2001, which would be us looking in the parallel and drawing into the next three to six months. What happened then is that the labor market started to show in some crops, so non-farm payrolls, instead of being 300,000 additional of jobs a month became 50,000.

[00:34:06] Alfonso Peccatiello: 70,000. So the labor market was still adding jobs, but visibly slowing down. I would expect the same to happen over the next three to six months. We saw earnings continuing their deterioration on the way down, which is also what I expect to happen over the next three to six months. Now, what happened to asset plus’s performance in 2001?

[00:34:24] Alfonso Peccatiello: Instead of everything sell off like we have seen in 2022 where bonds, gold, Bitcoin, equities, anything you can own, went now and actually some asset classes started delivering positive performance bonds being one of those. And also why? Because the Federal Reserve, at some point in 2001, saw that enough damage was starting to be delivered to the labor market.

[00:34:47] Alfonso Peccatiello: Unemployment rate had gone up already significantly, which allowed them at least to cut interest rates by a hundred, 150 basis point, and bring interest rates down from six and a half percent to 5%. So not to 0%, but at least to 5% to start accommodating the process of an economics slowdown, which helped bonds perform.

[00:35:06] Alfonso Peccatiello: Now, do I expect this weapon immediately in three weeks? Not necessarily, but I’m preparing investors to draw parallels with that period of early 2001 where a FED pivot is not necessarily positive for equities and risk assets because the FED will be pivoting when damage is done to the labor market and to earnings, which is not the situation where you want to be bullish.

[00:35:29] Alfonso Peccatiello: Risk assets, because the economy is lowing down very aggressively. We are in a recession, in an environment, there is an asset that can deliver positive returns, and in that cycle, in that particular cycle is bonds rather than equities, and that’s where I’m preparing to basically tilt my asset allocation going forward.

[00:35:46] Trey Lockerbie: Let’s talk about some other cracks in the system. So I’m trying to better understand what exactly happened with the pensions in the UK as of late, because the global pension fund industry is worth 35 to 40 trillion. I mean, this is just such a massive part of our global economy and the UK pension funds were in hot water recently, it seems like we got here by these funds using what’s called interest rate swaps.

[00:36:10] Trey Lockerbie: Can you please describe what an interest rate swap is and how it works?

[00:36:15] Alfonso Peccatiello: Yeah, that’s a good question, Trey. And this is a relatively complex topic, but we’ll try to make it simple. That’s why we’re here for, so bear with me for a second and let’s think about how a pension fund works. Pension fund balance sheet as a liability side, and on the liabilities, it’s basically the pension fund.

[00:36:34] Alfonso Peccatiello: Promise to pay pensions to write res in 30 to four years from now. Those are the liabilities, the new items for a pension fund. On the asset side, a pension fund will have investments to make sure it can generate enough returns to meet these obligations. So these investments will be a bunch of bonds, equities, real estate, investments, whatever they deem necessary to achieve these returns.

[00:36:56] Alfonso Peccatiello: What about risks? A pension fund needs to pay this pension obligations in generally 20 to 30 years from now, which means that rapid changes in interest rates can affect the market value of its balance sheet because you need to think about this pension liabilities as very long term duration liabilities.

[00:37:14] Alfonso Peccatiello: So the price and value of these liabilities changes with interest rates changing up and down very rapidly. In other words, the pension fund is exposed to interest rate risk. Now not only on the asset side, they need to generate returns trade. They also need to hedge this interest rate risk somehow, right?

[00:37:30] Alfonso Peccatiello: So the obvious candidate to generate fixed returns and hedge interest rate risk is a government bond, a long-term government bond, which not only generates a certain return, which is fixed if you own the bond until maturity, but it also hedges interest rate risk on the liability. And that’s why pension funds are notoriously large investors in the government bond market.

[00:37:51] Alfonso Peccatiello: I’m not saying anything new, but now let’s introduce the concept of interest rate swaps. Now, the problem with investing all your assets into government bonds rates, that interest rates were dropping very fast for the last 30 years, which meant that if you look at the UK pension fund for the last 10, And if they would only buy UK government bonds, they would lock in yields in the 2% area, and 2% is not enough of a return to guarantee a decent pension stream to rate release 20 to 30 years from now.

[00:38:21] Alfonso Peccatiello: So interest rate swaps became very convenient to use. And why? Because an interest rate swap is nothing. Just in an agreement where two counterparts exchange floating interest rates over time against the fixed interest rate that we decide today. So we’re basically fixing today interest rates against promising to pay floating interest rate over time.

[00:38:42] Alfonso Peccatiello: So it’s an instrument to basically lock an interest rate today and try to hedge this interest rate risk over the time span. But where is the trick? Because you could do the same with government bonds. The trick is that interest rate swaps do not require cash outflows, large cash outflows at the beginning.

[00:38:57] Alfonso Peccatiello: When you buy a government bond, a hundred million of a government bond requires you to disperse a hundred million cash. Interest rate swaps are derivatives. And they’re centrally cleared, which means that the clearing gas would only require you more initial margin for you to enter into a trade that hedges a lot of interest rate risk.

[00:39:16] Alfonso Peccatiello: Now, do you see the convenience of that? That’s awesome because you save a lot of cash. By doing this interest rate swap, you still hedge interest rate risk, but you do need to put all that cash off upfront. You don’t need to anymore, which means the cash you don’t put up front can be instead invested Trey in higher yielding assets, you can buy more real estate exposure, more equities, more emerging markets, more credit exposure, and make sure that both your interest rate risk is edged and your prospective return is much higher because now all of a sudden you’re investing your cash in higher yielding.

[00:39:48] Alfonso Peccatiello: Wow, that looks amazing, right? Well, there is a problem. The problem is that, and as long as volatility remains very low, the clearing house will require you to post only a little bit of variation margin. You know, this interest rate derivatives go up and down every day, but as long as volatility is contained, they will only call you to put a little bit of cash every day, or to receive a little bit of cash if the position is going your way.

[00:40:12] Alfonso Peccatiello: Now, let’s walk back to a month ago where interest rate volatility in the UK went through the roof. We saw as the combination of the fiscal package, which was launched by Let’s trust. And inflation in the UK being rampant, we saw interest rate volatility going through the roof, interest rates increasing 20, 30, 40 basis point a day, right?

[00:40:32] Alfonso Peccatiello: Which was nothing that any pension fund risk manager had incorporated in their molds. Now what happens, the clearing GOs is calling up this interest rate, this pension funds and saying, guys, you need to post a large amount of collateral because your position is underwater. Okay? So the UK pension fund goes and look for cash and it does some cash on side, it posts it.

[00:40:52] Alfonso Peccatiello: But the day after the interest rates, swaps keep going up, up, and up in interest rates, which calls them for more collateral. There is no collateral anymore. So what do you do is no problem. We’ll give you some bonds, right? We have a bond portfolio. We will use that bond portfolio as collateral to meet the margin code.

[00:41:10] Alfonso Peccatiello: The clearing houses do not accept bonds as collateral. They want cash. Now, one way would be to try and post this bonds somewhere else as collateral to receive cash maybe from a bank, for example, and use that cash to meet the collateral margin. Banks refused to do this transaction because they understood that pension funds had a liquidity problem.

[00:41:30] Alfonso Peccatiello: They didn’t want to lend money to an entity which is facing a liquidity crisis, right? Pension funds also do not have access to the central bank. They cannot go to the central bank and say, Hey, here is my bond portfolio. Please give me some cash. They do not have a line with Central Bank, which means the only solution.

[00:41:47] Alfonso Peccatiello: Is to sell rapidly down your bond portfolio, your equity portfolio, anything you have in your book, in order to raise the cash necessary to meet the margin cost or otherwise you would default on these contracts. And that’s exactly what we saw happening, right? A rapid fire sale that ended up compounding the problem of rising interest rates because not all interest rates were rising, pension funds were selling bonds on top of that to try and raise the cash necessary to meet the margin costs.

[00:42:15] Alfonso Peccatiello: And at some point the Bank of England had to intervene because otherwise a large systemic 40 trillion participant sector like the UK pension fund would be underwater very rapidly. So these are systemic risks that tend to be hidden until volatility picks up. In some corner of the, of this very leveraged system we have created actually shows signs of stress.

[00:42:39] Trey Lockerbie: So you’re calling in from the Netherlands today. And just to give a reference point, the UK pension fund industry is size about 119% of their GDP. This is a according to 2020 data, and the Netherlands Pension Fund assets is a percentage of GDP over 200%. Could the Dutch be facing a similar risk as the UK just be given the size of this break economy?

[00:43:03] Alfonso Peccatiello: In principle, yes. The Dutch pension fund industry is gigantic. There is a but to be said here. So the first is the size of the pension fund industry as percentage of GDP is actually one good indicator. The other one is the size of the pension fund industry as percentage of the underlying bond market.

[00:43:21] Alfonso Peccatiello: If there is a vast very liquid bond market, pension funds can tap. It also limits basically the risk that there will be collateral squeezes here and there because the collateral is abundant. Right? And it is not fair really to compare the Dutch pension fund industry to Dutch GDP because the Netherlands is in Europe.

[00:43:38] Alfonso Peccatiello: Uses the Euro and therefore can access the Euro bond market, the Euro repo market, and also needs to be measured against the Euro GDP. So if you change the denominator from Netherlands to Europe, then all of a sudden the problem becomes a little bit less acute. Nevertheless, it remains a very large systematic industry.

[00:43:57] Alfonso Peccatiello: It’s a bit better regulated if you ask me, than the UK one. But similar dynamics could unfold Trey because so far we only talked about collateral squeezes on interest derivatives, the pension funds, insurance companies, asset managers also use other derivatives for an exchange, derivatives, commodity derivatives, equity derivatives, and as volatility picking up in every single corner of financial markets.

[00:44:20] Alfonso Peccatiello: You always need to bear in mind that as we have built a very successful and fruitful and wealth generating system, we’d leverage when volatility’s very low, when volatility picks up. Such a leveraged system can become fragile, especially in places where you expected the least. And the Dutch pension fund system could easily be a candidate for potential signs of stress.

[00:44:43] Trey Lockerbie: So I want to talk about some other derivatives here. When you were talking to Preston a few months back, you were highlighting this risk of redden denomination in Italy from the Euro to the Italian lira, and the credit default swaps were climbing in price. How has that evolved since that discussion?

[00:45:01] Alfonso Peccatiello: So Italy is a new government, which has been recently elected.

[00:45:05] Alfonso Peccatiello: It’s a right wing government with basically three main parties in its coalition and so far we haven’t had any major updates on the fiscal stunts and the European stunts of this government, but we are awaiting news over the next few days. The reason why I use those credit default swaps contract to grasp the risk of a lira REO is that investors can hedge against Italian default risks in two ways using two sorts of credit default swap contracts.

[00:45:36] Alfonso Peccatiello: Trey, there is a 2003 contract, and there is a 2000 and, sorry, 2004 and 2013 contracts. Now, why are they two credit default swap contracts in Europe? That’s an interesting story. In 2004 five, before the great financial crisis, nobody thought or foresaw the possibility that one of the member countries of the Europe would want to walk away from the Eurozone.

[00:46:00] Alfonso Peccatiello: There was basically this possibility never crossed anybody’s mind, which meant that as an investor, if you bought a credit default swap, what you really did is you basically protected yourself against the default risk, the credit default risk of one of the sovereigns not being able to pay back their sovereign debt.

[00:46:18] Alfonso Peccatiello: That’s what you did. But if the sovereign decided to all of a sudden renominate that outstanding debt from Euro to Zetas or French France or Italian Lira, you wouldn’t be protected. That Renomination wouldn’t qualify as a default event where your credit default swap contract would be triggered. Now comes the great financial crisis and the Euro on debt crisis of 2011, Trey, and all of a sudden that possibility of a certain member country wanting to re nominate their debt in domestic currency and walking away from the Eurozone becomes a real and concrete possibility.

[00:46:51] Alfonso Peccatiello: So a new contract is born. A new contract, which is a 2014 CDs contract law, which basically protects investors also against the risk of a certain member country. Reno, their debt in Italian lira, Spanish Zetas, et cetera, et cetera. Now, right now, Trey, what that means is that there are two credit default swap contracts outstanding.

[00:47:13] Alfonso Peccatiello: One that protects you against the risk of red denomination, one that doesn’t. So comparing these two contracts basically isolates in the best way possible, the red denomination risk itself. The only material difference between trading one of the contract or the other is the red denomination risk protection or not.

[00:47:31] Alfonso Peccatiello: So if you compare these two contracts, you can get an idea of how much investors are willing to overpay by buying one credit default swap contract for the luxury to be also protect against re denomination. And this spread against these two CDs contracts in. Actually reached levels which were relatively high in the run up to the Italian elections and has remained relatively high, which means investors are willing to pay up for protection against Italy.

[00:47:56] Alfonso Peccatiello: Reating their debt in lira. Does it mean that Italy will, or that the probability has gone up? Not really. Only means that investors are more nervous about the event. Now, I don’t think this government will be extremely friendly to Europe. If you ask me. It’s a government which wants to and understands that Italy as a large leverage within the Eurozone being a very large economy, and especially in this geopolitical context, Europe cannot afford losing one of its largest members.

[00:48:23] Alfonso Peccatiello: And so what that means that if you are negotiating as the Italian government, you know, you have some decent leverage that you might want to use. So I do expect some confrontation between this government and Europe, which might want to make investors even more nervous going forward.

[00:48:38] Trey Lockerbie: Now, are there other parts of the market where CDs spreads or prices are increasing that’s causing you concern?

[00:48:45] Alfonso Peccatiello: Yes, there are a couple. The Chinese CDs market has become very active. China is undergoing a massively leverage Trey. It’s a leveraging process that involves the single biggest asset class in the world, which is the Chinese housing market. Chinese real estate market at the end of 2021 was valued at 50 trillion, which is much larger than the US equity market.

[00:49:10] Alfonso Peccatiello: Valuations a gigantic market, which is undergoing a massive de-leveraging because oxygen being in the Chinese Communist Party understood that the hyper financialization of China was not exactly the way they wanted to proceed forward. They wanted rather common prosperity, perhaps, you know, trying to contain some of the financial excesses that were ongoing in China, and they climbed down on tech sector and also clam down on the housing market.

[00:49:36] Alfonso Peccatiello: Now, when you climb down on such a highly leveraged and such a systemically big asset class like the Chinese housing market, you generate a lot of pain through the Chinese economy, and that’s visible together with the zero covid. Through the Chinese CDs market. So the credit default swaps in China, pricing actually quite some pain historically speaking in China.

[00:49:55] Alfonso Peccatiello: And the other sector that I’m looking at when it comes to credit default swaps is banks. Banks obviously are in a much better shape than in 2007. They need less to say, they’re much more regulated, much more, and they have less leverage on their balance sheet. But they do have significant exposure to the housing market, significant exposures to emerging markets to a certain extent as well, which means that as the housing market slows down, some of these might actually be reverberated through banks balance sheets and therefore credit default swaps are starting to reprise a meaningful possibility that some of these banks go on the trouble, see Credit Swiss in Europe, for example, being one example of a bank that has been targeted by investors as being in trouble.

[00:50:34] Alfonso Peccatiello: So those are the two areas, I would say financials both in the US and Europe, across the world and China, where I am looking for signs of credit stress.

[00:50:44] Trey Lockerbie: And speaking of spreads, another spread that you guys talked about a few months ago was the 10 year, two year treasury spread. At the time it was about 0.27, if I’m remembering correctly, and you predicted that it might go to 0.5 and shortly thereafter, like weeks later, it was at 0.48.

[00:51:01] Trey Lockerbie: It kind of peaked, if we can call it that, or the trough, I guess, has been at 0.51 on September 23rd. So you nailed this prediction so far. It’s right around 0.41 today because we kind of hit your target. Where do you see it going from?

[00:51:16] Alfonso Peccatiello: So that will basically depend on whether the Federal Reserve caves in to financial risks or financial stability pressures, or it decides to just march ahead and tighten monetary policy.

[00:51:27] Alfonso Peccatiello: Trey, curb inversions which is something I talked about for the first time in February on the macro compass, and people thought I was crazy, but actually they happen when the Central Bank is forced because of their Monday to tighten the screws so much. The bond market says, okay, we get you to influence the short term of the bond market.

[00:51:48] Alfonso Peccatiello: We have to price you accordingly. So we will raise yields back at the front end, but we will reflect the pain and the nominal growth slowdown and the potential recession you will generate by over tightening in the back end of the mon market. Because that reflects prospects for long-term growth and long-term inflation.

[00:52:05] Alfonso Peccatiello: And the tighter you are today, the more likely you are to cause a recession that will lower growth over the long term. Right? So that gets reflected into lower yields or at least a curve shape, which becomes flat and even inverted. Where the Federal reserve to continue tightening as the labor market slows down, as earnings keeps slowing down, I would expect curves to invert further.

[00:52:25] Alfonso Peccatiello: Now we have rich levels, which are pretty interesting. Minus 50 basis point in the two year, 10 year spread in the US treasury curve are levels seen in two thousands, levels seen 2007. So we are seeing levels that are pretty inverted. So from here, the risk reward in backing in further inversion, it’s not as palatable as it was at the beginning of the year or when I spoke even to Preston.

[00:52:47] Alfonso Peccatiello: Nevertheless, it’s all up to the FED. And I think to be honest, Powell doesn’t have major alternatives for the time being, if not to remain pretty committed and credible towards market is inflation fight. So I don’t expect a major reversal in this flattening trend of the yield curve. But again, the entry point today is much less palatable than it was at the beginning of the year.

[00:53:09] Trey Lockerbie: Are there any positions around the normalization of rates, if you will or just managing the volatility of the bond market that you’re considering?

[00:53:18] Alfonso Peccatiello: I think I’m eyeing the the exact good time. It’s very difficult too, of course, of buying five year or 10 year US government bonds cause there will be a point Trey, where this slow down will become so visible and will become so painful through the data to the labor market data to the earnings releases.

[00:53:37] Alfonso Peccatiello: And inflation will be slowing down because we are tightening the screws of the monetary and fiscal policy accommodation that we have done in 2021. It will become so visible that it’s basically going to be almost impossible for the bond market to ignore in this inflationary cycle ahead. Now the problem is that being early, as my mentor used to say, is also being wrong.

[00:53:58] Alfonso Peccatiello: So you need to stay there very patiently and wait for the point where the forward loading looking indicators, which have already dropped, actually feed into real economy data that the Federal Reserve is trucking very closely, and this is mostly the labor market. The labor market and earnings are next shoe to drop.

[00:54:18] Alfonso Peccatiello: So you need to be very careful that and observe that process ongoing. But there will be a point where five year treasuries at 4%. Oh, they will look like a fantastic investment with hindsight, and I will be trying through the macro compass to direct my macro assessment in a systematic data driven way so that US allocation becomes more and better equipped for what I expect to be at this inflationary period ahead.

[00:54:42] Alfonso Peccatiello: Where nominal economic growth will slow down very aggressively. Earnings will slow down. The labor market will also take a hit, and people unfortunately will get unemployed. To a certain extent, the housing market will slow down, but at the same time, there will be some investment opportunities finally for investors to belong something, because this year, whatever you bought, whatever you were long, unless it was energy or the dollar, if you were a non-US investor, was a big pain.

[00:55:08] Alfonso Peccatiello: And the good news is that from an investor perspective, I expect some opportunities for a long investor to arise over the next six months.

[00:55:16] Trey Lockerbie: Now last question here. Do you expect the other shoe to drop to kind of come from housing? Because you’ve written that housing makes up 20% of U s GDP and around 12 million jobs given its brokers and the construction and furniture shops, et cetera.

[00:55:28] Trey Lockerbie: And if this needs to kind of grow by 90,000 jobs, if our labor force needs to grow by 90,000 jobs and this only grows by 10%, we might see a negative sign here as far as non-farm payrolls go. Is that what you’re keeping a close eye on at the moment.

[00:55:44] Alfonso Peccatiello: So my expectation is that unemployment rate in the US will be at 6% by the end of next year.

[00:55:49] Alfonso Peccatiello: And this is not your median expectation. And the median expectation is for unemployment rate to rise to four and a half percent. I expect it to rise much faster to 6%. And the reason why is that I expect the housing market to be much weaker than people expect. I wrote the first article on the housing market weakness in March this year, and again, people told me I was crazy, but all I was doing was just looking at mortgage rates and at potential house building activity ahead, and the affordability crisis that people were basically staring into.

[00:56:19] Alfonso Peccatiello: And actually that’s what’s been unfolding. And the housing market is a vital sector of the economy. Housing is the cycle because it’s the most leverage, most interest rate sensitive. Sector, one of the first sector to move actually, and it accounts for so much of US employment and US GDP, that housing sector alone could be responsible for non-farm payroll to turn negative anywhere into one next year.

[00:56:44] Alfonso Peccatiello: And as we don’t add jobs, but we actually reduce jobs on a national level while we need to add job jobs to around a hundred thousand monthly pays to keep unemployment rate stable. If you do the mathematics, you end up understanding that unemployment rate is likely to shoot up much higher than four and a half percent by the end of next year.

[00:57:02] Alfonso Peccatiello: Solely accounting for a serious low down in the housing market, which is inevitable at this point. Right? The bull case for the housing market. It’s a complete freeze. It’s a situation where sellers have the luxury not to have to sell, and they can just basically pair back and the market will become dry.

[00:57:20] Alfonso Peccatiello: There will be no transaction and no new houses built. How many jobs will you lose in housing and housing related sectors at that point? Do you need brokers? If there is no transaction, do you need construction workers? If there is no appetite to buy any house anymore, Trey. Now this is the bull case. A more base case I would say is that the labor market weakens and therefore some people are forced to sell a house to tap into their equity.

[00:57:45] Alfonso Peccatiello: Because the housing market gains that we have seen over the last five to 10 years in the US account for a lot of the balanced strength in consumers, it’s people having their houses worth much more than what they paid for. Now, if they lose their jobs, they might want to be forced to a certain extent, at least, to tap into this this home equity, which means selling their house or refining their house or anyway, extracting some equity from the housing market.

[00:58:08] Alfonso Peccatiello: Now, if that happens, it starts a little bit of a cascade where I expect house prices to drop by 10%. By the end of next year which by the way seems very scary, but it would only bring us back to early 2021 levels. It’s not the end of the world and it’s a likely path ahead. It will also hit the labor market to an extent where I think unemployment rate will be in the 6% area by the end of next year.

[00:58:32] Trey Lockerbie: Wow. Well, Alf, this was incredible and you are putting out such amazing content and I strongly encourage people to not only subscribe to your newsletter, but follow you on Twitter as well. You’ve got amazing threads you put up there almost daily. So before I let you go, I want to give you the opportunity to hand off to the audience where they can learn more about you and find all the resources you’re providing.

[00:58:52] Alfonso Peccatiello: Very kind words from your side. Thank you very much. If people want to find more about my work, the best place to do that is my free newsletter. It’s called The Macro Compass. It has 110,000 readers by now. I’m very happy about the amount of people reading it. It goes out weekly and it’s a newsletter whose mission is to give.

[00:59:12] Alfonso Peccatiello: Financial education, macroeconomic insights and actionable investment ideas so that people can look at the same things I as a pro am looking at when assessing macroeconomic conditions ahead and make up their mind to be a much better informed macro investors and understand that there are risks to be managed, cycles to be managed when it comes to portfolio location.

[00:59:34] Alfonso Peccatiello: So my mission is to try and help people educate themself, become smarter about macro, about the bond market, which is in particular my specialty. And come up with actional investment ideas and portfolio locations that people can get ideas from when it comes to their own financial situation. And wealth preservation, basically that’s one way it’s called the macro compass.

[00:59:54] Alfonso Peccatiello: I can just Google it or look for it on substack and the other way is by Twitter, as you said, @macroalf is my handle you’ll find snippets much more frequent, let’s say in short, but not as deep, of course as the newsletter articles there. And occasionally some pictures about homemade pizza bread, you would pardon me for that, but I’m Italian after all.

[01:00:15] Trey Lockerbie: I love it. Well, Alf this has been amazing and I, I can’t wait to follow up with you and check in on some of these predictions we made today. Thanks again for your time.

[01:00:22] Alfonso Peccatiello: Thanks, Trey. It’s been a pleasure.

[01:00:25] Trey Lockerbie: All right, everybody, that’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app, and if you’d be so kind, please leave us a review.

[01:00:31] Trey Lockerbie: It really helps the show. If you want to reach out directly, you can find me on Twitter @TreyLockerbie. And don’t forget to check out all of the amazing resources we’ve built for you at theinvestorspodcast.com. You can also simply Google TIP Finance and it should pop right up. And with that, we’ll see you again next time.

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