Two months ago, RealVision's Raoul Pal brought our readers an interview excerpt with "The Fourth Turning" author Neil Howe in which the author and current head of Saeculum Research explained "what keeps him up at night."
Today, we bring our readers another RealVision excerpt of a reflexive "interview" in which Pal himself is in the hot seat, and is challenged by Ken Monahan to lay out the market shifts he expects in 2016. In the full interview Raoul goes into detail on the indicators he will be watching throughout 2016 that will suggest that a liquidity crisis is imminent. He emphasizes that if this scenario occurs, most people are in investments that “they should absolutely not be in."
One such metric closely followed by Pal is the ISM. This is what he says:
The ISM to me is the global guide to the business cycle. I think that [with the ISM below 50] we have a 65% chance or probability of a recession. We’ve seen that the cycle peaked back in 2011. It troughs at some point. The cycle always does this. We look back at the probabilities. We have a reasonable chance of a recession. Again, I don’t deal in certainties. It’s not like it’s definitely going to happen.
... the probability is now that we crossed 50, that over due course, the business cycle will continue lower, and therefore we should see the ISM coming through 47 which is the recession level - maybe much lower than that depending on the severity of the recession. So that would mean that the year on year rate of change of the S&P would be negative.
... if I’m right and the ISM, for example, gets down to 47, 45 then you’d start to see the year on year rate of change on the S&P at -10%
A way of visualizing Pal's point comes courtesy of BofA, which shows that once the ISM drops below 45, it virtually always results in a recession, with just two false positives: in 1951 and 1968.
And then there is another indicator which Pal watches, one which we have been warning about since early 2014 when it first started to slide because it is the most important leading indicator into any global recession, namely trade - for the simple reason that while central banks can print asset prices, "they can't print trade."
The ISM is my basic framework, you then need to further increase the probability of success of what you’re trying to do. So what you look at, for example, is all the other economic indicators around what’s happening in the global economy. For example, if I look at exports - global exports. Global exports around the world are the second lowest levels since 1958. There’s something going on that the world is slowing down. Some of it is dollar translation effect. And the other is volume loss. So there’s something going on that wasn’t going on in 2012.
Yes, something is indeed going on, and after years of ignoring it because it was masked by the "wealth effect" of central bank manipulation, the markets are starting to realize it. Pal then touches on all the other deteriorating economic data points we have covered over the past year.
Then we look at other things like freight shipments. We look at retail sales. We look at industrial production. Once you start putting all the data series together many of them are at levels - durable goods - that are only seen in recessions.
Correct, and yet the question is: why does Janet Yellen ignore it and continue to push on with the "recovery" narrative, because ultimately is all about the "narrative" to boost confidence:
Its the Fed’s job to say things are good because it’s about expectations management. Whether we like it or not it’s a behavioral economics world and I’m realizing that more and more that you need to look at how behavior and incentive schemes are done. Soshe has to say that. She’s not going to say, “Oh, my God, the economy is looking terrible” until she has to because then you flip around the expectations.
Of course, with every passing day, the moment when Yellen will say the "economic is looking terrible" draws closer, and with it brings not only a return to ZIRP, and then NIRP, but also presents the question: will the Fed do another round of QE, or will it finally proceed to what Bernane said back in 2002 was the endgame all along: helicopter money. Or non-helicopter money is on the latter.
There is more in the Raoul Pal interview excerpt can be watched below, and much more in the full hour-long interview. Furthermore, Raoul Pal has again given Zero Hedge readers an exclusive weekly trial so both the full Howe, and all the other fascinating interviews in RealVision's database can be watched in their entirety. To do so, please click here and use the "zerohedge" trial code.