Julian Brigden: "This Is What The 'Armageddon Scenario' For Markets Looks Like"

Tyler Durden's picture

Eric Townsend and Patrick Ceresna, the people behind the weekly Macro Voices podcast, have released an extended, hour-long interview with Julian Brigden founder of Macro Intelligence 2 Partners, in which among the various topics discussed (see the attached slidepack for supporting materials and charts) were: 

  • U.S. Dollar impact on the U.S. shale bubble
  • Peak acceleration in ISM manufacturing
  • Headline inflation peaking
  • Fed tightening going to start to impact data
  • Bond shorting opportunity is over
  • Risks to the reflationary trades
  • Wage trends in the U.S.
  • Perspective on European growth and inflation
  • Relative pricing between U.S. and European bunds

Brigden, who until recently was aggressively bearish Treasuries since June, is now confident that the "time to be out of US fixed income shorts for now." The reason for that is that he anticipates the recent surge higher in economic indicators (all of them of the survey, or "soft" kind), is now rolling over, and it "doesn't get any better."

Furthermore, adding to the downward pressure will be the upcoming inflation peak, as the energy base effect will in several months start to exert a downward influence, the same way it boosted inflation in the late part of 2016 and early 2017.

Furthermore, the ongoing tightening of financial conditions via higher interest rates across everything from Libor to mortgages, will start to impact the data.

Making matters worse, all of this will take place as expectations are near their highs, and all this puts the recent reflationary trades at risk.

And while Brigden says that he is not changing his overall secular outlook on the US economy  - the upcoming deflationary wave is merely a temporary blip until wage growth catches up - he is shifting his investing decisions and attention to Europe, where he believes growth is set to accelerate as there has been no tightening of financial conditions yet as the ECB's QE train continues to chug along, and where after a lag, European inflation is expected to more higher (we are not so confident, especially now that the base effect just lead to a big disappointment in the latest European CPI print just yesterday).

In any case, if Brigden is right and the next inflationary wave hits Europe as the US is deflating, however briefly, it would have major implications for both relative bond pricing (10Y TSYs vs 10Y Bunds and US vs Eurozone output), as well as FX: USD vs EUR.

Some notable quotes from Brigden:

  • Obviously, we've all seen it in energy prices and how oil prices are percolating through into inflation. But I think what's also not quite as well understood is how that also manifest itself via that same sort of essentially base effect into the economic data, the growth data.
  • When we typically look at growth data we very rarely look at the level of growth. What we typically discuss is the speed or the acceleration of growth and by that, I mean, month on month, quarter on quarter, year on year
  • So, to a large extent what we've seen is that in terms of some of these PMI data and that's what we were playing all of last year and what we said in December, we will come to a point where this thing will just naturally run its course. It just doesn't get any faster.
  • The model suggesting that maybe we can punch out one further higher number which I think comes out next week in May, we can clip at 60 on ISM manufacturing
  • you're already starting to get some signs of disappointment in some of these PMI. So, if you look at say the Dallas Fed survey which came out I think last week the previous number had been 24.5. It was supposed to come in at 22 and it came in at 16.9 and all of this makes us believe that we are approaching not only this sort of cyclical high in terms of the inflation story which we'll talk about in a second but also the cyclical high in terms of the speed of the growth story.
  • That has important ramifications I think for markets. it's not super bearish. We're not trying to say that we think the U.S. is going back into recession. We just think that the data is going to start to essentially disappoint.
  • we're going to settle on I think into a much more normal level of inflation. Essentially the same sort of level of inflation that we saw prior to oil's drop and now for central banks that's going to create bigger problems but that comes. Initially we’re going to get peak, initially we’re definitively going to get that peak.

However the most interesting part of the entire interview is Brigden's take on the so-called "Armageddon scenario", or rather what he calls the "endgame for markets", which as he correctly points out is not in the context of a deflationary episode - after all central banks can always paradrop money, political considerations notwithstanding, but when inflation is running hot. Below is the key excerpt:

Erik:    Let me just ask a question there because we've had quite a few guests express a view that Europe is in really serious trouble of course the Brexit article 50 trigger occurred this week a lot of guests have said that they think it's the beginning of the end. That soon several other countries will exit Europe. The economy will fall apart. They're in big trouble. Obviously, you're expecting European growth to accelerate. So, does that imply a different view about European exit risk contagion or how do you see this?


Julian:   Structurally no. One of the things that I often disagree with friends and peers of mine is whenever you get weak data, you have a lot of people that sort of run around and say oh my goodness look ISM is going to drop below 46. The whole experiment has failed. The world is going to blow up. The equity market is going to implode. My base case is always been that you don't get to the Armageddon scenario with weak data. You actually get to the Armageddon scenario when you actually get strong data. Because in weak data – the ISM dropping to 46, European growth failing to materialize, inflation sitting on the lows of 2014, 2015 – you can get vast swathes of accommodative central bank policy.


They can print, they can do all the other distortive measurements and steps that they've taken and they can essentially inflate the market. They can do what the Japanese are doing they can buy equities they can do whatever they want to Erik that's never the end game. You can get a wobble in that scenario but it's not the end game. The end game for markets, the most dangerous toxic scenario for markets, comes when you've got vastly inflated prices and central banks actually need to hike.


So, imagine a scenario later this year where they say look, obviously the French election could be a heart attack, but let's say we have continued deterioration in Italian economy which is our base case but everywhere else in Europe is booming and inflation pressures are coming through and the ECB whether Draghi likes it or not, he's facing a full revolt with everyone in Northern Europe including the French because the French economy looks to us like it's absolutely barring as I said Marie Le Pen about to explode in terms of growth and Europe’s second largest economy growing will have a material, material  impact.


But let's say for instance that that's what happens Draghi's actually forced to hike. In a bizarre way because he's created such a bubble in the bond market as that thing blows he's actually going to be responsible for sinking Italy because if the equity markets go south as that bond market blows, he can’t come in with more QE because he has ingrained inflation and they have a singular mandate. So, the end game doesn't occur by weakness it actually occurs by strength.

All this and much more in the full, free, hour-long interview below.


And the associated slide deck below:

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hooligan2009's picture

unfortunately, brigden is ignoring the mushroom cloud.

armageddon is here, right now - the modern equiavlent of the bomb dropped by the Enola Gay had "UNSUSTANABLE DEBT" painted on it.

it has already been dropped, we are in the midst of armageddon and the fall-out will be non-payment of most government liabilities by all countries.

the fault, of course, lies with politicians and their supporters.

the outcome will make "Suck it up pussies" look all too prophetic.

Croesus's picture

I am firmly of the opinion that when this thing finally goes off, all friggin' hell is going to break loose, owing to the social and demographic changes that make "this time" different.

As a population, society's gotten weak. Self-sufficiency, trade skills, tough human psychology...these are things that only a minority of people have, especially in the more densely-populated areas.

The structural weakness in supply chains that keep those areas going will break down...and that'll be all she wrote, as far as any semblance of "civilized society".

OCnStiggs's picture

The supply chain issue is absolutely critical to understand. That "chain" is extremely vulnerable.

When crime takes off and the supply vehicles cannot get out into the system because no drivers wish to get killed by mobs of gang members, the shelves will empty for a long while. It doesn't take much social disruption to get us to the point where re-supply trucks simply cannot get product out to the stores. (Look at the Rodney King riots if you have any doubt. Even law enforcement officers out on the street were forced into hiding because of the threat by the locals. Forget law enforcement. They will exist only in small pockets.) If you live next to a distrubution center, you'll be in luck for a week or two. After that, even those centers will shut down until security improves.

People will be desperate for supplies. Most folks don't have more than a week of food in their pantry or fridge.

Casey Jones's picture

What the heck? You mean having MSG laced hot cheetohs delivered from Amazon is not a sustainable business model?

Rey dTutto's picture

The worst idea in supply chain economics can be summarized in three words;

Just In Time

It hurt Boeing production, where missing or broken parts were scavanged from upstream, causing more damage and halting production.

Stores in suburbs, not in cities, mind ya, but the 'burbs, have to be resupplied daily. We have a large variety in the grocer, but not much of any one type of item. And suburbs don't have the same inherent chokepoints/checkpoints larger cities do. Urban fighting is Brutal.

So, great variety of very fresh produce, with lots of essential components, wherein a single failure at any of multiple points causes a systemic failure.  Just-In-Time sounds like our electrical grid, now that I reflect on it a moment.

gatorengineer's picture

You would have thuoght with Free money they would have financed some inventory, but nope... All went to bonuses for the top 5% of the corporate crooks....

Be interesting to see how far extend and pretend can take them, its worked this long....


itstippy's picture

Joining Amazon Prime is my primary "prep" for social chaos and food chain disruption.  With Amazon Prime I get two-day delivery GUARANTEED, and they sell a lot of different tasty foodstuffs.

I keep a two-day supply of Kraft Dinners and Mary Kitchen Corned Beef Hash in the house.  If the local supermarkets run out of stock due to a disrupted supply chain, I'll order stuff from Amazon Prime and live off my stash until my order arrives in two days.  From there on I'll live on big jugs of Utz Cheese Balls and King Oscar Kipper Snacks while you guys starve because you didn't think ahead and join Amazon Prime.

Delving Eye's picture

They're gonna use drones, too--very handy when traditional supply lines are in flames. So your delivery of nutritious foodstuffs will be even faster!

hibou-Owl's picture

I totally agree, supply lines that keep the masses stomach full are fragile.
There is going to be food shortages, and water.

We came close in 2008, very soon there is going to be alot of dead people as basic needs are withdrawn.
If.you relie on healthcare, electricity, water, sanitation, and the supermarket, your stuffed.
Some may laugh, but only needs one link to break.

Those links could be anything fuel, bond market, defaults, elections, government debt, infrastructure failure, terrorist attack, drought.

HRH Feant's picture
HRH Feant (not verified) Croesus Apr 1, 2017 5:14 PM

Matt Bracken wrote about this scenario back in 2011 in his essay, "When Cities Explode in Violence, CW2." http://westernrifleshooters.blogspot.com/2010/07/bracken-cw2-cube-mappin...

newworldorder's picture

Look to LA, Chicago, Baltimore, Philadelphia, etc. Imagine no cops after five days, no energy, no food and no magic money on EBT cards.

Most if not all people have not evern thought of these things, much less plan for them.

nope-1004's picture

he is shifting his investing decisions and attention to Europe, where he believes growth is set to accelerate as there has been no tightening of financial conditions yet as the ECB's QE train continues to chug along, and where after a lag, European inflation is expected to more higher (we are not so confident, especially now that the base effect just lead to a big disappointment in the latest European CPI print just yesterday).

I always have a hard time listening to predictions about the end or Armageddon when the players involved stay 100% invested in the current ponzi.  The entire thing is a manipulated lie and "investing" based on "data" is one thing, looking across the street and seeing my neighbors both with 2 incomes each  household not able to save anything is completely another.

The investment professionals involved in this ponzi have no right to talk about the end when all I see around me is evidence that the end happened years ago, while the financial whores all enrich themselves giving white papers and prognosticating that the end hasn't occurred yet.

NFL players that show up to play each game lose major credibility if they were to produce papers or talk about the complete failure and end of the game..... as they enter the huddle.

Pick one dude, or STFU.  Hard to listen to these financial heros......

2_legs_bahhhhhd's picture

hey, this market feeds on bears, gotta recruit them somewhere. Its worked like a charm for years.

gatorengineer's picture

i even learned not to be bearish, whether they can continue the volumeless melt up remains to be seen.  THere is a cork in the news flow until after the French election.  I didnt even know that Greece was fixed for example

Dilluminati's picture

looking across the street?

Look into the next cubicle, people arguing over what little work there is and that happening while pink slips swirl.


HRH Feant's picture
HRH Feant (not verified) Apr 1, 2017 3:50 PM

To the Durdens: trying to read this article on my IPad and the site is infested, again, with malware that shows I have won a $1000 giftcard!

ENOUGH! Make it stop, please!

rockstone's picture

Me too. I want mine in Bit Coin please.

sonoftx's picture

Turn off JavaScript. Not mine. Old advice from someone here on ZH.

TheMachinist's picture

Adguard Adblocker and I don't see a bit of it on this Win 7 Pro relic.  Can't you get that or something like it on your Crapple Maxipad?

Teja's picture

All that printed money cannot be kept under the lid for ever. I see it popping up - here an apartment going from 220k€ to 330k€ in one year, there average wages for scientific and technical people rising, according to New Scientist, 20% within two years. So something clearly is going on.

But I do not see a scenario for any endgame. I don't believe in a large scale breakdown any more. Even if money looses value rapidly, the structures of developed countries are more resilient than many may think. Look at Cyprus. One decree, and all money caught in the failing banks. Do what is necessary, they said.

milking institute's picture

So,buy everything or short everything,just tell me! ahh never mind,i will be up monday morning 6:00 AM waiting for Mr Fartman's insights on the markets,there just is no substitute for cutting edge analysis!

Dilluminati's picture

First he simply dismisses the notion of deflation.  He discusses the markets as if 1% of the populace who now benefits from them, benefits from the inflated assset prices can sustain an economy by shuffling their mansions among themselves.

On the other hand: his point about what if the economy gets ahead of itself?  

There is simply no data in the real economy that supports his thesis.

the upcoming deflationary wave is merely a temporary blip until wage growth catches up

I call this the falllacy of the blip, or the blip argument.

Lets just ignore that data and call it a blip.

Lets add allot of additional interest to the student debt bubble and see what happens

Let it Go's picture

For sometime I have felt the current trends that have developed since the reset of 1979 have become unsustainable and that a new reset will occur at some point. If I'm correct it will be interesting to see how a future reset likely to involve a massive transfer of wealth will effect financial inequality.

You can expect promises to be rewritten and broken. Rules will change as we go through the wash. Most people will see their assets rinsed away as society is put through the wringer. Below is an article containing such a scenario.


GRDguy's picture

When Wall Street runs a ponzi like they're running right now, 

it won't be over until THEY decide. Just ask Madoff.

Lost in translation's picture

I clicked on this for the chart porn. WHERE IS MY CHART PORN!?

man of Wool's picture

SHTF time for financial markets. 

Preppers do gold.

VanillaSkyGuy's picture

None of u have a clue.  Stay long until Recession.  Last 8 years it has been raining $$$.  Simple. 

2_legs_bahhhhhd's picture

great advice! Recessions are seen in the rear view mirror...by then your money is long gone.

directaction's picture

That's either a clever April Fools satire or some Five Star Dumb financial advice. 

Herdee's picture

The gradual increase in interest rates means a coming major recession or depression done on purpose to help clean out a lot of bad debt. Did you think that the crooks at the Central Bank actually care about Americans? They're gangsters, they should be given their own radio and television outlet and prevented from even speaking on any prublic stations. They're professional ConArtists destroying America on behalf of the global agends or the so-called new world order.

JailBanksters's picture

Armageddon oughta here


wide angle tree's picture

I'm predicting a 20 year bear market starting yesterday.

gunzeon's picture

well, they look like a pair of crooks if i ever saw one !

francis scott falseflag's picture


The real armageddon in the Low Earth Orbit is much moar interesting for me.