Ask The Expert - Steph Pomboy - December 2022
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Stephanie Pomboy is the founder and president of MacroMavens, a boutique research firm that provides macroeconomic research and commentary to an exclusive swath of the institutional investment community. MacroMavens endeavors to identify major macro trends and to flesh out the market risks/opportunities around them. Since its inception in 2002, the firm has earned a reputation for calling major macro developments well ahead of the curve. She was one of the few warning of the housing bubble's bust—and a lone voice in identifying the inexorable hit to financials to follow. Although closely guarded, Ms. Pomboy's views have been the subject of interviews in Barron's and her work has been cited in major industry publications from the Financial Times to the Wall Street Journal. She is a regular guest on Fox Business and Bloomberg TV. Ms. Pomboy earned a bachelor’s degree in economics from Dartmouth College.
In this edition of Ask the Expert, Steph answers several of your listener-submitted questions, including:
- What are the implications of the Bank of Japan rate hike?
- Will the stock market next year go higher on QE or lower on PE?
- Plus: the biggest surprise of 2022
For the answers to these questions and more, listen here:
Male Speaker 1: You're listening to "Ask The Expert," on Sprott Money News.
Craig: Well, welcome back to Sprott Money News at sprottmoney.com. It is time for your December 2022 edition of "Ask the Expert." I'm your host, Craig Hemke, and joining us this month is Steph Pomboy. Many of you will recognize Steph, in that she is frequently cited in the financial media, whether on financial television, or in the financial print media. And she's been running her own business called Macro Mavens, found at macromavens.com, for 20 years. And it is a pleasure to have her join us this month. Steph, thank you for joining me. I appreciate it.
Steph: Thank you. It's a pleasure to be here. Very much looking forward to this conversation.
Craig: Well, and as we get started, just a reminder that all of this content you find on this channel is produced by Sprott Money. So, give them a thank you. At least like or subscribe their channel, wherever you're listening in, or watching it. But also, you know, check out sprottmoney.com. We're fast approaching Christmas. The holiday guide is still there. But as we move into the new year, always a great time to be stacking physical precious metal. And if you're looking for a place to store it, they can help you with that too. So, go to sprottmoney.com, or give 'em a call at 888-861-0775. Steph, before we get started, tell everybody a little bit about Macro Mavens, and what you do there, and how people can find out more about your services.
Steph: Well, thank you very much. I started Macro Mavens, as you mentioned, 20 years ago, after working with the top economist on Wall Street, Ed Hyman, for about a dozen years, straight out of college. And I guess what fascinated me as, you know, I got my feet wet in the business, was looking at how people like major hedge funds, etc. took the economic data that we were pumping out at ISI, and translated that into an actionable investment idea. I thought that was absolutely fascinating. You know, why do you care whether the CPI is two tenths or four tenths? How does that inform an actual trading decision? And so, I got very excited about that. I wanted to connect the dots.
And then, I guess, sort of, over the last 20 years, what I've discovered is that, you know, that old saying, "What the market knows isn't worth knowing." And so, my starting point, each week, I try to figure out what the consensus is priced into the market, and then I take how I'm looking at the economic data, and say, "Well, what could they be missing? What are the risks to the consensus?" Because, again, I don't need to reiterate what the market already knows. I wanna highlight the unseen dangers. So, I start from a very combatitive point, you know, where I assume the markets are wrong, and I pick apart where they might be. So, it's not for everyone. You know, I tend to be very contrarian, and very cynical, and so I'm very bruised and bloodied over the last several years. That seems to be my steady state. But anyway, that's just a brief overview of sort of my style and my approach.
Craig: Well, I'm sure you have institutional clients, but some regular, private clients as well?
Steph: Yes. Yeah, I cover the spectrum from, you know, one-man shop hedge funds, to larger mutual fund complexes, and individual investors, etc. Which is fun, because you get exposure to a lot of different viewpoints, and, you know, people obviously have different objectives.
Craig: Sure. And all of this is found at macromavens.com, correct?
Steph: You've got it.
Steph: And if you wanna follow me on Twitter, I only tweet probably once a month, but I'm @spomboy, so you can find me there.
Craig: All right. Perfect. Well, Steph, we've been collecting questions. And again, anytime anyone has a question for any of our monthly guests, you can use the email email@example.com, and we've been collecting questions all month. I've got six of them for you, but I've gotta tell you, one of 'em I came up with on my own, and we're gonna go to that one first, because I'm the host and I can do whatever I want. But as we record this on the 20th of December, there was big news that came out, I guess earlier today, Japan time, where the Bank of Japan has been holding rates within their yield curve control program at 25 basis points or less on their 10-year JGB for the last, I don't even know how long now. And finally, they gave in to the pressure. I guess, too many rate hikes from the Fed, the ECB, and the Bank of England. They finally gave in to the pressure. They raised that to 50 basis points overnight. So, as we're watching the markets trade today, you never know how they're gonna react. But, what are the implications of that? That Bank of Japan rate hike, if you will. What are the implications for that, as we go into '23?
Steph: Well, I mean, I guess to the extent that there's a Yen carry trade still going on, where people could fund positions in JGBs that they knew were gonna be in that limited band, that kind of blows that a little bit. But I think, you know, as I step back, to me, I look at this sort of from the standpoint of the global currency backdrop, where this environment, with a strong dollar and a shortage of dollar-priced resources, specifically energy, creates an environment where countries that used to wanna have a weak currency to support their exports actually don't mind having a stronger currency, so that they can purchase dollar-priced commodities at a better rate.
So, I'm not sure how much of that is a factor here, whether they wanted a stronger Yen than they had been having, versus trying to keep the interest rates in a wider band. But, you know, that's sort of... I looked at it, admittedly, from my own glasses, which really are focused on the future of the dollar as the reserve currency, and sort of the future of fiat money in general. And I think that's gonna be an interesting topic that we'll be watching over the next few years.
Craig: Do you think there's much of that carry trade still going on that it could kind of drain liquidity from the equity markets?
Steph: You know, I have no idea. I have no insight into how big that was. I guess we'll find out, right?
Craig: Yeah, yeah. Guess that's right. Well, I had a question marked down as the fourth question, but you kind of led me right into this one, so we're gonna move this one up the ladder to number two. Do you expect the BRICs, you know, Brazil, Russia, India, China, and the rest, to eventually, I suppose, would be the key word, eventually offer some type of alternative to the dollar?
Steph: Yeah. I mean, I think absolutely. The writing is on the wall, and obviously that charge is being led by Russia and China, and possibly Saudi Arabia as well, now all kind of really looking at an alternative to this dollar reserve standard. And this has been going on, as you know, Craig, for years and years and years, where these central banks, especially the ones I just mentioned, have been slowly diversifying away from the dollar, and trying to cobble together local currency trade deals, and also reducing their dollar as a share of forex reserves. So, we've been doing this kind of in a glacial way, such that the average institutional and other investors haven't really worried about it, because it seemed like, "Ah, you know, there is no alternative to the dollar. What can they really do?" And they weren't really focused on these small, modest steps.
But I think we're reaching a point in that, you know, Russia invasion of the Ukraine, and then the weaponization of dollar currency reserves, etc., has really pushed that much more front and center, and you're seeing a lot more action, obviously, by Russia and China, etc., to try to advance this goal in a more timely fashion. So, I do think this is an issue that's gonna play out in the next, you know, 12 to 36 months, not in the next 10 or 20 years.
Craig: Yeah. Yeah. It certainly seems like the timeline is speeding up. I mean, as you mentioned, we've all been thinking about this, and expecting it at some point. But it certainly seems, and I think you're right, too, that that move, where the U.S. froze Russia's foreign currency reserves and locked them outta SWIFT, that had to be eye-opening for a lot of those countries.
Steph: Absolutely. I think that was pivotal. And I think that, you know, the surge in the Ruble, kind of, was very unexpected to policy makers. So, it really came back to bite them you know where. But, anyway.
Craig: Well, all right. Let me have you slip on your economist hat then for question number three. This is pretty straightforward. Will the Fed cut rates, or begin cutting rates at least, in 2023? A lot of folks say, "Oh, no, no, no. No chance." What do you think?
Steph: Yeah. Well, I will confess that I never thought they'd be able to complete the taper. I mean, I thought, coming into this year, you know, the math on the supply-demand dynamics for treasury debt is just so awful, for, in large part, the reasons we just discussed, with these foreign central banks backing away. So, really, the Fed has been the buyer of last resort for treasuries. And I thought as they tapered their balance sheet, we'd see rates move substantially higher, and any prospect of actually tightening would be completely, you know, stymied. So, phooey on me, because not only did they complete the taper, they have tightened in unprecedented fashion. I never imagined they would raise rates that far.
And thus far, while the markets have suffered this year, it hasn't been a catastrophe. They've actually managed to do this in a fairly orderly fashion, which I also wouldn't have expected to be the case, but I think that is largely a function of this conviction that they're gonna have to reverse, and that the rate cuts are coming. So, the markets are, kind of, you know, when they go down a lot, they realize, "Oh, well, that just means the Fed's gonna come in and pivot that much sooner," so it goes back up. So, it's sort of this feedback loop, a little bit. But so, I think what it's gonna take is being pounded over the head with really weak economic data, and most importantly, I think the corporate earnings picture disappointing.
And that, I think, will really happen in 2023. So, long way of answering your question, I think we'll get a lot of economic pain, we'll get sufficient pain that the Fed actually is forced to pause, and then we'll see if they pivot. You know, they're saying they're gonna hold without cutting rates. But I think push is gonna come to shove, because my analysis of the economy is that we're sort of like the Road Runner, off the edge of the cliff, and that the speed with which the data start to illustrate how weak the economy is will catch the Fed by surprise.
Craig: [inaudible 00:11:42] just, in my own mind, I wanna ask you. I've been on my site talking about how the Fed over-tightened, because they waited too long to start tightening, and the war didn't help. And so now, have they gone to the extreme on the other side, maybe without knowing it?
Steph: A hundred percent. I mean, but this is their MO. They cut rates too late, and then they hold them too low, too long, and inflate a new bubble, and then they get to that too late, and they birth... You know, it's just classic Federal Reserve policy actions. So, I agree with you. I mean, I thought the window to tighten lapsed a long time ago. But it will be interesting, because, both on the inflation front and the employment front, the twin mandates of the Fed, you know, the data could get much weaker very quickly. I mean, just doing the math on the CPI, and I won't bore your listeners with this, but we can be at 2%, the Fed's target, by June, without too much heavy lifting at all. And then, of course, on the unemployment front, you know, there's a whole raging debate about the payroll data, which seems to be the only one that signals strength, and everything else looks like it's rolling over hard. So, I think the Fed might find that it satisfies its mandates much quicker than they currently believe.
Craig: Yeah. Than most economists believe, too.
Craig: Gosh, Steph, we're already halfway done, and you kind of teed me up pretty well for question number four. So, what do you expect for the stock market in 2023? And I thought this was an interesting way to put it. Will it go higher on QE, or lower on PE, price-to-earnings ratios?
Steph: Well, I definitely am in the latter camp, lower on PE. I think what we've had in 2022 was a re-rating in the markets. There was an adjustment to the Fed's tighter monetary policy. And that's basically all that the markets have done, is reflect the new level of interest rates. The next phase is to reflect the impact that those higher rates have on the economy, and the slowdown in demand, etc. And so, that's why I think that that PE story will be critical. And I've been, you know, pounding the table on the prospect of an earnings recession since the year began, or even actually beforehand. So, I think those estimates have started to come down for 2023, but they're still positive. No one's forecasting an earnings recession, or at least the consensus isn't. So, we've got a lot of room to the downside on those forecasts, and obviously the market will follow those earnings forecast level [crosstalk 00:14:29]
Craig: Yeah, yeah. I kind of figured that that might force the Fed's hand too. All right. Let's move on to question five. Here's kind of a macro picture for you, my Macro Maven friend. Do you believe in this concept of a great reset? Maybe I'll let you define that, what that means, if you think so. And if that's the case, how does a regular person try to mitigate the financial damage something like that could cause?
Steph: Wow. Well, in my view, the great reset would be a shift away from the fiat money regime that we've lived under for the last 50 years, to a hard money standard of some sort. That's how I would describe a great reset. And for the average person, that is very tricky. I mean, personally, I anticipate, like I said, this happening in the near future, you know, in the next year or three. And so, I have really tried to position myself in hard assets to the extent possible. Gold, obviously, precious metals in general, but even strategic resources, like oil, for example, and farmland, and food, etc. But, you know, admittedly, it's hard to invest in those. But obviously, Sprott can help people a lot with that. I'll give you a plug.
And I guess my personal view is, I wouldn't touch the stock market with a ten-foot pole right here, based on what I see the Fed doing in terms of over-tightening, and the weakness in the economy. And, you know, all these realities, if they do start to come home to roost, will not be favorable for paper assets.
Craig: Yeah. Let me ask you a kind of a follow-up question to that, because I stress all the time about it. You just gotta stay alert. You know, you don't know when this is gonna happen. You know, it's like the snowstorm. You know the snowstorm is coming, or the hurricane is coming, and you don't wanna be, you know, the last guy in line, you know, outside Costco, trying to get in. You gotta make your preparations ahead of time. If you were to advise somebody how to stay alert, what would you tell people? I mean, are there websites you go to? Are there books to read?
Steph: Oh, my gosh. Well..
Craig: Yeah, I mean, join up macromavens.com. That would be a good one.
Steph: There you go. Subscribe to Macro Mavens, because my job is to highlight the risk out there. So, there's that. I mean, obviously Twitter is a great source if you can identify the right people to follow. So, obviously, follow Craig. You've got a lot of great insights, and I love your handle, mostly.
Craig: Just a big, funny hat.
Steph: Oh, no. It's great. But, you know, other than that, it's hard for me to answer that question, because I look at the economic data, and so, for me, that's really my starting point. And I try not to get my views watered down, I would say, by too many extraneous opinions. I like to just look at the data, and make my own dispassionate assessment, and then I can step back and hear what other people are thinking. But I think, generally, as long as you're on top of what's going on, and you have your eyes open, and you're not just taking verbatim what people are spoon-feeding you every day. Because if you're watching CNBC, and these other news programs, their objective is to get people rah-rah, excited about the market, so you have to go in with that understanding, and be able to be a little bit more, if I may say, cynical about the message that's being sent to you.
Craig: I think that's very good advice. All right. Lastly, one last question for you, Steph. This is near and dear to my heart, and probably everybody that's invested in precious metals. It has been a tough year, mostly, for commodities, as the dollar has, you know, is just such a huge rally. Maybe that's topped out. Who knows? But what do you expect for commodities in general in 2023? And then, if you follow at all, specifically, what do you think about silver?
Steph: Yeah. Well, I will start by saying, you know, I was at a meeting with one of my hedge fund clients just recently, and they asked me, "What was the biggest surprise to you in 2022, and aside from the fact that the Fed was able to tighten?" I said, the biggest surprise to me was how well Gold did relative to the biggest tightening since Volcker, and this massive rally in the dollar. So, I think that gold actually performed really impressively in the face of all of that. And, I guess, for... I don't know. I would say that... I'm sorry, I totally lost the question now. All of a sudden, I've rambled on my... Oh my God.
Craig: No, but you're right. I mean, with the stocks down 20%, and the bonds down 20% in that kind of tightening, to have gold do as well as it has back to green on the year, that's pretty cool.
Steph: Yeah. So, the question was about commodities broadly. I'm sorry.
Craig: Commodities in general, and then silver.
Steph: You know, 20 years in the business. You know, I'm starting to get a little...
Craig: It's been a long year.
Steph: The wheel's churning. But, you know, my concern, obviously, would be that commodities will trade in lockstep with sort of the expectations for global growth. So, if you're invested in a broad commodity basket, that may not be the way to go, because things like copper, lumber, etc., may drag you down, while precious metals, like silver and gold, and energy, will continue to move higher. So I'd be very selective. I think I would focus on those categories, energy, food, and precious metals. And I would probably limit my commodity exposure to that, just for fear that we do go into a severe global downturn, and people, sort of, the Pavlovian response is, "Well, we're going down. Sell emerging markets, sell commodities," and that's pretty much the extent of the analysis.
Craig: It is going to be an interesting year, that's for sure. And you're right. If I'd have told you back in January, or especially maybe when the war was beginning in Ukraine at the end of February, you know, that the yield on the two-year note would go all the way to 4.5%, and gold would go sideways at the end of the day, I'd probably would've been surprised.
Steph: Absolutely. I never would've forecast that. So, I'm very optimistic about the outlook for precious metals next year, because it clearly seems to me like the dollar has peaked. And, you know, whether the Fed pauses, or actually cuts rates next year, I think the dollar is going to lose a lot of ground versus the rest of the world currencies. And, I guess, that circles us back to the Bank of Japan, and, you know, that's sort of setting that stage right there.
Craig: There you go. We took a full round trip, Steph.
Craig: Well, this has been fascinating. Thank you so much for your time. And again, I want to encourage everybody, follow Steph on Twitter. Just look her up, Steph P-O-M-B-O-Y, and then go to macromavens.com, buy yourself a Christmas present, and subscribe. I just couldn't think of anything more valuable as we head into such a challenging, volatile year ahead. I mean, you've gotta have as many independent sources of information and research as you can get, because you've gotta be able to think for yourself. Like you said, Steph, if you're just gonna sit back and let the mainstream media, you know, feed you their normal cheerleading squad stuff, you're probably whistling past the graveyard. Steph, thank you so much for your time. This has just been great.
Steph: It's my pleasure. Thank you for the opportunity. And Merry Christmas, happy holidays.
Craig: Right back at you. Yeah, that's exactly right. It has been a fantastic year. We look forward to a great year ahead, and from everybody here at Sprott Money and sprottmoney.com, thank you for watching. Have a great holiday season, and we look forward to seeing you again in 2023.
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