#384 Henrik Zeberg: While Markets Rally, a Recession Signal Just Quietly Triggered

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Speaker A: Let's get into layering. My concealer is making me look worse. Sounds like the wrong shade. Let's get you matched. There's only one store that really gets what you're going for. Get beauty from people who get beauty only at Sephora. Hi, I, uh. Let's get you a basket. Hey, everyone. Welcome back to another episode of the Julia Laroche show where we are kicking off the third quarter with Henrik Zberg. He is the head macro economist at Swiss Block, here for his quarterly check in on where we are in the economy and the markets. In this episode, Henrik shares his structural recession call. With the US Economy already starting to roll over. Now, this is the quiet hand at play. This that most investors just cannot see. And when it comes to that loud hand the markets, he explains why we haven't seen a top just yet in the markets and why we could see possibly another violent rally ahead for risk assets. I really enjoyed doing these quarterly check ins with Henrik. I know you all enjoy them as well, so I hope you all enjoy this episode. This episode is sponsored by Kalshi. It's the largest prediction market here in the US on this channel. We love using Kalshi charts to just get a better understanding of how people are thinking about events, whether it's in the markets, the economy, or anything really happening in the world. You will see Kalshee in action later in this episode. You can go ahead and download the Kalshee app and use Code Julia to get $10. When you trade $10, that's Kalsh. K A L S H I trade. What's next? Henrik Zberg, head macroeconomist at, uh, Swissblock. It is so wonderful to welcome you back to the show. Great to see you as always, Henrik. Really appreciate you taking the time.

Speaker B: Thank you. Thank you, Julia, for having me on again today.

Speaker A: Of course. Well, Henrik, it's become a tradition to kick off each quarter with you. And I was just looking back at our prior conversation, and you said we would continue to rally from where we were, and we certainly did. Um, so what a quarter it's been. Let's start with your new outlook. You just published a great piece in Substack called the Quiet why the most Exuberant Market in History is Standing on an economy that is Already rolling over and why nobody whose job it is to see it can. I want to start where we are with that big picture macro view. Your assessment of the economy, where we are today, where you see things headed, and also tie the markets into that as well. And as you know, Henrik, you can take all the time you need to set the table.

Speaker B: Oh, thank you. Thank you so much. Well, yeah, I think, um. How do I put it? First of all? I think if we look to what has been happening since, uh, since we spoke the last time. I think that was actually when we just had the. No, we actually before that, if we had the bottom in the market, and I. I'm pretty certain that I've said that we would see a strong rally coming out.

Speaker A: Yes, you did.

Speaker B: Of the lows. Yeah, and we certainly have. I mean, where everybody was bearish and expecting, uh, a bear market to develop and, you know, and. And see more decline from that level. And we. We didn't see that. We saw quite the opposite. That was expected because there was no reason why we would have a. An economy that would be rolling over at that point. Um, and I would say that today we're not at the point where, again, the stock market is topping right here. Now, that's not what I see, but I do think that the economy is rolling over. And what do I mean about that? I mean that if you look to the deterioration of the economy, when you look to the labor market, you look to the housing market and so on, it could go on for a certain amount of time, and it's not a problem. But all of a sudden it becomes a problem. It's like jumping on ice. I mean, it's not a problem until the moment you go through. And, uh. And so. And that's what we have been seeing. We have seen the. The. The housing market having a really tough time for quite some time, and the. And the consumer, which is the real economy having had, you know, been underwater for quite some time, and, uh, a lot of people living paycheck to paycheck. Um, I'm being told. And this is, you know, the US Economy and I don't live there, but I, you know, I studied the numbers, uh, and that can go on for some time, as I said. And that is also what we saw back in 2006 and into seven. We saw that the economy was slowly rolling over. This is not a thing it does all of a sudden it's a slow movement. Uh, it's the weight of the, uh, interest rate on the consumer that is then making the consumer spend less, which then requires less, uh, which will then, um, require less of, uh, producers and uh, shops and so on. So people will buy less and that will then require fewer people to be hired and so on and so forth. That's what we see. Um, and that's a slow process and that's why it's almost invisible because, uh, we don't notice that kind of move when it's something of a gradual move. Um, on the other hand, that's where we see all these fantastic things happening in the market. And we see this. The market is just going straight up and uh, all these fantastic valuations and you know, and we talk about. We. We have a, um. There's almost not enough data centers and the demand for those are just, you know, exploding and all that. This is what's happening in an economy that is in the late stage. That's exactly the science we have seen in the 90s and in 2000 and also 2007 and so on, where we see all this happening in the economy where the, you know, the exuberance and the. The party is just getting going. But the real economy, and for those who need to understand it different, there's a financial economy and the financial markets, and then there is the real economy. The real economy is about the consumer and the consumer is rolling over and the. The economy. The real economy is rolling over. And that's happening now. And I can tell you that today actually is the first day, um, that my. My macro indicator, um, is actually telling us that, uh, this is the time where, where it's actually, um. Yeah. That we have what I call a structural recession call, which means that now we're just waiting for the market actually to understand that the economy is almost about to roll backwards. And again, nobody saw that in 2007, in December, um, I just looked at the number. The probability of the recession back then was down at 5, 5%, 6%. It's the same today. So I'm not saying the recession is right here because we would need to see two more things at least. And that is we see the liquidity actually rolling over a bit more than what we do. And also that the short term yields are starting to decline. Um, these are the two things I would uh, be waiting for. But if we see that those two things before next time we talk, then I would call the recession within this period that is coming here before next time. So we are in a stage where the division between the financial market and the economy hardly could be any bigger. And nobody actually sees it coming. But that's where we are.

Speaker A: Mhm. Um, our partners over at Kalshi, um, I was just checking there to see what traders on Calshi are forecasting recession this year. They are looking at a probability of 10.4%. That's the probability as of today that they're giving on July 1st for recession this year.

Speaker B: What did they say in December of 2007?

Speaker A: Let's see. I don't know. I don't think cow she didn't exist back then. But let's.

Speaker B: Okay.

Speaker A: Oh, even a year ago, just like last summer, in July of last year it was a 42% chance. But right now it's 10.4, which probably aligns with.

Speaker B: I didn't have any, uh, anything there. I mean, because back then there was no reason, there was no, you know, call for, um, any reason why we would see a recession. There certainly is now. Yeah, I think that is the, that's the problem that people don't, I mean they look to the one hand of the magician and do not realize that they are actually looking at the trick and not at the real thing that's going on with the other hand.

Speaker A: Mm. Yeah, you, you open your piece too. You were talking about being invited to that conference and what did they say? That you would come back when uh, there was. What was the line? Oh, when investor concerns around a potential U.S. recession become more acute, they would follow up with you. Um, why do you think folks miss it? Because you point out, even going back to the 2008 recession, um, it wasn't until 2009 when it became consensus, uh, that the recession was here. I think that's what you wrote in your letter. Why do you think so many people are missing it? Because even when I look at Kalshi, 10% of very low probability.

Speaker B: I don't know. I mean I've been asked that before and I was actually also asked that question, uh, in a webinar like that and they said, I don't know what people are looking at, but to me it's quite, you know, I don't just say easy, but it is honestly. Because if you look to the, to the how GDP growth is being calculated then we look to the components of those. That's consumption, it's investment, private investment, it's public expenditure and it's net exports. And if you look to that, I mean 70% is the consumer, 70% is private consumption. So if you go to that, you look where do we have the correlation then with what the consumer spending? Well then you look into those kind of things and you'll realize that by the end of the day it's actually very much about where, how much many jobs are being created in the US and if you do it simple Rachel, and you take the number of jobs created and you do it on a rolling 12 month rolling basis. Because the numbers on the non farm payrolls you cannot trust. We have seen that over and over. Last year in August we all of a sudden saw a million jobs disappear like that. It has been a great year until then. And then all of a sudden all those jobs were, you know, lost. Right. But if you look to that, you can see that as a part of the uh, of the labor force. You know that ratio tells you it's never been lower before going into a recession. Never been lower. The long term unemployment rate has never been higher than what it is right now going before going into a recession. The average weeks of unemployment has never been higher than before going into a. And I can keep going like that. And this is what matters, this is growth, that's jobs, that's how many people are actually working. And then people say yeah but the job numbers, forget the job numbers. The non farm payrolls you cannot trust before they're actually getting revised. Second, you will also have to remember that the non farm payrolls are both part time jobs and full time jobs. And if you shove those aside just for a second and then look at the numbers of full time jobs, you'll actually see that last month where the non farm payroll we're saying was at 170,000,000,000. 72,000 non farm payroll jobs apparently. Uh, which we know will be revised by the way. The full time job report told us that we lost 79,000 full time jobs. And since 2025 January we have actually seen a loss of 1.7 million jobs in the US. So I do not know what they are looking at but I know that if they want to look at growth they need to look at job creation, real job creation and not all this fantasy about, uh, PMI numbers and so on, which are ridiculous to look at. And so, so this is the case. And I, uh, honestly, I think it's, you know, luckily, they, these guys are not, you know, the ones who are calculating how to, um, you know, to, uh, to fly to the moon now or do something that is really, you know, where people can get hurt immediately. But the thing is, they are terrible at what, what they do. I. I need to be honest. It's. That's what it is.

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Speaker B: Yeah, but it's, it's really about understanding the quality of, of the, of the labor market. Um, so first of all, do we see a labor market where there are a lot of people participating in the job market? In the labor market right now that number is plummeting, which means that people are leaving the labor market. I think it's 1.9 million people. Of a labor force of 170 million people, 1.9 has left the labor force since November and December last year. That's six, seven months ago. Why do people leave the labor force? Because they become dis. Encouraged about staying in the labor force. It doesn't matter. We can't find a job. I mean, I don't know about AI and all that. So people leaving, that's not a good number that you first need to look to and say why is that dropping? And when do we normally see that? And secondly you need to look at how many jobs are created and if you just look to the headline and you say the 172,000 you will get so distracted because last year we saw all through, as I said, 10 months. Months we have seen or eight months it was, we saw that apparently was like a million jobs created. Million one uh point one million jobs. And then we saw all of a sudden, As I said, 1 million jobs disappeared because they did the revision, which they always do. Then again, you also need to understand the quality of the job. Is it a part time job? And you. We were just talking about the World cup Now in the U.S. guess what? A lot of part time workers has been hired in to, you know, do things and help there. And again, if you look to the ratio between the part time jobs and the full time jobs, that only rises in the moment when you have a recession coming or when you have bad time coming. And you can look at how long people are staying unemployed because that matters if they are staying. In 2008, 2009 actually, uh, eight before going into the recession it was at 16 weeks on an average basis. Now it's 25 weeks, 20, 26 almost, which is more than 50% more. All of these things are telling me that the economy is not in a great place. And so you cannot just say it's just one number because that's what we like to do. You need to look across and then say, is there a deterioration of the labor market earlier?

Speaker A: And then that goes into the consumer as well. Um, that rolls over into the consumer side of things. Um, yeah, it seems like, yeah, the consumers, the real engine of a recession rather than any sort of like external shock.

Speaker B: That's what we hear all the time. So what will cause it then? I always ask people again, first of all, now imagine an avalanche. What causes the avalanche to start rumbling down the slope of the mountain? Is it always a big bang that makes it stop moving down? No, it's not. It's the underlying structure of that avalanche that started to move. So it's the structure of that avalanche down beneath. If that's unhealthy or unsound. There's not a, the snow is, I don't know what is the, how you define that, but it's really that. But makes it so it can be the smallest, you know, um, extra piece of snow there, snow coming in or um, if it snows during the night or something and then all of a sudden starts to tumble, uh, down the mountainside or it can be something bigger. What we see is that going into a situation where the economy is slowly deteriorating, then people are becoming more and more vulnerable, though they can take a shock to the uh, private economy. And we can see right now the median consumer right now in the US will simply get thrown overboard, buy a $6,000 extra payment. And we're talking about the median consumer in the US this is massive. This is a lot of people that cannot handle if their car all of a sudden breaks down or something like that. So the situation is that it becomes vulnerable. Because of this situation you have with high interest rates, with how easy it is to find a well paying job and so on and so forth. And all of these things are making people hold back. And if they hold back, then there will be this feedback loop, the dynamics of it. And then all of a sudden you see that people won't be able to pay their bills, which we by the way also see right now. We see the delinquency rates going up and they won't do that fast when we see it before the recession. But they can spike. But already this time around we see them be that the serious delinquencies on the credit cards, which means they are above 90 days, is now above the Level that we saw in, in 2009 when the recession was already there.

Speaker A: Mhm. Buy now, pay later. Either.

Speaker B: Exactly, exactly. We don't know how big that is. Right. So it's, it's. The thing is that people think it's. That needs to be something of a big bank. That is incorrect. The big bang comes as a consequence because the whole avalanche, you know, the area has become so vulnerable and can just start, you know, crumbling or whatever you call it down the side because of the slightest thing or the slightest extra weight that comes onto it. And this is what people say. And then you will see that these black swans that they call it, they occur in that environment because underneath the hood the consumer is really weak and cannot pay their bills, which makes real businesses get into trouble. And this is the dynamics of it. So people that just looked at the surface will say, hey, the financial crisis was started by Lehman Brothers, they had overinvested, blah, blah, blah. No, it was the environment that made it possible for the Lehman Brothers situation to occur.

Speaker A: So. Fascinating. Um, you also point out that housing is another one of the leading signals to watch. I gotta tell you, I just, I just. We just bought our first starter home. Um, I know I've been talking about a long time on this, uh, channel, but yeah, I'm learning all about housing. Um, why is it that housing turns first in the cycle and how does the weakness in housing kind of set off the rest of the chain? I think I might know as someone who now has bought and I see like how much it impacts the economy. But how, yeah, how does that kind of affect everything else?

Speaker B: Because first of all, housing is a very big part of our, you know, expenditure as consumers. And again, forget about all the fancy stories of all the media of basics and all these things, that's not the real economy. That's just, you know, the, whatever you call it, the cherry on the, on the top. Right. But the real cake is something quite different. And that is you and me buying a house and you know, trying to make ends meet and on a daily basis, on a monthly basis. And um, what happens when the interest rate starts to rise is that we are feeling, oh, it's getting a little more expensive and I can refinance now or I, if I want to buy this or we want to, you know, build that extra thing to our house, we probably, we should wait a little because it probably going to be a little too expensive for us to do that right now. Let's wait. Right. Or let's save up some more. What that does is that creates that dynamic effect through the economy that then the, you know, the one guy you wanted to do that or to build it, it's actually, no, okay, I, I don't get that order. Um, then hopefully the next one will come in and, and. But it will create a kind of slowing effect on the economy. And that is why the rates are being raised, because they want to slow. That is the, the whole dynam. We have this way of controlling the economy through monetary policies. So this is quite well known. Ah. To the Fed and so on. What is not so well known, understood, is the effect to, uh, the consumer. So when you start to see that all of a sudden you cannot refinance your house and you can see the mortgage loan has become a little more expensive. You have variable rates or whatever you have. If you want to buy a new car, it's a little more expensive. If you finance it. All these things are putting a dampener on the economy. And when it does that, that's why the most expensive things we spend money on is what we pull back on first. You don't tell the kids that, hey, you know what, we're not going to eat tonight because, uh, we want to buy this new house. So what you do first is you feed your kids and then you find out how much you can buy, you know, the house for a new house for, or the car or whatever, the bigger things. That's why the housing market is so important, because they will. That's where we. It's a direct impact from what we get from the interest rates.

Speaker A: Boom.

Speaker B: Right in on the mortgage loan. Right. And that's the bigger impact in terms of, at least on my, you know, my budget. It's always, you know, the housing bill, obviously the mortgage loan that is the most, uh, the heavier one. So if you look at it like that, you will, um, you'll understand that takes a beating first. And then you'll see the housing actually starts to decline, which was what Michael Burry also saw back in 2006 already. And five, he was so early, he was looking at those numbers and that's why he was so early, because it's one of the leading, leading indicators of the economy. But later then these dynamic effects, they take a time to go through the economy because it creates that feedback loop. And then later on it will come, uh, to other areas and then people will be holding back a little more and a little more. And then eventually you'll see that the economy comes to a standstill.

Speaker A: So the quiet hand is what's going on underneath the surface, um, in the economy. And just to kind of recap, you said that you have a structural recession. Um, call. Can you explain the structural recession call. Is there a probability of a recession? Are we in a recession, starting a recession? Do you see one happening the next, you know, year, couple of months, whatever the time frame is? Can you just kind of reemphasize and elaborate a bit more on the structural recession call?

Speaker B: So what has been very obvious since 22 was that the economy from that boost we got from COVID where we went up like that and everybody who called the recession 22 I did not said well this is, you know, now we have a recession because prices started to rise. What we did see was that it just went skyrocketing, uh, with everything, all demand and so on. Now since then the economy has actually done like, I don't know what to, to, to, to, to compare it to. But we went up and then it started to decline. And this we could see in the leading indicators. And this is why for a long time I said there will be a recession coming. We're not here but it's that we see that the, the we are going in that direction. It's going rather fast right now. And then we kind of leveled out for a little, little time around the um, equilib equilibrium line as I call it. And then it started to plummet again which was in November of 24. In my leading indicator. That is the slowdown signal. That is not the signal says recession. So when you last year in March, I said I don't understand the numbers of the Fed. You can go back and interview, say I have no idea where they get that from because in my model they had said we will have a slowdown. Then came August. Boom. We saw that slowdown. And I said okay, that proves the model correct and the Fed wrong. Now I say we'll come to the next point which is the coincidence indicators which is where the slowdown has been going on for such a long time that is now has affected the numbers in the real economy to the degree that we are going to see a recession. And that is an index of things. It's not just one thing people like to say. But what is it? Is it. Give me that one number. It's not a one number thing because if it was that easy then you know, a lot of people figure it out. But it's really thick. It is indicator, it is um, macro indicators that are following the GDP number very, very closely. So if they are moving up and down like that. But they are more. They're easier to measure on a monthly basis, which means that I don't need to sit and wait for the GDP numbers to come out. And I can actually just, you know, say that if they start to cross certain lines, that's when the momentum to the downside is strong enough. Though you ask me for probability. And I can only say, going all the way back to the 60s when this has happened, we have never not seen a recession every time, and has never made a false prediction, not once. I didn't live in 1960. I'm old, but not that old. But I did, you know, going back. And it's not just been doing something. It was. I did the index and it showed the uh, it showed this kind of, uh, performance. And uh, it called also 2019, which was the first time I actually started really to use it. It could. This. It really clearly, uh, what do you call that? You know, uh, said that there was no recession in 22 when everybody was calling for it, but now it's crossing over. So I'll say since 1970, 60. 70, uh, it has never, uh, given a wrong signal. And that means that the normal time frame has been between one to three months before the recession sets in. So what I'm also studying, as I said earlier, it's not the recession signal right now, because I want to point it out. I want to point it out on the month and to show that it actually is possible. And if we think about the consequences of this, that if it's possible for me here, sitting in Copenhagen with my little laptop to do this once and actually could Dismiss it in 2022, where everybody else was on the wrong, on the other side, well then there might be something to it. But what I'm saying now is that there are two more things I need to see. I need to see the liquidity regime actually rolling over a bit more. Liquidity starting to become a little more scarce. And which I have an indicator for. And also the uh, the imminent recession indicators, which I call them, I have 10 of those, which, um, where particular one or two of them needs to flash. And if like shorter.

Speaker A: You said shorter term yields earlier, right?

Speaker B: Term yields, yeah. If they start to plummet, if you observe one year yields, two year yields, um, if they start to plummet, um, within the next one to two to three months, the moment you do that, that's the moment I call the recession.

Speaker A: Okay, interesting. We will definitely be watching that. Um, and of course we've been having you on quarterly as well. Okay, so we have the quiet hand, what's going on in the economy underneath the surface. But there's also, as you put it, the loud hand, the market, a market that has continued to move higher. Um, I would love to get your assessment of the market. I know you talked about it at the top a bit, but let's kind of go there. Um, continued melt up here. Is that the thesis? Like we'll continue to go higher. How are you thinking about the markets?

Speaker B: Well, the markets haven't topped yet and that's uh, very clear. And I think we could even have more of a decline in this uh, current small uh, correction we have seen um, and we will also see that we move into the face which is the most uh, difficult one to decipher because that's where we actually see all of the riskier stocks or the riskier assets starting to move up. As I see it, because in the first part of it we can understand it from ourselves also if we had to invest something and the environment and the psychology of sentiment is kind of, oh, this is bad, then it takes, you know, if we put our hard earned money into something, we probably put it into some of the bigger ones and say, yeah, but this is a big company, a stronger company, I'll do well with that. And that's what happens. You know, money first pours into the NASDAQ and to the big ones, to the, the, to the seven big ones there, the max seven and so on. And then what you will see at some point when people have been seeing all of these fantastic returns and some of those and you know, the related ones, they'll start to think, oh that's great. I mean I'm up to 300% now on these um, uh, semiconductor stocks or whatever. Um, maybe I would take a little chips off the table there and put it into something which hasn't moved yet and then the move goes on and then you put it into something else and then that goes up by zero a lot. And we can see that happening right now, real time. I don't have a sequence to which ones will do exactly, but you could see it in the Cosby and you can see all around the world we have seen this moves up all of in an extreme way. And at some point it's going to reach the ones that are the most uh, vulnerable stocks or the most riskier ones. Uh, crypto is the most risky one. Uh, we will see the most, least risky one perceived that which will bit will be bitcoin, but probably will find Some kind of a bottom and bounce really hard and then you'll see that there'll be a rotation into that. So right now I think that we have seen the uh, the prelude so to this uh, the spro off top that I talked about and been going straight up in certain indices which I think is very telling for exactly what it is, a blow off top. And now we are simply seeing that rotate into nice and you know, quietly into uh. For instance we can see the Russell 2000. The small caps index has actually not, has been outperforming the SP 500 over the last two uh, months I think. And um, it's starting to show that you can see some of these um, these small uh, cap stocks and whatever starting to perform better and that rotation will go on. So what I see is that you might have seen a top in certain stocks. I think there's a good chance we've seen a stock market top in Microsoft for instance, and uh, other stocks as well. Palantir for instance, also like that. But you're going to see that they will bounce somewhat into that before they then will continue their bear market decline, which I think they're in. And then you will see that a lot of stocks will, then, you know, the small side, the small stocks, the more riskier ones will do well into that phase. That is risk rotation. That's how it happens. And uh, we'd have to see if that plays out. We will be sitting here three months from now. We've had the, the first step in it. We have had the NASDAQ taking off. Now we have the economy really starting to not um, look great. At some point people will realize that inflation is not here. There's no inflation. It is all talked up about oil shock which comes from the supply side. But guess what? How would you bring about inflation and carry that on if you and I are met by higher prices? Uh, when we stand there and we need to put some gas uh, on the car and then all of a sudden you have to spend, you know, uh, you have $1,000 per month you can use for whatever for consumption and you see that you actually have to spend, you know, 10, 20% more to put your gas on your car. Are you then all of a sudden having magically more money in the hand which you can then spend and then inflation can keep going. It's not, not for me at least. What happens is that I have to prioritize and then say oh, I spent more on that. Then I need to cut my cost on something else which is a demand destruction. But when a supply shock like this comes, the only way you can have inflation coming from that is if the consumer has deep pockets. The way they have deep pockets would be by looking at this savings rate. In the 70s where everybody looks to right now, savings rates were 9 to 20%, which means that every month out of their pockets they could save up 9 to 20%. See, if something went up in price back then, you would then say, I'll dig a little deeper in my pocket to buy whatever I want. But if you have 2.6%, which is what you have right now, you cannot dive deeper. Um, you simply cannot. But that's why you're cutting back. That's why there's no inflation coming. This is completely wrong, completely wrong. So there is actually a disinflationary impulse from this, the shock in supply. There is disinflationary in the economy. And then the Fed is talking about hiking rates and the ECB actually did that. I mean, what I said before, I'm not certain that they actually know what they're doing. This summer, soccer is here and so are the watch parties. And Uber Eats has your game day essentials covered with 30% off orders from Aldi Kroger and Dollar General. Everything you need to keep your crowd happy delivered straight to your door. Chips, dips, fresh and green ingredients and more. 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Speaker B: I mean this is, this is, you know, they are. How would you see inflation carry on if there's nobody actually being able to buy it? If they look to a savings rate Amongst the consumer, 2.6% just. I mean it's, it's as easy as that. Inflation is not something that will just pop up and stay magically up. You can be a supplier now.

Speaker A: You can sell c. Where would you see the decreases in prices? Because I'm going to say like, you know, I definitely notice groceries are more, more expensive than they have been in recently. They're still expensive. And uh, they've been expensive for the last like five years or so now. Um, but I need to eat right and I'm going to need to fill up my car with fuel to get around because it's not like America's, that walkable. Where would you see the prices come down because of the demand destruction?

Speaker B: But the thing is, by the end of the day, if you are a producer and you also have a demand and a price and a supply curve, at some point you will need to push your price lower if the demand is not there. Because by the end of the day it's the consumer who holds the buck. And if the consumer cannot pay and you have to reprioritize, at some point the supplier of this will have to push his weight, will have to push prices, ah, lower. And the thing will be, there are certain things that have been going through the supply chain which have been more costly. Now it's not fuel, but something else where what do you call the intermediate products of this has been more expensive. And that's why it takes a little while for inflation to go through both the one way and the other. Because people want to have covered the cost of whatever they have bought. As a producer, I buy this, I put it together with that. Those are both going up in price. I don't want to sell it too cheap. At some point I could be forced to do so. If my storage is filling up and the customers can't pay it and it's going to get destroyed if I don't sell it, then I'll be forced to. But the thing will be that the products that, um, are coming later on will be cheaper and cheaper. There will be a downward pressure of this from this also from the production side as well. But it takes a while. And that's why I say there. And then there is the difference also between stock and flow. But now you're in a bathtub and the water comes in through the top. That's flow, that's inflation. But the bathtub level, the level of the water in the bathtub, that's the stock. That means what is the price level in the economy that is different from the flow? And when we talk inflation, that's the flow. Right now the flow is slowing down. You can look at rent inflation and everything like that. It's slowing down remarkably very fast. And that's actually one of the big ones. So looking at the price level and say, oh, but inflation is high. That's incorrect. That's like saying there's a lot of Water coming into the bathtub. No, the level in the bathtub is high. That's the difference. And that's why if you want to bring that down, that's actually outright deflation you're talking about. And nobody likes deflation, I can promise you, because that's going to be costly into the business layer. So the difference between flow and stock is very, very important there. And people are confusing those two terms.

Speaker A: Yeah, um, again, I love hosting the show because it's a marketplace of ideas and viewpoints. Um, I have some guests who have opposite takes and that's okay. Um, I want to go back to the market, um, and why we could see this final rally play out. What would need to happen or maybe not happen to see, see that final rally play out in your mind. Like what would be the forces at play here?

Speaker B: First of all, I think it's going to happen. I mean it's um, there's no indication that the market is stopped at this point. At some point we will see that the money managers in the financial industry will all of a sudden realize that maybe the economy is not as strong and maybe this about being so risk on is going to be a bad idea. So they're going to take a lot of, and that's a lot of money, put that into some, into bonds, into the bond market instead, and you're going to see that bonds and the yields will start to decline. That's why you observe the decline in yields, the short term yields, because that is the signal that the market starts to realize that there is something going on in the economy. So the situation is that, um, you will have to watch for that. I mean, I don't know what can happen that will make it not happen or happen. I mean this is what I'm, you know, so far there's no indication of that. We see a, uh, major top. There is, um, the risk on rally seems to be, you know, thriving at this point here. And it can do that for, you know, a good amount of time.

Speaker A: I know you've been long the market too for some time. Like when do you, do you still want to be risk on? Is there a moment when you say, okay, I want to take some of my chips off the table, take profits. I don't know if you've done that already to an extent. Um, how are you thinking about, you know, kind of riding this, if you will?

Speaker B: Well, there's a, um, you could say that there is a situation, uh, where depending on your risk profile and again, if you are not so risk prone uh, well, then probably is a good time now. I mean, yeah, you will be sitting there and watching everybody, you know, partying on the, on. Um, but the hangovers can be quite, you know, quite severe. And uh, so. But I think you can see that some markets at the S and P and the Nasdaq. NASDAQ could be up to 15% from here, maybe more. Um, but again, that's about risk profile. If you want to step out now and say, okay, I've done well. I was actually long 20, 22 when everybody was short.

Speaker A: Ah.

Speaker B: And they were thinking it was going to decline. I went in massively long into tech stocks and has. Have done well some of these money. Of course, I've been putting into something, you know, more now aggressively because I think, you know, there will be this final phase for far the most common investor. Um, I'm not going to tell them what to do. I'm just going to say that you cannot expect what we're going to see the next coming weeks here. Um, and it may not be straight from here. Remember that it's not straight from today on or whenever this is, uh, aired. Um, but that you're going to see that there's going to be a move maybe into the Q3 there, that that will continue. There's no indication that that can continue for an extended amount of time when the economy rolls over. So DEP Risk profile, you can say, am I the one of the guys who actually think I can, you know, figure this out and I'll be able to step out when we see this rotation and we can see all these riskier stocks? Well, that's where I am. That's what I do. But I'm not certain that that's the same as what every common, uh, investor would do. And, and if I'm right on that, you're starting to see that the yields will be pushing down. Well, there is a point, and that's actually in my model, what I call the Seafare Solomon protocol, where you step out of the stock market completely knowing that you might not see the exact top, but this is enough for you to step into bonds 100%. That moment is actually today. That was when the coincident indicator crosses the equilibrium line, which is right now.

Speaker A: Wait, wait, wait. Explain that again. What's happening today

Speaker B: goes back to the signal that I talked to. As I said earlier, uh, when you have the recession, the structural recession signals coming. So if you go 50 years back in time and you get out at this exact point here, that would have been the same as getting out of equities in November 2007. It would have been the same as getting out of equities in February, uh, 2001. That. Hang on, hang on, hang on. 2000. So just before. So all of these, that this is where you step out of the market knowing that there is a, you know, a spike into the, into the. We've seen these stops before, right. And you know that that might be coming. But at this one, this point here, the economy is now so weak that being long bonds is better in the coming, let's say months, quarters, years ahead, uh, than being long the stock market at this point.

Speaker A: And this indicator, it signaled today, July 1st.

Speaker B: It uh, it is a quarterly model, which means we're just into the quarter, uh, the third quarter here now. And uh, the third quarter and at the end of the second quarter. That is my, as I said, the coins and indicator crossing over the recession signal, the structural recession signal, which is not imminent recession, but it tells us that we are now at that point that if you're from a risk profile setting, step out now, then you do actually on a 50 year basis and you follow this, you know, if you follow that, uh, rigorously you would have. And also when you need to get in, there is another signal when to get in, you would outperform the market by three times over 50 years. So S&P had done 8,000. You grew 24,000%. Uh, so this is a moment where you simply from you've been in since, um, what was it? 2020. And I think it was a Q3 2020. And until this point today, long the stock market.

Speaker A: What are you going to do?

Speaker B: Well, I have a certain amount of cash that I am not investing, which have had invested before, but I also have quite a significant amount that is uh, in more riskier asset into this where I see the final blow off top, which can be a crazy move. I mean Dalio is talking about this is the last 20% where people go crazy. And I completely support that. That's the crazy move that we're going to see. And I think you can write it out, but you can have a more conservative model and you can have one where you say this is what you do if you are more risk prone. Again, it's about risk profile.

Speaker A: Yeah, of course. And everyone has a different risk profile. Of course. Um, Henrik, you've been. Am I getting this right? You've been quite constructive now on bitcoin. I didn't realize you liked bitcoin. But are you constructive on Bitcoin? I think. Where is bitcoin right now, as we record. Where are we?

Speaker B: 58 something.

Speaker A: I know. Oh yeah, 58. Yeah. Just if. Yeah. What are your thoughts on bitcoin?

Speaker B: No, I, I'm not, I'm not constructive bitcoin. Nothing. No, no, no, no. I, I'm saying, uh, you know, depends on how you put it. This is where people, you know, find it. You can't be both. M. Both are. I mean actually you can. Because what if you realize that bitcoin has, as I see it, potentially put in a very large top last year in 25, I think that was the top. Uh, and then we have seen a crash down to around this level where we are now. Then at some point you're going to see a bounce. That bounce is not going to be because bitcoin is going to be revived or there's going to be renewed anything like that. That is what is going to be interpreted as. But it's going to be because of the Dixie actually declining. And this is where the uh, you know, again, the Dixie I see here is a very, very important factor for, for bitcoin. And that final decline, I think we're going to see in the, in the Dixie here before we see something quite different, will be very supportive of risk assets and especially crypto and the whole rotation. And when people are rotating a lot of capital out of uh, I mean semiconductors, whatever, NASDAQ and so on, you're going to see that some amount of this is going to come into crypto. That's the most. The more riskier part. That amount doesn't need to be big. It can be half a billion, it can be 1 billion. In between. There is enough for the rotation to get started in crypto, enough to get, you know, the whole cycle they're going. And the euphoria. So I'm not uh, positive or not, I don't see it, you know, value in bitcoin. I have to say it and I honestly, I get a lot of heat for that. But I don't see any value in bitcoin. I don't. I mean it's a um, yeah, it's a stocked up asset. It is supposed to save the world. And it seems like it's have a difficulty of just saving itself in an environment where it's actually not been a bad environment. Right. It's been a good environment. So I think the uh, top. The narrative doesn't really, um, or at least the price doesn't show what the narrative is all about. And people hate me for saying that. And I know, I'm just saying the bitcoin is a part of this bubble and is going to have a bad future. But not straight from here. That's the point. The thing is when we have a risk on rally in all of these things that I'm talking about then you're going to see bitcoin as being one of the drivers in that and that's because nothing drops in a straight line. All bear markets have massive rallies and that's what I see coming for bitcoin.

Speaker A: M okay, what about gold?

Speaker B: Yeah, gold surprised me how far it went. No doubt about that. Um, I think gold will have a short term with bitcoin as well and with the risk asset, riskier asset will have a bounce because it's all about as I said, the dollar maybe reaching 93, 94.

Speaker A: Ah.

Speaker B: And if we see the Dixie getting down to that, you're going to see gold bounce from around these levels here probably. But I was not surprised. I mean when we saw that massive rally into 5,800 or how high it was, everybody was talking about that. Now we have a de dollarization and that's why and we have inflation and all that. There's no de dollarization actually the dollar is quite strong that we see right now. There's a Dixie is at 101. Just go back and see what it was 10 years ago. So this is you know again it's, it's you know, chit chat. But the dollar is strong. Uh and the thing is that gold will do well if we get a weaker dollar for some time and the weaker dollar will be here for the next month, two months, three months as a maximum. And then I think you'll see that next time we talk. Gold has had a bounce but uh, that's going to be it and I think it's going to head lower as we see the next phase coming in and that'll be something quite uh, severe because the dollar is going to show its strength.

Speaker A: Um, weaker dollar though. Is that right?

Speaker B: Yeah. With the weaker dollar at this point. From this. Yeah from this point on here. Yeah. At this point from, from where we are around there where we are now.

Speaker A: Mhm. Yeah we're. Oh yeah. 1010137 on the uh, the, the Dixie. M what's your, what is your outlook though for the dollar?

Speaker B: So when we talk the next time you see if you can uh, you see if you can put me, take me up on this next time I say we have been visiting 93, 94 on the dollar. And I think we have at that point, we probably also have seen around the bottom and we have heard people saying the dollar is dying again. That's the narrative we need to have coming back in. Uh, if that comes in, then I think the bottom is in for the dollar for the very big run. And that's where I say that if you get a bust like what I'm seeing, and you see the AI bubble bursting, which it will, then you're going to see the dollar being very, very strong. And when I say very strong, we can look at what we saw in 22 when it was at one, uh, hundred fourteen. And I say it 120 the minimum.

Speaker A: Um, Henrik, before I let you go, um. Hm, let me think about how I want to ask this one. What is something right now that you're thinking about that would be quite contrarian? And if we are having this conversation a year from now, let's give it a year time frame, um, and you and I are having this exact conversation again would be much more consensus. So maybe it's more of a prediction. What's something that's contrarian for you right

Speaker B: now, a year from now?

Speaker A: A year it would be. Yeah, like a year from now would be more consensus. Commit to the shot.

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Speaker B: That would be that, first of all, that the AI bubble has burst. That's a year from now. And that we have a, that we have seen, uh, Bitcoin below. Let's just be. Make it easy for myself below 20,000, which I think is going to be pretty easy. And, um, we have seen, uh, a recession setting off, which I am not certain people realize at that point. Remember, we didn't see the recession before the recession was almost over in the financial crisis. Right. Which it was quite clear um, but nobody didn't see it before, end of, uh, 2,000, uh, nine. So, um, um, I think you're going to see that these are the big ones, that you actually will have a recession, and it's going to come and it's going to be soon. You're going to see that the dollar is going to strengthen. Ah, like a lot. Um, that might not be as, uh, controversial today, contrarian. Um, but also that you're going to see the AI bubble burst and you're going to see the NASDAQ having a 2000 kind of events. Uh, what I mean by that is that I think in 2000 it went down like 30%, uh, in four weeks or something like that. And I think we could easily see something like that this time.

Speaker A: Wow. Um, Henrik, I love doing this with you every quarter. It's great to get your thoughts. Um, before I let you go, let folks know where they can find, um, more of your work. I know you have a number of, um, substacks as well. There's, I guess one, four more for your portfolio stuff. And then, um, and then let folks know where they can just follow you on social things like that. And then any parting thoughts, anything that you'd like to leave this audience to think about until we next regroup? Uh, the floor is all yours.

Speaker B: Well, um, first of all, I think people should think. I mean, when everybody is so much in agreement about what's going to happen, uh, it rarely is the case. And look, uh, to some of the old wise guys, I mean, Warren Buffett has done well. There's a reason why he's taking his chips off the table. Profound. And maybe the most respect I have for anybody, uh, for him. Uh, and that's the way to go about these things as I see it. So look to that and don't think that he's wrong. He's never been wrong. He's been early on purpose, doesn't chose to be early. Um, so that's what I want to say. But, uh, don't think that when it feels right that that is the right place to be, because the situation when everybody seems to be. And you seem to be feeling what the next guy is feeling as well, then it's becoming a little of a crowded trade. I would be looking out for that. And. Well, then, yeah, follow on, uh, substack or, uh, on X. And, uh, and also, yeah, go to our. Some of our services that I have. You can also find the link there on X and on substack for, um, where I do some more in depth work.

Speaker A: Henrik Zieberg, head macroeconomist at Swissblock. Thank you so much for being so generous with your time, all of your knowledge and wisdom helping us all learn and get better. And we love doing this with you every quarter. Um, and until next time, be well. Thanks again, Henrik. You want to get your backyard summer ready, but you don't want to break the bank. Wayfair gets it. Planning on dining al fresco or relaxing poolside? Wayfair has everything you need to prep your space. Shop now and save up to 70% off during Wayfair's 4th of July clearance. Score huge deals on outdoor furniture, area rugs and more. We're talking thousands of products for every style and budget. Plus surprise flash deals. July 6th don't wait. Shop Wayfair's 4th of July clearance now through July 6th at, uh wayfair.com wayfair

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