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Right now onto this week's show, Welcome to Merron Took's Money the podcast image.

People who know the markets explain the markets.

I'm Maren Zumseert Web.

This week, Vincent Deloa, director of Global macro Strategy at stone X Financial, joins us now.

If you're a regular reader, of Bloomberg.

You're likely to have come across his name before.

He's often cited in news letters written by John authors, and earlier this month, John Stepic dedicated an entire money to Telder Vincent's Peace, looking at where the global cancel culture movement has come for recessions.

So we thought it'd be a good idea to get him on the show with us to talk through some of his research pieces and to hear what he is currently thinking about stock markets.

Vincent, Welcome to Merrin Talks Money.

Thank you very much for having me, Very happy to be here.

Okay, now there's so much to talk about, but I want to start with a piece she wrote recently that John wrote about about how recessions have been canceled.

So many things have been canceled recently, but you think that recessions themselves are no longer what they used to be.

Will you talk us through that?

Well, mean, part of it is just a statistic observation.

Really here to get the nineteenth century, who will spent almost half of that century in recession, and then the frequency of recession started to decline, especially after the Great Depression, when we had a new deal and progressively we increased the arsenal that governments can deploy against recession with the triumph of Canasians ideas the addition of the second mandate to the FED.

And it seems like every recession we build new tools who fight them, and that takes us all the way to the eighties, which were almost a recession three decade.

Same story for the nineties, one big reception in two thousand and nine.

But for the past sixteen years, I mean, if we stud COVID, which we can all agree was exceptional, we haven't had a recession in the past sixteen years.

So it does seem that my theory is at least empirically verified.

As far as why that may be happening, I would suggest three many explanations.

One is technology.

We'll moved from the gricotia to industreet, industry to services, tangible asset to intangible assets.

If you wear to buy the nestlac in dex today, you pay a dollar and you get about three cents in tangible assets.

Tangible assets are things that you can touch, things like plant, things like machines, think that you have to finance, and things that you have to depreciate over time.

While we no longer have this physical economy.

Intangible assets behave very differently and they remove a lot of that ciflicuility.

Then there is the policy explanation.

As I was hinting, we have hyperactive policy which seems determined to do everything it can to avoid recession, even if that means infeeshion.

And then the third one I'm sure we'll talk about about a little bit more is the explosion of fiscal spending, which means that the US economy at least is in a constant state of physical stimulus.

Okay, can I ask for my thing?

Is very obvious question, why is it that intangible assets are so much less cyclical than tangible.

Because they are a different breed.

Quite often they're just a raw spontaneously out of the business process.

I mean, if you think about a network effect, you don't really have to pay it.

Just more people use your platform, and certainly you become the biggest platform, and that gives you a huge intangible asset.

You didn't pay for that, It just happened, so you didn't have to take a loan for it.

You don't use it over time, if anything.

Instead of you have these economies of scale in economics, right, the bigger you get, the less efficient you become.

It's almost the opposite with intangible assets.

I mean you can think also about brand, about name recognition, about out of IP.

It just behaves differently from the hard stuff that we use to put your stuff with.

And in a way you can think of an international division of labor where the US keeps intangible assets in large part because we have better core, better IP, and then we outsource all the tangible stuff to China, to South Korea, to Germany, and in a way with kind of outsource recessions to our trade partners.

So effectively, these intangible assets aren't no longer hostage to a capital cycle.

That's absolutely correct.

So that's the way it works.

We let other people take the head of the capital cycle, and Western economies who are very dependent on intangible assets ie the US, effectively no longer have to worry about it.

It's fascinating.

And then we have policymakers and the different things that they do.

And then we have this idea of there being as a permanent stimulus from effectively the welfare state, entitlements, healthcare expenses.

The problem there, of course is in I get that I completely see what you're saying, But it's not really sustainable, is it?

Over time?

Nothing is sustainable if you think about you know, a bicycle or a bicycle is always spoiling.

It's only because you keep adding momentum to it that it doesn't fall.

I would argue the US economy is in a similar situation.

And yes, I agree that at some point there is a capacity issue crowding out debt crisis.

We may be at the beginning of one.

But I think if we are running it in the world hegemon at a time of high nominal growth, This process of constant stimulus leading to inflation growth can last longer than people think, and it only has.

I mean, look, in the past five years, I've been on so many panels against so many distinguished economies who were so much more than me, who had already signed one hundred percent probably toy recessions.

After the FED started hiking grade in twenty twenty two.

Then in twenty twenty three, then we had the original banking crisis.

Last tuner, we had a Samule panic.

Yeah, there seems to be something that mainstream economists are missing key, and I think what they are missing is how long this process can take doesn't mean that it's it's sustainable in a long term.

I would agree with you, But as so many A Caine said, in the long term, with all.

That, yeah, so basically we can we can expect it.

If you're right, we can expect to see a very long period we don't know how long, but a very long period the no recessions, of very mild recessions, followed by at some point, probably possibly far out in the distant future, a catastrophic collapse of the state.

Correct, but I would trust that that collapse would happen by fire.

You know, there are two ways you can dierect.

You can die by ice or dies die by fire.

And in the economy and dying by ice is pretty much the story of the European Union for the past one years, where you know, the economy slows, inflation is big or target like a kind of great depression like scenario.

And then the death by fire is something that's more common in emerging markets, where the government spends too much, invasion takes off, the economy accelerates, capital leaves the country, and you have a very different recession experience.

I mean, in one case, it feels like you know, slowly falling asleep, as if you were like dying from from cold.

In the other end, in the other in the other one is kind of a frantic manic recession where the economy overheats into a recession.

And then you would get an Argentina style renew well at some point, but that's far off.

There is one thing that I wanted to ask you about, and John and I talk about, you know how you need recession to clear things out, you need a creative destruction and renewal, etcetera.

But you arguing in your paper that that's not really necessary because we have new institutions that take on new organizations.

Should I say that take the place of a recession to create renewal?

Is that right?

Yeah?

I mean I'm a little comfortable with that argument because it's almost religious some moral rights.

You can hear the Catholic schoolboy in that.

Or you need the pain, you need to atone for the sin, and it's only for the pain that you shall be redeemed.

Mmm.

I mean, I think it's best to leave that to one's conscience.

I think the idea is that here that recession would clear out inefficient businesses and favor innovative ones.

I would argue that we have a huge portion of our economy that's now dedicated to that.

I mean, fearing out the Caucuses is basically the drop of private equity, right, I mean they will go out and scout for like air conditioning businesses that are around that by boomers, and take on some debt and buy them so they can put their clients on salesforce and call that improved management.

Then we have the VC industry, which constantly needs to justify fees and it's constantly looking for the next big idea.

And I mean, I'm making fun of it, but empirically it has somewhat worked.

I mean, I don't think innovation has slowed in the past sixteen years.

I mean we had major you know, from the iPhone in two thousand and seven to a large language model, to advance mon in evs, batteries space.

Despite the absence of recession, it seems that we are on the verge of a technological breakthrough.

Okay, so let's take that.

I think it's a very compelling argument.

And you're right that empirically, recessions do appear to have almost disappeared.

So if there will be no recession, will there then be no market correction?

As we hear a lot about the only way that you will see a big market correction in the US being as a result for a recession, and most people are churning out papers showing us how much markets fall in different types of recession.

But if that's not going to happen, is the US market just don't just go up forever?

It's not that good, Marian.

I'm sorry.

No, we already had market corrections despite the lack of recession.

I mean twenty twenty two.

Oh, but I don't think we're really going to count that, and that we're pretty much back where we were.

Well, okay, then maybe I mentioned it because I thought it was an interesting precedent, okay, in the sense that we had a large market correction affecting both stocks and bonds at the same time.

I mean, if you look get total region number sixty forty portfolio, the losses of twenty twenty two was considerable because, okay, the stocks may have been down only twenty percent, but the bonds were also down, So in terms of a total dollar damage, it was almost as bad as as two thousand and eight, But it was also much shorter.

Now, why was it much shorter and as we mentioned, much shallower.

I mean we basically back at any all time high.

I think it's it's because of that tale, that recetionary tale that's been removed.

So if you think about a bear market in the equity market, you're really accomplishing two things.

The first thing that you're accomplishing is correcting for over optimism.

People get too excited about the future, too excited about future growth, and they pay too high and multiple for stocks, so you need to knock that down.

And then in a recessionary bear market, there's a second thing that kicks in, which is the economy does slow EPs starts to fall, so the multiple drops, the earnings drop.

There's an interaction effect that takes stock down from you by sometimes fifty percent, like we hadn't in two thousand and eight and two thousand.

If I'm right and we don't have recessions, we only see the first part of this process, the valuation correction.

The valuation correction typically takes multiple down by twenty percent.

When that happens, it's earnings are still rowing.

People are going back to stocks.

So that lead me to this idea named after the famously wrong economists who in nineteen twenty nine mentioned a permanently high plateau for valuation.

Yes, sometimes believe in that that we will see other corrections, for sure, But once multiples fall into the sixteen seventeen range, people will go back and buy stock, So we won't have the very deep bear markets where multiple fall into the law teams as we had in two thousand and eight and two thousand and one.

Okay, and they will go back into equities much faster than they would have otherwise, because the lack of a real recession means that earnings per share either stay static or continue to rise.

So the numbers that would previously have said to people, Jesus needs to be a lot cheaper before I'm going back in simply won't be.

There, absolutely correct.

Iferen things are going to grow by about six percent of a year, which is way below the post World War two average, by the way, and you compare that to bond yields.

I mean, okay, you have what is the ma You know, you have bonds that yield around four point four percent tenure.

Today.

Let's say we have a big correction that brings you back down to four percent so you have one instrument that gives you four percent fixed, has a lot of duration risk, that's bonds treasures, and then you have another instrument.

If we're looking at an eighteen P that converts into a four point five percent earnings yield and is growing up one at six percent, I mean you are going back into stocks because you no longer have the fear that you have these catastrophied dealins and earnings like we had in two thousand and nine.

Okay, I want to stick with this for a minute, just because there is another piece that you've written about the Mega War on the corporation where you talk about how one of the probably so far misunderstood hearts of the Mega revolution is to be a rebalancing of returns to capital and returned to labor.

So we would expect that kind of change, and I ask you to explain what you mean by that in a minute.

But that would lead surely to falling earnings, which would mean that even if valuation stayed within this high platter range that you suggest, you could still get a long term band market.

Yeah, or atis, let me walk through the idea if.

You mind that for me, that would be great.

In general, in the US, in the Western in general, we have a funding crisis.

We have a lot of boomers.

They voted themselves very nice benefits, and they are aging and they are getting to the period of life where you spend most of your health care expenses.

So someone is going to have to pay for it.

We don't have the private seetings to pay for it, so one or another is going to have It's going to have to come from the government budget.

And you go back to government budget.

You can inflate some of that.

I believe we are doing that.

You can increase their capacity, but at some point I think you're going to have to tax some of it.

The question is who do we tax?

And the answer is not foreigners.

Uh Trump.

Trump came in and basically promised that something that really crontovenes the concept of the state, that somehow the US would be able to tax foreigners.

And that was the beautiful story, a story that got him elected in one way because it meant that we would not have to tax labor or capital, we could simply tax foreigners.

The reality is that we don't tax foreigners.

I mean, you know, if you are in the UK, I cannot send an IRS agent to take your money away from you.

Not can I force the Bank of England to swap it's it's it's currency reserves for a bond that doesn't pay interest.

That was another idea that was fully a few months back.

So now we are back to squel one.

We have this increase in liability and government expanse and we really only have two ways we can take the money from because we don't we don't tax sales in the US, so we can either take it from corporate income or dvidual income.

That is the grand sum total of all income that there is in the US.

It's either earned by corporations or individual And my impression is that trun and then the MAGA movement is protecting income individual income.

We are seeing this with a big, beautiful bill.

We have so many exemption right.

We have the TCGIA, the tax cut of twenty seventeen that are extended.

We have no tax on tips, no tax on social security, no tax on overtime, extension of the state and local deduction.

All that is basically to protect individual income from the shock of tariffs.

On the other side, we have some level of tariffs which are tax on corporation corporations are the one that pay tariffs.

I mean again, it's not foreigners, it's the important So it's a tax on corporate income.

And we also do not have any reduction in the corporate income tax rate.

So if we look at the burden of taxation in the US, it's folding more corporations less and less on labor.

And that means that over time profit margins are going to decline.

Now, for the first part of your question, will that lead to falling earnings?

The quick answer is I don't know.

I am somewhat hoping that we can do it in what Radario would call it a beautyful deleveraging way, where what happens is nominal growth is very high, so the pie is growing so fast that we can reduce the share of capital without reducing its absolute number.

In other words, nominal GDP grows at seven eight percent, which is where we've been since COVID, and maybe EPs grows at three four percent, So over time we are rebalancing from capital to labor without necessarily causing a contraction in EPs.

Okay, I mean, but the whole thing makes sense.

The idea that tax burdens should shift towards corporations to a degree.

One of the numbers that you quote that John, I've talked about a love in the past, this idea that profits of an idea fact that profits account for much more GDP than they have over the long term.

So ten point six percent of GDP at the the US accounted for by profits.

Long term average is more like six percent, So you'd be looking for some kind of normalization there.

Yeah, it's I thought that.

I think it was a famous American bank robber who was asked, you know, why do you rob banks, and his answer, well, that's because that's where the money is.

If I'm the US government and I'm looking for money, I'm going to take it where it is.

And the money in the US is not in the bottom ninety nine percent of the income distribution.

The money is in in corporate margins, which, as you pointed out, have exploded since since the mid nineties.

So it only makes sense that we are seeing this kind of political pandem swing away from from the big ideas of the nineties of Blairism, of Cringtonism, of Okay, we're going to tax labor and we're going to be nice to capital because capital can move and we had basically four years of of that where we reduce corporate income tax rate, we added all these exemption the effective tax rate fall and even below the nominal tax rate, and at the same time we made our governments more reliant either ondish ones or on taxing income.

This movement actually ended in the US in twenty eighteen with Trump cutting taxes on income and starting to raise revenue on corporations with the tariffs and Trump two, I think is even a clearer move in that direction.

And if I may make some more podcasts, suspect that the mega movement, as Trump kind of goes away, we'll move further into that direction under the impulse of people like JD.

Evans, that like Miller, like like Bannon, like Taker Cars and where you see very clearly that this is between a file between capital labor.

I mean you can almost take you all the car Mark's book out there and then see this playout in real time in the Republican Party.

Interesting.

You know, when we use that joke about UK finances, why did you bank that's where the money is, we use it about pensions, why are you going for pensions?

Because that's where the money is that's where all the spec capitalists in the UK.

Some might not call us bare, but there you go.

I wanted to just stick with the big, beautiful bill from it because one of the things you say in and I've written about recently is this idea that it may impose taxes on foreigners.

You know, we recently had this talk about taxes on remittiences.

And then there is an idea that foreign companies and individuals could be taxed differently inside the US with capital that they earn inside the US, which could end the flow of capital coming into the US.

It in tern has been one of the big drivers of the US rally.

Yeah, I think that is indeed to keep revisioning the bill.

I think it was in it.

So there are two parts when you mentioned is the remittancies, which would be a significant hit for you know, in small Central American economies like from Joas, Nicaragua, even Mexico.

And then the second part is I think it's part of the trade negotiation.

I mean, the U had threatened to put a digital service tax on the tech platforms, and basically Trump wanted to codify that act so that it can be part of the negotiation, and said no, I'm going to have in my bill.

I'm going to reserve the right to tax the dividends and the interests and the coupon payments to foreigners who are taxing us.

So yeah, it's an extraordinary change in the philosophy of taxation.

I mean, there was this idea that, you know, we treat all capital holders the same.

I mean that was parted that kind of globalization.

We want to make ourselves open and attractive to the rest of the world, and taxing capital doesn't work because capital can move.

Well, we are walking the way back.

I think it's highly significant, and I think it would accelerate what we are seeing today, which is the repatriation of foreign capital from Europe, from Japan, from South Korea, which are massive investors in the ustack market and are now bringing their money back home because they are not treated fairly in the US.

And that means that a reversal of flows that have any going one direction for a long time.

I mean, yeah, let me if I'm interested that something.

I think one thing that probably the Trump crowd did not quite understand, or maybe they understood that didn't say you did, is that the trade in the capital account balances are simple mirror of one another.

If I have a trade deficity, add a capital account surplus and vicepra sites just the way accounting works.

I mean, if you consume more than you and then you produce somehow, you must be financing this.

See that you set assets or you borrow that, you have a surplus and the capital account.

So if we are going to correct quote unquote trade balances, we need to correct capital account balances.

And the age of protectionism on the trade side means that on the capital side we have what Russell Napier called the age of national capitalism.

We're going to see barries to the movement of capital.

We are going to see different treatment days on the nationality at the capitol all that, and we are going to see financial repression.

And you can see all these ideas slowly making their way in the US discourse.

Because again we're trying to close the trade, we're going to have to close the capital at the same time.

Okay, so that does suggest that short term least things will be challenging for the US market, I believe.

So I'm doing the thing that one should never do on a public podcast, which is a verifiable short term market core.

So in the research we warn our client that we think the market is going to correct in July.

Why did I pick a dly one.

It's because the market, as you pointed out, as we bounded so much, we basically back at a newr time high.

We have yields at a starting to get to the point where they start to hurt the equity market.

I mean, I would say four point five four point six percent on the ten years is a pain point.

We could be there in a couple weeks.

And July, of course, we have massive partyy risk with the end of the ninety day pass for tariffs.

I'm very skeptical that we can negotiate complex deals with two hundred countries in less than two weeks.

I'm also very skeptical that Trump's great frenches in pin is really interested in a big, beautiful deal.

So we have party series on the tariffs.

We'll have a very important FED meeting where there's still some expectations of cuts, or certain expectations of forward guidance or that cut which we may not get.

I also worry that the positive invation surprise that we had last month will be reversed in June as we see the impact of terarrorists and prices.

The tarriffs really did not hit until the end of May when they were actually paid, so that's why they were not in the Maid number, but they might may may show up in the June number.

And then I also worry that this would be earning season, so companies, I think we'll still have decent earnings, but they'll start to get lower.

We have very high expectation for the second half of the year, so they might to stop warning that this is not going to be met.

And then finally, as companies report earnings, they are not allowed to engage in buy thats so these first two weeks of July, when most companies are in the process of reporting, we won't have this buydack bid, which is I think what saved the market in April twenty twenty five.

Fascinating.

Thank you.

One last question before I let you go, do you think that under these circumstances there is a chance of things defrosting a little in Europe?

We talked about your dying advice, but there do seem to be significant changes and if we see flows of capital leaving the US and heading towards Europe, suit of the obvious place for the money to go.

Might Europe defrosts just a little.

I believe so, I mean against our own will and our better judgment, but we are somewhat forced into making the right podicy moves finally by the Trump administration.

I mean, one thing that I find fascinating in Europe is the lack of investment.

If you look at the trend in GDP between Germany and in the US, it starts to diverge in twenty eighteen.

Whether the US really takes off and Germany starts to statmate.

Now you can talk about the pipelines, the energy policy, digital revolution, and China, all the social things that we know about, but one thing that's very clear is different trajectories and deficits.

I mean, since then, the US deficity to GDP has average five percent.

Germany we've been under one percent.

If we were just to add back the deficit to German growth and assume a forty percent pass through, which is tiny.

Forty percent physical multiplier means a dollar club expanding increased growth by only forty cents, which I think is way too low, German GDP would have caught up with USGDP.

So we have underinvested in ourselves for many, many years, and Trump is basically forcing us to invest back at home by telling us that our money is no good in the US.

So just bringing that money back means that the currency appreciate, energy costs four, productivity picks up, yield cares deepen, and yeah, it's a pretty good outlook for actualy So relatively speaking, for Europe to cash up on what has been a twenty year crisis of confidence.

Excellent, Thank you, Happy days for Europe.

You're traveling at the moment, Vincent, I know what are you reading on the plane?

Oh?

I'm gonna have to give you the honest answer here.

This is not what you expect.

I am reading How to Change Your Mind, a book about the spite of psychedltics in the US in the sixties and early nineties.

And it's a fascinating read.

But it's not how I produce economic research.

I keep the two activities separate.

Thank you very much.

Thanks for listening to this week's Marin Talk's Money.

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This episode was hosted by Me Maren Sumset Web.

It was produced by some Asadi and Moses and sound design by Lake Maples and of course very special thanks to Vincent Deli up