JAMIE MCDONALD: Let me ask you this, because a lot of what I was doing when admittedly, it was shorter time frame and doing a lot more sort of bottom-up analysis, for lack of a better word, was a lot of expectation versus reality. And that's how we were trying to make money.
And I wonder how it works. Because you guys are much better at macro than me, is I was looking at a certain company. What are their earnings going to be? What's the market expecting? And therefore try to make some sort of out for in around that.
But how does it work in the macro world, when it comes to manufacturing data, consumer confidence, is that a way that you should be thinking about adjusting your portfolio, thinking how are people thinking about consumer confidence and then watching those macro data bites come in?
ROGER HIRST: I think the difficulty with a lot of those is that they're coincidence indicators. So for instance--
JAMES HELLIWELL: This is key.
JAMIE MCDONALD: Or backward-looking.
JAMES HELLIWELL: This is key. Because I always thought it was the Holy Grail, the ISM, and all the rest. But you said this to me again recently, how you feel it's actually coincidence.
ROGER HIRST: Yeah. They're nearly always coincidence, and certainly more recently. I mean, maybe 20, 30 years ago the ISM was what businesses think. But then because of the central banks doing monetary, which destroyed the value of future growth, the concept because--
JAMES HELLIWELL: Yeah, pulled it forward, in other words--
ROGER HIRST: Suddenly, corporates didn't do CapEx, they bought back shares. So therefore, if you interviewed someone at a company and they say, yeah, things were really great when the equity market was going up, because they were getting better off. So the ISM has this relationship with the equity market.
JAMIE MCDONALD: Well, I was going to say, so how do you-- I mean, how do you what the leading indicator is?
ROGER HIRST: It's really hard. I mean--
JAMES HELLIWELL: Are there any left that are truly leading?
JAMIE MCDONALD: They all just play off each other.
ROGER HIRST: Well, people use big data now, don't they? They use data analysis to try and get ahead of the game. Because nearly all of these macro points that we've used before ebb and flow with the performance of something like the equity market.
JAMIE MCDONALD: Yeah.
ROGER HIRST: So for instance--
JAMIE MCDONALD: Is this what you mean by reflexivity?
Roger HIRST: Yeah. So what you're seeing is that the data points themselves are defined by the success of the market. And the success of the market is--
JAMIE MCDONALD: Right, OK.
ROGER HIRST: --you get the loop. So you reinforce the market with high markets give higher sentiment readings. Which then make people more excited to put their money into various financial assets which like growth.
And what we've been seeing within this period is that instead of seeing a sort of peak and then a slow grind back down, which is what we saw in 2000, 2003, we've seen these pockets where we go up and then collapse, then we bounce straight back out again.
JAMIE MCDONALD: Yeah.
ROGER HIRST: Because one defines the other one. One is the other. And you're not really getting that much information from them, which is why they're often better off looking at changes in certain assets themselves and the rate of change of asset prices to give you an insight that you go, wow, the momentum in asset a which is normally reflective of growth, if that's starting to slow and roll over, then you go, maybe the momentum is now changing in the underlying market. And that'll happen before ISM turns.
JAMIE MCDONALD: I see. So with actually looking at the derivative can often give you a lot more insight into what's really going on.
ROGER HIRST: Yeah.
JAMIE MCDONALD: It's not the change but the rate of change.
ROGER HIRST: And often, within, so people now tend to look less at [inaudible] and headline figures and more at the subsectors [inaudible] new orders versus ventures. So are ventures picking up or are orders picking up?
JAMIE MCDONALD: Yeah, well, isn't it another point to consider, because someone was mentioning this to me, if you just think about what information is available now versus what information was available 20 years ago? I mean, now you can just tell exactly to the minute how many people are looking at travel websites.
JAMES HELLIWELL: Yeah, real-time transaction data.
JAMIE MCDONALD: How many people-- real-time transaction data. And that changes the way that data feeds back into the economy.
ROGER HIRST: Yeah. And the speed with which people can analyze it. I mean, if everybody's looking at the same data point, I mean, it doesn't really give you that much information.
JAMIE MCDONALD: I know, yeah.
ROGER HIRST: I mean, macro used to always be about having that informational edge, which meant that you wanted to get information before everything else. You'd be talking [inaudible]--
JAMES HELLIWELL: You position. Yeah.
ROGER HIRST: --to get that feedback. A lot harder today because everybody does that.
JAMES HELLIWELL: Yeah.
ROGER HIRST: So that's why I think people are now looking at these fast data points to give them the clues, exactly what you just said, which is if we start to see footfall changing, unless it's not during a pandemic, because that was an unusual situation. But let's say footfall is changing in terms of shopping habits or restaurant habits.
Then you think, OK, maybe something is up here. Maybe inflation is curtailing people's ability to spend. But the ISM will only show that with belatedly, because we've got to focus on the consumer cycle rather than the business cycle. And the consumer cycle is now leading the business cycle. Whereas normally, you always think it's the other way around.
JAMIE MCDONALD: Let me throw in another sideball, and see what you think. Globalization has basically eroded so much edge away that there are now random factors influencing the market more than we could ever predicted, like social media. So like the Reddit platforms, like these online platforms that can just affect--
JAMES HELLIWELL: We all remember wallstreetbets, eh?
[laughter]
JAMIE MCDONALD: Basically.
JAMES HELLIWELL: I mean, the--
JAMIE MCDONALD: I mean, the dawn of the retail investor is in a way a secular shift. Do you think that's right?
ROGER HIRST: I think there's more that the retail investor was around but got hurt in 2000 by dot com bust.
JAMIE MCDONALD: Oh, I see.
ROGER HIRST: They were massive then. They played very much second fiddle to institutions. And then after the or during the pandemic retail came back with a vengeance. But there's more cases, they've been subdued by 20 years of difficult markets where actually passive, which was another big trend--
JAMIE MCDONALD: Yeah.
ROGER HIRST: --passive replacing active.
JAMES HELLIWELL: Yeah.
JAMIE MCDONALD: Yeah.
ROGER HIRST: Best thing for you as investor is do we just put your money into S&P--
JAMIE MCDONALD: Yeah.
ROGER HIRST: --or NASDAQ.
JAMIE MCDONALD: Yeah.
ROGER HIRST: And just not worry about it.
JAMIE MCDONALD: Now, is that over?
ROGER HIRST: No. Because I think that the idea that an individual can take control of their own finances is what this is all about today, what we are talking about today.
JAMIE MCDONALD: Yeah.
ROGER HIRST: And it's, the individual can go out and say, you know what? I now have the information at my fingertips. And I have these low-cost instruments be able to do it. On almost any assets anywhere in the world you could trade via an ETF. Or you can just get yourself into a passive instrument. So you don't need to pay your 1% to a fund manager who basically going to be the market anyway.
JAMIE MCDONALD: Yeah.
ROGER HIRST: You can make your own decisions. This is the whole thing, which is [inaudible] happened to get involved.
JAMIE MCDONALD: How many ETFs are there in the world now?
JAMES HELLIWELL: Oh, I don't know.
JAMIE MCDONALD: Thousands and thousands?
JAMES HELLIWELL: I doubt that there's more cryptocurrencies than ETFs. that's a crazy thing I heard the other day.
JAMIE MCDONALD: Well, that's a good segue into that then, is the dawn of cryptocurrencies a secular trend?
ROGER HIRST: I think it's the dawn of decentralized finance and Web3. Yes, it probably is a secular trend, because it's a different way of doing business and a more efficient way of doing business.
JAMIE MCDONALD: Yeah.
ROGER HIRST: And it feels-- and you can see the arguments, that tribal battle that's going on, which is a lot of people think it's absolutely twaddle and others think it's the new world. That whole battle is an indication that there is something changing. And the old world wants to hold on to the old world and not see the new world take their thunder.
JAMES HELLIWELL: It's almost in reverse. A moment ago we were talking about retail investor participation coming back to the market more recently having been hurt through a couple of previous chapters.
JAMIE MCDONALD: Yeah.
JAMES HELLIWELL: And it obviously otherwise been institutionally dominated. It's almost the complete opposite in crypto. Where it's tribal-- quite tribal to say the least. But it's definitely a retail audience or retail investor community--
JAMIE MCDONALD: Yeah.
JAMES HELLIWELL: --that institutional investors are gradually coming into. And that's changing the dynamic, I think, of how it trades and what it represents. But in terms of the current trend and the technology, its behavior is being very much determined by retail investors.
JAMIE MCDONALD: But if we're just to summarize where we are then, we've got the longer term trends, the secular shifts years, decades. You've got cyclical trends, months and years. And then you have what we're calling, I guess, tactical trading which is of daily to monthly trends.
But what I was going to ask was, do certain asset classes only work with certain types of time horizons? Because they're basically three different time horizons. So with stocks, obviously, it works well tactically trading them. They go for a lot of news flow. But can you tactically trade commodities? Can you tactically trade Bitcoin?
JAMES HELLIWELL: Yeah, for sure. There's a heck of a lot more volatility. And I think we probably need another round if we go [inaudible].
JAMES MCDONALD: Oh, I tell you what, do you want same again?
ROGER HIRST: Yeah. Yeah, same again, please.
JAMIE MCDONALD: All right. Cheers. So let's-- you were this one, weren't you?
JAMES HELLIWELL: Cheers Jamie.
JAMIE MCDONALD: No worries. So let's talk tactical first.
ROGER HIRST: So I think, when you look at this tactically, what is that? It's normally anything between day trading and maybe a one week, maybe a one month view.
JAMIE MCDONALD: Right. But things like news flow, data.
ROGER HIRST: It can be. Yeah, it can be anything.
JAMIE MCDONALD: Yeah. I'm just going to think--
ROGER HIRST: Because these are the trends which are-- might be driven by emotion, they might not. It might be just driven by a short-term overbought position. So these are sort of fine movements. So you might have the very long-term trends.
JAMIE MCDONALD: OK.
ROGER HIRST: Then you have the secular, then you have the cyclical trends on the secular. And then you have the tactical along there.
JAMIE MCDONALD: Right, yeah.
ROGER HIRST: So it's trending--
JAMIE MCDONALD: Yeah. Yeah.
ROGER HIRST: And in some ways, this is the easy point for a lot of people to start. Because people can just get involved in these sort of short-term moves and people can build up their own confidence based on that. These are tactical opportunities.
But we've also got to set that within that more cyclical view, which is, OK, when you see something tactically go to the top in a trend that should be down, you kind of know, OK, these are where you set your limits. This is a point which we've got within this sort of trading world, which is that you've got to have an idea of where you are within this.
And you've got to have this idea that you might have to become more tactical if one of those big trends becomes shorter. We've been talking about trends which have been lasting for--
JAMIE MCDONALD: Wait, what do you mean? What do you mean by that?
ROGER HIRST: So the business cycle, you look at them, was '91 to 2000, those nine years.
JAMIE MCDONALD: Right. Yeah.
ROGER HIRST: 2000 to 2008, that was eight years. 2008 to 2020, the big one, the biggest ever, 12 years. They've been getting longer and longer. But now it feels like maybe those big long-term trends-- and these are the cyclical trends of business cycle and central banks--
JAMIE MCDONALD: Yeah.
ROGER HIRST: --what if the volatility of GDP and the volatility of the reaction function picks up so that instead of having long-wave GDP growth and then a shorter deceleration, we actually have much shorter cycles like the '60s and '70s. If you're looking for a 10-year cyclical trend but we're moving into two-year business cycle cyclical trends--
JAMIE MCDONALD: You need to be aware of that.
ROGER HIRST: --you need to be more tactical.
JAMIE MCDONALD: Yeah.
ROGER HIRST: So you actually need to apply a tactical mentality to a cyclical trend that the previous cyclicality felt more like a long-term secular trend. So these things is, nothing is in stone. These trends are constantly changing. And you constantly have to test your thesis on it.
JAMES HELLIWELL: I think that's where people-- a lot of people get it wrong as well, just assuming that, OK, just because, I don't know, nine out of 10 occasions in the past nine out of 10 recessions have been predicted correctly by an inversion of the yield curve [inaudible], we assume that's going to be the way forever.
You're taught when you're beginning to learn, you look at these indicators, the ISM as well, to go back to that-- these are the yardsticks, these are the things that you should always refer to. But you need that flexibility, I think, as well. And that ultimately is macro, right?
JAMIE MCDONALD: Yeah. But you were saying something to me earlier. You're saying that you can't really trade tactically unless you have a secular view or a cyclical view. Is that something you stick-- I mean do you stick by that?
JAMES HELLIWELL: I think you're benefitted by that. And if you turn it on its head, I'm not sure that nowadays you can play necessarily either extreme in isolation.
JAMIE MCDONALD: Right.
JAMES HELLIWELL: So whether it's short-term tactical almost day trading stuff. And equally now in this current environment, I don't think you can just afford to sit there and say even with maybe 20 or 30 years to invest, perhaps through to retirement in my case, I don't think you can afford to just sit there long equities anymore and say, they've always gone up in the past over the long-term and they'll reflect growth even if we have some corrections in the meantime. Because of the volatility-- the increased volatility and compression in the cycles, it's a completely different environment now, right?
ROGER HIRST: Yeah. I mean, you've got to have that understanding where you are on both secular at the cyclical and the tactical. So for instance, in 1994, you could have said, oh, I believe the bond bull market is going to continue. And you'd have been right when you looked back over 20 years.
But in 1994, bonds sold off very, very aggressively. And so, your long-term view would have been destroyed before it even started. Because you needed to be aware of the shorter-term cyclicality and the tactical trades that are in there.
So you've got to bring a sort of blended view. You've got to understand where you are in that big, big trend. And it might not have a massive impact on your own outlook. But you know roughly where that trend is. Where are you in the cyclical trend within that and where are you tactically within the cyclical trend.
And I think that's, in going forward, and it seems that those longer-term trends may be changing with what we've seen in China, what we've seen with inflation, and now what we're seeing with things like crypto.
JAMIE MCDONALD: Yeah. But going back to your point on central banks though, how much are central banks looking at stock markets?
ROGER HIRST: I think--
JAMES HELLIWELL: Oh, that's a good one.
ROGER HIRST: Yeah. They're looking at growth. So they had a growth mandate. And that meant that they always supported growth, which to them meant I can support equities. So every time you had a growth scare, which was often indicated by equity selling off, they went we'll cut rates, we'll do more QE.
Today they're driven by price. So by being driven by price, and they say, oh, the equity market is selling off. But if they do more and price goes even higher, they've failed on that. So there's that different mandate. And that's the thing to understand.
JAMES HELLIWELL: The policy regimes.
ROGER HIRST: --bonds have changed their reaction function from being supportive of growth to capping price. And that's where they are now.
JAMES HELLIWELL: And that's worked so well in supporting equities over the last 10 years. But you can cut both ways.
SUBJECT 1: That's the central bank of the USA--
[interposing voices]
ROGER HIRST: Yeah. Emerging markets may be always focused on price, because emerging markets have seen much higher volatility in price and inflation. Whereas others might still be out there saying, you know what? China, for instance, doesn't have much CPI inflation. So CPI is consumer price inflation. So they may still be able to support growth.
JAMES HELLIWELL: What about Japan? Talking of Asia and inflation and how they target the policy? And in this case, something that just hasn't worked to stimulate the economy over 30-odd years now.
ROGER HIRST: Yeah.
JAMES HELLIWELL: What the hell is going on in Japan?
ROGER HIRST: They've still got the demographics deflation story. Which like everywhere else is seeing inflation picking up. But their central bankers have been locked into this battle since 1989 since the mid-nineties that we have got terrible demographics. And that's not changing just because there's a bit of inflation. So they're still looking at that big, big structural trend.
And so, you've got to approach Japan still-- until somebody changes, or Kuroda has left, or whatever, you still have to assume that they are using the same reaction function to the market, which is, we still worry that the demographics is going to kill us.
JAMES HELLIWELL: Right. And that's ultimately what's been crushing them over 30 years is debt, a combination of debt and demographics.
ROGER HIRST: Yeah. It's been crushing some of the markets. But actually, the standard of living for Japan has actually been going up.
JAMES HELLIWELL: I'm sure it's a nice place to live. I don't mind being there. Trains work a lot more efficiently.
ROGER HIRST: GDP is an abomination. Everyone uses GDP as a way of understanding growth. Now, GDP has been pretty weak. But actually, the standard of living for Japan's population has actually been pretty good. So it's not been a terrible time to be Japanese consumer or a Japanese investor. It's just been difficult to invest in the domestic market.
JAMIE MCDONALD: Well, going back to this time, it's different. I can tell you from painful personal experience that trading Japanese equities is tough.
JAMES HELLIWELL: [laughs]
JAMIE MCDONALD: Every time you think--
JAMES HELLIWELL: The old [inaudible] trap.
JAMIE MCDONALD: Yeah. Oh my God. They're all trading at 20% or 30% below book value. And this is the catalyst that's going to take them back.
ROGER HIRST: And that's why so many of the macro guys didn't believe Japan in 2012--
[interposing voices]
ROGER HIRST: Because [inaudible] this, we're going to do something different.
JAMES HELLIWELL: The bazooka.
ROGER HIRST: And there's this amazing setup in the market. And they came out with a bazooka. And all the macro guys go, yeah, we've seen this before. Japan always fails.
JAMES HELLIWELL: That really was a catalyst. Yeah. [laughs]
JAMES HELLIWELL: I mean, if that wasn't going to work--
ROGER HIRST: and I've got a few clients long. But even I didn't really believe it when the market went from 8,000 to about 12,000. And said, oh, that's 50% gain. Get out. Take your profits. Went to 16,000 that first move, it doubled in the matter of--
JAMES HELLIWELL: Yeah. What was dollar yen, about 79, 78, or 79 I think it bottomed around then?
ROGER HIRST: Yeah.
JAMES HELLIWELL: I remember that chart so well. I was a couple of years in. And yeah. I remember looking at that.
ROGER HIRST: Basically he had a very, very strong yen. And he just said, I'm going to weaken the yen.
JAMES HELLIWELL: Yeah. And he really did.
ROGER HIRST: Just try and stop me. And they're still doing that in early 2022, they're still trying to cap yields, which means that the yen has to fall, because everyone in Japan will be going, hang on a minute, there's 2 and 1/2 I can get in the US versus 25 basis points in Japan. I'm going to put my money elsewhere.
So you can see that that central bank function of Japan is going to define the currency, which is also telling you what the Japanese population investors are doing. They're going, we're going to invest overseas.
JAMIE MCDONALD: Yeah.
ROGER HIRST: And so, just for a final point on that Japan thing, which is that not only is this the reaction function from the central bank forcing those investors overseas, pushing the yen weaker versus the dollar. But at the same time, Japan imports shitloads of commodities, just loads and loads of commodities. And so, for them, this is now a really difficult environment where commodity prices have gone through the roof, which they need to import, energy prices.
Yet again, that's putting more pressure on the yen. So that understanding of how the yen should move is a combination of the old trend that was in place plus this new potential cyclical trend that might become a secular trend of are we going to see higher commodity prices for much longer than we've been used to.
JAMIE MCDONALD: So picking up on that. So where we are today and looking out to the future, what big secular trends are we facing? We've got rising interest rate environment, maybe deglobalization?
ROGER HIRST: Absolutely.
JAMES HELLIWELL: Oh, that's a big one.
ROGER HIRST: That's surely seeing peak globalization.
JAMIE MCDONALD: OK.
ROGER HIRST: Globalization, I think peak globalization or the trend to more and more globalization, I think, ended even before what we're seeing in Ukraine and the pandemic.
JAMIE MCDONALD: Mm-hmm.
ROGER HIRST: And I think that's probably the most obvious one that we can put our finger on. Because we can absolutely see it. Governments have shifted. They were shifting after the pandemic. And now, since the beginning of 2022 and the war in Ukraine, they're saying, security.
JAMIE MCDONALD: Yeah.
ROGER HIRST: Got to have my supply chains at home. I've got to make chips at home rather than rely on the supply chain of chips mainly from Taiwan. I can't rely on energy and commodities from just Russia anymore.
JAMIE MCDONALD: Right.
ROGER HIRST: That is a major, major trend that's going to be a secular trend.
JAMIE MCDONALD: Right. And what about demographics as a secular trend?
ROGER HIRST: So demographics, I think you can see these are very, very slow burning supertanker trends. You can see that the population growth is slowing. But what really matters here is, do we get another China type moment, where a region or a country goes, you know what? We're going to try and grow much more rapidly than people expect.
So China came in, brilliant people, 2001, really late '80s it started. Can India do that? Kind of combination India, Indonesia, and other parts of Southeast Asia effectively together move from being very, very low income countries to middle income countries in a way that a large part of China did? That could be another major secular trend if we get a rapid move.
But the big thing that you have to watch there is that the leadership in China wanted to make that change. It's very much-- it's much harder for leadership in these other countries because it's not a simple flicking the switch on and off.
JAMES HELLIWELL: Supertankers eh? They don't sink quickly.
JAMIE MCDONALD: No. [laughs]
ROGER HIRST No. And that's it. That's the biggest-- the supertanker trends are the ones that define everything. But we should be trading more cyclical and more the tactical on that.
JAMIE MCDONALD: Yeah.
ROGER HIRST: Because I'm going to be dead before the end, the next big supertanker trend. So that's the way that a lot of these things are working.
JAMES HELLIWELL: I think we ultimately all end up somewhere in the middle, don't we.
JAMIE MCDONALD: Yeah.
JAMES HELLIWELL Kind of how we started. So we're thinking secular, cyclical, and tanker trends.
JAMIE MCDONALD: Supertanker, speedboat.
JAMES HELLIWELL: Yeah. And actually roll in a nice little--
ROGER HIRST: And you have to become more hit and run. I mentioned the concept of am I going to invest for 10 years? But if the GDP cycle becomes more volatile, you have to have a hit and run mentality, which is trade and watch it more closely than perhaps you would have. Because these might be two-year trends not 10-year trends.
JAMIE MCDONALD: All right. So obviously, we need to be aware of all of the trends and the different time horizons of each one. But what's the best way to look at these trends?
JAMES HELLIWELL: You can put it all together and ultimately see it in the chart, I think, can't you? That's ultimately what we need to discuss.
ROGER HIRST: Absolutely. I mean, the easiest way to see the long-term trend is a prices with a chart. The short-term trends are also prices drawn on the shorter scale. So charts are the best way to look at them.
JAMIE MCDONALD: Next section on charts?
ROGER HIRST: Absolutely.
JAMES HELLIWELL: Indeed. Cheers.
ROGER HIRST: Sounds good.
JAMIE MCDONALD: Here's to charts.
ROGER HIRST: Cheers. Charts.
[laughter]
Fucking hell.