Ep.54: Why Russia Won't Invade Ukraine & Are The Fed Doomed To Fail

Hello and welcome to episode 54 of the Market Maker podcast. And a couple of things to start off with. First of all, hope everyone stays safe and sound. We've got a pretty monstrous storm hitting the UK shores. I think we've already seen— you saw some images this morning, right, Eddie, of trampolines and dustbins 100 feet in the air in Cardiff, I think, or somewhere in Wales. Is that right?

Yeah, some, uh, some random objects like 300 foot in the air. So keep your head down today, you don't want anything smacking you in the face.

Yeah, but honestly, I hope everyone is safe during the, during the next 24 hours or so as it passes through. But otherwise, a massive thank you to not just the internal team at Amplify for the new Crypto Tech Sim that they've put out. And this week they launched But for everyone who took part, we had an overwhelming response. We had, I think, 650-odd people take it on Wednesday afternoon, which was fantastic. So yeah, thanks very much for everyone who attended that. If you haven't done the new one yet, I mean, other than those people, they're the first to go through it. So get involved. All you need to do is just go to AmplifyMe.com, find the FinEx Accelerator, and sign up. We've got another one happening on Wednesday. Next week. So love to see you there. And then thirdly, you probably just heard there, the voice is not Piers Curran. It's Eddie Donmez. And so again, Piers is— while we're here fending off, defending the shores from a storm, the biggest in 30 years, Piers is sunning himself somewhere in Southern Europe, I believe.

He's always somewhere. It's either the Bahamas, Seychelles, Mauritius. Or in Tuscany. So he needs to get back and do some work, if you ask me. There you go, I'll step in and take the reins. All right, cool.

Well, look, as per usual then, a quick summary of some of the, the topical headlines, and then I know there's some, some definite stuff that we can look at, um, with your expertise as well, Eddie. But this week certainly dominated still by what's going on with Russia and Ukraine. Biden, the US president, continued to sound very assertive over the situation. Saying that it does remain possible that Russia will invade Ukraine and that they're in a threatening position despite all of the things that Russia is saying. So we'll delve into that in a moment in a bit more detail. Otherwise, in some of the other major asset classes, gold futures have briefly topped $1,900, third weekly gains that we're seeing there. A lot of sparking of safe haven demand given that, that geopolitical risk increasing. I saw Citi overnight, they upgraded their near-term gold forecast looking for $1,950. Citing geopolitical tensions from 1825. Something I saw you mention on LinkedIn, Eddie, was Elon Musk. He made his second— or he has made the second largest ever charitable donation. What was going on there then? How much has he given away of his wealth?

Yeah, I think what my point was on LinkedIn was he gets so much stick. Mainly from you and Piers, but mainly the Democrats, I would say, particularly Elizabeth Warren and Bernie Sanders, for just being a billionaire. So I thought I'd give him a bit of positive propaganda and point out that he did actually donate $6 billion worth of Tesla shares. I think filings were from last year. That's when he did it. So yeah, he gets so much stick for not paying his taxes and This comes off the back of, I don't know if you saw last, I think it was last year or very recently, he was talking about the UN World Food Program and saying about where $6 billion went. And he said, "If I had $6 billion, I would solve world hunger. I would sell my Tesla stock right now." So I don't know if that charity money went there, but at least he's doing something with that money. You know, of course there's going to be people saying, yeah, it's a tax write-off, but it's still—

but $6 billion is $6 billion, right?

For a good—

for a good cause. So yeah, I mean, I'm a hater, I hate Elon Musk, so I mean, he is writing off his tax, but that money is going to a good place. So yeah, I mean, I agree. So all good there. But he's landed himself a little bit of hot water overnight. I think it came out where he's tweeted I think he was tweeting in a thread about crypto and it included then some sort of satirical comparison between the Canadian PM Trudeau and Adolf Hitler. So, and then he's pulled the tweet.

I think the guy must have gone too far. Has he, has he realized he's gone too far for the first time in history?

But well, I mean, look, we're here talking about him, so I mean, he's Here we are. But yeah, I mean, other than Elon, a couple of other things that have been going on. UK inflation. I don't think it's a big surprise when you see these numbers.

I know you pick up a normal—

if you're just a man in the street picking up the paper and you're like, inflation's 30-year high, you're like, oh my goodness, I'm feeling the pinch. I was looking at the individual basket breakdown. There's some products in your normal your normal weekly shop, like margarine prices are like 40% or something. And you're like, okay, that doesn't feel like a lot when you're paying like, I don't know, 20 pence, 30 pence. But when you do a whole shop for a week, and actually there's a meaningful difference where there's a £10 difference or something, that's a lot of money for a lot of people. And so the problem here, of course, is the direction of travel, because the number came in at 5.5% in the UK. Touch higher than expected. It's a 30-year high, but the Bank of England have already said it's going to go to around 7.25% in April. We've got a massive leap that's going to happen in energy bills. Taxes are going to go up. So yeah, I guess this is a lot of the issue many central banks are facing, which is the threat now to what action follows that you're going to do in response. To then what that might do to the implications for the economic performance thereafter. And certainly, I know with the Fed— well, with the Fed 50 basis points, I mean, here we are a week later from that red-hot inflation reading. I think we saw 95% priced in for 50. I checked this morning, that's now down to 29% now.

Let's just say AC nailed it. What did you say? There's 30 days to go. Hold your horses.

I just think that every time we do this podcast and we go back and we look at the week and it's like, whether it's inflation, whether it's a single stock, whether it's a crypto, the market always overreaches in the first instance, nearly always. Now, I'm not saying 50 basis points, I'm not writing it off because just like it's gone from 95 to 29, it can go up to 95 again. The point I was making was like, don't just make the assumption that 30 days out it's a shoo-in, because 30 days in financial markets is a lifetime. I mean, if Russia goes to war with Ukraine, well then, you know, Kishore, 50 basis points goodbye then at that point. Well, or not.

Absolutely. I think, yeah, it's— you've been in the market a long time and you can see the psychology of markets always overshoots and then pulls back. And it's kind of the same as what you're seeing with I'm not going to say tech, but high-performing tech. So your Shopifys, and those companies, of course they're going to come back, but you see your Paypals, your Shopifys, they're off 46% year to date. Over the last year, they've been cut in half, literally 50, 60% down. Do I think they're going to pull back? And even your Facebooks. Yeah, I know we've given a lot of, you know, negative catalysts on that side and the commentary around that. But are they going to pull out the bag in the next, let's say, medium term? Of course, I believe they will. Sure, there's some low profitability tech, the high growth, more speculative names that some of these are just not going to make it. And they've been punished correctly, in my opinion, down 70%, 80%, 90%, talking about the disruptive tech names. That's really like a venture capital-style investment. You are trying to pick one winner out of a basket of 100, and that's going to drive your returns. But some of those have been punished correctly. But with your Shopify, it's particularly Shopify, the fact that the market's gone so far down is speaking to exactly what you were talking about.

Well, it sounds like you got a little buy the dip there on your Shopify holding.

Well, people have been banging the drum about Facebook. Is it time? Is it time? But I think a Shopify that that's got such a great tech story, but is also then linked to the global economy in terms of arming the rebels, giving everyone an ability to have a shop front and things like that, plays into the secular trend of e-commerce that is not going away, obviously. But the fear is, and why the stocks were punished, is because the economy is now decelerating in terms of the economic growth that I know we're going to talk about a lot later on.

Well, taking that e-commerce type of element and taking that on a slight tangent, but JPMorgan this week, they came out with a report. They're the first bank into the metaverse, opening a lounge in the blockchain-based Decentraland. And I just saw this tiger roaming around this really bad-looking lounge with a picture of Jamie Dimon on the wall. So what are they saying? I know they did issue a report, and actually, If you want to read the full extensive JP piece on the metaverse, which I highly recommend you do, it's really great analysis, just jump on Eddie's LinkedIn account, Eddie Donmez, and he's— just go to his post and you can access the full report. But Eddie, is there any highlights out of that report that you saw?

Yeah, uh, crypto and the metaverse is of course, uh, gaining traction and is gaining more mainstream attention. And of course, like we joked about Jamie Dimon was, of course, criticizing Bitcoin and trashing it. Of course, he's long to the eyeballs crypto and the metaverse, but that's another story. But yeah, it's really just— there was a great report published and it's talking about the $1 trillion metaverse opportunity. And I really liked the fact it was really just calling out hype versus reality. What's realistic? What's not? Because there's, of course, a lot of hot air in terms of what it could be, And then the reality of it is going to be, of course, very, very different as we kind of move 5 to 10 years, what that's going to look like. But there's some really good stats and analysis. I'll let you read it in the show notes and we'll link that post. But $54 billion is spent on virtual goods every year, double the amounts spent to buy music. So again, with these gaming M&A and Roblox, of course, got punished a little bit after earnings. There is a huge amount of demand to spend time virtually playing games, transacting virtual economies, and things like that. And what they term it as is metanomics, metanomic models, which is basically metaverse economic metanomic. And 60 billion messages are sent daily on Roblox.

That's just insane. That's insane. I was watching. So I went on a— this is what my life is like now every weekend. So I was on a playdate. And then so my daughter's friend has got a slightly older brother and he was, he was there on his tablet playing Roblox and he, he was just chatting away and it's just carnage. I don't know if you've actually seen them playing it. It's just a whole bunch of these little Lego men going mad, just shouting out. People just talking nonsense. But the message rate was insane. It was just like pop, pop, pop, pop, pop, pop. And I mean, and he was jumping out of these different zones or rooms. And it was— I know I sound super old now when I say it. Completely wrong terminology. But yeah, it was incredible. And just watching him navigate around as well. Because even my daughter, who's like 3, watching her just utilize— now she can work my PC. My laptop, my phone, and she can do all three at once. She's basically—

yeah, yeah. I think with Roblox, I haven't seen the latest earnings report, I have to admit, but I remember last earnings report, it was really, uh, one of their key metrics, of course, is time spent on platform, right? How, how many hours are people using in terms of gross volume? But of course, you can get to a per-user kind of time spent on platform by dividing it by the number of active users. And it was some insane stat. It was something like, on average, each Roblox user spends something like 3 hours a day on the platform. And it's just, in terms of my brain, when I think that, I think there's so much opportunity then. If someone's spending 3 hours of their life, regardless of how old they are, on there interacting socially, virtual goods, because of course you want to show off if you're a kid, buying new armor and swords or things like that. And then advertising potential as well. Imagine there where you, like you mentioned with the JP Morgan metaverse, the framed picture of Jamie Dimon, imagine advertising and stuff like that on the walls. There's a huge opportunity obviously there.

Yeah. But the interesting thing was you mentioned hype versus reality. And I've got a friend of mine that I knew back at university and he works at one of the world's largest advertising agencies. And I was talking to him about this whole metaverse thing. And I was getting all excited about it, all caught up in the hype side. And he went— I was like, what are you seeing? What are you hearing? And he was like, Ant, just calm down. He was like, people still watch X Factor and still want a primetime advert on the Super Bowl. No one cares about the metaverse in terms of the mass population. That adoption to hit that— because I'm the same as you, I think. Just watching this, this, this little virtual avatar walking around this land, I was like, you could just plaster posters on the wall. You basically, you can create an unlimited universe, basically. But then the reality of that is so many hurdles to cross till we get to that point. And it's just so interesting, he was like, no one's talking about it because it's just, it's, we're so far away from that right now and its adoption. So there's, I guess there's different he's at the much more, I guess, transactional part of it, whereas JPMorgan is trying to position itself with its $12 billion they're spending this year on technology alone. I mean, I saw the stat that they employ 50,000 technologists at JP, which is more than the entire of Credit Suisse's workforce as a whole organization, which is just insane. But it shows the seriousness in the fintech space beyond just metaverse, where a lot of these big banks are undoubtedly gonna have to head towards, right?

Yeah, and I think to your point, it's purely demographics, right? Like my mom is not gonna be on Roblox, right? But there's plenty of Gen Z and even after that entering that stage that are gonna spend that time. And like what we're doing at Amplify, right? We build simulations and experiences in quantitative trading and asset management and sales and trading, eventually we will get to a space where we will have a metaverse, right? And a room where— I'm sharing all our business plans here— but we will have a room where people come virtually to interact and do simulations in augmented and virtual reality, right? Where it's such an immersive experience that basically emulates what it is to be on a trading floor or things like that. So it's definitely the way the world's going, but it's definitely a massive demographic divide.

I tell you what, following that through, it'd be really interesting given the pivot that we saw when it went through, um, floor-based to screen-based trading in the late '90s. When we go from Web2 to Web3-based, let's say, trading, it'd be interesting to see whether you get a revert back to type of characteristics that, let's say, you do a simulator trading floor in an old style where it's physical but it's physical in an avatar form. I wonder then, like, um, how that would play out. It'd be interesting to see the full circle effect of that. But the other headline, just before we get, we get more serious, on a slightly lighter note, I saw your boy Kanye is coming out and he's boycotting, as, as he always does. He's always controversial, of course. Kanye West is boycotting YouTube, Spotify, Apple, and Amazon. With his new album, and he's basically going to have it exclusively only on his own, of course, platform called the Stem Player. Have you seen the Stem Player?

I haven't seen it, but you know who it reminds me of? Who else is creating their own social media platform?

It's Donald. Yeah, it's Donald. They're going to team up. He's going to have the— yeah, he's going to have the Twitter replica from the man Donald, and then he's going to roll out the Stem Player. I checked out the Stem Player, quite tempted to make a cheeky purchase.

Oh really?

It's like this little disc about the size of a CD, but it's about an inch thick. It's kind of like a rubber shape with a, with a, with a cross on it. And basically, so when I, when I was at university, I used to, I used to mix and we used to have decks and we used to have what we call a Korg pad. So anyone who plays piano or anything like that, this electronic screen that you roll your finger over as a synthesizer to make different sounds. So he's, he's created this disc player that's got— that you can basically roll your thumb over and it isolates single channels of the, of the music that you're listening to. So you can live mix your own, his music basically.

So it's a, it's a Walkman player with a, with a screen, is that what you're saying?

Is it? It's got an ability to um, it's got ability to add your stamp on someone's music because you yourself can integrate your own flavor onto it. And then like, okay, I sound like a salesman.

I'll take 5.

Oh yeah, you can basically control vocals, drums, bass, isolate parts of the track and stuff like that. So if you're into DJing, it's like a live, uh, VJ kind of thing, like visual thing, but you're just doing the audio. It's quite cool. $200. It's a steal. Anyone who signs up, I'll give you $50.

Yeah. Drop my affiliate link in the bio.

No. All right. Look, let's start then with a bit of an update of where we're at year to date. We're several weeks in now and we've seen the most volatile January in a long time. It still continues to be pretty volatile given the Russian situation as well. What's that looking like in US equities and on a sector basis as well at the minute?

Yeah, I mean, so I'm looking at a heat map essentially for the viewers or the listeners on Spotify or Apple Music. So of course we're seeing a lot of volatility because of this whole inflation picture, and then the Fed, you know, just come out of really nowhere with a— or the market's pricing a potential 6 to 7 hikes. For this year. And as you would imagine, as we've just discussed, those really speculative tech names have taken a battering, um, you know, with the, with the higher discount rates and things like that. And real, a rotation, uh, into value really. And what I'm talking about there is your defensives, industrials, energies, and things like that. And that's really painted, uh, the picture of, um, the heatmap of what I'm looking at. So you can see the real stark divergence looking at the large-cap names now. So Tesla down 17%. Of course, that's its own roller coaster in itself. But then you've got the contrast of energy, which is the brightest green on my screen right now. So Exxon up 28%, and it had a really good end of the year as well. Chevron up 14%. ConocoPhillips up 26%. And what was, I think, even more surprising, I would say, for me is that Google down nearly 9% year to date after definitely the best earnings report out of all the big cap tech stocks. You know, if I was to pick one, much like, like Piers says, Google is the most resilient, I think, um, in terms of those big cap tech. But, and they had the best report, but it's down 9%. You know, actually, Apple's only down 5% this year. So you can see how the market is so sensitive to this current situation, which we'll get on to, is higher inflation, higher rates, and then now this whole Russia-Ukraine conflict that I know we'll talk about later. Um, it's just put the market a little bit on edge, and you can see this reflected in the volatility index, the fear gauge essentially, um, which is up 24% year to date. So the VIX and volatility does remain elevated as I assume portfolio managers are buying protection. Um, you know, not, you know, let's say the Fed then pulls back on those rate hikes and it's maybe 3, which is right, I would say my base case. Um, tech, big tech, uh, cap tech that is profitable, that does power the market, you know, you, you don't want to rotate completely out of those because that's really the best, you know, uh, I, I, for the next in the short term and near term are going to be the best performers. But you want to buy some protection. You will also want to buy some value stocks. And there was an interesting graphic coming out of the— I think it was the Bank of America Fund Manager Survey— the investors have never been as bullish as they are right now on value versus growth. So that really speaks to where we are in the market in terms of really favoring those kind of defensive names. What was interesting to me from a sector rotation, sector performance perspective is any— sorry, healthcare which is generally seen as more of a defensive name, is down, I think, 9% year to date. So really, it's kind of March 2020 vibes where there was nowhere to hide with yields spiking. And, you know, we all remember those nightmare days. But yeah, even some of the defensives, you know, not performing too well. And then when you've got the fear of this kind of recession, you know, really being elevated at the moment, you in the second half of the year, that then really takes the steam out of those cyclical names that, of course, benefit when growth and economic growth is high or accelerating.

It's funny just listening to you talking about the healthcare being down, even though defensive, then talking about really high inflation. Both of those, in their conversations, what, 2 years ago, you'd be going, "Oh, so how high is Bitcoin? How well is crypto doing right now?" Because before it was always, That's the flight to quality. That's the inflation hedge. And here we are, Bitcoin still sat at that $40K for the moment.

For me, Bitcoin has never been an inflation hedge. It's a risk-on asset, period. When liquidity is flowing, financial conditions are loose, money will flow there. It's a hedge against basically money printing. Essentially. So when the Fed and there's more debt, there's money being printed, it's a hedge against that monetary, basically currency debasement, in my opinion. But right now, it's very clear that we're in a risk-off phase. There's fear in the market, there's volatility, and of course, you're going to pivot out of those high beta names, Bitcoin, your high, let's say, disruptive names like ARK. So it's never been in my opinion, an inflation hedge.

How is, uh, Cathie? When was the last time you spoke to her?

Well, we had a Zoom call, uh, in January. It wasn't looking too good for her, but no, no, I think she was on CNBC yesterday and she just had another clanger basically. So she was on CNBC getting interviewed, and obviously ARK holds Zoom as a, as a stock right? And something that popped up on her screen was, your time is running out, which means that she was on the free version. So it was just like, it actually happened, it actually happened.

The—

came up, um, and it said, look, you're running out of time. And so it shows that, well, of course, on the computer she was on, whatever that is, she wasn't actually paying for Zoom, which was just another one in that kind of She's having a terrible time. Let's just put it that way.

But I mean, if you're investing in her ETF, I mean, surely that is a long-term speculative proportional minority makeup of any of your holdings because of the nature of what it is in an innovation fund.

Well, it should be basically in your whole—

So why I don't get why people are so upset or so frantic about it. It's like, well, that's just the nature of what you're investing in. And so it went up a huge amount initially and now it's come down a lot. So such is that type of investment.

I think in terms of where retail were positioned, of course, over the last 5 years she's had amazing performance. So let's give her massive credit in terms of her inception. The ARK funds have done incredibly well. That's where retail have been making a lot of money when financial conditions are loose. After the COVID crash, the stimmy checks, low monetary policy, low interest rates, times were good. Everyone's been positioned in those funds. Bitcoin, I would bucket into that, the high beta names making a ton of money. And of course, generally, if you're investing in those, you've never seen them go down, or you've seen them go down very little. In this new new regime, if you like, of higher inflation and potential higher interest rates, then of course there's going to be volatility.

Yeah, just two other stock stories that I saw. Amazon have reached a worldwide deal with Visa accepting payments on their credit cards through its stores, and that was going on for months and months. And then the other one was about Walmart earnings I saw exceeded expectations. Uh, any thoughts on that, just given what you're saying about the sector movements that we're seeing at the moment, given the nature of their business?

Yeah, not too much. I think Visa, um, in terms of, you know, they got, they got pulled by Amazon, isn't that right? Yeah, in the UK it was as a kind of trial, and everyone was calling for the worst, saying they're going to pull Visa kind of payment processing all over the world, and that would obviously be a massive hit to, to someone like, like Visa. But they're, they're up 4%, year to date. So they're slightly more resilient as transactions are going on. But then again, if you're looking forward into the second half of the year, recession risk kind of increasing in likelihood and a not-so-soft landing from the Fed, then you're going to think, actually, you know, you're not too, not too keen on that. In terms of Walmart as well, it's those consumer staples that, of course, as prices go up in terms of supermarkets, people and not gonna not get margarine, or they're not gonna not buy any fruit and avocados and things like that. They're gonna keep purchasing them. So those defensive names, uh, definitely outperforming those kind of more, more, uh, high beta names.

Okay, cool. Well, let's, let's delve into the, the Russia-Ukraine side of things. And I, I guess I can kick it off with— we're recording this on, on Friday the 18th, so depending on when you listen to this, I'm sure the situation may have evolved. But as it stands at the end of this week. The Russian Foreign Minister Lavrov is going to meet with US Secretary of State Antony Blinken in Europe next week, so the week coming. Russia told the US in its official response to security proposals from Washington that it has no plans to attack. They've, they've kind of stuck to that all week. Regardless, Biden is going to speak to transatlantic leaders today about the Russian troop buildup. The Russian Defense Minister is going to be speaking with the US counterpart as well today. So one thing this does mean is there's going to be a heck of a lot of headlines flying around. And I think that's definitely one thing if you are not used to watching short-term markets, so intraday, you could easily get caught the wrong side of this. So a couple of kind of ground rules for anyone who does look at short-term markets is always think about the source of where that information is coming from because having seen this initial conflict in 2014 and other conflicts over the years, definitely dependent on the origination of that piece of news, the same event can be reported completely differently. So in this case, you know, IFX or Russian news agency, or if it's a Ukrainian, or if it's American or Western European, you've just got to be conscious of the fact of not over-committing and jumping on one piece of information without them seeing it line up with other, other credible sources. So trying to trade the intraday noise in a situation like this, I'd say unless you have access to the fastest news aggregation software or individuals who will service that job for you, which is only really for professional investors, as a retail trader trying to trade some of these headlines, I think forget it because you're going to get smoked in the wrong direction. Um, taking a positional play thinking, you know, this is going to get worse, my belief is because of XYZ, therefore like you said, I want to pick up some exposed kind of hedging of that risk by the VIX or via some other play, sure, that makes some sense. But trying to trade outright to catch these moves Forget it. The other thing is people often have this preconceived conception or perception that news just comes from Bloomberg. And I can see why that is because all institutions will have Bloomberg terminals. But I can tell you now, when it comes to this type of information, Bloomberg are horrendous. They are so far behind the curve, it's unreal. That's because they report financial news. They do not report on the scene in some small village in Ukraine because that's not what they do. And so what I would do and would have done in the past is I would find that journalist who works for the BBC or for a UK newspaper or Ukrainian newspaper, and I'd follow them on Twitter, for example, because they're on the scene firing this stuff out in real time. Of which Bloomberg typically would be minutes later. And so although you need eyeballs to move the market, if you can get a time arbitrage, that's when then you can trade these headlines. But if you're not doing that, forget it.

So in terms of— so that's obviously on the short-term basis. In terms of a like actual scenario happening and the incentives behind it, how much did you value in your time listening to like RT Russia News, or, you know, basically foreign news agency. Because if you listen to Al Jazeera, you get a different story. If you're listening to RT News, you're getting a different story. If you listen to CNBC, you're obviously getting the, the American view. How much in your career did you value, in terms of the actual— from the Russian side, what is the incentive system? What are they actually going to do? What do they really want? How much did you value that?

Yeah, I, I think a great deal. Um, I know it sounds like it would be exhausting to follow all those kind of channels of information, but a big part of, I think, what my skill has become is to be able to determine the strategy and how then governments like Korea or China or Russia use propaganda to flex on their optics to service what it is, is their end objective. And so in order for me to determine how serious or not I believe, say, Russia is, I have to see what Russian media is reporting because that's coming from the state. And so that gives me a degree of how they're lining up and whether or not they're going to make a strategic move in this, in this instance. Then I kind of play that off and I think about, well, why is Biden being like he is. I mean, all week Biden has been banging the drum. I mean, the last shot I saw yesterday was a classic Trump shot. He's taken one out the playbook. This is when they have the chopper in the background and the chopper's going really loud and they go, 'President, President, what do you think about Ukraine, Russia?' And he goes, 'I think that—' And it's like his hair's blowing, the chopper's going.

It's a classic, like he's being flown in from the front line.

But that is curated. Like, that's not like an impromptu shot. That is done on purpose. And even though that has nothing to do with him having military expertise or anything like that, this is all part of how this works. And, and so, look, to give you an idea, the reports that we've had this morning is that Russia is— they're gonna, they're gonna conduct strategic drills on Saturday. Putin, according to Russian press, so again, this is optics, he's going to oversee it personally. I mean, in your head now visually, you've just got this picture of him sat there with his shirt off overseeing these missiles in the snow on a bear. But the point is that if you think about what has been happening, and I've got a few points to cover on this about my overall thoughts on what might happen here. But, you know, think about North Korea, it's the same. We see intensification of these provocative kind of steps, firing ballistic missiles. These tests at the weekend, you know, the Western press in Europe and the UK and the US, they really latch on to the idea that it's going to be ballistic missiles, that they really hype it up because that helps their own domestic agenda to then garner support for then being more forceful in the actions that they take. And it ticks the box for Biden on his ability to reinsert control on the foreign affairs where he's totally blew it with Afghanistan.

And distract away from inflation. And that's a massive thing, right?

So you're absolutely right. For me, the biggest pivot he needs to make as far as the electorate is concerned is they are going to feel some serious pain. Now, I think people in markets are fairly focused on the fact that US growth, US jobs, they've all surprised to the upside. And it's been like, oh, okay, so that means that the economy underlying all of this is strong. Omicron's over. It can survive these rate hikes that are pending. But actually, I delivered a session at UCL, University of London, this week. and I was talking to the lead professor of that program, and he was talking about the February preliminary University of Michigan sentiment report. So that's basically a report where they telephone thousands of different consumers and they ask them about how do they feel about economic conditions at the moment and the future. And the impact of higher inflation on personal finances was spontaneously cited by one-third of all consumers, with nearly half of all consumers in the US expecting declines in their inflation-adjusted incomes during the year ahead, which will become a reality. We're seeing that in the UK. Saving rates are getting slammed at the moment. So as you were kind of alluding to and you're talking about, is this— and we can get to this in a second— is this threat of then the risk of recession increasing over the course of action the Fed might take with hikes. The consumer at the moment, if they lose that confidence to spend, or is this what then the Fed actually wants to engineer to cool demand to control inflation? Well, we can discuss that in a moment, but these are all reasons, I think Anthony's absolutely right, why Biden has to make a big deal of Russia, because at home there's some really bad things happening with inflation. And so It's Russia now. If you think about 4, 6 weeks ago, do you remember it was Saudi Arabia? They were having pop shots left, right, and center saying oil prices are moving higher, it's Saudi Middle Eastern fault. There's no word on Saudi now, and oil prices are higher than where they were because now Russia's the bigger ticket in town to talk about in that sense. The final word I'd say on on this situation is not so much about the economic side, it's more about the geopolitical side. I saw a really great report from a professor at University of Melbourne, um, in Australia, and she outlined 3 points of why she said that all-out war, Russia-Ukraine, won't happen. So I'm just gonna extract out some of the— those 3 major points. Number 1, The massing of troops, both as defensive maneuver that fortifies Russia's southwest border, and as a signal to the West of its seriousness with Russia, views the position of Western forces on its doorstep. So an invasion of Ukraine would force Western countries to increase their own military preparedness for war with Russia, if not mobilize to act to defend Ukraine. And that's tantamount to further reduction of Moscow's security. So it's counterintuitive for them to actually do this or go too many steps too far beyond trying to posture and leverage in negotiation, because it's going to mean there's even a greater threat of military presence against them. Number 2 was Russia's geopolitical strategy. Now, you go back through history since the fall of the Soviet Union, they've always, um, Well, in terms of the military movement, they haven't tended to involve, involve overt aggression. Rhetoric, yes. Actually military personnel movement, no. So there's a pattern recognition here of the type of behavior that we're seeing, and this gets seen in other areas of conflict like with Korea and China and so on. Sounds aggressive, it very rarely tantamounts to something of military action. So that's another thing. Russian foreign interventions have been based on pragmatic consideration of proportionate force, which is necessary to meet its interests. That's very important because it gets, I guess, pigeonholed by Western media as in they're, you know, they're very out of control, it's on a knife edge, it could happen any moment. We're talking of war here. These things don't happen too much like that these days. However, we will talk about— there's obvious risks to that scenario. And then thirdly, if the seizure of Ukrainian territory was of significant Russian interest, think about it. That opportunity was in 2014. That's not now, because now it's harder. And now there's more repercussion because there's more involvement. Globally in this matter. If they were going to do it, they would have done it. And now's not the time. And so with all of this, of course, there's been other reports about, okay, sanctions. Putin can survive those sanctions because he's making more money than ever because the price of oil at the moment. So great. The summary I would say of this, um, is Russia uses its presence similar to that of, say, in Iran uses its nuclear program. If you think about it as a means of extraction of concessions from the Western world, I see it exactly like that in this instance. So it threatens, but it will never fully act because to do so would mean an exchange of leverage for punishment, and they don't want to do that. It's self-inflicting. And so this is just a very serious game of poker that's going on, is what I'm saying. But welcome to the world of geopolitics. This is what it's all about. So I think in summary, Biden's full of BS when it comes to this. I think he's absolutely got an agenda, as we've just discussed. I think he wants to manage his foreign policy and how people view him on that front after Afghanistan and other situations. And I think inflation is his biggest headache. And I just think the winner here is Vladimir Putin, right?

I agree with all of that. I think if you listen to the Western media, Putin is a thug, you know, he's a madman. He's not. He's a very intelligent, calculated leader, much in the same vein as Xi Jinping. They're thinking in like They're playing 3D chess while the rest of the world are responding to this. He's thinking 3 years out, 5 years out. I don't think it's in his interest. I don't think he really wants war. Very much posturing. We do need to think about, and just for the listeners, in terms of when you posture so much, especially like we've seen in 2017 with North Korea and things like that, there's always an increased chance, and this is what I worry about, of an accident or a misinterpretation, or a misinterpretation, or, you know, a loose cannon, much like there was with the Capitol riots. It only takes— of course you're going to attract out of a million people one or two that take these extreme views too far. So when you think about Ukraine, you've— much like the other kind of Eastern European states like Romania and Moldova— is you have Russian Ukrainians and you have more European Ukrainians, those that, you know, don't want kind of Russian interference. And what you have to at least calculate or take seriously as a risk is one of these people already in Ukraine, even if there's not an invasion, taking things too far or, you know, firing a shot or taking some provocative action that then accidentally triggers military action from both sides. So I think, yes, my base case is this doesn't happen. It's not in anyone's interest, in my opinion. And if I was Vladimir Putin, I'd be doing exactly the same thing. Do I want NATO in my backyard, getting closer and closer to my territory? Would— I always like to say, Would America allow Russia to take Canada, or to have an increased military presence in Canada or Cuba? Of course they wouldn't. They would be in the exact same defensive position. So yes, my base case is this doesn't spill over, but accidents can happen. But I think what Ant talked about in terms of even myself listening to all these headlines fire out, you know, they're invading, they're not invading. The one thing that made me laugh was like, yes, an invasion is expected on February the 16th. In what world would a military invasion be, be well known, right? The whole point is it's meant to be a surprise, or it's meant to be a, you know, a big, a big move to catch the opposition, you know, off guard. It wouldn't be broadcasted to the whole world so they know exactly when they're invading.

James Bond is not actually— didn't actually die. Yeah, he's in Russia right now. He got the day out. But yeah, I mean, that, that type of thing. I mean, the amount of comments that have come out of the, the US where they've made claims and then had no supporting evidence to back up then these claims, which is what makes it so transparent to me of what they're, they're, they're trying to do. But look, I mean, I won't say any more on that matter, but I know just to finish, Eddie, you wanted to touch upon just generally, I guess, what we've talked about with equities, the risks, the 50 basis points, lots of yield movement that we've been talking about in recent podcasts, but this idea then about Fed strategy and managing 2022, I guess. Anthony Cheung. So what are your thoughts on the yield curve inversion and risks of recession, good, bad, and how can they engineer controlling inflation through a rate hiking sequence?

They're in a real tough spot, to put it lightly. They've got one big problem at the moment, and that's inflation. Traditionally, there's 2 ways that they can slow inflation, by hiking short-term rates or by forcing long-term interest rates higher. Historically, the Fed really have used rate hikes to engineer recessions, but actually soft recessions in the sense of just to take some heat off the economy. It's termed opportunistic disinflation. It's to keep generate that slack in the economy to keep inflation in check whilst basically managing their dual mandate essentially. But the point is every Fed tightening cycle has ended in a crisis. And the probability now of a Fed mistake or a policy error, I believe, is highly elevated just in terms of where the market's priced. Even you see this now in mortgage rates, for example, the market's moving and the Fed hasn't even moved yet. So I believe they're highly behind the curve. They should have gone. I sent you a text, I don't know if you remember, in the last policy meeting with some expletive language about Powell saying he should have gone basically in Q4. Now they're behind the curve. The market's moving and pricing in 6, 7 hikes. Getting ahead of itself. Mortgage rates are kind of, um, they're 3-4% now if you're looking at the 30-year mortgage rate in, in the US. You've got high inflation now coming again from if this Russia situation does, you know, evolve. You've then got more oil price inflation. You've got, um, and just remember all those Eastern European countries, they produce a lot of fertilizer as well. So it, with everything else, you've still got supply chain issues are slowing in terms of their severity, and they are improving. I saw a really interesting chart showing that, but they're still very, very elevated. If you throw higher fertilizer costs into that, um, palladium and all the kind of, um, inputs or exports from Russia, inputs for all of the Western world, you've got then higher food prices into economies and households that have— let's, let's be clear— have been in very strong state after the stimmy checks, um, the work from home, people still getting paid and things like that. However, the purse strings are tightening. Oil prices, the price to fill up your car are increasing, the food prices are increasing. You've got a lack of supply in terms of labor. So this is where the, the wage pressure is coming from, which again is not A great sign for the Federal Reserve. So they've got a lot of things that are going against them right now, and they don't know what to do. I believe that they don't know what to do in March. Do they go 50? Do they go 25? Do they go 50 and wait? I don't think they actually know what they're going to do in March. And that's probably where the market pricing that was 100% priced for March 50 is now gone down to a 30%, 40% probability because the market's now going, actually, we don't know what the Fed are going to do. Because they don't know what they're going to do, but they're not in a positive scenario. One interesting thing I did see from Pozsar, who is a Credit Suisse strategist, very well known, has the ear of the Fed, is basically that the Fed may actually want to move down the Powell put and allow a bit of volatility. And he actually termed it as the Volcker, but vol standing for volatility, and letting equities and Bitcoin and all this speculative excess come out of the market because it may actually then force some more people into the labor force to actually ease those wage inflation, um, that we've seen. So has the Powell put moved down a little bit, maybe to 3,800, or, you know, a little bit lower? You know, we'll see. But they're not in a, in a great situation at the moment. Um, that's my, my take on it.

Yeah. And then what was it, Goldman Sachs a few days back? They're starting to get a little bit more cautious in their outlook. Yeah, alongside some other US banks. And MS is always— yeah, it's always led on that side.

They cut their S&P target from 5,100 to 4,900 based on lower valuations and, uh, and higher inflation. They've actually again projected out a recession downside case all the way at 3,600. Um, and of course the big problem comes when you have a central bank tightening into a slowing economy. Pair this with high inflation, lower consumer confidence— consumer confidence is at an 11-year low right now— this could materially hit earnings. And this is when companies will suffer from lower demand from the economy slowing, plus an inability to raise prices from that lower consumer confidence. So, um, that's the kind of picture at the moment. So valuations coming down, the real risk at the moment is S&P 500 earnings and EPS growth is, is still strong. It's remained strong, but it's decelerating. So if you get the E, for example, in those PE ratios also coming down, then you've got a real problem because then you've got companies not generating earnings. Valuations— if you hold the— if you pull the E down, the ratio gets more expensive even if the price doesn't move. Right, so then you need prices to come down to fit that kind of multiple of a 15 or 20 times earnings. So the thing to watch going forward really is, of course, the Federal Reserve, but it's then the resilience of earnings. And if that falls out of bed, then look out below.

Yeah, I kind of like the idea at the moment of there's so much yet to be answered. Over the coming weeks going into that March meeting. I kind of like the feeling of keeping my powder dry and actually seeing how this plays out. And if that worst-case scenario materializes and you do get that 3,600-type move, being in a position then to— then I'd say you're going to get a forceful reversal if we then go down that low, and then the market will readjust for the second half of the year. It's almost like this big dramatic shift we've had to have to go to ultra hawkish mode has been painful, and I'd rather let that pain shake out first. I think if I was thinking about it more strategically as a year-long view to invest. But cool. Well, look, we'll wrap it up there. And thanks, Eddie, for taking the time out to jump on. Always a pleasure. Never a chore. And yeah, thanks everyone for listening. Um, as I said, I'll drop in the show notes the link to the Metaverse Report for JP. I'll also drop the link for our Market Maker Daily Newsletter and also the Crypto Tech New Simulation. If you haven't done it, get involved. It's free to do, of course, as per always our mission to get it out there to as many people as possible. So if you're interested in sales, trading, market making, asset management, then check it out in the show notes. All right, take care everyone. See you next week.