Macro Investing Explained

Hello and welcome to our guest session where we've got Mike Singleton, who's tuning in from the States. He's going to tell us a little bit more about himself and his background, but Mike is a senior analyst at Invictus Research, and I've seen quite a few of his videos now, and I think they're— I think they're awesome. They really break down and deconstruct what can be quite a complex macro environment, particularly given how pretty ferocious 2022 has been, into something a little bit more digestible and also practical if you're a student trying to consume this data and information and news into something more kind of investment strategy-wise. So I'll hand it over to Mike, and he's going to walk us through a kind of slide pack, how, you know, his investing philosophy and his process and how he makes sense of it. So Mike, welcome, and over to you.

All right, thank you for having me, Anthony. By way of introduction, my name is Mike Singleton. I'm the founder and senior analyst at Invictus Research. And as a quick summary, our goal at Invictus is just to provide research on the business cycle, to keep it really simple and deliver it through short, easy-to-watch videos, sort of like the business section of the newspaper, but from the perspective of a global macro investor rather than a journalist. Before starting Invictus— oops, let me go to the intro slide— I was working at a private investment firm called Broad Run Investment Management. I was the senior-most analyst on the investment team there. It was a wonderful experience. I had the chance to lead about $100 million worth of investments over my time there. Prior to that, I worked briefly at T. Rowe Price and Main Street Capital. And on the right there is a picture of my lovely wife, Mimi, and I on our wedding day. And not pictured is our son, John, who was born about a month ago. All right, let's take a step back. Most investors, particularly as it relates to macroeconomics and the business cycle, are really all over the place. We're living through a very interesting time in financial markets. Pretty much everyone has access to unlimited data. One might say we're all drowning in data, retail and professional investors alike. Uh, in our view at Invictus, information really has very little edge by itself. Um, you have access to the same data that I have. Hedge funds have access to that same data. So if there's no informational edge, where does the edge lie? The edge is in how you analyze it. And believe me, there's a lot of misunderstanding when it comes to macro, probably more than any other discipline within finance. So what do you— what you need when you have an excess of information like this, what you need is the the right frameworks for putting it all into context. You need mental models, as Charlie Munger might say. So what is a mental model? It's an analytical framework for understanding reality. Good mental models describe reality well. Poor mental models describe reality poorly. If you don't have mental models in investing or in life, you will tend to just be overwhelmed by all of the data that life throws at you. The various religions are sort of like mental models. Anthony Cheung: political parties provide mental models. Again, mental models are just ways of putting the data that we encounter in everyday life into context and making sense of it all. And like I said earlier, mental models are good if they describe the world accurately, and they're bad if they don't. And a large part of your journey as an investor is figuring out which mental models are the right ones to make central to your process. One of the frameworks, one of the mental models that's most central to our process at Invictus is our growth and inflation framework. What does that mean? Well, it says that growth and inflation are the two primary variables that drive the returns of the liquid asset markets, so stocks, bonds, commodities, and currencies, and nothing else really matters. Everything else is either A, noise, or B, an input into our growth and inflation outlook. Almost every analysis we do at Invictus, whether it's looking at the employment situation or the credit cycle or we're doing some type of market analysis, it's always with the end goal of trying to get a better grasp on the growth and inflation outlook. Anytime you are presented with new information, anytime anyone, any analyst of the business cycle is presented with new information and you don't know what to do with it, a pretty good first step is to think about how it might change your outlook for growth and inflation. Okay, so growth and inflation drive the asset markets, but there's more to the story. You can't just look at them willy-nilly. You have to have the right method of interpretation. So we look at growth and inflation in a very specific way. We look at the year-over-year rate of change, so this year versus the same time last year. The absolute level is really less important than the rate of change. In other words, we care less about growth or inflation being high or low. We care more about it getting better or worse. And this is sort of logical, right? It doesn't really matter to the markets if growth is high in absolute terms. If growth is about to crash, stocks will do poorly. Likewise, if growth is very low in absolute terms but it's in the process of bottoming, then stocks are very likely to do well. At this point, I think if you're new to macro, hopefully you're breathing a sigh of relief because as a discipline, macro has a reputation for being very complicated, but now you really only need to worry about two things. And it gets even better than that because forecasting growth and inflation— well, take a step back, not forecasting, but growth and inflation are not random. They're not unpredictable. They are cyclical, and they move in trends. So So if you want proof of that, we will go to the next slide. Here we're looking at the growth and inflation cycles going back to the 1950s. And you can see that they look like a sine curve. If you remember from trigonometry, they trend and then peak, trend and then trough, trend and then peak over and over and over again. Growth and inflation are both cyclical. And together, the real— that's real growth on the top, not nominal growth, I guess I should clarify. Together, the real growth cycle and the inflation cycle form what we at Invictus call the business cycle. So if you're an astute listener, you might have realized that because growth and inflation can only go up or down, uh, this creates the possibility of 4 distinct economic regimes, each of which represents a distinct phase in the business cycle. You've got early recovery, where growth is accelerating but inflation is still going down; reflation, where growth and inflation are going up together; stagflation, where growth is going down but inflation is going up; and deflation, which is when they are both going down together. So the first two regimes, early recovery and reflation, are broadly risk-on. And the bottom two, stagflation and deflation, are broadly risk-off, risk-on. You could think of them as being good for risk assets and bad for risk assets. It's just sort of the parlance. We'll talk more about these regimes later. But before we do that, we're going to spend a couple of minutes talking about the growth cycle in the US and what the implications are. So on this slide, we're looking at the Institute for Supply Management's Manufacturing PMI. PMI stands for Purchasing Manager's Index. So what is this? Why do we care about it? Why are we showing it to you? Invictus, we think the ISM Manufacturing PMI is one of the best cheat codes in macro. And yet so many investors still ignore it for some reason. It's a diffusion index. It's something called a diffusion index. It's constructed from the survey responses of purchasing managers at manufacturing companies. So if a lot of you are new to macro, that might not have helped at all. So I'll do my best to simplify it. But this is only a very slight simplification. It's not really that complicated. Purchasing managers are asked in a survey, are business conditions getting better or worse? If they say better, then this line goes up. If they say worse, then the line goes down. Uh, that's it. It's pretty much that simple. The PMI is indexed to 50, so above 50 means positive manufacturing growth and below 50 means negative manufacturing growth. Although keep in mind, we're still more interested in the rate of change here than the absolute level. So the PMI is just another way to measure growth. That's how we use it in Victus. We like it because it's high frequency, meaning it's reported monthly rather than, say, quarterly for GDP. And we also like it because it's a measure of manufacturing growth. Manufacturing is very, very cyclical relative to services. It's very sensitive to economic conditions, and so it tends to lead other measures of broader growth, like, say, GDP. In any case, the important takeaway from this slide is simply that the ISM Manufacturing PMI measures economic growth. It's a way of tracking the growth cycle. So, uh, if you want evidence that it tracks growth and you don't believe me, uh, you can see the PMI here next to the year-over-year rate of change in GDP. They look very, very similar, and that should make a lot of sense because they're both reflections of the same underlying growth dynamics in the real economy. Of course, GDP is reported quarterly, like we just said, instead of monthly, and that makes it less useful despite the fact that GDP essentially gets all the headlines, but that's just in the US, right? This is a really interesting chart, I think. Uh, we're obviously looking at the PMI again, and we're comparing it to the OECD index for global growth. And you can see that the US growth cycle and the global growth cycle actually track each other shockingly closely in my mind. Uh, why is that? Well, we live in a very globalized world, especially with regards to commerce. I will also add that the US by itself has an enormous impact on the global business cycle. First of all, it accounts for about 20% of global output and accounts for a larger percentage of consumption. The US tends to be a significant consumer of global goods and services. And on top of that, the US currency, the US dollar, is the primary global reserve currency. So the US business cycle has significant impact on every other country's business cycle. And as a result, the US and the global business cycles are largely synchronized. All right, here's another interesting chart. The PMI against the CRB Commodity Index, which is essentially like the S&P 500, but it's for commodities, uh, so oil, natural gas, corn, copper, gold, wheat. And you can see there's a fairly close correlation there as well, which should make sense, right? All else equal, as growth increases, so does aggregate demand for commodities, um, think lumber for homes, copper and steel for cars, oil for powering industrial activities— that boost in demand in turn pushes up prices. The price of anything is just a function of supply and demand, and the PMI represents demand. So all else equal, faster growth should mean higher prices for commodities. So in short, um, just from looking at the ISM Manufacturing PMI, you can get really valuable information about the US growth cycle, the global growth cycle, the commodity cycle, and all of this is just from looking at one diffusion index. That's pretty good bang for your buck there. If you're interested in learning more about this, Raoul Pal actually has a great video covering a lot of this on YouTube if you're interested. It's one of his oldest Real Vision videos. That's a good resource. All right. We've talked about growth and inflation. We've talked about the four economic regimes a little bit. We've talked about the ISM Manufacturing PMI and its implications for the growth cycle in the US and globally. But all this macro stuff so far has been somewhat abstract. And to be honest, it's only useful insofar as it actually helps you make money. That's your goal if you're an investor in the asset markets. So if you're forecasting GDP correctly down to the decimal point, it doesn't necessarily mean you're going to make money. It doesn't matter unless you know how and why that information drives the asset markets. And the good news is that there is a relationship between the financial markets and the real economy. And the relationship— maybe this is kind of consensus— the relationship is fairly straightforward. The financial markets are a reflection of the underlying economy. That's the relationship. Because growth and inflation trend and cycle, so do financial markets. And the financial markets do so because the economy does so. It's also important just on a high level to understand that each business cycle resembles prior business cycles, not just in terms of growth or inflation going up or down. That's obviously true, but also in terms of the asset market's reactions. Why is that? Well, because similar assets will always react in similar ways to similar economic conditions in aggregate, not specifically.

All right.

So if you want evidence that, uh, markets reflect the economy, this next slide should be pretty clear evidence of that. On the top is the ISM Manufacturing PMI, which we just talked about quite a bit, and it's overlaid with the year-over-year rate of change in the S&P 500. Obviously, that's a very close relationship. Uh, in my opinion, it's a very logical one. Um, but let me give you the right read on it in case it's not perfectly obvious. When growth is accelerating, when the PMI is moving up, Stocks tend to do better. And when growth is decelerating, going down, and the PMI is going down, stocks do worse. It really is that simple. Don't overcomplicate it. Economic activity drives trending stock market performance. I think anyone who says stuff like, you know, the market is broken, price discovery is destroyed, the Fed's ruined the markets, that's not right. And they're probably just suffering from about a bad performance. I don't know anyone who's doing really well that says stuff like that. Um, on the bottom there is the CRB Commodity Index, which we just talked about too. Um, it's a basket of commodities. We're looking at the year-over-year rate of change versus CPI inflation, which by the way is also measured in year-over-year terms usually, and they look very similar. Why is that? Well, the price of commodities is certainly an input into inflation, so that's part of it, But commodity prices are also the most liquid and economically sensitive constituent of inflation, right? When there's an economic shock, what typically will react first, the cost of your rent or the market prices of freely traded commodities? Well, obviously, it's the latter. I would also point out that generally speaking, the markets front run the reported economic data by about 3 months. Markets are forward-looking. They are what a classic investor would call a discounting mechanism. And that's extremely important to understand. The markets take economic information and they price it in in advance. Okay. All right. Back to the four market regimes. We have early recovery, reflation, stagflation, and deflation. On this slide, we're showing the backtest for the various equity sectors against those four economic regimes. And if you pause and just look at the page, I think you'll find it to be extremely common sense. When the market is pricing in better economic conditions, faster growth, healthy inflation, and whatnot, you'll see riskier, more cyclical exposures tend to outperform stuff like technology and consumer discretionary stocks and financials. Why is that? Well, people are— the market is discounting people are going to buy new iPhones, new cars, new houses. They're going to be taking out loans. When the market is pricing in worse economic conditions, it's the defensive exposures that tend to outperform— utilities, healthcare, consumer staples. And again, that should be very logical, right? Most people don't stop paying their electric bill or their health insurance premiums or stop buying toothpaste even if there's a recession. That said, I will give a word of caution on backtests because I think everyone in the finance industry has sort of a thing for backtests and anything quantitative. I think there's the sentiment that because something's quantitative, it's handed down by God, and that's not true. All backtests are highly sensitive to your backtest parameters, where you set dates, how you're defining growth, et cetera. And second, every business cycle is different. So I'll give you an example. Real estate is generally defensive, right? Which again, should be logical. It should pass the common sense test. Most people and companies really have to be in trouble before they stop paying their rent. But if you looked at 2007, '08, '09, that was a risk-off market, but real estate underperformed the broader market. Doesn't that contradict the backtest? Yeah, it does. But of course, if you remember, or if you've seen The Big Short, there was a real estate crisis going on. So if you had just bought real estate stocks in 2007, because the backtest said that they were defensive, you know, you would have gotten your clock cleaned. So the best way to view these backtests is that they are just guidelines. They are for setting expectations. Um, they're not for predicting the future. This next slide, we're looking at the same economic regimes, but instead of looking at equity sectors, we're looking at style factors. Uh, what's a style factor? It's just a way of grouping together stocks that have similar characteristics and therefore usually to some extent trade together as a group. So think small caps versus large caps, high beta, low beta, defenses versus cyclicals, and so on and so forth. Again, this slide should make a lot of sense intuitively. The top half of that square is risk-on, early recovery and reflation. When growth is accelerating, that's risk-on. So in those regimes, you should be seeing riskier exposures outperform— small caps, cyclical, high beta, high leverage, low liquidity, etc. On the bottom, You have the two risk-off regimes, so you should see largely the opposite. Large caps outperform, defensives outperform, low leverage, high liquidity. Um, and also another high-level comment: if you see a backtest that doesn't make any sense economically, uh, or intuitively, it's probably not a great backtest. Common sense is a very important skill when interpreting a backtest. Next slide is just another way of visualizing those same backtests on the prior two slides. Two things I want to point out here in particular, because they might be a little bit surprising right now with inflation where it is. In developed markets, so think largely the US and Europe, risk appetite, liquidity, strong performance from risk assets are all pro-cyclical with growth and inflation. Drawdown risk moves left on this chart. Drawdown risk increases as growth and inflation slow together. And there are a variety of explanations for this, which we can maybe touch on later. But on a high level, the reason is that developed markets are rife with naturally deflationary forces. So over the last 40 years or so, when inflation has kicked up, it's been largely benign, and at least relative to pre-1980. So deflationary forces have been Deflationary shocks have really been the larger risk to the markets since around 1980 versus inflationary ones. All right, so at this point, I have to apologize because I've lied or at least been a little bit misleading. Earlier, I said growth and inflation are all that matter. And there's a sense in which that's true if I really wanted to stretch the truth a little bit. But there's one more thing that we really need to get a handle on, and that's monetary policy set by the Federal Reserve. The reason we talk about this last, after growth and inflation, is twofold. First, growth and inflation are primary. That's really, really important to understand. They drive the majority of price action across the global asset markets. And second, growth and inflation largely drive central bank decision-making. Nevertheless, it's still important to talk about this separately, I think. Luckily, understanding monetary conditions is much easier than most people make it out to be, particularly if you're equity-focused. So first, what do we mean by monetary conditions? Invictus, we define it as the impact that the Federal Reserve has on liquidity through the financial markets. I'm gonna sip water real quick. We call it inorganic liquidity because it's the result of an exogenous force, not free market behavior. In terms of stocks, all you really need to know is at the bottom of the page there, the bottom left. Tighter policy means higher discount rates for discounted cash flows, lower asset valuations—think the price-to-earnings ratio in the case of stocks. Easier policy means the opposite, lower discount rates and higher asset valuations. And this is all else equal, right? Obviously, there's never just one factor affecting stocks. The best way, in our view, to measure monetary conditions is through real-time market indicators like the dollar relative to other currencies, mortgage rates, mortgage spreads above and beyond the risk-free rate, the relative performance of growth equities, real rates, yield curvature. You can also look at some reported data like the Fed funds rate or the Fed's balance sheet, but you have to understand that those datasets will always, always, always lag the market. If you want to see how monetary conditions interact with different equity risk exposures, uh, as in a, as in a backtest. Uh, check out the right side of the screen there. I'll just summarize it quickly. Um, easier policy, lower discount rates disproportionately help high-growth, high-valuation, riskier exposures. Uh, of course, the flip side to that is when liquidity is taken away, they tend to crash, which is what you're seeing, uh, in certain parts of the stock market right now. All right, that brings us to another important part of our process, what we call confirmation from the asset markets. So it's one thing to understand the economic data and build a model, and we certainly do a fair amount of that in Victus. But there's a second part to our process, and this is actually the more important part. We have our fundamental view from our bottom-up work, growth or inflation will go this way or that. But we will not invest on that until the asset markets are confirming it. We want validation from the asset markets before we start underwriting new investments with real capital. Why? Why is that? Well, it's because human beings, including us at Invictus, might forecast the business cycle incorrectly, but the asset markets as a whole will never forecast the business cycle incorrectly. Never. I pretty much guarantee it. Moreover, as we mentioned earlier, the asset markets will actually front-run the economic data every time with virtually no exceptions. So you'll give yourself a huge edge in terms of forecasting and more importantly portfolio management by studying the bond market, the stock market, the commodity market, the forex market, and learning what they have to tell you about growth and inflation. So Here's some quick evidence of what we're talking about. On the top there, we've got a ratio of small-cap stocks to large-cap stocks. In the middle, we have spot price of copper versus the spot price of gold. And on the bottom, we have the US 10-year yield. And, um, a lot of people have never seen a chart like this before, but they're surprised to see that they have a very similar profile over time. And the reason is that they're all trading on the same underlying macro dynamics. More or less, namely growth. All 3 of these indicators largely change— trade on the rate of change of economic growth. So, uh, if we were to, uh, do sort of a thought experiment here, if we believe based on our fundamental outlook that growth was going to accelerate, we would like to see all 3 of these indicators going up, confirming faster growth. Uh, over the last year or so, we've actually seen a historic divergence in these charts, right? You can see usually they move together Right now, they're kind of moving in opposite directions. It sort of looks like a Neapolitan ice cream carton. But we can talk about that later if you want, maybe a conversation for another time. If you want more evidence that studying the markets will refine your forecasting and, more importantly, help you make better investment decisions, then look no further than Stan Druckenmiller, probably the most successful hedge fund manager of all time. Famously compounded his client's capital at 30% per year for 30 years with no down years, and I think it's maybe like 1 or 2 down quarters, possibly making him the best hedge fund manager of all time. Who knows if anyone will ever recreate a track record like that. Stan says, "By far the best economic predictor I've ever met is the inside of the stock market. I don't mean the stock market, I mean the inside of the stock market." What does that mean in practical terms? Well, it basically means what we just talked about. He has his own expectations for growth and inflation, but he respects what the market is telling him. He respects things like the copper-gold ratio, small-cap/large-cap ratio, performance of cyclical stocks versus defensive ones. He wants validation from the markets before investing. If you've ever listened to Stan talk on YouTube or whatever, you know how seriously he takes market internals. All right, one last mental model before we wrap it up. But first, we need to answer a question, a question that we haven't addressed explicitly, and that's on the topic of time horizon. So over what time horizon is the market— are the markets an accurate reflection of underlying economic activity? To use a round number, at Invictus we say about a month, although obviously That's not a rule, it's just sort of a principle. But generally speaking, any market move longer than a month is a reflection of some economic development, the most important of which is always growth. Another way of saying that, the growth cycle drives trending performance in the asset markets and probably always will. But what about the shorter-term moves? What about the seemingly random noise in the markets? Well, a lot of it is noise. It doesn't mean anything, but we associate a lot of that noise to positioning, sentiment, and psychology. So the mental model here is trending moves are driven by economic fundamentals, and short-term moves are driven largely by positioning, sentiment, psychology. And the good news is that analyzing sentiment and positioning data is fairly straightforward in principle, although it's more challenging in practice. And the reason it's straightforward in principle is because it tends to be mean reverting. Uh, positioning tends to oscillate from bullish to bearish, and in a perfect world, we want to be adding exposure when everyone is bearish and reducing when everyone is bullish. And obviously the reason we would want to do that is better returns. Uh, when positioning is really stretched in one direction, even small counter-consensus surprises can cause big moves in price. You know, we have it in the quote there, but think of it like a rubber band. The further it's stretched, the more violently it'll snap back on a catalyst. Um, and Victus, we use a number of sources to evaluate, uh, positioning and sentiment, including investor surveys, flow of funds data from the Fed, which is longer-term data, uh, the weekly Commitment of Traders report from the CFTC, and we also look at a lot of options data. So That's the overview of the Invictus process. I don't know if Anthony has any questions. I'm happy to answer them or whatever you want to do next.

Yeah, let me— I do have a couple of questions I was noting down. And as you can see on the screen as we go, there's definitely some good resources that Mike has. So you should definitely check those out if you've enjoyed the breakdown there. But yeah, a couple of things, I guess. One, just to give further context to the listeners, is what does your daily— because they're thinking about careers as well, so I'm trying to tie in that element. What does a typical day look like for you then? Because if you're eliminating out, let's say, the kind of blast and all the headlines that are coming out every single day, how much is it following, tracking, say, single items of major news flow, like a central bank speaker saying X or a company stock coming out with an earnings report of why, or to then looking at data and just looking at the growth and various different— or looking at the other types of information that you said with market internals. What's a typical day in your life look like from your analyst's perspective?

That's a great question. And it's funny, I think that a lot of investors really like Warren Buffett, right? And Warren Buffett famously says he spends all of his day reading, He says he subscribes to 8 different newspapers. So I think that within the industry, there's this thing that everyone wants to read newspapers and be on top of the news, and I think there's the perception that there's some edge from that. I think I really admire Warren Buffett. I've read all of his letters. I don't think his edge actually comes from reading the newspaper. At least personally, I sort of separate, uh, my professional work and analysis and reading the news. I consider that more entertainment, um, and there's a few reasons for that. One is that the news is written by journalists, and journalists tend to be backward-looking just because the nature of their profession is backward-looking, right? I report on something that's just happened. You can't report on the future. But the markets, um, are discounting mechanisms like we mentioned earlier, So the worldview that an investor has is just very different from a journalist. So that's part of the value-add of Invictus is we're looking at the world the way an investor looks at the world, not the way a journalist looks at the world. Maybe that seems like a fine distinction, but as an investor, where you get your information is really important because in subtle ways, it can affect how you think. In terms of what we actually spend our time looking at, Almost all of our information is taken from, basically, call them government reports, the BEA, the various Federal Reserve surveys, and the markets. So that's where we get information that we use for making investment decisions. And I like staying on top of what Elon is doing with Twitter too, but it's just not a part of the decision-making process. OK, cool.

And then the other thing was one of the slides I saw when you were explaining about the risk-on, risk-off, and it had the kind of spectrum between the different assets and where they would sit. On the most extreme in terms of, I guess, risk appetite was crypto. Now crypto as an asset, what's your views there in terms of where we're at at the moment, and then from the clients that you talk to, to the analysis and correlations that you see? With more traditional assets, if any?

Yeah, no, that's, that's a good question. So I think the most important thing to understand is that crypto is a risk asset that trades with financial conditions, very closely with financial conditions. So I'll try and break this down in a way that makes sense. Um, there's two, there's two constituent parts to financial conditions. Excuse me. I'm not used to talking this much. There's two constituent parts to financial conditions. There's economic conditions and there's monetary conditions, right? So, and they're the two inputs into liquidity. So liquidity gets better when economic conditions improve, which should make sense, right? If the economy— if I think the economy is going to do better, I'm more likely to transact with you, Anthony Cheung. And then the second constituent to liquidity is the inorganic liquidity that we talked about earlier. That's basically the Fed. So Bitcoin does better in risk-on regimes where economic conditions are improving, people are feeling good, they're buying a car, they're investing in altcoins, they're getting stimulus checks, whatever. And crypto is also an asset with zero cash flows, which sort of de facto makes it a very long-duration asset. So it's very sensitive to the discount rate. So when the Fed is raising rates, that's really bad for crypto. And when it's easing monetary policy, reducing rates, particularly real rates, crypto tends to do very, very well. So right now, our outlook on crypto, Bitcoin, Ethereum, the altcoin complex is bearish. And the reason is the Fed is explicitly saying it wants to take the wind out of risk assets. And there's only one institution in the world that has the credibility to say something like that, and it's the Fed. So if they're promising us they're going to do it, we believe them. And we have some precedent for this, right? If you look at a chart of real rates and a chart of the price of Bitcoin, they look fairly inverse. And if you look at the last hiking cycle, the last policy cycle, which ended in 2018, you can see that as real rates went up, Bitcoin crashed. The Fed's saying it wants to do the exact same thing. It wants to take rates above neutral. I will say I'm impressed with how well Bitcoin and crypto generally has held up. I would have thought it would be down a lot more. It's still down a lot. I think that's probably important to keep in perspective. But as long as the Fed is saying, we want to tighten, we want to bring rates up, we want to bring real rates up, we want to take the wind out of risk assets, Bill Dudley is saying stocks need to feel more pain, I wouldn't touch crypto. I'd be looking for tactical opportunities to add short exposure.

Okay. And then the final one was where you had the— what I thought was really excellent breakup with the 4 regimes. Where do you see where we're at right now in the regimes? And I know it's— you were talking about a month to kind of let things and trends materialize and so forth, and a bit of time for that to see through. But how do you see where we're at in the context of right now and that transition, but then also with what the market is kind of aware of with where we're heading with the soon-to-be tightening of policy and the subsequent impact that we could have then for the second half of the year?

That's a very good question. So I think it's very— I'll refer to— framework we used in our last monthly market outlook. There are 3 parts to our thesis right now. One, we expect growth to continue declining. It's already declining. We expect that to continue. The asset markets are clearly pricing that in. Two, we expect inflation to decline in the coming months. Obviously, that has not happened yet. We think April— the April print is very likely the first decline in year-over-year rate of change terms. I'll add the asset markets aren't totally pricing that in yet. Inflationary exposures are still doing quite well. So we don't really have validation from the asset markets on that part of the thesis. So we're not short inflationary exposures yet because we don't short uptrends. We don't short strong momentum. Our backtests tell us that's a horrible idea, and so we don't do it. And I've certainly lost money betting against those things in the past. And then the third thing is tightening financial conditions, which is like we just said, the Fed's saying it's going to tighten, it's happening, yield curves are inverting, rates are moving up or have been moving up across the curve. We saw the Dixie Dollar Index is moving higher, mortgage rates are spiking, clearly financial conditions are tightening. Eventually, that's going to break something. That's sort of the history of central bank policymaking in the Western world. And when that happens, that will happen through crushing demand, so that'll push growth down further, and it'll also reduce inflation. So that's around the corner at some point. In terms of when it actually happens, we're watching closely, but I could guess it's going to happen in the next couple months. But really part of being a good investor is keeping an eye on things and changing your mind when information changes. And right now, the market is still saying stagflation, faster inflation, slower growth, tightening policy. We expect that to transition into deflation, but we leave it to the market to tell us exactly when that is.

Cool. All right, well, look, on that, we'll look to wrap up the session. Mike, thank you very much for giving up some time to to share your thoughts and share your process. I will share in the description of this video all the links to Invictus and to Mike, so feel free to connect with him through those means. And Mike, thank you again from the community, and catch up with you soon.

My pleasure, Anthony. Thank you for having me.