Marquee Finance by Sagar Podcast Sagar Singh Setia

Eric Basmaijan is the founder of EPB Research, who has done a remarkable job in the past few years and developed an actionable and systematic macro framework for identifying the business cycles in the US.
Thanks for reading Marquee Finance by Sagar! Subscribe for free to receive new posts and support my work.

Timestamp: 0.50 mins (Demographics: Secular Trend)
We started by discussing the secular trends in the global economy. Lately, we have seen that declining demographics have become evident since the beginning of the century in Japan and in Europe.
In fact, China last year, for the first time, reported more deaths than births.
Eric said that demographics is the most critical trend to analyze when looking at a country's long-term growth, potential or inflation.
According to him, in the last four-five decades, the world's biggest economies: Japan, the US and China, obtained most of their growth from a real estate-based construction model.
And as the depopulation occurs, the real estate model collapses, leading to below-trend growth for decades and delivering a tremendous deflationary impulse (for example, Japan and China).
Timestamp: 6.20 mins (US Demographics)
When we look at the US, it’s still witnessing positive population growth. But, according to Eric, the population growth across the 15 to 64-year-old bracket (which matters the most) is seeing flattish growth, and the birthrate has fallen far below the replacement rate. Thus it’s too late to turn the ship around.
Nevertheless, he believes the magnitude of depopulation in the US will be lower than what we have seen in Japan and Europe.
Timestamp: 10.40 mins (Path of Fiscal Policy)
As per the US Census Bureau, the median age in the US will climb to 43 by 2060 from the current 38. This will have far-reaching consequences for the government. This will likely lead to burgeoning social security needs, low savings rates and thus, a higher deficit for the government.
Eric believes that there are three possible paths for fiscal policy.
* Government can cut spending by scaling down entitlement benefits which is, however, politically challenging.
* Government can increase taxes but doesn’t curtail the benefits.
* Fund the rising costs with ever-increasing deficits!
As per Eric, in all of the above three outcomes, we will end up with a lower real GDP growth rate and a worsening standard of living.
Nonetheless, he believes the third outcome will be the worst for the economy.
Timestamp: 16:15 mins (Labor Market: Secular Trend)
One of the most considerable deflationary forces post-2001 was China being the world's industry and the cheap labor (globalization) a tailwind for lower “global” inflation.
Nevertheless, the active workforce peaked in China in 2015 and has been since decreasing, which will also be a reality in the US in the next few years.
However, with technological advancements such as AI and Machine learning, we may get enormous productivity gains which have the potential to outweigh the labor shortages.
On this topic, Eric believes that in the last decade, a large part of the global economy (Japan and Europe) was in a quasi-recession.
He believes that there will be a significant deflationary impulse from China as the demand for industrial commodities wanes, which will likely offset the labor shortages.
Furthermore, the productivity gains will also offset the inflationary impulse arising from the reduction in labor force.
Timestamp: 20:40 mins (SLOOS)
Then we discussed the Fed’s Senior Loan Officer Opinion Survey (SLOOS), which reported that 46% of the banks have reported tightening lending standards. In fact, the highlight was the divergence in auto, CC, and personal loans, which saw an uptick in demand, while the C&I loans witnessed a contraction in demand.
Here Eric concurs with my view that the divergence between auto, credit cards and personal loans is because the broad labor market has not deteriorated to the extent expected in early recessiona

One year ago, I started this substack to share my views with the world, and I never, in my wildest dream, thought that we would be able to get the love and support of thousands of friends. It has been an incredible and unforgettable journey which will be cherished for life.
I am grateful to all of you and sincerely hope you love the unbiased updates about the latest macro developments.
For our 1st Anniversary, I had a special guest on our monthly podcast.
Ritesh Jain is a market veteran who has managed billions of dollars across various Fixed Income Funds and has been the LinkedIn Top Voice 2019. He is currently running his own macro firm, PineTree Macro, in Canada.
We started by discussing the hottest topic trending across social media since Xi Jinping visited Russia. A slew of decisions post Xi’s visit indicate that countries across Asia ex-Japan, are working round the clock and taking swift actions towards their “de-dollarization” dream.
Ritesh calls this a “Brave New World” and believes that we are in a Kondratiev winter phase for the greenback (reserve currency).
According to Ritesh, as we progress towards de-dollarization, commodity producers and high gold ownership countries will see their currencies strengthen as they have tangible assets to barter against rapidly devaluing fiat currencies.
He believes the trend started to post the sanction of Russian FX Reserves last year during the war.
The dollar’s hegemony is unparalleled as the global reserve currency, accounting for 90% of the total trade settlements.
Nevertheless, lately, the US has been running massive trade deficits as China has become the world's factory (post its entry into WTO in 2001).
De-Dollarization Challenge 1: Timestamp: 5.30
The US runs persistent trade deficits, and the resulting massive CAD (Current Account Deficit) is financed by the recycling of surplus dollars by the current account surplus countries like (Japan, China and Saudi Arabia) into the US assets like the Treasuries. As a result:
USA’s net investment position has been falling drastically.

Ritesh says that Petroyuan is not the future because China has a closed capital account and China does not run CAD. He shared data which shows that China’s FX reserves were 46% of GDP in 2013, which plunged to 26% by 2018 and now has drastically reduced to 18%.
PS: Markets speculate that China has been “mysteriously” buying USTs through various custodian accounts in Europe to protect itself from likely future sanctions.
He says that the incremental dollar has been buying assets worldwide (and not the US) since Xi took power in 2014.
He also believes that Gold Standard is not the way forward in a fractional reserve banking system.
De-Dollarization Challenge 2: Timestamp: 10:45 (Global Dollar Liabilities)
Since the GFC, the private sector has accumulated a lot of leverage (96% of the world GDP), and unsurprisingly, more than half of this debt is dollar-denominated (around $12 trillion).
So when I asked Ritesh about how will the private sector and even the sovereigns cope with a dollar shortage in the initial phase of the “supposed” De-Dollarization, he said that there would be enormous selling of the US-denominated assets, a playbook similar to the covid crash when US bonds and equities fell simultaneously.
Timestamp: 13.30 (Stagflation)
Next, we discussed the likely stagflationary scenario in the next decade due to the likely buoyant commodity prices resulting from the multi-polar world.
According to Ritesh, stagflation is the most likely outcome for countries with higher debt, low GDP growth and huge underfunded liabilities (most of G-7, ex-Japan). On the other hand, he believes EMs with lower government and HH debt and young demographics will be able to absorb the associated cost of deglobalization.
He believes that local consumption will drive growth in EMs in the new multipolar world.
Timestamp: 18:00 (Liquidity Framework)
At Pinetree Macro, Ritesh focuses on t

This week I was joined by Ryan Lemand, the CEO and Co-Founder of Neovision Wealth Management, based out of the Middle East.
We had a very insightful discussion about the recent events that rocked the financial markets, the FOMC meeting, asset allocation and the way forward for the US economy.
Thanks for reading Marquee Finance by Sagar! Subscribe for free to receive new posts and support my work.

First, we discussed the FOMC policy and how the circumstances changed post the fallout of SVB and the turmoil in other regional banks. Furthermore, I chatted about how the expectations of bond markets have drastically altered, and the terminal rate has shifted from 5.71% to less than 5% in just a few days.
Ryan believes that the tightening cycle has probably concluded as there is political pressure on the Fed Chair amid the banking crisis.
He also talked about the recent increase in the Fed’s balance sheet as the loans to banks under BFTP crossed $50 billion. In addition, though the discount usage had a considerable markdown from the highs, there was a strange uptick in the FIMA Repo Facility as most likely the Switzerland CB tapped $60 billion as pressure rose on deposit outflows from Credit Suisse.
Ironically, as Ryan mentioned, 2/3 of the QT has been reversed, and the Fed’s balance sheet is now down by only 2.58% from the peak.
He referred to the Volcker Era and shared that more than 1000 savings and loan institutions, also known as Quasi-banking institutions (now called shadow banking), went bust when Volcker raised rates to more than 20%.
Ryan believes that there will be multiple casualties and 25% of the S&P companies are zombie companies and cannot survive the impending recession.
We are already witnessing carnage in highly leveraged companies. Do watch out for this space, as Ryan mentioned.
While the market believes 75 bps of rate cuts will happen this year, Powell’s base case scenario involves no rate cuts.
Ryan agrees with Powell and says that there will be no rate cuts this year “unless” we get a systematic event or a credit event, and the Fed will resort to other measures as they are doing now in case of idiosyncratic blowups (regional banks)
Ryan believes Q323 or Q124 will be when we see the maximum pain in the banking sector. This is because small banks account for the lion’s share (around 70%) of the total banking sector loans outstanding to the Commercial Real Estate Sector (CRE), leading to an enormous rise in loan loss provisions for the small banks as CRE loans go sour.
Ryan believes there is no soft landing and the US economy will soon undergo a recession.
I mentioned that, as per JPM, around $1.1 trillion of deposits have moved out of the banking system in the last year, roughly 6% of the total $18 trillion deposits.
The astounding fact is that more than half of it was only in the last month post the SVB fallout as panic and fear gripped the US banking system.
The root cause of the deposit flight is the high spread between the Money Market Funds (MMFs) / USTs (>4%) and the bank deposit rates (0.5%). Also, lower bank reserves in small banks are exacerbating the crisis.
He thinks that the outflows from smaller banks will continue, and thus, the regional bank crisis will intensify.
Next, we discussed Europe and the shotgun wedding between Credit Suisse and UBS.
Ryan believes that Swiss regulators declared the viability event as CS was on a weak footing, and as a result, AT1 bondholders faced the shock of their lives.
He also believes there is a risk of contagion in Europe, as visible from a spike in the CDS of several large banks like Deutsche Bank in the last 48 hours.
The Largest AT1/Coco Exposures In Europe: Barclays, Santander and Deutsche Bank.
When I asked about the knee-jerk reaction in AT1 bonds of Asian Banks and the resulting increase in the cost of capital and lower return ratios in the future, Ryan replied that there are a lot of zombie banks and financial institutions which will

Folks, I have a surprise for you!
After a recommendation by a subscriber, I have started a “monthly” podcast series.
My first guest is Rich Excell, who is an ex-hedge fund manager, currently working as a Professor at Giess College of Business, Illinois and writes a weekly blog and also writes Excell for Options for CME Group.
We discussed the FOMC decision and how markets perceived JayPo as dovish when he talked about disinflation, claimed victory in the war with inflation and believed that the US economy was heading for a “perfect” soft landing.
We also talked about how bond markets are rooting for rate cuts as early as the end of the year and how loosening financial conditions can be counterproductive in this “likely” long-drawn fight with inflation.
Next, we discussed the earnings in the US and how muted has been the earnings surprise this quarter.
Rich shared with me this interesting chart.
Next on the agenda was the tremendous liquidity in the system. Some facts:
Assets in money-market funds hit a record $5.18 trillion in December, generating a yield of 4.12%.
BoJ QE of $550bn in the past six months and more than $150bn of US liquidity in the past three weeks despite QT as US Treasury aggressively withdrawing TGA funds (debt ceiling fiasco).
So much liquidity sloshing around despite a rundown of more than $500 billion in the Fed’s balance sheet thanks to QT.

Rich is an expert in options. He elaborated on the recent trend with the 0DTE options.
Can it become a systematic risk to the system, which can lead to violent moves?
Housing is the “real” business cycle, and signs are emerging that housing markets have bottomed.
The reason has been the 100 bps fall in the 30-year mortgage rates from the peak as the 10-year has fallen.
Rich explained the anomaly in the spread between the 30-year mortgage rate and the 10-year UST due to Fed’s MBS buying.
Nevertheless, the affordability is still extremely low, and the sky-high mortgage rates are still bad for single-family homes.
We also discussed the Chinese reopening and debated whether inflationary forces will weigh over the deflationary forces as the Chinese pent-up demand picks up.
The Services PMI bounced back sharply in January, indicating that the Chinese economy is undergoing a swift reopening.
As the Chinese splash RMB 2 trillion of excess savings, it is expected that Chinese GDP growth will be more than 5% this year (consumption is 55% of the total GDP).
BoJ is on the path to owning 100% of the JGBs if they continue to defend the YCC by buying bonds in large amounts. We discussed the potential future trajectory for the BoJ and the Japanese economy.
Lastly, we talked about productivity gains and how demographics may affect the future of the global economy.
It was a very insightful discussion, and I hope you all would learn a lot from it!
Do share with your friends if you loved it!
Disclaimer
This publication and its author is not licensed investment professional. Nothing produced under Marquee Finance by Sagar should be construed as investment advice. Do your own research and contact your financial advisor before making investment decisions.



Get full access to Marquee Finance by Sagar at marqueefinancebysagar.substack.com/subscribe