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Bubbles are therefore made by the big rises and then after the big falls because there are very strong consensuses. And very quickly, I realized that it was precisely necessary for me to analyze the consensuses, their potential robustness or not, to know whether or not to go against them. >> Frédéric is head of the Cross Asset team and global manager at Carminakem. Today, he alerts us to a major change, the end of 40 years of disinflation. A shift that could redistribute the cards for all investors. In this Finaritok, I wanted to understand how a professional manager reads the warning signs of such a reversal and especially what to do when managing one's own savings in the face of these announced upheavals. Frédéric also uses a often criticized tool, technical analysis. He will detail all the uses he makes of it and in particular his favorite techniques. Come on, let's go for Finaret. >> It's the return of the active manager who knows, thanks to inflation, when to switch from one asset to another. >> Hello Frédéric. >> Hello. >> 1987, 2000, 2008, Covid. You have gone through many crises, you have been on the markets, so you have experienced this from the inside. Your specialty is anticipating major market reversals. So the question I want to start with is, how do you become a reversal hunter? >> Yes. Well, it's not premeditated, I think it's indeed a state of mind from the start. This state of mind is the contrarian state of mind. Uh bubbles are therefore made by the big rises and then after the big falls because there are very strong consensuses that are created around an idea. Uh 1987 was typically, you know, an extraordinary craze for the markets, particularly American ones. And then we have this considerable crash that happens extremely quickly. Uh it's Black Friday. >> Yes, that's right. It's Black Friday - 20% approximately on the American market on the S&P. And so at one point, we explain this, we try to explain how we can go from such optimism to such pessimism. And so it goes through a consensus that forms. And very, very quickly, I realized that it was precisely necessary for me to analyze the consensuses, their potential robustness or not, to know whether or not to go against them. And uh 87 was really the best school for me, the moment that allowed me to say, but how could I have anticipated this? to turn towards technical analysis in particular, and then to realize that these very, very difficult moments for a young manager who loses almost everything did not disarm me, but on the contrary, gave me the strength to want to understand and to advance in the understanding of the markets, and I believe that 87, for example, was an extraordinary founding element of the manager I became afterwards. But there you go, the idea, it's the feeling, it's this desire, it's to understand the consensuses to know if at one point or another, you have to go against them. And there you go. And that's how you become a reversal hunter. >> And if we take an example that I think will resonate with everyone, Covid. >> Yes. >> What is your state of mind when the crisis begins? What do you do? What do you put in place? >> Well, very interesting. uh 2020. What has been happening since late 2019 and early 2020 on a technical level, we'll perhaps talk later about the tools I look at, but >> uh we see a progressive exhaustion of the stock market, a fatigue, divergences. Well, which tell me that as soon as there is bad news, it is likely to have a fairly strong negative effect on the markets since the market is exhausted and it is waiting for now, it is living without bad news, but the first bad news that arrives is likely to be very negative. And uh and so for the funds that could, the most dynamic ones, I would say, Covid arrived while the funds were very, very little exposed thanks to this technical reading of market fragility. Then, the very important moment was the attempt to discover the low point or the low zone. And there, well, these are moments, you can imagine, market meetings every day under great stress because the decline was very strong and very rapid, about thirty percent in two or three weeks. At one point, a technical element tells me "Well, we have to buy back, this is the low point" and there is a big debate and nobody believes you, nobody wants to follow you because we are dealing with something quite far from a firm reality. >> It's simply a market sentiment that says "that's it, it's over, let's go." Well, and that said, similarly, the somewhat offensive and more flexible funds re-exposed themselves quite quickly, and so 2020 was a very, very good year since the rest of the year was an enormous performance of technology stocks which were very, very present in our funds. There you go. So there, it's something exogenous that can only be properly understood, I think, with good technical analysis and with the tools that go with it, namely hedging tools, so as to be able to cover portfolios as they are positioned at the moment the event occurs. Well, technical analysis, we'll come back to it, Frédéric, because I think it's a divisive subject, let's not mince words. We see people selling online courses telling you "You'll get rich thanks to this." In parallel, you tell us that you are a professional manager and in fact it's a useful tool. There is also someone like Stanley Druckenmiller, whom I admire a lot, who is a great, fervent user of technical analysis. So >> it's fascinating. And earlier, you're going to talk to us about the tools, particularly the indicators that you look at precisely. Today, you are announcing a new imminent change in the markets. You've brought out the crystal ball, the end of 40 years of disinflation. So, quite simply, a paradigm shift. Can you explain to us what you mean by that? Yes, that is indeed a rather significant forecast in its consequences, and this is more an economic forecast than a market one. I was able to make a good bearish call in 2000, that was a market call. This is an economic call. How did I do it? Uh, in fact, I am a fan of Kondratiev cycles. Kondratiev is this Russian economist who understood that capitalism functions according to a long cycle of about sixty years. A good, balanced growth at the beginning which then becomes inflationary because demand grows faster than supply. Then comes the autumn because we have raised rates, the economy's growth rate decreases. Economic agents compensate for this weakness in growth rate by borrowing more, by creating leverage. a new market crisis at a certain point when leverage has become too strong, and winter which breaks the debt, you know, by killing indebted companies in the end, and we can then start again on a new cycle, a new spring. Uh what happened in the previous Kondratiev cycle is that winter never arrived, meaning we remained in a very long autumn, a cycle of very slow growth with relatively low interest rates which were Nirvana for financial markets for years >> which were therefore, it was until 2020 actually. until 2020 with precisely the 2010 decade which was incredible, almost no economic cycle, inflation around zero, and assets called long duration which soared, particularly American technology. >> What is long duration? Long duration is in fact an asset is valued as the sum of future cash flows that this asset will generate, discounted by the interest rate. The lower the interest rate is at the denominator of the discounting, the higher the future valuation is. >> And this is all the more true as the future cash flows are significant, therefore non-cyclical, recurring, systematically growing, as for example for large technology stocks. So when rates rise, if they rise really strongly, the companies that will suffer the most are these companies that are used to growing their results every year. Sure. >> Uh it was the Nifty Fifty in the 70s, if any older people are listening. Uh the real estate market, it's a bit like that. The real estate market, when rates are at zero, uh there is no competition for a good real estate rental investment. When bond rates are at 3, 4, 5%, well, your real estate product must yield 3, 4, 5% otherwise you'll go buy bonds instead. And so when rates rise, your real estate must adjust downwards. We saw that a bit in 2022. Uh there you go, these are long duration assets, and they are potential victims of an economic environment where rates would be higher than they have been for all these years. >> And so that's an analysis, I'd say, almost macroeconomic. >> It's even above macro, in fact. So there you go, I had this conviction that at some point winter would arrive, or if it didn't arrive, something else would happen, and in fact Covid arrived, during which we all received a lot of money from governments, particularly in the United States, without being able to consume it since everything was closed, there were no production chains open, and on the other hand, as soon as the economy reopened, we had both all this money that had been put into consumers' pockets and all the production chains that reopened more slowly. So a lot of demand facing constrained supply, hence very strong inflation. we went from 0 to 10 in the space of a few months or a few quarters. We are talking about price increases. >> That's right. Price increases and therefore interest rate increases. And then I said to myself, that's it, I have my revenge, my cycle is rebuilding, we are off for 15 years of inflation, 15 years of summer. Now, 15 years of inflation is not a straight line from 0 to 20% inflation or price increases. It's a cyclicality that returns, a series of upward waves in inflation as we experienced between 1965 and 1980 where we ended with 15% inflation. Uh what happens in such cases? Uh well, everything changes in the valuation of assets, absolutely and relatively. So why, however, did I think we were heading for 15 years of inflation? What was the factor that allowed me to draw this somewhat somewhat bold conclusion? Well, I thought about all sorts of structural forces that are above macroeconomics. Demographics, sociology, world trade, geopolitics. The most important force I identified that explained 40 years of disinflation and which now explains and will perhaps explain 15 years of inflation is global demographics, at least for the main developed countries, which leads to fewer savers each year than the previous year, therefore less savings available for investment, therefore less productivity. So less disinflation or more inflation. For 40 years, we have had more savers every year and we have had this continuous disinflation for 4 years. We have the opposite and we see that it's not exactly the same story. Another important demographic factor was the Chinese age pyramid in 1990. Tiananmen, you remember those dramatic events, students, nearly thirty million of them entering the job market every year, at that time, a very, very wide pyramid at the base, not finding jobs, complaining, they are massacred in the square, and so the Chinese are forced to reinvent a new economic system, to become the low-cost workshop for the rest of the world to employ this abundant and cheap labor. This prevents all other countries in the world from increasing wages in a way they would have liked to, because otherwise they would lose everything they had left in terms of competitiveness compared to China. So we haven't had inflation for 30 years either, thanks to this abundant Chinese labor. A third factor, world trade. It started to take off after World War II. It plateaued a bit from 2010 and then Covid, like the war in Ukraine, revealed that we are too dependent on countries that are sometimes distant, not necessarily friendly, for strategic production. We decide that we will bring back a certain number of productions to our own countries for which we are not really equipped to do it at a good price. This will be very inflationary. We are eliminating what is called Ricardian disinflation, which is in fact that of a geographical specialization of production, we produce where it is cheap to do so for the whole world. So when we multiply this, we create disinflation, therefore lower interest rates, therefore higher financial assets. And when the opposite happens, that is to say, when we bring back productions to our own countries that we will produce very expensively, we will increase inflation, increase rates, and perhaps decrease the value of financial assets. Three important factors. Fourth, a sociology that has changed. In 1980, after 15 years of inflation, everyone is fed up with inflation and everyone is ready to make efforts for efficiency at work, and so we arrive at a good, strong productivity trend that allows for disinflation, lower interest rates, higher assets. Today, work ethic in sociology, in the major sociological trend, is more about work from home, remote work, inclusion, a bit of ethics everywhere, which are probably very good objectives but not necessarily synonymous with great economic efficiency and therefore great productivity and therefore disinflation. Then, we have energy. In the 80s, Americans managed to produce much, much more energy. This lowered oil prices. Today, we have embarked on a very rapid energy transition, probably too rapid, which tends to increase energy prices and therefore also tends to increase inflation. So we are reversing everything we have known for 40 years, these major trends that allowed disinflation for 40 years and which will now, on the contrary, give it a tailwind. This is the structural explanation for this 15-year inflation call. And from my point of view, it is more useful to understand these major structural forces than the business cycle that lasts 3 or 4 years to envision a future inflation regime. it was necessary to go beyond the two or three or four years of the economic cycle. And I think this is an error that is often made. You have armies of economists in central banks looking at the 3-4 year business cycle, and that's why they are very often surprised when a regime change occurs. This was the case with Powell at the Fed in the United States in 2021. It was also the case with Alan Greenspan in the 90s who didn't understand why disinflation was so strong. And disinflation was so strong because the structural trends I mentioned were in favor of disinflation. And so it was the conundrum, it was the mystery of disinflation and low rates. >> Regardless of the economic cycle, inflation, deflation, one rule persists, you must follow your assets. And it is for this reason that I am writing Finari. Life insurance is simple, it is the preferred investment envelope for the French. The problem is that most contracts are loaded with fees. Subscription fees, management fees, contract fees, support fees, arbitration fees. It's a real indigestible millefeuille that you will face. Combined, these fees can quickly reach over 3% per year for traditional players like large banks. If you follow this channel, you know that 3% per year is nearly 60% of lost earnings over 30 years. It is precisely for this reason that I launched a life insurance contract with low fees. Management fees start at 0.99% and vary depending on your Finari subscription. It's simple, this contract is one of the cheapest on the market for profiled management. And for fans of free management, the latter is coming soon with even lower fees. And above all, if you subscribe to profiled management today, you will be able to switch to free management when it becomes available. Click on the link in the description or scan the QR code displayed on the screen to start opening your contract. There is another not a mystery but in fact a very strong phenomenon that is happening. You were talking in preparation for this podcast about the end of Pax Americana, the end of dollar hegemony. We see China emerging, we see Gulf countries wanting to buy gold rather than dollars, and generally Trump also seems to be withdrawing rather than opening up. To give some figures, the dollar has lost 15% of its value since the beginning of the year. So that's completely incredible. >> What impact does that have concretely on the markets? >> Well, the question is interesting. Pax Americana is also in the same vein as world trade. There are more geopolitical tensions today. Pax Americana, to explain to people simply what it was. Here too, we come from World War II. The Americans say, dear European allies in particular, I will spend a lot on armaments to help you defend yourselves against our common enemies, and at the same time, I will also become, the United States, the buyer of last resort for your industrial production. This will lead to fiscal and budgetary deficits and trade deficits. The twin deficits. In return, what I ask you is to finance our debts by buying our US Treasury bonds. So this has allowed for 60 years relatively low rates, a peaceful economy, and therefore enormous economic development and also market development. Then gradually, well, it's the war, the war in Ukraine that broke everything, tensions with the Chinese, so the Chinese who want to develop outside the United States, Europe which no longer necessarily has the same surpluses given the rise in energy prices, Arab oil-producing countries which say "Ah well, listen, no, now when the Americans ask me to increase production, I reduce it." I no longer necessarily want to buy US Treasury bonds, I prefer to buy gold. So all of this is gradually unraveling, which should eventually lead to a decline in the dollar. And so the decline in the dollar is also a major element in all the reasoning that needs to be done. If we remember the American outperformance from 2009, let's say to 2020 or even 2024, it's extraordinary. It's x 6 over this period 2009-2024 compared to x 2 for the rest of the world. >> There, you are on the stock market. >> Stock market x 6 thanks to the rise of the dollar, thanks to the rise of stocks. What happened during this last phase of 10 years of strong inflation? Zero rates, so asset values increased sky-high. And so what increased the most? The great growth stocks which are mainly American, the Magnificents, etc. The whole world buys dollars to buy Apple, Microsoft, Google. This drives up the dollar, drives up the American market by lowering other currencies and preventing other stock markets from rising. If I am right about this idea of inflation, rates will rise. What will suffer the most? Large growth stocks, American tech. And so what will happen? We will sell our dollars to sell Apple, Microsoft, Google, and Nvidia, and to buy cyclical industrial stocks in Europe, in China perhaps, in Japan. And so we see the dynamic that will reverse the course of the dollar, amplify it, recreate or create this great rotation from the United States to the rest of the world for markets, but also for financing deficits. And we also guess that with this dollar that will gradually decline due to this rotation dynamic, emerging markets will be very, very favored since emerging markets are countries that perform very well when the dollar is weak because the weakness of the dollar frees them up in the implementation of their monetary policy. In particular, when the dollar is weak, I am an emerging country, I have to lower rates because I am experiencing a slowdown, I can do it because the dollar is weak. If the dollar is strong, I cannot because my currency implodes, and so when the dollar is weak, emerging markets boom. And so we can see after 15 years of systematic underperformance of emerging markets compared to developed countries, an inversion. This is part of this great rotation that I am presenting. So a geographical rotation and probably a sectoral rotation as well. In this new context we are discussing, there will be a likely great return of industry. Let's also think about Trump, because in fact, from my point of view, Trump is a consequence of the reversal of two or three of the major structural trends we discussed. Trump is elected because Americans want the government to take care of themselves and not others, to finance their needs rather than those of others. Trump is elected for that. And what does he do? He manages to quickly force Europe to invest much more in its defense, which will be an expense less for the United States, to invest much more in its infrastructure. Trump humiliates Zelensky live on television and Europe in 2 days, and particularly Germany, understands that Trump is the enemy and that therefore now they must take charge of themselves. Trump is making the rest of the world great again. which forces the rest of the world to take charge of itself, to become stronger with China. A week or two after Trump's statements, we hear the Chinese Prime Minister say "Today, consumption is becoming an economic priority in China." This is the first time we have heard this since China joined the WTO. If China becomes a consumer, it will be inflationary. Until now, it has been deflationary since it was a country that produced cheaply for the rest of the world. If China starts consuming in the coming years, it will have an inflationary impact. Germany, which is starting to invest heavily and run deficits to buy armaments and infrastructure, will be inflationary. And a third simultaneous factor, the US Treasury Secretary, Scott Bessant, reminds the market of Trump's policy, it targets the middle class. Wall Street, Wall Street will take care of itself very well on its own >> whereas he is a former, he is a former market hedge fund manager. >> And so what does that mean? It means we will favor the consumer. It means we will give him the means to consume more. It means we will create inflation in the long run. And that is, there you go, three major areas of the world that, under the impetus of Trump himself, elected as a consequence of major trend reversals, are adding inflation between the cyclical and the structural. It's really a major moment. I mean, we are lucky to witness this, I think. >> Well, I don't know if it's luck, I'd say it's rather worrying. So, I put myself in the shoes of a saver who hears you. What concretely needs to be put in place to prepare for a major paradigm shift? >> You need to realize what has worked well in the markets during this period of sustained disinflation. Absolutely. it was growth stocks, long duration assets, real estate, private equity, >> to do the exact opposite. >> Well, you have to, in any case, choose well what you keep from what has worked well, and then look carefully at where you need to move. In short, the return of inflation means the return of inflation cyclicality, which in turn brings back economic cyclicality. This means that we are returning to an environment where we need to be a bit more courageous than in the past, less lazy, I would say. Well, this means we are no longer in a buy and hold strategy, meaning I buy, I hold, and I go to the beach and I come back to see how much I've earned. It means you have to know how to buy, sell, buy, sell, buy, sell. You have to know how to switch from stocks to bonds, from cyclical stocks to growth stocks because it will move with the cycle. We are returning to an environment where, ultimately, the global top macro active manager finds his preferred ground to differentiate himself positively from ETFs, or at least from passive management. So this means more movement, understanding inflection points. Generally, they come from inflation inflection points, and depending on what we see, inflation will rise. So, I'm getting out of growth stocks, I'm moving towards the rest of the world rather than the US, I'm selling my dollars and buying other currencies, and I'm removing duration from my bond portfolios, and vice versa when I anticipate the opposite. The inverse correlation between inflation and stock markets was perfect in the 15 years of inflationary cycle from 1965-1980 and is still perfect in the current cycle. An interesting detail, the peak of US core inflation in October 2022, the low of the S&P 500 in October 2022. So the mirror continues to function in the same way it did 60 years ago. >> So, very concretely, if I want to build a relatively simple allocation that won't require extremely significant work in the coming years, I have a little savings set aside, what do you advise me? What do I put in my bag? Well, a large geographical diversification, meaning that the big easy performances were being on the US market, particularly in tech with the dollar >> which strengthened every year. >> And that worked extremely well until 2022. 2022, I don't know if you see. So the year when we realize there is inflation, bonds fall, stocks fall, diversified investments fall, everything falls because in fact inflation correlates with a decline in stocks and bonds. >> So we need a strategy that takes that into account. The first way to take that into account is less US, more rest of the world, more investment in cyclical economies, in cyclical industrial sectors undervalued due to under-representation of investors in these areas and sectors. First thing >> so Europe, Japan >> Europe, Japan, probably China for other reasons too, well, emerging markets. Latin America is also fascinating because it is rich in raw materials and in a context where the dollar is falling and where, ultimately, everything is being done to create a bit more growth as we will see in the United States, as we will see, as we see in Germany, as we will perhaps see in China through consumption in the coming years, there will be demand for raw materials which will be very favored in terms of valuation by the fall in dollar prices. So, index more towards raw materials, do not completely neglect interest rates because at some point you are at a level called carry which will be average, you will perhaps have 5-6% all the time. So having a bit of that, 5-6%, is good. Do not forget cash, which is an asset class that was very, very important in past years and which can become so again. Gold, I think, is a very interesting tool to have in portfolios since we see today that many surplus countries in terms of trade want to invest their surpluses in gold rather than in American bonds. So it's all of that. Look a bit at what dad or grandpa used to do, perhaps more for the people listening today, but a return to the old economy and much more mobility, particularly by looking, perhaps with a bit more acuity than others, at inflation inflection points which are truly the compass that has returned for the active manager, and I would say an individual investor on his side can be an active investor. Absolutely. Active investor. Precisely, that's a topic we talk about a lot on my channel. A study I like to cite is the Spiva study, which compares the performance of active managers to their index, their benchmark. And it's true that depending on the geographical areas, we have between 85 and 90% of managers who underperform. So the finding is rather terrible. Why do you think that in an inflationary world, active management will become fashionable again? Well, there are two answers. The first, a positive active answer, is that precisely if we enter an environment that becomes cyclical again, there will be good times and bad times to go to the market. >> We will have to enter, exit, >> stay on it >> without moving too much, and in the end it should not yield an extraordinary performance. On the other hand, someone who does a little better than others, who is a bit more on value, on cyclicality rather than growth, will from time to time be able to outperform. >> So, there you go, the return of the cycle is both this possibility and the return of the compass at the same time for the active manager who knows, thanks to inflation, when to switch from one asset to another. The other answer, more negative and by default, is why has it been so difficult for an active manager for 10, 15, 20 years to beat a passive ETF? Well, it's because the ETF indeed does nothing. It is invested in things on which it must remain because the structural decline in rates justifies nothing else, ultimately, with the benefit of knowledge. But it cannot, how to say, it cannot last indefinitely, and above all, it creates bubbles and inverse bubbles. You are on an ETF on the S&P, you are forced to have in your ETF a representation of Apple or Microsoft or now Nvidia that is the weight it represents in the index. And so this means that the higher a stock is, so somewhere also the more overvalued a stock is, the more it is represented in the ETF. That's the bubble. And the less it is valued, the lower it is, the less it is represented in the ETF. So in the end, it creates a situation at one point, if we want to get out of our passive ETF, where we can buy what is underrepresented in ETFs because valuations are very low, and conversely sell what is overrepresented because valuations are very high. But there you go, we are arriving, we are putting as much money, or even much more, into companies that do not need it, and we are neglecting companies that are valued like this and that would need it. That is the imbalance created by passive management. And so the active manager today, as soon as we have, I hope, a second wave that starts without even having to anticipate 10% inflation. That's not the goal, it's just cyclicality. As soon as we have a second wave that starts, the investor will realize that we are still in a very different context from what we had become accustomed to. And then, we will have to say, "Ah, well, finally, yes, passive management, is it not a problem? Shouldn't I find good active managers who have managed to survive in this environment that has lasted a long time? That's our case. We are not very numerous. In any case, on the independent side, we are not numerous. Shouldn't I myself engage in this more active, more courageous management that requires more work? And from a purely factual point of view, I could very well have active positions with ETFs, therefore pay the least possible fees, and simply enter and exit an ETF, I don't know, long duration bonds, European stocks, move to emerging markets. That would be possible theoretically. >> That's true too. Absolutely. >> It's you who do the active management of the work, >> it's you who do it rather than entrusting it to an active manager. But it's true that ETFs can lend themselves perfectly to this mechanism. Absolutely. Yes. >> Frédéric, I want to be a bit provocative, but in most of the predictions we make, we see it every day, most banks make predictions, the market will rise, will fall, etc., they don't come true. And so, what gives you today the confidence to, on the one hand, formulate such a prediction
And on the other hand, as a manager, have you taken positions that are aligned with these these forecasts? >> Okay. So indeed, there are many forecasts that do not come true. Uh I think that the forecasts that do come true are not consensual. So I agree. >> I believe that to make a good prediction that works well with a timing that is not too loose, you have to identify a consensus, understand if it is robust or not, and position yourself against it. And well, that's typically what needed to be done in the year 2000 and what was done very well by some of us. That's what needed to be done even not in 2008 but in 2007 when we understood that the weakness of the economy would come from the banks due to this political will to make everyone a homeowner. >> It was announced by Bush. It was >> it's it's it's him who wanted it, it's it's this >> there was a program to make >> this generalization, this democratization of real estate ownership. Well, and at some point, not everyone can be. This created a situation of much too fragile debt. It started with a major destabilization in 2007. In addition, Berstern died at that time, but that was a bit secondary. Then after, in 2008, we had the death of Lehman and then with the crash that really arrived. But to manage this period well, it was to understand as early as the summer of 2007 that things were starting to shape up in that direction. And it's because you managed 2007 well that in 2008, when Lehman arrives, and you can't predict or foresee the day itself, that you decide to remove all your exposure because you earned well before, that you have a good lead over your competitors, that your clients will always be happy, and from there you sell even if it drops sharply, and because you did it at the lows of 2009, and then you understand that pessimism is at its peak, that all the press articles are about catastrophe, the end of the world, you should hang yourself. Well, then you buy because you see press articles with a sentiment as dark as possible and at the same time the first leading indicators of the Korean economy, for example, very cyclical, which tell you "Ah, the leading indicators on production are starting to rebound," and then you buy back. So it's a completely contrarian moment, uh, which requires a lot of courage and a bit of work at the start to build a real conviction. So >> and which can take time to materialize >> and which can take a little time to materialize, a little less if you use, as we discussed at the beginning, perhaps more technical tools that allow you to improve your timing as soon as you master these tools, that you feel in sync with their functioning. moments like the lows of 2009 to buy the market or July 2007 to sell banks. There is fundamental global understanding, but there are also technical tools that allow you to see divergences between the strength of the market at the price level, Elliott waves, which are also an excellent way to measure the sentiment of the market as a whole. Is it in euphoria? Is it the opposite? A mix of all that and at the same time feeling, sensing the market sentiment, the time lag, well, that tells you the market thinks this, and everyone thinks that, and then ultimately they are all wrong. >> precisely the technical analysis, let's go. >> Stop, a little explanation is needed. Technical analysis is one of the most controversial approaches in modern finance. The basic idea is simple. Price charts reveal repeating cycles as if markets had a memory, a collective psychology. For its proponents, technical analysis captures human emotion, fear, greed, euphoria that drives markets. This is the case, for example, of the legendary Stanley Druckenmiller, who relies on these tools to manage billions. But for its detractors, technical analysis is an illusion of control over the unpredictable. It owes its bad reputation in particular to training sellers who promise quick wealth. Can we really predict the future by studying the past? Do technical indicators like RSI, moving average, divergence, Elliott waves reveal hidden truths or are they just coincidences? This is what you will discover here. Alright, I won't bother you any longer, back to the talk. >> You mentioned several things, Elliott waves, what are the tools you concretely use and how do you use them to make investment decisions? >> First, I use very few, meaning that throughout my career, especially in the early years, I tried a large number. I think that's why you have to start. There are indicators that are more there to give you an indication of the strength of the trend, its potential durability, and there are others that are there to warn you of divergences and therefore of the possible occurrence of a reversal in one direction or the other in the short term. And very, very quickly, given what I told you at the beginning, well, I turned to these indicators that allowed me to detect reversals, whether short-term, medium-term, or long-term. So, for example, I arrived at the RSI, Relative Strength Index, which measures the strength of the market. How do I use it? When I see a market making successive highs and an RSI making highs that are lower than the previous one, I have a bearish divergence. I am very wary. >> On what time horizon do you look at the RSI? It depends if I want to look for a local high in a one-month movement, I'll do it on the daily, sometimes even on the 2-hour. And then otherwise, I can do it on weekly data, on monthly data. I will put that in contrast with my understanding of the market. What I try to do is synthesize the global view of the economy and quickly understand what are the two or three macro variables that need to be understood, that need to be watched closely to anticipate future development. Because there are 42,000 macro variables, but there are two that matter at the moment. The labor market. Well, it depends on the moment we are in, but understanding that, adding to that a range of technical tools, so the RSI for example, very strong divergences between what is called the cumulative advance-decline line on the Standard & Poor's compared to the Standard & Poor's index itself. When you see the Standard & Poor's index making two successive tops that are not accompanied by a rise in the cumulative advance-decline line, you have a rare and powerful signal. And then you say, okay, well, whatever happens, I sell, I reduce my exposure. Around that, you have my Elliott wave analysis, it's a big discipline that requires many years of practice before it can be useful to you. But it's a real investment that is worth it. It's analyzed by wave structures if you are in an uptrend, downtrend, or correction, and in some cases it indicates extreme psychological patterns, either in terms of optimism or pessimism. And if you manage to consider that it's exactly the same message as the one conveyed by your divergences on the RSI and your perception of market sentiment and your broad understanding of the order of things, well, you go all out. with a real position, as soon as you are looking for reversals, you necessarily have stop losses that are not far away. >> Stop loss, what is that? >> Stop loss, meaning it's a level from which you say, "I'm wrong, so I cut my position." When you are detecting a peak, for example, >> yes, >> uh, well, it's starting to just go down, you say, "Well, my stop will be the peak, and it's perhaps just 1 or 2% above, while your potential for decline is considerable." So in the end, your risk-reward ratio is formidable, and that's what you try to play through, particularly with derivatives. Yes. >> So to summarize, you, for example, you anticipate a decline, you protect yourself against a potential rise, but you profit from the fall. >> In fact, I anticipate a decline, so I position myself to profit from the decline. I sell short, particularly futures contracts on the CAC 40, the Euro Stoxx, the S&P, Nasdaq. >> So that's a derivative product. >> Derivative product. Classic, listed, as transparent and liquid as can be. >> With leverage. >> Well, you can use it with leverage as you can choose not to use leverage. Generally speaking, we refuse to use leverage. We, >> we are invested, let's say, 100% in stocks in a stock fund. I will put 100% coverage on it, but not 500% through futures. So, I could technically do more than 500%, but that's not what we do. And so what I do is I take the risk of de-indexing myself from the market rise. I take the risk of being the village idiot because perhaps I will be the only one to be wrong because everyone else will always be buyers, and I put my stop just a few percent higher, saying, well, I'm wrong, the market was stronger than I thought, I'll try again another time. So that costs you 2-3%, but when it works, it brings you a lot. With this way of working, the most dynamic funds I managed at Carminiac had a positive performance in 2022. There aren't many. Uh, so that's the kind of thing it allows, and it builds a very attractive long-term track record. And by the same methods, well, we played very, very well on the large wealth fund in 2007, 2008, 2009, the peak, the bottom. And it's after that that clients arrive in droves for the fund because you inspire considerable confidence in them, and rightly so. H >> Does having more assets under management, having collected a lot after the exceptional track record post-2008, make your job more difficult? >> Well, that's a question we've often been asked. Uh, I think the difficulty we encountered, indeed, Patrimoine was a truly extraordinary fund. To say without equivalent, it created the Patrimoine concept in Europe. It became the largest European fund across all asset classes. >> How many AUM at its peak? Just that fund, 31 billion. So that was at a time when we were managing 62 billion, half of it was in Patrimoine. And in fact, things became complicated afterwards, but not for size reasons, because the tools we use are the most liquid, especially hedging tools, dollar hedging, US 10-year rate hedging, equity hedging on the Standard & Poor's for the Euro Stoxx, it's extremely liquid. So the problem wasn't there, and the underlying portfolio itself is not meant to move every two days. So it's really the derivatives that vary the exposure, and they were the most liquid in the world. The difficulty in performance was rather, well, it was this decade of the 2010s that was arriving without cycles, and therefore the compass of the active manager that we were was a bit broken, and at the same time as this compass was broken, the beginning of the end of emerging market outperformance due to the dollar rising for the reasons we discussed earlier. So, and since then, let's say for a good year, a year and a half, we've found our good active manager reflexes again. This year, Patrimoine is outperforming its performance benchmark by almost 10% since the beginning of the year, having managed the dollar well, managed duration well, managed equity exposure well, etc. >> I'd like to go back to your example where you start to sell short, you put a stop loss, and the market goes in your direction. The question we often ask ourselves is, at what point do I take my profits? How do you reason about that? >> That's the hardest part. To let it run or >> Yes, that's the hardest part. There is no one answer per manager. One answer per good manager. I am working on one of the funds we are creating with another manager at Carminiac of great quality, who always tends to be positioned a little before the reversal because he has a different mode of action than mine, which is more smoothed out, I want to say. He knows he'll be a little ahead, betting on it systematically, he exits before the end of the movement he anticipated. So anything is possible. There is, well, after that, it's risk appetite. Are we ready to give up a lot of the gains we made on the downside in a rebound that will come sooner than expected? That's a real question because rebounds in bear markets are violent. These are days with +5%, +6%, +7%. When you are short selling on days like that, it hurts, and it's especially regrettable compared to what you managed to do just before. So you have to manage these sizes. I think it's at the time of initiation that you should have the largest size because that's when the stop loss is closest. >> Hm. >> And therefore, probably reduce your position as your forecast progresses. That is to say, we take into account the degradation of the risk-reward ratio; the more this risk-reward ratio decreases, the more we reduce the size. And in the end, we may not make extraordinary profits that we talk about in the newspapers, but over the medium term, we have a potentially very enviable performance. Yes. Does it happen that you deviate from your management policy by, for example, letting a position run because the performance is simply exceptional, but it no longer meets the criteria that would normally have made you sell a stock? >> Well, in that case, what can happen is that generally speaking, my hedges in 95% of cases are Delta One futures. >> What is Delta One? Delta, so it's really a futures contract on an underlying asset. So the Standard & Poor's, if I decide to sell a Standard & Poor's contract, if the market goes up by 1%, while I sold it short, I lose 1%. Okay? If it goes up by 10%, I lose 10%. If the market falls by 10%, I gain 10%. Okay? And so when you see something very powerful that you don't understand, you don't necessarily want to put Delta One in place because you forbid yourself any continuation of the rise. So you will rather use options markets. You know from the start the insurance premium you are spending. You cannot lose more. And if you are lucky enough for it to reverse during the life of this option, of this insurance, well, you are very well off because you are freed from a good part of the decline without having taken a major risk of not participating in the continuation of its rise. So, when there are things we don't understand, very strong trends, well, we will rather go for options because the cost, the price of the error, is still lower. >> Earlier, we talked about contrarian bets that we can make. One that has been extremely profitable, I think, for all those involved, is cryptocurrencies, and particularly Bitcoin. We see BlackRock launching into the race, Fidelity, it has become an institutional tool. Today, it is in the portfolios of the largest institutional investors, certainly with very small percentages, but we are very far from the phenomenon that started on an internet forum. What is Carminiac's position on this asset? >> Well, I'll talk about mine for now, since we don't necessarily have an official position as we haven't launched anything official on this. My personal concern about Bitcoin is that, well, they want to make it a currency. However, for Bitcoin, we are organizing its scarcity. >> Yes >> uh, well, through issuance which is capped by mining which is increasingly difficult to get a Bitcoin out of your computer. How can we make this kind of thing a currency from the moment a currency must be able to adapt its production to the needs of the economy it is supposed to help develop? So that's a first major concern for me, it's how can a cryptocurrency like Bitcoin become a currency for a country or even part of a currency. That's a major concern. I see a lot in cryptos, first and foremost, before saying I'm an old grump who didn't understand anything, and I accept the criticism. It's a largely organized speculation tool. There are certainly things you can do with it, we agree. But this organized scarcity reminds me, and this is very provocative, of Dutch tulips in the 17th century, if I'm not mistaken, where extraordinary values were reached, sometimes worth the price of a house for a tulip bulb, because people thought it wouldn't be replicable. Then, very quickly, it turned out to be very replicable. For Bitcoin, it's a bit the opposite. We organize scarcity, but by organizing this scarcity, what does this object become? What is it for, if not an element of speculation? You say it was great for those who anticipated the Bitcoin movement well, but before being at 110,000 today, we were at 60 or 70 in previous years, we had dropped to 25 or 30. You have to withstand these kinds of movements. The real difficulty for someone like me, who has market experience of many years as you mentioned at the beginning, is that we need to be able to link an asset to a fundamental value. Well, a dollar, I know the deficits, the difficulty of financing, the interest rate, etc. But Bitcoin, how do I link that to fundamentals? Some say, "Yes, but it's rare, so it can only go up." Well, I mean, okay, you remember the little craze for NFTs, it wasn't that long ago, was it? Those NFT Monkeys, some were sold for I don't know how much, do they still exist today? Scarcity in itself is not enough to justify a value. Then there's all the cryptography that goes with it. There are stablecoins. Even at Carminiac, they asked me, "Will you put stablecoins in your inflation fund?" Why not? But in that fund, I know exactly everything that's in it. I know how it works. Stablecoins, maybe if one day we hire a great, great specialist in the crypto cause, we'll do it. But I need to understand. I need to understand the underlying asset, and for now, I'm a bit far from it. It's also perhaps because my intellectual efforts are not focused on this subject but on others. That's possible too. There's a parallel that's often drawn with Bitcoin, which is that it's a bit like digital gold. Gold, it seems to be an asset class that interests you. You said it earlier, it's replacing the dollar in some economies. Is this parallel valid for you? >> Well, it's still something physical. I mean, small physical Pokémon cards have held up better than NFTs, those NFT Monkeys. But that said, it's an observation I'm making. It's certainly not a definitive conclusion about the future of these currencies. But that's a bit of the difference today between gold and Bitcoin. Saudi Arabia today is buying less US Treasury bonds but buying more gold. And we see that this is a movement that is developing somewhat everywhere among a number of central banks. Is there an anticipation of inflation that we don't really know about? I don't know, but well, gold has always existed, and when you take a coin out of your pocket, you know it will be accepted everywhere, with the idea that in 3 weeks it won't be 30% lower, which is not yet the case with Bitcoin today. So. >> Gold, do you expose yourself to it with your funds, and if so, in what form? Two forms. Well, you have funds that are, for example, strictly French law, cannot buy direct indexing. So the only thing possible is either the purchase of gold bullion, which is the most classic case, or very diversified commodity ETFs that allow for the integration of funds. And otherwise, if you have Luxembourgish law, you can have direct indexing to individual commodities, gold, silver, but also oil, natural gas, uranium, that sort of thing. But well, so we have both, with funds that are French or Luxembourgish law. We also have this rather significant indexing in CARMIAC Patrimoine. >> Are there any factors or phenomena today that would make you change your position on upcoming inflation? >> Today, the big pushbacks, that is to say the oppositions I am given to the idea, are that artificial intelligence will be so deflationary with the mass unemployment it will create, particularly that there cannot be inflation. >> And can you explain to us why it would be deflationary? What is the reasoning? >> The reasoning is that it destroys jobs, therefore demand, and therefore in the end, there is more supply than demand, and therefore it lowers prices. Uh, well, I say that in the long term it's possible. However, in the short term, this artificial intelligence is extremely consuming of infrastructure and energy. So it contributes to a lot of investment and therefore rather to some inflation. Uh, then, I say, the potential of AI is so considerable that I don't think it's very intelligent to want to project linearly everything we see today. There will be pushbacks from white-collar workers. To say that the victims of AI in companies will be white-collar workers at first, and there will be opposition. So we may not go as far as we think today. And above all, I think very quickly there will be the possibility of realizing that young students today will abandon their intelligence to AI. And for me, that's a real concern. I'm very afraid of what could happen there in terms of how young people will use their intelligence or, more importantly, stop using it. And so here too, I think it will create oppositions that we probably don't imagine today, and therefore probably projections that we make today that will no longer be valid in some time. The second pushback is Chinese exports. China will continue to export its deflation to the rest of the world. Well, we see today, particularly since Trump, that it will not be as easy and obvious as we anticipated even 6 months ago. There will be tariffs that will potentially rise very sharply, as is the case with electric cars, and which will prevent this deflation in developed countries, which are the ones that will defend themselves the most against it. However, it may fuel price decreases in emerging countries, in the Global South, among Chinese partners, and therefore it will further justify higher stock market valuations in the emerging universe thanks to the tailwinds linked to disinflation. contrary to what will happen in developed countries, where we will have the inflation I expect with rising rates and falling asset valuations. So it further justifies a reallocation of portfolios towards emerging countries. So what could make me forget this inflationary idea is a persistence of frankly negative inflation figures with a dynamic that seems to be setting in. For now, I don't see it. I even rather have the feeling that the next inflation figures in the United States from next month will show the first effects of tariffs in the United States. So it's starting again, >> it's starting again, perhaps slowly, with, in addition, well, an economy that is not that weak, and at the same time, a scarcity of labor linked to the halt in immigration which will very quickly contribute to inflation, as was the case in 2021, since in 2021, due to travel disruptions and everything else, cheap labor from emerging countries was no longer arriving in the United States, and therefore we saw wages, it was the lowest wages that rose the most during this period of economic reopening, which is something we can also see. Uh, so, well, I find that the structural forces are too strong to be beaten by more cyclical data on this idea. That said, reality will impose itself. Well, so I won't remain stubborn on something that has become obviously false, but I don't think we'll get there. >> It is often said that the market is always right and that ultimately the current price reflects all available information in the markets. Is the market currently right with the price levels, with the valuation levels we are facing? >> The market is right at the moment, that's by definition. Uh, I think that if my inflation view is correct, and therefore a second wave starts in the coming months, quarters, rates will rise to a level that I think the consensus is very far from having in mind today. >> More than 10%? Not necessarily, but today we are at 4.20% in the United States on the 10-year. If we go back up, even just to 5%, that will already change quite a few things. And if we break the levels we saw during the first wave of inflation, that's 5%, well, then we'll ask ourselves big questions, and I think that assets with the longest duration will suffer more than others. So tech, which, well, doesn't continue to grow, to grow its results as it's doing now. Uh, real estate, perhaps private equity, the VAGs, all that will suffer. Uh, yes, I think that rates will very likely go beyond what the market has in mind because the market doesn't believe in a second wave of inflation. Ultimately, it's not inflation that kills the market, it's the effect of inflation on rates, and it's rates that then break valuations. >> It's true that a question I really like to ask is to ask professionals what they invest in personally. Yes. >> Sometimes I see big divergences. Is that the case for you, what do you invest your wealth in? Well, three things. I may have mentioned it earlier, I am setting up an inflation fund at Carminiac which will be accessible to all our European client base, which is available from today, probably very recently. A multi-asset inflation fund, bonds, stocks, commodities, foreign exchange, inflation swaps, meaning direct indexing to future inflation. This fund is capable of allowing unit holders to benefit from the upcoming inflation by having a very short duration on bonds, by being exposed to stocks but to stocks in cyclical sectors that are very undervalued, rather short on growth stocks in the rest of the world, exposed to a decline in the dollar, and moreover, this fund, for example, between the beginning of this year 2025 and the end of June, despite disinflation, has still produced 11% performance because precisely this multi-asset management is dynamic management that relies on the short cycle and accepts to take into account that we are in a phase of disinflation within a major inflation cycle. And so in these moments, we don't hesitate to buy American tech, knowing that we will sell them quickly, but in the meantime, we are on it. We don't hesitate to be sellers of dollars. So. And so, I think that here we have a product that will allow me to diversify a bit everything I have elsewhere in financial products and which will be more negatively impacted by the rise in rates that I foresee. That's my classic investment part, which is actually linked to my profession. Besides that, I've done other diversification things. I wanted to be useful to people who need us. So I joined an agro-industrial project in Africa to help populations feed themselves, to find them jobs close to their homes, which allows young people in neighboring villages to imagine a positive future close to where they were born. And another subject, the third one, let's say, after the first two we discussed, well, I'm a fan of vintage cars. I have made a few purchases over my many decades of work in finance, and I have always tried to be interested in vehicles that had an important history, a position in the history of our civilization that makes sense. I have two cars that I can mention a bit like that. Well, a Rolls-Royce that was built in 1929. '29, of course, is the Great Depression. >> that everyone knows. It was ordered at the beginning of '29, before the crisis. So, well, it was total opulence by someone who had money. The chrome was replaced by gold. And then all the best trades and artisans in the United States worked on this car to create incredible woodwork, superb mechanics, a body with very difficult shapes to implement. And then it was delivered after October '29, after the crash in December, and so we arrive with a very, very ostentatious car in the midst of a crisis where people were going to starve. But what did this car show? It showed first of all that you have the right to be rich. You had the right to be rich in the United States and to show it. That's an interesting factor for French people. And then it especially showed, through the car's shape, a transition between a world before and a world after. The back of the car, the cabin is a carriage, and the front is a very long, very modern engine with a very low windshield, and therefore a beautiful transition between before and after, and 1900-1920. Fascinating car, 6 meters long, undrivable in >> Yes, I mean, parked in Paris. Yes, it's a museum car, waiting for the museum at my place. And then I have another car that has an interesting story, but actually it's even two twin cars that participated in Le Mans in 1964 and have a lot of aerodynamic patents. In fact, it's both the transition between aerodynamics, air penetration aerodynamic coefficient. We didn't have much power solution from engines at the time. So the goal was to reach speed, particularly through very strong aerodynamics. This car has the lowest aerodynamic coefficient, the CX, in the history of the world at 0.12. But at the same time, it's a car that invents the ground effect, and therefore the fact that as speed increases, the car is pressed to the ground, which allows it to hold the road extremely well. So downforce and aerodynamics, all on the same car. Well, that's something quite fascinating that also deserves to be in a museum and to be well described to all those who look at this automotive industry as it evolves today. >> What is the model of this car? So it's a C as in Charles Dutch, who was a French engineer, Panhard. The engine was Panhard, and all the aerodynamic chassis design was Charles Dutch. Incredible. Frédéric, you've been in financial markets for a very long time. You've seen crises, you've seen euphoria, you've seen moments of panic. But you're still here. So, what's the advice, if there's only one piece of advice to give? The advice you want to give to the individual investor who wants to grow their wealth? One piece of advice, that's not much, but the first would be, if you want to >> be reasonable >> reasonable in your expectations. Be reasonable in the size of the positions you take, be able to endure the decline without it transforming you mentally. Very important, don't overtrade. Do what you can do, accept the declines of what you've decided to buy. That's important. And over time, build a toolbox that you've become familiar with over time and with which you are in sync on the level of your psychology regarding our relationship with the market. Those would be the three pieces of advice. And that, well, that allows for independence. So it allows from time to time to make very contrarian calls, to put yourself in front of the train and see the train stop just in front of us, and well. But for that, you need to have these tools. You need to remain reasonable and have expectations that are not out of reach. So. >> Frédéric, I suggest we finish with the chronofinary. Two options, you give me the one you prefer with a short explanation to justify your answer. Let's go. Inflation in 2025, return or false alarm? >> Return. Return for the structural reasons we discussed. And in the United States, I think the situation is starting to shape up to create the second wave after that of 2021-2022. >> ETF, bubble or sustainable revolution? >> Well, I'd say bubble, even if indeed the listing continues to have its appeal and even if active management in ETFs will be able to establish itself, but in that case, it will be at a price that will be entirely equivalent to what we have in mutual funds today. >> US Dollar, hegemony or decline to come? Decline to come, investors' disaffection with American investments, so sell dollars to buy other markets, dollar decline and at the same time a currency that is less and less international, even if it is still massive, but we see very clearly now many large transactions being done in currencies other than dollars between countries that are not American. So I think it's the beginning of the end, but it's a beginning that will last. But yes. >> Bitcoin at $110,000, is that genius or madness? >> Well, I don't know, but I don't know how high it can go, but I have an idea of how low it can go. >> China versus United States, who wins the game? Well, one of the big theses today is to say that the United States needs China more than the reverse. And I don't always agree with that. I think China has a demographic situation that is a real catastrophe underway. Which is probably even worse than the figures we have today, particularly in terms of workforce capacity. I think China needs the rest of the world for its growth, and particularly Americans. And by becoming a consumer, at least that's its political announcements, it acknowledges it. >> Value stocks or growth stocks? >> Value stocks. Return to value, return to cyclicality, return to old economy companies. At least for a non-negligible part of global allocations. Yes. >> And a slightly provocative comparison, S&P 500 or CAC 40. >> Ah, CAC 40, and if you had said Dax, I might have said Dax because it's very industrial. The CAC 40 still has many attractively valued stocks, beautiful growth stocks in good sectors that we know well. So for that, I would still say S&P because there will always be very, very good stocks in that market capable of capturing growth, perhaps more than here. >> Bonds, opportunity or trap to avoid? Trap to avoid. That is to say, in short, you will have to know how to be in negative duration, that is to say, rather a seller of future yields than a buyer in a number of moments in the next 10 years with rates that will tend to rise. >> Thank you very much, Frédéric. It was my pleasure. [Music]