Chapter 1: What is the main topic discussed in this episode?
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Subject to credit approval, Apple Card issued by Goldman Sachs Bank USA, Salt Lake City branch. Terms and more at applecard.com. Bloomberg Audio Studios. Podcasts. Radio. News. Michael Purvis, he's a founder and CEO of Talbakan Capital Advisors. Michael, what are the conversations you're having with your clients these days?
We're going into week three of this Iran issue here, and it's been such a volatile time for financial markets, starting with the commodities markets. What are the conversations you're having with your clients these days?
Well, one thing I think I've certainly been doing is standing back and looking at sort of some of the cross-asset correlations and how those are moving, because I think those give clues as to what type of risk environment we're edging into there. And so one of the interesting things here, Thomas is referencing the VIX at 21, which is really not that high a level there.
That's right in line with its long-term average there. But at the same time, you're seeing very high process of correlations. For example, like crude's correlation with the VIX right now over the last several days, really since these attacks began, it's in the top 2% of all readings going back a decade. If you look at crude's correlations with high yield spreads, those are also in the top 2%.
And what's interesting about that is that high yield is now correlating with the VIX, which it had kind of de-correlated. It's supposed to be positively correlated, right? You know, spreads back up, VIX back up, you know, when risk-off happens. That correlation kind of broke down over the last 18 months for all sorts of interesting reasons, but now that correlation's coming back.
Now, as it relates to the VIX, what's Interesting also is that the VIX at 21, yes, it's been correlating with the crude prices, but the cross-stock correlations are still really kind of muted. They've gone up a lot over the last couple of weeks, but they're not really high here, right? And you're still staying on any given day.
One stock can be in the green and a bunch of other stocks can be in the red there. So we're not really in the sort of risk-off environment, but crude is clearly driving the market. So I think that sort of begs the questions about how are you really trying to contextualize what's been happening here.
I think, again, you have to step back a little bit and just think, look, we had a great year last year in the equity market. A late winter malaise is kind of normal without Iran, right? That's something that could be expected here. We had a bad jobs report with some...
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Chapter 2: What are the current market tensions affecting volatility?
really important questions that were begged by the complexion of what jobs were being dropped, particularly in the, you know, sort of those pillars of job growth, the leisure and hospitality. So if there's a Fed today, what do you do? I mean... Yeah, you... Artfully dodge as many questions as you can to get off the stage. No, but seriously, I think it's interesting.
I mean, Tom was referencing urea prices, sulfur prices, helium prices. All these things will impact producer prices that will sort of weave its way. Did you have inorganic chemistry freshman year in college? Did you go down in flames like I did? Continue on urea and ethylene. We need more on methyl ethyl ketone if this continues. Oh, God.
But all those things do raise questions about, I think, what the Fed has to deal with today is what I call inflation complexity. Oh, I love that. Can we steal that? Sure. Okay. in some ways similar to post-Ukraine, some different.
Chapter 3: How do cross-asset correlations indicate risk environments?
But those are going to linger and creep into the inflation metrics we see a few months from now, right? And maybe longer than that. We don't know there. But at the same time, you've got companies laying off a whole bunch of workers with AI, right? So that's part of the inflation complexity that the Fed has to deal with. And then, of course, the other dimension of the
the Fed has to contend with is this sort of K-shaped economy. And in a way, the Iran attacks almost worsen. Rather than think about this situation as like straights on, straights off, it's really not that binary, nor is the fact that is it recession on, recession off. If you understand that in terms of the K, there will be many things that magnify the economic divergences.
Michael Purvis with his charm besides a 12 week vacation in the summer is he really truly mixes in analysis of equities, bonds, currencies, and commodities. So I've plotted Aussie Yen as a Pacific Rim proxy back 30 years. Observation, one, two, three, four, five, six times in 30 years, we've had two standard deviation plus, strong Australia, weak yen.
And the word I use is stochastic, they're pointy. They go up, there's stress, and they turn around and come down. Why is this time any different, where this is the mother of all opportunities at 2.2 standard deviations and the long trend, and you go against this gloom, this zeitgeist that's out there now? Well, I'm going to pivot that back to maybe dollar-yen and dollar-euro.
I think one thing that's really apparent here is that when you look at relative hydrocarbon vulnerability, that is obviously today, the United States, very different than it was in the 1970s here. Right. So we're not a petro currency, the US dollar, but relative to the yen and relative to the euro, we are. And I think what you're referencing in Australia is some version of that theme here. Right.
And so what have you seen? You've seen, you know, I was before Iran, I was waiting for the euro to break 120, maybe go to 125. That worked out. until Iran, right? And now you're seeing that. Now, if you measure, say, the US dollar relative to the Canadian dollar, that's really been very stable, right, there. So there are sort of petro-currency
I don't like the term, but there are petro-currency dynamics that are in that, and it's also being reflected in the equity markets as well. I've got to wrap this up, but you're a young guy. Can you just state that usually these tensions are stochastic and they repeat and reverse? Always? Almost? The question is, yeah, classic Gulf oil spikes, you know, they're temporary.
You know, gold shoots up, shoots back down. You can see it on a chart. Right, right. The Australian dollar shoots up relative to the yen and falls back. But the question we don't know is, and you saw this, by the way, in SPX Options, where the three-month football skew finally caught up with the one-month skew just the other day. that this may be not a two-week thing.
Maybe this tension will persist for a few months here. And so following Ukraine, that was not a sort of straights on, straights off type of dynamic. That just kind of kept going. And yet it drove a lot of problems, for example, in the Eurozone, right? Relative to the U.S., right? Did you survive St. Patrick's Day? Yeah, mostly putting together charts. And I did have a green bagel, though.
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