StoneX' Vincent Deluard: The S&P Is Hiding a Bear Market | #655

Hermès International S.C.A.

• Vincent Deluard · StoneXBullish

  Hermès's multiple has halved despite strong fundamentals; could make money eventually but won't rush.

  French luxury names have been de-rated, and Hermès's multiple has roughly halved. The business is still strong, with high margins and a good-quality balance sheet. He thinks that at some point investors could make money on the valuation reset. He would not rush to trade and sees this as a patient way to deploy capital, though eurozone debt stress limits how well European equities can perform overall.

  “looking at French luxury, for example, like the multiple on your Hermes or [LVMH], I mean, halved. And they're still pretty good business fundamentally”at 42:39

LVMH Moët Hennessy Louis Vuitton

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• Vincent Deluard · StoneXBullish

  LVMH's multiple has halved despite good fundamentals; could make money eventually but won't rush.

  French luxury names have been de-rated, and LVMH's multiple has roughly halved. Fundamentals remain good, with high margins and a good-quality balance sheet. He thinks that at some point investors could make money on the valuation reset. He would not rush to trade and sees this as a patient way to deploy capital, though eurozone debt stress limits how well European equities can perform overall.

  “looking at French luxury, for example, like the multiple on your Hermes or [LVMH], I mean, halved. And they're still pretty good business fundamentally”at 42:39

US Treasuries & yields

• Vincent Deluard · StoneX

  Bond yields are at levels that are becoming a problem for the stock market.

  Yields have risen to a level that starts to hurt equities, which is why he moves duration from long to short. He argues the rise is not simply a growth story. If yields were rising because growth was strong, credit spreads should tighten, yet spreads are widening, especially in consumer names. That points to an inflation or financing shock rather than a growth boom.

  “we are starting to see attractive level of yields that I think are becoming a problem for the stock market.”at 6:53

• Vincent Deluard · StoneX

  Bond volatility (MOVE) is at an all-time high while equity VIX looks normal; the divergence should resolve.

  Historically the MOVE and VIX move together because stocks are discounted at the bond discount rate, so volatile rates should feed into equity volatility. Now the MOVE is at an all-time high while the VIX is subdued. He expects the divergence to resolve through some combination of bond volatility falling after the crisis and stock volatility rising, which implies pressure on equities.

  “here we have the move index at an all time high, while the VIX is, you know, kind of normal, things can always resolve two ways, right, divergences”at 24:48

• Vincent Deluard · StoneX

  Rising yields are normal; the decade of negative term premiums and QE was the abnormal baseline.

  He argues that the rise in global bond yields is normal healing. The prior ten years of negative term premiums and QE were abnormal and gave a misleading baseline. A 5% long rate with inflation around 4%, real growth near 2% and AI capex at 3% of GDP is a plausible normal level, so the move back toward it is not a crisis.

  “I think what was abnormal was the prior ten years when we had negative term premiums, the QE, and that really gave us the wrong baseline.”at 39:40

• Vincent Deluard · StoneX

  Bullish on bonds in the belly of the curve; yields won't fall much, but 5% coupons buffer losses.

  He is turning bullish on bonds, mainly because he is bearish on stocks. He does not expect yields to fall meaningfully from current levels. The belly of the curve has much lower duration than the long end, so a coupon of about 5% or more can offset much of any further rise in yields. Even if yields keep rising, he expects bonds to finish the year up.

  “I don't think yields will meaningfully come down here, but I just see that there is enough of a buffer, especially if you look at that belly of the curve where the duration is much lower”at 40:16

Europe's economy

• Vincent Deluard · StoneX

  Europe is repeating Japan's 2011–12 debt trap; a much weaker euro will come through a chaotic sequence of crises.

  Europe's demographics put it roughly ten to fifteen years behind Japan. Europe is running Japan's failed playbook: fiscal stimulus, monetary easing and productivity reports. Taxes cannot rise, debt capacity is limited, immigration is politically blocked and productivity is falling under energy costs and Chinese competition. The only way out is a much weaker currency, as Japan achieved with the yen after 2012. But with 17 countries and cross-border transfers, Europe cannot coordinate a currency policy. The euro will fall through a sequence of crises: France's debt crisis now, then Germany, which will take down the euro. He says the euro could reach about 0.8 against the dollar, and that a Japan-style fall would be around 50%.

  “[Europe today is where Japan was in twenty] eleven, twelve, just uglier. And it kind of makes sense.”at 27:02

• Vincent Deluard · StoneX

  Europe faces a negative terms-of-trade shock: costlier energy and weaker industrial exports are making it poorer.

  Europe must pay more for energy and receives less for its industrial exports. This is a negative terms-of-trade shock, which makes the region poorer. East Asia faces the opposite situation, with large surpluses, which is why he contrasts the two regions.

  “what we have in Europe is a negative term of trade shock, right? We have to pay more for energy and we get less for our industrial export. As a result, we're getting poorer.”at 36:44

• Vincent Deluard · StoneX

  France shows every marker of a severe sovereign debt crisis, with the worst r-minus-g gap in the region.

  A sovereign debt crisis needs high debt, a large primary deficit financed by foreigners in a currency it cannot print, a stagnant economy, unpopular politicians and no ability to raise taxes or cut spending. France meets every one of these conditions. Its r minus g (interest cost minus growth) is the most negative in the eurozone context he discusses, whereas Japan has growth above interest costs and the US is roughly neutral. Political tension and bearish public narratives add to the risk. He expects France's problems to persist through and after its election.

  “Perfect hit for France, we hit every single marker of a severe debt crisis.”at 57:09

US stock market outlook

• Vincent Deluard · StoneX

  Turning bearish on US stocks: breadth is weak and yields are becoming a problem for equities.

  The index is at all-time highs, but over 70% of US stocks trade below their 200-day moving average and about a third trade at negative beta, so the rally is narrow and held up by a few mega-caps. He calls the bull market long in the tooth after a 17-year run and says the stock rally itself has become the main justification for itself. He flips from overweight equities and no duration to bearish on stocks, citing yields at levels that pressure equities and widening consumer spreads. Healthcare's index weight is at an all-time low, so no sector can lead a rotation. He expects a Sept–Nov downturn around the midterms, as in past cycles. Normalising stock correlations would mean a correction rather than a bear market.

  “A majority of US stocks would disagree with you. I'm turning bearish on stocks.”at 0:00

• Vincent Deluard · StoneX

  Bearish on US stocks, which is why he is turning bullish on bonds and long yen.

  He is worried about the stock market and says his bullish turn on bonds is mostly driven by his bearishness on stocks. Long yen is also presented as a hedge against an equity downturn. The part-two discussion gives no detailed valuation case, so the case rests on the macro cross-currents he describes.

  “...I'm kind of turning bullish on bonds and it's mostly because I'm bearish on stocks.”at 40:06

US inflation

• Vincent Deluard · StoneX

  The next inflation shock will be inflationary, because the policy response to it will be inflationary.

  Shocks are neutral in themselves; the policy response determines whether they become inflation. COVID was deflationary in China, where there was no stimulus, but in the US, checks and supply mismanagement produced about 10% inflation. Governments now cannot raise taxes, cut spending or take land, so tariffs and export bans become the easy revenue tools and feed inflation. He expects the stagflation to intensify in the last two years of the presidency. He also thinks official CPI is understated, and that any task force on CPI will likely push the measure lower.

  “I don't know what the next shock will be, but I know it will be inflationary because the policy reaction will be inflationary.”at 17:08

• Vincent Deluard · StoneX

  Yield rise partly reflects markets pricing that official inflation gauges are systematically understated.

  Breakevens have not moved despite energy prices, agricultural prices, PPI and prices paid all rising, which contradicts a standard inflation shock. He thinks the market is pricing a risk that official inflation is being systematically understated. He cites a PCE revision that cut portfolio management fees and software, and expects CPI and PCE to be tampered with. Under this view, the yield move is not purely real, and the implication for gold and Bitcoin is less negative than real yields alone suggest.

  “Part of my idea is that that move in yield, looks like it's all real but it's not all real, it's the market pricing, the risk that inflation is going to be systematically understated”at 51:46

Japan's economy

• Vincent Deluard · StoneX

  Japan is exiting its debt trap, and he likes the yen.

  Japanese rates are rising and money is flowing back into Japan. Japanese investors repatriating capital drove much of the pain in the French sovereign bond market. Japan's tax collections have grown about 7% a year for ten years. Under the debt-trap logic, the cost of debt (R) minus growth (G) is deeply negative: rates have risen from zero to about 4%, but nominal growth is about 7%. The debt trap is ending, which supports the yen.

  “In Japan, R minus G is very negative. Even if R has gone up quite a bit, I mean, R was zero, now it's 4%, but G is seven. So you're still doing good. The Japanese yen would be one that I like.”at 36:15

• Vincent Deluard · StoneX

  Long yen is a good defensive hedge; Japan's growth far outpaces its borrowing costs, so no debt crisis.

  Japan's tax collection has grown about 7% a year for ten years. Japan's r minus g (cost of debt minus growth) is very negative: r has risen from zero to about 4%, but g is about 7%, so the debt dynamic remains healthy. Because he is worried about the stock market, he sees being long the yen as a useful hedge. The yen tends to rise defensively when risk assets fall.

  “So because I'm worried on the stock market think being long yen is a nice hedge.”at 36:32

Emerging markets

• Vincent Deluard · StoneX

  South Korea and Taiwan's huge surpluses will push up the won and Korean rates; Bank of Korea likely to hike.

  South Korea and Taiwan run current account surpluses of about 25% of GDP, expected to persist through 2030. Because these economies are small, the flood of money has nowhere to go but into the currency, rates and domestic spending. Surplus money leaks into consumption, public investment and military spending, which builds pressure on rates and the currency. The won is already up about 15% against the euro in the past month. Inflation and investment are picking up, so he expects the Bank of Korea to raise rates. Receiving Korean rates is one way to express this trade.

  “The current account surplus in South Korea and Taiwan is 25 percent of GDP and that's expected to stay.”at 36:55

• Vincent Deluard · StoneX

  Brazil's rally may shift from local to foreign buyers, adding currency gains; multiples remain low.

  Local managers chased Brazil's rally into the election, then took profits after a roughly 30% gain in a few months. Political disappointment in Latin America has been repeated, and Brazil's constitutional checks limit what any single leader can do. Brazil is also not as bad off as Argentina was, so the political shock is less severe. For foreigners, the story still works. Many US advisers have no international exposure, and Brazilian multiples remain modest, especially for the big banks. He expects the buyer base to switch from locals to foreigners, bringing a currency tailwind with it.

  “I could see the drivers change, local buying, switching to foreign buyers, and then when you have foreign buyers you have a currency effect”at 49:36

US growth & recession risk

• Vincent Deluard · StoneX

  GDP is a fuzzy, nearly worthless gauge; tax collections track nominal income better.

  GDP was a meaningful measure when the economy produced steel bars and cars, but now it is hard to count and does not show whether growth is real. He prefers to track income through personal income tax collections, which are visible in real time. Those collections show nominal income growth slowing from 8–9% to about 5%. With inflation around 5%, that means most people are making no real progress.

  “Like I feel GDP is really a fuzzy concept that makes us more confused than before... but these days it's kind of worthless.”at 4:46

AI infrastructure & data centers

• Vincent Deluard · StoneX

  Tech capex near 3% of GDP is the biggest investment boom, bigger than the canals and railways.

  He lists the tech capex cycle as one of four explanations for the unusually strong nominal income growth. Tech investment is running at close to 3% of GDP, which he considers probably the biggest investment boom in history, larger than the canal and railway booms. That spending is a key driver of nominal growth.

  “Three is this CapEx cycle in tech. I mean, we're looking at close to 3% of GDP. This is, you know, the biggest investment boom, probably even bigger than the canals and the railways”at 6:07

US immigration

• Vincent Deluard · StoneX

  Immigration likely drove the nominal income boom; removing immigrants should slow tax-revenue growth.

  Personal income tax collections grew 8–9% at the start of the year, against 4–5% before COVID, and are now closer to 5%. He thinks immigration was part of the nominal boom: more people in the country meant more income. Removing people should therefore slow that growth, which is consistent with the slowdown he is seeing. He admits it is hard to know exactly how much immigration contributed.

  “I think you can make a reasonable argument that a lot of that has to do with immigration,”at 7:47

US consumer

• Vincent Deluard · StoneX

  Consumer spending is propped up by stock wealth and 401(k) withdrawals, not income, so it cannot last.

  Real wages have been negative for four months, as wages absorbed the oil shock. Consumption has held up because the stock market has risen and households have been pulling money out of investment and 401(k) accounts. JPMorgan data show withdrawals across the income spectrum, and Vanguard's emergency 401(k) withdrawals rise every year. The savings rate is at generational lows. This resembles 2006–07, when consumption held up by extracting home equity. Consumer-sector credit spreads are already widening, which is where he is most worried.

  “Now we've had four months of negative real wage gain. Why has consumption been so resilient? It's because the stock market's been up and people have been taking money away from investment account from 401ks,”at 8:32

US elections & politics

• Vincent Deluard · StoneX

  A Democratic midterm sweep would bring investigations and stagflationary policy, which is bad for stocks.

  The view that gridlock is good for stocks is a 1990s framing. Today there is an inflation problem and a budget crisis. Betting markets give Democrats close to 70%. A blue wave would mean two years of corruption investigations and impeachment, with nasty policy and stagflation in the last two years of the presidency. Historically, the stock market has had a bear market in September to November around midterms, and he sees the midterms as a catalyst for a downturn.

  “If we do get a blue a blue wave, I mean, that means that for the next two years, everything that we're going to do is gonna be a corruption investigation, impeachment.”at 12:06

US rates & the Fed

• Vincent Deluard · StoneX

  No Fed or fiscal put will rescue asset prices in the next two years.

  Historically, whenever things went wrong the Fed came to the rescue, and fiscal policy announced stimulus or new programmes, so asset prices had a policy floor. He does not see either backstop in the next two years. Constrained by inflation and a fiscal crisis, the Fed and Congress are unlikely to step in to support markets.

  “I don't see any of these puts”at 13:35

Oil & fuels

• Vincent Deluard · StoneX

  Effective global oil cost is about $150–200 a barrel once refining margins and freight are included.

  WTI understates the price the global economy pays, because consumers buy diesel, gasoline and jet fuel. The relevant price is the refined-product price paid in Asia: add about $20 of refining margin and about $20 of transport and insurance to the crude price. Oman crude shipped to Asia trades about $15 above WTI, which shows real demand. The two buffers that held prices down are running out: the strategic petroleum reserve is near its minimum operational level, and Chinese crude imports, which had collapsed, are recovering, with August imports picking up.

  “So effectively we are living in a 150 to $200 oil world.”at 16:05

China's economy

• Vincent Deluard · StoneX

  Chinese PPI is the leading indicator of global inflation, and it is now running at 5–6%.

  Most goods Western consumers buy are made in China, so Chinese producer prices pass through to Amazon and Walmart prices. Chinese PPI deflation was the main reason inflation fell after 2022. PPI is now running at 5–6% domestically. In addition, the PBOC is letting the yuan appreciate by about 0.5% a month, which raises import costs for foreign buyers and adds to the stagflationary picture.

  “I think the leading indicator of inflation globally is Chinese PPI. Right? Because at the end of day, most of the things we buy are made in China.”at 16:13

Agriculture & food commodities

• Vincent Deluard · StoneX

  Agriculture is the biggest risk: the energy shock is likely to become a food shock in 2027.

  Diesel is central to farming, so the diesel shock passes through into farm prices. Fertilizer is stuck in the Middle East, which cuts yields and keeps prices high. Wheat, corn, rice and soybeans are up 25–30% this year. El Niño, with Pacific temperatures about five degrees above normal, brings heavy rain to Brazil and Argentina and monsoon failure in East Asia. Heat and drought turned France from a grain exporter into an importer, and Black Sea grain is stuck. These pressures could destabilise import-dependent countries such as Egypt and Pakistan.

  “I would be most worried about the ag part of the equation, because I think this is where you have the biggest concentration of risks and spillover.”at 18:40

US deficit & government debt

• Vincent Deluard · StoneX

  US fiscal shock: tariff revenue is falling short and the deficit is near 6% of GDP at full employment.

  Without the war and the Supreme Court ruling, tariff revenue would have been around $250bn, and it would have offset borrowing costs. Instead, interest expense has soared. This summer tariff revenue turned negative, because refunds on emergency tariffs exceeded collections on new ones. The shortfall is about $500bn versus CBO estimates this year. The deficit is close to 6% of GDP at full employment. With no room to raise taxes or cut spending, tariffs and export bans look like the likely fix, which would feed inflation.

  “I think tariffs are our fiscal issue. At the end of the day, we have a very negative fiscal shock in The US.”at 21:23

Market sentiment, positioning & volatility

• Vincent Deluard · StoneX

  Near-zero stock correlation is suppressing the VIX; normal correlation would push it near 40.

  Index variance is the average stock variance plus a correlation component, and correlation is the dominant driver. Average stock correlation with the index is around 5%, and about a third of US stocks trade at negative beta, which is unprecedented. He attributes this to pair trades, the AI trade and earnings-driven trading replacing macro trading. When he recalculates the VIX at a normal 50–60% correlation, it would be around 40. Because stocks struggle to rally with the VIX above 20, he expects stock volatility to rise.

  “The average stock correlation with the index is around 5%. This is unprecedented.”at 23:53

AI bubble & tech valuations

• Vincent Deluard · StoneX

  The AI trade story is tiring; cracks are building and nothing yet replaces it.

  Since the summer the market has rotated from refiners to tobacco to cheap stocks and back to AI, which signals a lack of conviction. He expects the AI leadership to keep the market going until the Anthropic IPO, but cracks are accumulating. Energy stocks have performed well, but rotation into refiners cannot sustain a bull market, and even a new leadership group would not be enough to carry the index.

  “I think the main narrative is getting tired, this kind of AI story. I think, again, we keep it going until the Anthropic IPO, but the cracks are accumulating and we're just not seeing anything that can replace it.”at 25:49

Central banks outside the US

• Vincent Deluard · StoneX

  The ECB cannot hike rates during a debt crisis; in the short term it can only hold off.

  Eurozone debt stress, especially in France, constrains the ECB. Hiking rates during a full-blown debt crisis would worsen the sovereign's funding position. Short term, the ECB's only option is to skip hikes at upcoming meetings. This is why he would pay euro rates rather than expect hikes.

  “I don't really see the ECB being able to hike rates when we have a full blown debt crisis. And that's really the only... In the short term, that's the only thing the ECB can do is not hike rates.”at 38:54

International equities

• Vincent Deluard · StoneX

  UK equities should turn around first; he would pair long UK against short eurozone stocks.

  He expects international assets to outperform eventually, though he would not rush to trade. The UK should turn first because it has already been through a populist debt scare, its budget balance is improving and its new prime minister is less incompetent. The Bank of England retains autonomy and can react faster. UK equities are cheap: the MSCI UK share of global market cap is about 2%, below the UK's share of GDP. Foreign investors have left, and UK pensions have cut domestic equities from about 50% to about 5%. The index is weighted toward energy, healthcare and banks. He suggests a pair trade of long UK against short eurozone equities.

  “One specific market I'm looking at, which is unusual for a French man is The UK. When things start to turn around, it will be in The UK first.”at 43:06

Bitcoin & crypto markets

• Vincent Deluard · StoneX

  Crypto's resilience despite rising real yields may reflect Korean surplus money flowing into crypto.

  Crypto has rallied despite a major rise in real yields, and this is unusual. South Korea's surplus money, with bonus payments at Samsung and SK Hynix flowing into bank accounts, may be recycling into crypto. Korea has the infrastructure and culture for it. He notes that about 20% of South Koreans own crypto, with the US near 15%. Korea's gambling culture, its history of bank failures and central-bank currency repression explain the appetite. If the surplus persists for about three years, more of this money could reach crypto.

  “I guess some of that is going to go to crypto just because the infrastructure is there, the culture is there. And maybe that's one reason why we've seen these extraordinary resilient crypto prices”at 54:56