Deutsche Bank's Ozan Tarman and Aditya Singhal on Understanding the Macro Risks

Ad Laws is brought to you by Vanneck. For years, investors basically forgot about real assets, energy, gold, and infrastructure. But look what's driving markets now. Central banks loading up on gold, massive capex cycles, currencies doing weird things. These assets are at the center of it. Rax, the Vanneck real asset ETF is an actively managed one-stop shop for real assets, spanning gold commodities, natural resource equities, and more. Go to vanneck.com/raaxpod to learn more. Fund disclosure is later in this episode. Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made. And I'm Caroline Hepp getting London with the hosts of the Blue Bag Daybreak Europe podcast. We're up early every week, day keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy, and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money, and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break. So whether it's geopolitics, energy, tech, or markets, you're hearing it while it happens. It's smart, calm, and to the point. And it fits into your morning. You can find new episodes of the Blue Bag Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin, and Paris. On Apple, Spotify, YouTube, or wherever you get your podcasts. Blue Bag Audio Studios. Podcasts, radio, news. Hello, and welcome to another episode of the All Thoughts podcast. I'm Tracy Alloway. And I'm Joe, why isn't that? Joe, our live show in London, recorded May 7th at Wilton's Music Hall. A lot has happened since then. Him markets. It's hard to have a market's conversation that you know, isn't out of date within like a minute or two. Yeah. But I think this one, this one carries on. I think this one is still relevant. Well, you know, I have to say, I always feel a little anxious about recording markets episodes because of this very phenomenon. But this is true for a live and our recorded shows that by the time it comes out, who knows how much will have changed. This is why you should go to the live show. This is why you should get this exact where I was going to go. It's actually good to record markets episodes of the live show because that's like, all right, you create an inducement to get people to buy a ticket. But again, you know, with a lot of these things, like how traders are digesting this particular moment in time, sure the headlines and the prices on the screen change. But there are certain like principles and frameworks for understanding what's going on that will be sort of useful regardless of what's happening in the meantime. You mentioned frameworks and that is the perfect framing for this discussion. So we indeed have the perfect guess. We spoke to someone who's been on quite a few times before. One of our favorites for letting us know what the big money is actually thinking about and trading. We spoke with Ozan Tarmann. He is of course, vice chair of Global Macro over at Deutsche Bank. We also spoke to his colleague, someone who hasn't been on the show before, but who has quite a reputation. One of Deutsche Bank's star bond traders, a ditch a single. He is the head of EM trading across rates, FX and credit at Deutsche Bank. So take a listen. Okay. Let's start with the obvious question. Lines on the chart keep going up despite what would seem to be some challenges to the global economy to put it mildly. Why? First of all, even when I walked in, I was taking free people, you guys. It wasn't like that 15 minutes ago when we're not recording this at 733. Exactly. 20 seconds. Yeah. When one agency claimed that Operation Freedom was back on that President Trump could try to open the Hormuz by force, a stampede and liked it at all. Oil was surging higher than Al Jazeera denied. So we're all calling again. But the bottom line is why we keep going higher despite everything that Havier and Lorkin said is because buses are empty. When I say buses are empty, I don't only talk to my portfolio managers, but men on the streets, to my college classmates. One of them was like, what do you mean, buses are empty? That means investors don't have it. The analogy is a bit like closer to April 9th of last year when we had the big tariff chalk billboard up. We thought that it would be the end of the year, end of the markets. Then President Trump stepped back. And the markets never looked back. A bit similar, coins, things or not. March 31st is the first time he claimed to Wall Street Journal that he would separate state of Hormuz and the operation. That too could go separately. None of that happened. But that was the first big brief market took. And on April 9th, exactly the same day, the big first post-pomant came. He said, you're not going to do anything for two weeks. And since then, markets never looked back. Now, historic late by take, Nasdaq and Sampirelli. And you know I talk to a lot of people, a lot of key ladies guys. Honestly, maybe three, four, five people really believed in this rally since April 1st, April 9th. That's one big part of it. But it can't be all positioning. Also, fundamental, right? Earnings. Yeah. Again, head of sales. One of my legendary researchers, Jim Reed. Just today, he was on Bloomberg as well, talking about earnings in Q4 of last year, just 13% growth. Q1 records, biggest in five years late by take 24%. That engine keeps us going. Yeah, the earnings are what they are. So I'm here still there, curious. So Ozone came in and he gave us the latest headlines. Thank you, because I haven't, I hadn't been looking at that. Auto my job. Yeah, exactly. Can you look at his phone for 15 minutes, which might be a record? It's a record. New traders deal with the market in which they're just the sheer number of headlines. How do they know what to take seriously and what's real, what's not real. How are they ingesting news? So from a trading perspective, mostly almost everybody, fundamentally five asset classes. You have a thematic view and you have raised effects, credit, equities and commodities. But a lot of people are fixated or are mandated for asset class. So they have no choice but to stick within that kind of region. And then of course, are you, if you're a real money investor, a hedge fund, or if you are a sales side trader, just depending on how you are positioned, right? It's not really difficult to get in and out, right? So thematically, you have to take a structural long term. You see what every asset class is pricing on that particular view and defying an upside downside kind of scenario. And based on the liability profile you have and that how you define that is the function of the money you have. What kind of draw downs are acceptable? You take a particular position and you let it play out. So in this kind of environment, it's difficult. So what is the upcoming kind of positive news that you can rely on to the market, right? Today, if you were to sit here today, you say, okay, so the fact that not much action has happened in the last three to four weeks within the straight means that at some point or the other, the resolution will come. Pakistan is mediating as we can see. There's been enough talks happening. So you assume that a resolution should come as for the market as price theoretically. You also have a situation with Russia, which is developing, right? Russia, you create war, which could be positive or also. And then you have the visit, the US visit to China, which also is the item positive. Now, of course, there's a lot of it isn't the price per se, but fundamentally speaking, as a trader, you position yourself and then you just choose, you know, at some point to close it to the time, but get out. But just like, just, and I, that all makes sense to me. But like our traders sitting there with a true social window open, like the literal ingestion of news, how do you do it? And just getting the message from me. Yeah, right. Just getting it. Well, someone needs to make like a motivational poster that says, Lord, give me the confidence of an equity investor trading on an Axios headline. Yeah. Like, I feel like that would, that would sell out, right? So, yes, we have one open. Yeah. But generally, we have no choice. But fundamentally, it's like this, right? So you make up, you see what's, so we had a, if you would look at the rates market, for example, it's just an example, right? There was a six sigma event that happened within it. At some point, the pricing gets to a level where it doesn't make any rational sense. Okay. So you start to look at that on a, on a most structural basis and you start to ignore the noise in the middle. And whether we like it or not, we have to operate with that kind of philosophy. So you take one side or the other. It's very difficult to trade the headline because it's impossible because as of now, you had two conflicting headlines and you can get caught out. So most people have come to that understanding. So you've taken a respectable review that either this is going to get resolved. Or you can believe it's not going to get resolved. There's a way of expressing it within the five asset classes where you might get the most convexity. Similarly, if it gets resolved, there are certain things that actually might work which haven't yet worked. So you take those sides and you just sit and wait. You know, you mentioned irrationality just then, which means we should talk about AI, right? Because all of the stock market rally at this point essentially seems to be a bet on AI. What are you hearing from your clients, so is that on how comfortable they feel with us? Well, just two days before the Iran War began, we were in West Palm Beach and Miami with Adich as well visiting clients. And then the whole talk of at least one. that town but the US in general was that famous three-nipies, the other 15 million stampies, something big is about to happen, how in 12 to 18 months 50 percent of white color jobs could be wiped out, what that could mean for rates, that itself is very, very telling, right? And because of that and one source of claims numbers, if you remember US 10 years, that five day before the bombs came in, close at 393. And one of my more famous friends clients sends me a message on that five-day night bond is the new gold, three-night three top-declose. Then Iran war happens, not that surprising, but of course how it played out is very, very surprising, war, flation, high-skilling price thing, for people completely pushed aside, the slowdown job growth labor part of it, and then started completely focusing on the equity, the growth, the AI engine. And again if you just go back to January February, we were caught unquote happy because the thing was broadening out, it was a rally, but it was a rally late by Russell as well, would it be negative four, negative three, magnificent seven was forgotten, and how Lord behold, some of us thank God have three month memories. Now we're complaining about, oh it's all about seven stocks, the breath is too, we're just fighting ways to try to fight and wrestle away the rally, but so back to your question at the moment, yeah the cool aid is to believe that this AI run may have another one to two years to go, pull to the Jones public, one of definitely my more famous friends clients, today claimed that that's the case and made the 1999 analogy. So either you swim with that or try to feed it. Yeah you know this is the other thing, all right so we talk about these very worrisome scenarios, the price surge and oil, but very worrisome scenarios about deep shortages in various commodities, so that's one reason to be worried, but then there's this other thing that basically you know the disinflation is stalled out, if arguably it's going in the other direction, rates around the world, you know we're I think you know there was some sort of what was UK 30 year? Highest since 1998. Yeah so again just intuitively you would think these things compound each other and should really take the wind out of the sales of risk appetite and yet, so how is it that like even like you know what we see going on and selling of how does the selling and sovereign bonds mix into this market in their view? So let me take this to actually give you a thematic kind of how to take about things, right? Okay just give a perspective, right? So ultimately there is only one thematic view that matters for the next few years, right? And that is if you would assume you have China and China aligned countries and you have the West, right? If you would take China and China aligned countries, right? And they went space, what does West need theoretically in both manufacturing and services? And if you were to reverse the roles and if the West was in space, what does China and China aligned countries need both in manufacturing and services? And the reason I'm bringing to this point is I want to give a perspective. So what happened right in the last many years? So this microphone for example, right? This most of the material in here comes from China or China aligned countries, almost 90 percent, right? Manufacturing capacity of the world is 55 percent China, China, China, link but some places almost 90 to 95 percent. Take an example of cohort, cohort refining all in China. Now in the past what happened was they would give you this microphone and you would give them dollars or pounds or euros or whatever it is. So they hold that, so China holds that. What is the most rational thing for them to do? The most rational thing for them to do was to buy your land with that money. But you said no. Then they said I'll buy your equities. You said no to that too. Then they said what you know what? I'm going to buy the commodities that you might need in the future. You said fine do it, which is what China did for years. Then here's the interesting thing you said in return, let me sell you my services. So let me sell you fine wine. Let me send you the Gucci, you know more, you know, phenomenal bags. Talk to your educational services. Talk to education, education, and a lot of other things. And then also services. Services, whether it's a Microsoft Excel or whatever it is, right? But now what's happening is you have that side of the world, which is also building their own services tax. So tourism is now on shore. They started building their own cars of the chain value chain. So you're getting to a stage where if you expand this thematic view, you in the west have to literally build all of it from ground up. So if you assume China was in space, they can still disrupt the services sector, but they can't disrupt the manufacturing sector. They're not doing it anymore because you can, you will have to build it all up. So if you want cobalt and if they say no you have to refine it, mine it, refine it. You need to have companies that refine it. You need to have the engineers that do that work. And fundamentally that's what the fundamental paradigm of the world is. So when you talk about sovereign debt or any holding of or any equity holding, ultimately the creditor is China and China allied countries. They are the credit of the west and we are the debtor. And this is only increasing. So if you believe the wizard, what is the ultimate objective agenda of the visit of the US to China is to balance the current account to some extent. That's what the agenda. And this of course there's certain other aspects to it, but fundamentally that's what defines the kind of makeshift of the next kind of year to three years. And whether we like it or not, we have to build this. Data centers need electricity. AI needs copper, reshoring needs steel and golds run may tell you something about how the world is repricing money and debt. All of those point back to real assets. 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I want to come back to China versus the US on AI in just a second, but I definitely want to also ask this question because we are in London. How big a deal are the UK elections from your respective purchase, the local elections that are happening tonight? It is important because basically the UK and brought this for the past two years at least a big fight between fiscal dominance, beliefs, 10 years, 30 years, morning, 30 years, around the world. Will they get more out of control since we are in London? Will we have the dear list thrust two moments? Or, well, financial repression meaning emerging market style, treasury and central banks working more close together, especially on issuance, issuing less on the long end, more on the short-hand, taking a risk, but making sure that 10 and 30 years are under the leash. In fact, a very keen investor last summer, as in a smaller round table. What happens if all four of them, this was probably August this year before, back to school, September, races began. US, France, Japan and UK, if all of them had their thrust moments. And then September came in, I remember us talking about this. Yes, it happened, but only four hours in the guild market. I remember that little mini that moment. So now there is an excitement again, because UK has a different risk premium, net international investment portfolio, IE has a budget deficit and the current account deficit has to be nice to the foreigners because they will buy your R-DET. There are question marks on what this local election may mean for the government. Will there be a change there or in the chancellor will somebody more to left come in? All these are under question mark. Famous last words, my feel is for the moment still this financial repression will win. We won't have the thrust moment too, but obviously we they will need a little bit of luck for the Iran situation to continue to come down, because unlike the thrust moment, thrust moment one, now all of this is happening for reasons much beyond the UK. Joe, I am impressed that we always manage to schedule these macro conversations for maximum event risk between when we record and when actually publishes. So we have the UK elections, everything happening with Iran and we have non-farm payrolls tomorrow. There's so much going on and we just apologize in advance. This is why people should buy tickets to the event. Because if you have to hear this conversation on the podcast feed, who knows it could be out of date, but those who are here don't have that issue, is emification of Western policy making? Is that an apt characterization of it? Siting a side specific elections here or there? You hear that term amification of, and is that apt? It depends, right? So it's country to country. In this, again, paradigm you have. So let's the legalistic UK is an example. Let's elaborate further. The real rates are reasonably high. The country's gone through a difficult situation because it would happen with oil. The past through effect, but it's happening pretty much everywhere else in the world. You have current account pitch matters mostly in most EM countries, including UK. You have an input factor of energy, and you have an output factor of services effectively that you said. So depending on where you are in the world, which country you. Depending on who you are, if you have a situation where you are an energy importer, and your exports are highly dependent on effective services, which are getting disrupted, courtesy AI, fear and trouble. Alongside, if you are an importer of manufacturing also, or goods, again, you're in trouble. So this adjustment will happen. So you have to have allies. You have to have people who you do a quick pro-crow with, and that adjustment is what we're seeing effectively, and markets are finding a true balance of risk premium alongside. Well, okay. So on this point, two things you've said, which sound very rational on stage, having a series of allies, I don't know if those are stable, and then also this aspiration to balance the current account between the US and China. It sounds nice, but do you think. Are there actually any real prospects of moving the dialogue on that kind of thing? So, again, I don't want to comment here. This is in terms of our house view, but. I'm sure. but I give you a general perspective. On the same example, if you were to get West in space and ask China, what does it need from the West? Yeah. It's not much. Yeah, I've heard. Apart from Boeing and Airbus by parts, if you were to just look at from that perspective. So there is a desire, and maybe there isn't, they will oblige. I do think there is certain things like, for example, agricultural products that could benefit. There are certain aspects, but fundamentally, unless we choose within the West to build the whole manufacturing stack, it's going to be very difficult to keep this current account balanced. And on top of it, the biggest worry, and again, I may be jumping on this point, is when people talk about the AI stack that the West is investing in, and the CapEx stack that the West is investing in, the key is not what the West is doing. The key is to understand what China is doing in it. Understand what they are doing with the deep-seek version 4 models, the GLM5, the Hawaii clusters, I can go on with an optical compute, there are quantum computing, there are many more things that they're actually investing a lot in, which effectively becomes a true competition and a cost factor reduction. If there is a risk, that is the risk to watch out for, right? It's not to study what we are doing here, because we will find ways to keep evolving, but you have an ecosystem there, which is actually quite well-versed, and also has a lot of capital behind it. And there was somebody who was quoted as most of the engineers today, actually, are part of the world. Another thing that the market miscalculated, right? Right after Trump got elected the second time, December 24, January 25, by far, the big consensus rate, besides the US 10 years going to 550, you know, everybody being dollar-long, was to buy these dollar C&H options, strikes at 775 A. Everyone I knew was buying dollar C&H jobs. There you go. And they keep going. And what happened? It's the start, the start, you're in CZA, the other way around, C&H. So that shows you, even though some people are really into saying, "Markets are never wrong, you're wrong." That can be very, very wrong itself. So we're all human beings, and certainly, that can make markets very wrong itself. One more aging country that we need to talk about to bring you right to the markets, Japan, right? So to your question, higher oil, higher rates, why doesn't this thing bring down equities? Why are these no? Why is this guy a zon sending messages, buses empty, nobody's buying it? It can be quite frustrating, right? Last Thursday, Friday, it almost happened, because, you know, it just filled itchy. The other young looked like it would break, one on the 60, it looked like US rates would continue to sell off. Hormuz, again, question mark, there wasn't that tunt. And then, just like the rate check of at the beginning of the year, one of my closest friends on not-on-art trading floor, but on the sector, I had heard this big Irish voice, you know, this is a Fed, New York calling on behalf of Bank of Japan. I'm like, what's going on with this guy? And because he was shouting around, because they want to make sure that public information, they told those three banks that they called would let others know that they were watching. Similar, this time around Fed didn't call, Bank of Japan itself came and they panted for risk parity. What does that mean? They panted for lower volatility, comer-waters and stable rates. The moment they pushed down, yen, dollar, yen, lower, yen, stronger, US rates come down, equity's got a bit, etc., etc. So it's always a tug of war. On one side, risk parity camp, mostly central banks trying to keep things calm. And on the other side, sometimes my dear fast-money friends, looking for more to 2022, like years, Christmas come early, every Friday, another 50 base points fell off on Ty, US 10 years, higher volatility, etc., etc. And us staying in the middle, then try to decide which one is right. Can you just tell your fast-money friends to calm down for a little bit? No, I do, I do. They usually listen to me. A teacher, I want to go back to what you were saying about US versus Chinese AI models, because if we think about how much the stock market rally is actually dependent on AI at the moment, and how much of the AI story is dependent on this idea that, well, the West has these amazing, more sophisticated, albeit more expensive models for which the, you know, TAM is basically the entire world. And you're arguing that actually, that's not the case, and China's models are perfectly suited for its own needs. Elaborate on that. How are you as a sort of trader evaluating these models? How much of your day basically is now just trying to figure out AI? It's a very, very good question. And the key here is to understand what are you-- so currently there is a whole-- there is a very strong narrative. Yes, also a very strong use case. Now, the valuation stack versus a forward earnings, kind of multiple, right? If you were to look at it, right? It says that there is going to be a huge cap of investment within the West and stack for the next three or four years. And that's what's created this rally within various companies and the second order effect companies. China is doing something similar. It's very clearly said in the West that they are effectively using Nvidia chips. And Nvidia is just a company's just to give an example. But just they are chips to train the models in reality. Now, they have Huwai chips, which are pretty much parallel or comparable to H100 processors. The big problem that the West is not appreciating is that the reason West is investing so much in Capix is because they want to effectively get two superhuman intelligence very quickly. So almost everybody is saying, OK, you have a model that has 7 trillion parameters. Now we go to 15, maybe at 25, 50. And it becomes self-learning and it's reinforcement. But the reality is you have things like distributed AI. You have things which is actually being worked on in the West. You have also things which are very different, which is something as simple as quantum computing. Or I would say optical GPUs, right? It's another concept. Please read about it. So you have currently there was a narrative in the West where you had GPUs of Nvidia and you had a copper connector between them. Now you have optical compute firms or optical firms, effectively that have happened very well in the last many months. So this narrative will remain, right? Having said that, if you keep an eye on what's going on on the other side of the world, also use case in terms of actual uptake of usage, because it's not like I'm going to run five different AI models together. I'm going to probably converge to one at some point. It will eventually cause some kind of a problem in the future. The second thing that you have to keep an eye on is also robotics. That's the other aspect, which is going to be the second narrative that is actually going to start within the Western stack, which is the Elon Musk revolution of Optimus. And again, something to keep an eye on, what's happening in China within it? What's happening in West? And how deficient is West on it? You talk about OK, this microphone that we're talking to, almost certainly, the majority of it are all of it, probably made in China. How much do you see clients or people that you talk to purchasing Chinese financial assets, including Chinese government bonds, which more and more people are talking about not just the safe haven, but a safe haven that's done well and a diversifier. And how much is that becoming a meaningful part of portfolio construction? It can grow already. It's happening with FX. But people first denial than anger, then act on the human rights, where they realize that FX train has mood. To your question, government bonds, Chinese assets, just two, three years ago, even when I went to Singapore's and Hong Kong's off the world, people were either fearing, claiming, being very confident that China was uninvestable. Yeah, man. And deep inside, I was saying, if Chinese are uninvestable, your future in Singapore and Hong Kong, I turned out to be correct, right? But it turns out it starts with FX, but there is still a lot more room to go in Chinese equities and Chinese bonds. That bus is also not full. OK. All right. Lots of empty buses around. Ozan and Adita, thank you so much. for coming on All Thoughts. Really appreciate it. Thank you. Thank you. Thank you for coming on All Thoughts. [Music] A live short, daily news podcast focused on just one story. But right now, you probably need more. On up first from NPR, we bring you three of the world's top headlines every day in under 15 minutes. 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