Transcripts

 

 

Erik: Joining me now is Forest for the Trees founder Luke Gromen. Luke, to my thinking, there could not be a better time for you to be acknowledged as our second most popular Macro Voices guest ever. The reason I say that is nearly a decade ago, I coined the phrase, the Luke Gromen moment inspired by the Minsky moment.

And what I mean by that is when we first started talking nine years ago, or ever since then, I have been. Absolutely convinced that you would be proven right in the end on your bold calls that the US dollar was eventually gonna fall into decline, fall outta prominence, not be the us or not be the world's reserve currency anymore, just as the pound sterling fell out of popularity a hundred years earlier.

But I also said at the time, I thought you were early. I thought it was several years away, and, and I knew you'd be proven right. And of course you got ridiculed along the way and so forth. Let's start just by making sure I'm not overreacting here, because I don't think you're early anymore, Luke. I think the Luke Gromen moment is happening right now, kind of scares the shit outta me.

And then I read your last three writings, frankly, over the weekend, and that scared the shit outta me even more. So is the Luke Gromen, uh, moment that I describe actually happening the way that I think it is. Am I being true dramatic or is the shit really hitting the fan in a bigger way than most people seem to be talking about?

Luke: Well, first, thanks for having me back on and, and congratulations to you and Patrick. I'm honored to have, have been a part of your guys' amazing success and, and wish you all the best and continued success from here. So, to answer the question you know, I, I've always thought of I guess the quote unquote Luke Gromen moment was sort of a, a gradually then suddenly phenomenon, right?

Like, how'd you go bankrupt little by little then all at once and have a few. Having me on for this actually caused me to search for my first appearance. I wanted to see when it was on Macro Boys, isn't it? It was September 8th, 2017, and the title of that episode was, was Luke Gromen. The biggest mean reversion in 50 plus years is underway.

And so at that point, we had been bearish on the dollar beginning late 2016 at a time when most were pretty bullish on the dollar. In fact, you let off by saying that, you know, we had so many secular Dollar Bulls, we wanted to bring listeners a credible secular dollar bear. So here, here's Luke. And so, at that point, the dollar had hourly fallen that year in 2017 from 1 0 1 to 94 by the time we did that first interview.

And, you know, we said, look the d Dollarization trends that had kicked off the Dollar Bowl market in earnest in the third quarter, 14 had gone too far. And you'd started to see the deficit in the US. As a percentage. GDP back then in, in 2017, re widen for first time since oh nine and only the seventh time since 1969.

And basically every other time we had a recession, or one time we didn't, we got the dollar devalued at the plaza accordance. What we said was like, look, if you look at the poll at the debt levels, a recession isn't a policy option. And so we think that the government's gonna, we gonna weaken the dollar.

And so we did see that. And the key thing within that was that was the first time in our career in any dollar at that point. Up until that point, we'd been a bull in, in 16 up until early 17, we had never seen the US fiscal situation. The deficit widen or the fiscal deficit sort of breakout before you had an EM crisis.

But that's exactly what happened. And so what we said in, in, at the bottom line was, look. Because foreign central banks stopped buying treasuries back in three Q 14 on net. Either the fed's gonna have to raise rates. They tried to, it didn't work because the fiscal situation broke before emerging markets.

They're gonna have to force us domestic investors to buy treasuries. They did. Or the fed's gonna have to grow their balance sheet. And so we, we kind of saw that. And so when you, when you look back to that, it's pretty amazing. As you know, from the date of our first show with you, you know, fed balance sheet was $4.4 trillion.

It's 6.6 trillion now after nearly four years of qt. Um, you know, on that show you asked us, Hey, what's the trade? And we said, look, in a nutshell, the trade long gold short oil, you know, that day gold oil ratio was 22 barrels an ounce today at 61 barrels an ounce all time high. GDX gold miners, which is a proxy for gold oil ratio, was 22 bucks at 73 today.

So you got a couple triples in eight years. 15, 16% KRS for both. We also warned on that show about long-term treasuries. We said, look, something that jumps out at me as I try to look at forest for the trees is US retirees, commercial banks and pension funds are all the biggest bid for long-term treasuries.

And if those groups are on the right, the right side of a major macro trade, well ahead of time, it would probably be the first time I can remember in my 22 plus year career on Wall Street. And so, you know, we said that that day, the TLT Long-term Treasury, ETF was 125. Today it's 88, so down 35% in risk-free long bonds when, you know, long-term treasuries had basically been a one way trade for the prior 35 years up to that point.

Uh, and obviously, some pretty well-known long-term treasury bulls were sure that deflation was gonna drive, ETF, you know, the T-L-T-E-T-F, uh, higher and higher and higher. And then finally, on that first show, you know, we said, look, I think the overriding message of the political populism that has broken out in the US and in western social democracies over the last six to 12 months.

Is that all the US entitlements are gonna get paid with printed money. And I think that's what maybe Mr. Market is starting to discount. I said on the show you've seen a breakout in the s and p 500 over the TLT the, uh, the long bond ETFA very pronounced breakout in a 25 year chart. So, you know, went back and looked at it today and, and you know, that day the s and p over T-L-T-E-T-F was 20 and today, you know, it had recently broken out over 15 for the first time in at least 15, 20 years.

You know, today up from 20, the s and p over TLT is 75 x, so nearly quadruple in eight years. And so all of which I bring up by way of, of background to the question regarding the Luke Gromen moment is that I never really saw it as a moment. I saw it as more. Gradually then suddenly, you know, and gradually was, you know, gold to oil ratio up three X in eight years.

It says 15 16% cagr, TLT down 33% in eight years. GLD over TLT up four x in eight years, s and p over TLT up four X in eight years. You know, the dollar's been 94, it was 94, then it's 96, 97 today. You know, we've been tactically bullish and bearish a few times in the show, but you know, I think overall pretty good calls, pretty good positioning early.

Yeah, I think probably maybe, but you know, we should all get 15 to 20% CAG run levered returns on our early calls. Right. In terms of what we were saying. So that was the gradually part, you know, it worked out pretty well for Fftt clients. Worked out pretty well for my own portfolio. And so with as by way of background, as that context is the Luke Gromen moment, I think are we, I think it's really about are we going from gradually to suddenly? And, and to your point, I think we are, I think the suddenly portion is beginning. Uh, you know, we wrote two weeks ago, we thought the fall of the, or the, excuse me. We thought the week, the, the week of the SEO, the Shanghai Cooperation Organization meeting was might've been the most important geopolitical week since the fall of the Berlin Wall in 1989.

And, and if that's right and I think it is, then I think we're likely to see things accelerate further.

Erik: Look, I want to congratulate you. I think you've made some brilliant calls over the years and I wanna be clear when I've said you were early, I meant the part about the US dollar falling out of providence and not being the reserve currency.

I thought that was early. You've certainly been very timely in a lot of your past calls. Luke, I think what we need to get to is what causes the state transition from slowly to suddenly. What is it that causes that to happen? And I think it's the recognition by all the people that were in denial that, oh, he was right.

You know? And think about the pandemic. All of us who called the pandemic early were being ridiculed. We were being called alarmists. We were, you know, all kinds of stuff. And then one day it's like, well, duh, everybody knows there's a pandemic. You know, what's what? Do you think you're smart? And I think all of the sudden, the Luke Gromen thinks the US dollar is falling out of, you know, reserve currency status.

That means Luke has to be a conspiracy theory nutcase. No, I don't think anybody thinks that anymore. I think it's pretty darn clear. Is that what's going on? Is everybody else is waking up to it? Or is it something else that's causing that sudden acceleration?

Luke: I, I think it is. I think it's a gradual awakening, I guess, and on multiple fronts, right?

So when you highlight that, you know, you can look at things objectively, right? So all of a sudden gold is now bigger than the Euro in at Global FX reserves. And it, uh, after another two or three years, if we assume another two or three years of, call it 800 to a thousand tons of Central Bank gold buying, we assume modest gold price appreciation for the next two, three years.

Gold is gonna be the biggest global reserve asset. And then that just gets into a question of semantics. If gold is the biggest reserve asset, it's bigger than the dollar. Who, what's the primary reserve asset? The dollar or gold? And, that I think is, is part of it. I think the other thing.

May, and maybe the biggest thing that is really starting to drive a recognition is the the reaction to the trade war. And in particular, post liberation day, remember we came into Trump's administration and, you know, it was, Hey, we're gonna, we're gonna doge, we're gonna cut and we're gonna strengthen the dollar.

And okay. And we tried to Doge and we couldn't, you know, we saw very quickly, oh, we're gonna take pain. Well, we took pain for like, 10 days. And then the treasury market started dysfunctioning. Uh, we weren't able to scare money out of stocks into bonds. Yields went up, not down as Bess and a lot of other thought.

And I think that was sort of strike one right. To, to the recognition. Then more specifically, uh. April, April 7th, I think it was Bessant who on Wall Street I think is, was seen by sort of the, the adult in the room, if you will within the Trump administration, right? He's our guy. He's the adult in the room and the adult in the room.

Bessant sat on April 7th, Tucker Carlson as the debtor, as the trade debtor. We have all the leverage with China. They're gonna do what we tell 'em to do. And on April 9th, the US treasury market dysfunctions severely very badly. The move volatility index hit 1 75 or something intraday, which it had only done like when Lehman nine 11, the 87 crash.

Like all it was, the treasury market was breaking. And Trump, it it, that led to the phrase taco right? Trump always chickens out. That led to the first Taco instance. We've also, you know, I think people said, well, we, we, we don't need the Chinese to supply us. We can get it from somewhere else.

And, and then, you know, major US retailers went to the White House, I hear in either late April or early May, and said, well, not really, actually, we can't do this without China, and we taco it again. And so I think there has been a recognition, even most recently, how many times have you and I ever occurred from China Hawks that, look, if we cut off food to China, China will starve.

We've heard, I mean, I've heard it so many times in my career, too many times they count. And yet the Chinese have not bought a single new crop, soybean or a single new crop corn from the United States this year. The Chinese aren't starving. Why? They're getting it all from Brazil. They're getting it from elsewhere.

So they don't need us on food either. So we have no leverage on trade. We have no labor. Our, our treasury market broke in five seven trading days after liberation Day, which yes. China would've been hurt, but they weren't gonna be hurt in seven days. I, they probably weren't gonna be hurt in seven months.

So I think that was, you know, we didn't have leverage on food. We didn't have leverage on trade, we didn't have leverage on the treasury market. And then the rare earth situation got layered on as well, which was, as it turns out, again, something else we've been highlighting for a long time was ultimately you know, the key parts of the US military are made in China, and particularly around rare Earth.

And the, the information was all out there. But again, I don't know if it was confusion or busyness or hubris or, or what, but US policy makers seem to think we have all the leverage and we literally can't go to war without China on the conventional side. And so then you layer that on. I think as you kind of layer these things out, that leads to two things.

It leads to the recognition on the trade side that we don't have all the leverage. Then you start looking at some of the stuff that actually, the biggest export market for Chinese exporters relative to the US is, is actually is, is actually consumer electronics and that for a lot of other stuff.

The Chinese consume a lot of their own stuff. And then I think the final sort of reason why we're seeing this acceleration now is because rightfully, you know, something we've heard, and like I said, I think it's, it's rightfully that anytime someone says, well ultimately the US military backs the US dollar.

True. But we just had it demonstrated that the Chinese rare Earth and Chinese factories back the US military. So what actually backs the US dollar? And I think there is this growing recognition. We saw it even again this week. Critical shortages in germanium. Uh, we've seen it a number of other different key raw materials mostly around rare earth, but elsewhere as well.

The Chinese have just stopped sending the stuff as it relates to the US military. And so when you layer all those things on, you realize the US doesn't really have the leverage we thought we had. So when you look at the reaction to post liberation day along the five stages of grief, right? Denial, anger, bargaining, depression, and acceptance.

There's still a lot of investors that are just now getting out of denial. Out of this, Hey, we have all the leverage. And that was pretty obvious from like before it started. You're getting into some of the anger, right? When you hear things like Secretary Bein telling Pulte that he's gonna punch him in his effing face, uh, at Chamath birthday party at the White House a couple weeks ago.

I think that's anger. I think he's under a lot of stress. I I would be too. And now we're kind of starting to get, I think, mainstream into this bargaining. Well, like maybe if we sort of cobble together the Europeans and, and, and the Argentinians and we can create this buying group and we can cut out China and like it's bargaining.

It's it, it's, it's gonna work. Um. We still have to get through bargaining and then into depression, and then into acceptance of all of this. So I guess I would say the last thing as sort of wise accelerating is in the first half of this year, it has become very apparent and obvious that another thing that was said by the establishment was wrong, which is that, Russia was, you know, the ruble was rubble.

Russia was a gas station with nukes, blah, blah, blah, blah, blah. You know, they're putting, they're fighting the US military with tanks that they had to put chips in from washing machines. That was US official government saying that three years ago, well, either our military couldn't beat a bunch of guys who had washing machine ships in their weapons systems, which would be very disturbing or more likely.

And the truth Russia's industrial base is in better shape than ours because we've been offshoring it to support the dollar system for 45 years and they've outproduced dust. And so I think there's this. Reason why I think we're watching this quickening is this accelerate, is this, this sequence of demonstrable empirically demonstrated facts that we don't have the leverage that we thought we did to support the dollar system.

And ultimately, if we can't go to war to support the dollar system from China and Russia trying to change the dollar system because China makes key parts of said military then we're gonna get a change to the system. And that's where we are. And that's why I think we're seeing the quickening.

Erik: I want to go back to something that you said earlier, Luke, the Shanghai Cooperative Organization meetings that were held recently.

You follow much more closely than I do. All I know about it is I was taken aback by a photo I saw of Vladimir Putin, Narendra Ram Modi and Xi Jinping, obviously a a, you know, made for the press, uh, for public consumption. Photo intending to show, at least the way I interpreted it, that Modi or, or that India has pivoted to China and Russia, or is in the process of doing so.

It was like two or three days later, or, you know, wash, rinse, repeat. I see another photo. This time it's Putin standing shoulder to shoulder with Xi Jinping and Kim Jong un, north Korean head of state. And I, and that was at a military parade. I mean, that's a pretty unmistakable message. The, the guys that are in charge of most of the nuclear warheads on this planet are working together, and they don't wanna be messed with.

So I look at this and I think, oh my gosh, that's like really big. I gotta get on this. I Google iconic photo news coverage, and sure enough, it's the biggest thing. Well, the biggest thing in the United States was the photo where Sidney Sweeney apparently put on some blue jeans, and that's created an ideological.

I don't really get what the battle's about anyway. Luke I don't think we're paying attention to the most important stuff. So obviously I brought that up to point out the irony of the corporate media's priorities, but I really think there's an important and serious issue here. You're saying, okay, we're we're just at maybe the denial stage, why, or, or some people are.

Why would you expect anyone to ever come out of the denial stage if the news coverage about the things that are like really, really important signals are being replaced with sydnee sweeney's blue jeans? Help me with this. I mean, and, and it's, I'm not just ridiculing them. I'm saying, seriously, until this gets fixed, why would you expect, you know, the mainstream to ever come around and see what you see if what they're paying attention to in the news is very different than what you're paying attention to?

Luke: I think part of the media strategy is to distract. And without getting myself totally in trouble, I, I will tell you, my sons certainly noticed it. They're all, uh, the young adult men and yes, they absolutely noticed.

Erik: Luke, you had the opportunity. All you had to do was to just run with the Sweeney story, figure out how to pull Taylor Swift into it, and you could have totally leapfrogged next week's mystery guest and locked in more downloads than anybody else.

But you want to talk about little stuff like, you know, the future of humanity and how it's gonna play out in financial markets. Fine. We'll do it your way. Go ahead. What did you write about on the 9th of September? On the 9th

Luke: of September, I said, I thought what had just happened the week before at this Shanghai Cooperation Organization meeting, or SEO meeting might have been the biggest geopolitical week since the fall of the Berlin Wall.

And what we pointed out was you had this meeting, which you saw the pictures, uh, with, with Putin, um, Modi and Xi, which, you know, to me, I think, you know, discredited an army of think tankers in Washington, right? Because we were supposed to be sort of, you know, splitting those three, any number of different ways against each other.

We used the, the media, or excuse me, the picture you referenced to the parade. We had Russia and China signing a major gas deal, uh, that could reshape global energy markets according to the ft in which the head of Gas Pro said it was likely going to be priced, uh, the same way the other gas deals were between them, which was to say in rubles and in foreign currency, which is to say not the dollar.

It highlighted, of course, you know, the, the military parade unveiling new weapons. It was followed by President Trump accusing she Putin and Kim of quote, unquote conspiring against the United States of America, which one of the charms about President Trump is that he will several times a year actually tell you what's going on by virtue of sort of some sort of impulsive, uh, uh, expost or, or, or true social posts.

And I think these were one of these, I think he got a briefing about like, uh, sir, this is happening. And he immediately took to his phone and then he followed that up. E even more tellingly, uh, by conceding it seemed like to me, to the bricks saying, it looks like we've lost India and Russia to deepest, darkest China.

May they have a long and prosperous future together. Which to me, like I said, read as a, as a concession post on truth social after him getting a briefing about what was decided there. And then finally, all in the same week over that weekend, the US Pentagon, uh, released the New National Defense Strategy report, or at least, uh, drafts of it to the Washington Media.

And they said it was gonna be pivoting away from China in a much more realist view and focusing on a more sort of Monroe doctrine like policy in our own hemisphere. And so, like to me I thought that was an enormous set of events. And what I think it meant was that, you know, sort of this, this daisy chain of things we highlighted started highlighting back in 17.

And we've talked through the years, um, that to your point, they were still early. We were still describing things. They stop buying treasuries on net, they start shifting commodities outside the dollar with net gold settlement. They do China 2025, et cetera. They've now reached this point where they're comfortable sort of, coming out on the town on the Grand Promenade.

And, China Rush and India are using their real economic cloud in manufacturing and energy and commodities and, and in population. They're essentially restructuring the rules-based global order. They're gonna force gold back into the system as a neutral primary reserve asset to replace treasuries, to replace Western sovereign debt.

And ultimately over time, that means Western central banks are probably gonna have to engage in some form of yield, curve control or its proxy through, you know, the genius act, stable coins, however they want to do it. And I think that was. I think that week was, we're gonna look back in five years, 10 years, and at the same way we look back at when the Berlin Wall came down, like everything changed.

Erik: Luke, when I read that September 9th piece, I was extremely impressed. Listeners, we do have it for you. It's linked in your research roundup email. If you don't have a research roundup email, just go to our homepage, macro voices.com. Click the red button above Luke's picture that says, looking for the downloads, Luke.

Wow, it was a doozy. I thought it's gonna be a long time before Luke comes up with another tree rings report that, that matches this one. Uh, you actually outdid it three days later on September 12th. And I'll tell you, I just had a really strong reaction to that. I've been reading your stuff for years and the way I read it, Luke, is, Luke's a smart guy forecasting some long-term trends that haven't happened yet.

It feels to me like you're like reading color commentary on really big stuff as it's going down. To me seems like a really big change from the way you used to write and report on things. And it sounds to me like it's a very direct reflection of what you described earlier, which is we're going from the slowly at first to the all at once.

So am I right? I mean, is that how you perceive what's going on? And obviously we've teased the listeners now you gotta tell 'em all about what's in the September 12th report,

Luke: right? I always say it. And so people will laugh when I say it here is, is, well, you know, what's normal for the spider's? Chaos for the fly, right?

Like, if you're long gold with all this happening today, you're not unhappy. You know, if you own Bitcoin, I think if you own stocks, you're not gonna be unhappy. You own long term bonds. You know, I think you're, you're gonna be fine. But you know, I think you're gonna go from, you know, eating steak to eating hamburger, to eating dog food, to eating kibbles and bits, you know, so, that's okay.

What really has gotten why I was so, you know, high, really focused on, on, on the pace of events and, and highlighted in that piece was. Look, three weeks ago we had this SEO in the China parade, right? That that effectively threatened, you know, mutually assured destruction, you know, with a demonstration.

Essentially what they said in plain English, conventional war with China and Russia is gonna lead to mass casualty events in major western European cities, major US coastal cities. That was the message that parade, uh, in my opinion, and I think you've gotta take a step back within that and why it got me.

So, you know why, what happened that week was so big is if you go to three months before that. The US it was reported that the US ran down 15% of its of its tad, T-H-A-A-D air defense missiles. In just 11 days of medium intensity combat defending Israel, Israel ran out of their air defense missiles even faster.

And it was a supply chain issue. We simply can't make them fast enough because we've offshore too much of our industrial base to China. So basically we need to ask China nicely to send us the stuff. And China is keep saying no, because we keep telling them we're gonna use them to point it at them, understandably so.

Uh, and then if you even take a step back from there, over the past three years, NATO supplied intel surveillance, reconnaissance, weapons, tactics, strategies to Ukraine versus Russia. Ukrainians were very good and, and Russia won with China's support. And so when we saw, you know, partly of that was due to the, the na, the nature of war changing.

To, to drones and missiles, partly because NATO got outproduced by Russia because we, again, we had to get out of the industrial production business to support the dollar system over the last 40 years. But I don't, I don't think investors recognize what has just transpired here, which is that, you know, the last three years, and especially last month, the last three months, excuse me, proved to a lot of the world what a lot of people at high levels in finance and in military intelligence had already known, which is that the US defense industrial base has been too hollowed out by the structure of post $71 hegemony to be able to sustain.

A conventional war versus the bricks for more than just a few weeks. And certainly not without severe casualties. And, and certainly by the way, not without the Fed, essentially buying the entire $130 trillion bond market with printed money to, to prevent it from crashing which it would on open war with any of these guys.

So we highlighted, you know, in running through those military things. And then in this report, what we really, on of the 12th, what we really highlighted was that a combination of softening US consumer sentiment. Uh, we then highlighted that ultimately there's a fundamental misunderstanding between how much China can outproduce that actually that the United Nations has, has understated Chinese.

Production so that, you know, and consumption and economic, that China's real purchasing, power, parity, economic growth. You know, we highlighted that, you know, there's starting to be an awakening around, hey, these raw materials that we've been, we have for 40 years said all we need are dollars.

And so let them produce everything. There's starting to be a recognition around that by the International Energy Agency, the US administration, the west more broadly. What we point out is that's great and the bond market is the elephant in the room. We can't just run industrial policy to start producing a bunch of this stuff.

For multiple reasons. We don't have the skilled trades. And from a bond market perspective. You know, we could get the skilled trades if we're willing to let inflation really, really rip, but if inflation really, really rips because our debt is already so high from the things we've done, you end up in a position where the you know, the debts, the debt will create more of a problem than it solves.

So basically what the report lays out is that there is no way this works unless we get into some form of yield, curve control, whether that's via the Fed, whether that's via treasury. There's a lot of different ways to try to do that. But that's what has to happen. And I think we're watching in markets a growing recognition of exactly that.

When you talk about gold, you talk about Bitcoin, you talk about stocks, et cetera.

Erik: Luke, that was the September 12th missive. And listeners, that one too is linked in your research roundup email. Luke, I do want to respect our standing policy that we never ask you to share your latest current writings with our listeners out of respect for your paying subscribers.

I'm gonna break the rules on this one at least a little bit, and, uh, I certainly understand we cannot share the full September 16th PDF with our listeners. But how about at least giving us a sense of, uh, who is Emmanuel Todd and what's he writing about, and, uh, why is that kind of important in your mind?

Emmanuel

Luke: Todd is a French, an French anthropologist who is famous for having written three different geopolitical essays o uh, over the past 50 years. So he spends most of his time studying anthropology, the human of, uh, the study of human, family systems and organizations. The first geopolitical essay he wrote was called the Final Fall.

He published it in 1976, and he predicted the collapse of communism based on the anthropological concepts of declining Russian female fertility rates and rising Russian infant mortality, because infants are the most sensitive indicator of a society that is starting to fail. Uh, he wrote his second, uh, geopolitical essay, and, and of course it goes without saying, you know, he had to wait 14 years or 13 years, but he was right.

He published the final fall in 1976. Soviet Union collapses, 1989. He writes his second geopolitical essay, it was called After the Empire, uh, it was published in 2002, and it was published at a time in which he said or excuse me, in it, he said that the United States would not enjoy an indefinite unipolar era because the world was too big.

The relative size of America is shrinking economically and America will not be able to control this world. And this, this happened at a time, if you recall, where there was, great consensus that the United States was in the very early days of a, of a generational unipolar power moment. And once again, he was right based again on, strictly on anthropological uh, inputs.

And then that brings us to the third, uh, geo geopolitical essay that he has written in his life. Todd is now an, an, an old man, of course, and. He published in January of 2024. What he thinks will be his last geopolitical essay and which is written in French, still not a translated to English.

Interestingly, it's titled The Defeat of the West. In the defeat of the West. He states that as a result of many of the same dynamics that led him to predict the collapse of the USSR in 1976, he says, quote, the west has been defeated, industrially and economically citing US infant mortality, which is, uh, above Russian infant mortality, US f female fertility rates falling US industrial base, having been hollowed out by offshoring in a manner of reminiscent of what happened to the Soviet Union when he wrote his first essay, uh, newly graduating engineer numbers in the US and educational attainment more broadly in the US falling for decades.

Uh, so he wrote that in early 2024 before it was obvious that, that the us uh, or that the, the proxy war in Ukraine was not going for nato. Uh, in April of 2025, he gave a public speech, uh, discussing the defeat of the West, in which he said, we're past a turning point. We're moving from defeat. To dislocation.

And what makes me cautious is my past experience of the moment of the collapse of the Soviet system. I predicted this collapse, but I must admit that when the Soviet system actually collapsed, I was not able to foresee the extent of the dislocation and the level of suffering that this dislocation would bring to Russia.

We read it in, in, it was, he published it publicly at the end of May, we read it then, uh, we kind of set it aside in our cutting room 'cause it didn't feel like it didn't feel like it made sense yet, and we pulled it out as part of the report of September 16th after the events of a few weeks ago. 'Cause it's starting to feel like it makes sense now.

You know, our friend Balaji s Bassan came at this exact same issue. From a completely different angle. In conversation with our friend Peter McCormick, a couple of months ago, in July Balaji came at it from a technologist, but he came to the same conclusion, which is essentially we're past the, the point of no, no return.

China has disintermediated Red America. The internet and Bitcoin have disintermediated blue America, right? They control media and they control the money and, and they're being disintermediated in the same way that China disintermediated Red America with manufacturing in the military. And so we're, we're getting this dynamic that we're watching every day in our lives now, just, you know.

Everywhere. You know, blue fights with red, red fights with blue, red fights with China, blue fights with Bitcoin and the internet. And, and the US as a nation pulls back because it's getting beaten in its own open, global capitalist competition game that it created and it's getting beaten by the global south, right?

How often do we hear? Chinese, China, China's out producing us. We've gotta get them to like slow down. They're producing so much stuff, they're beating us at our own game. That's highly inflationary over time. Best case in this report, in addition to what Emanuel Todd said. In, in May of this year, uh, or excuse me, Jan, he wrote the book in January, but he said this in, in April and May of this year.

In addition to what Balaji and Peter McCormick said in July of, of this year, we highlighted a Chinese People's Liberation Army General who gave a speech in 2015 to the CCP Senior Leader leadership. He warmed up some of the very same things. Most western investors either never even saw it, or, or, you know, those that did kind of laughed at it.

And, you know, they're not laughing anymore. And you know, I don't wanna take things away from our own, our own folks here. Like the US military was ahead of this more than any of the above. As were some major US industrial titans from ge, Google, Intel. Most Western investors ignored her to laugh.

I'm gonna read a brief passage from top US military leadership in 2011 in Edward Lu's 2012 book. Time to start Thinking quote, senior US military leadership. 2011 said this quote, the window in America's hegemony is closing. We are at a point right now where we still have choices. By 2021, we'll no longer have choices.

The US is way too dependent on its military should sharply reduce its global footprint. By winding up all wars, notably in Afghanistan, and by closing peacetime military bases in Germany, South Korea, the UK and elsewhere. All this is a means to an end, which is to restore America's economic vitality. Our number one goal should be to restore American prosperity.

As such, we recommend the Pentagon shrink its budget by at least 20%. Most of the savings would be spent on civilian priorities such as infrastructure, education, foreign aid. Nobody here thinks the politics in this town are gonna change overnight. All we're saying is that we're in trouble if they don't.

This is not about ideology. This is about understanding where we are as a country. And so the US military's been warned about this for 14 years. Of course, they said, we're gonna be out of time in 2021. And the problem of course, is that 2021 is almost five years in the rear view mirror now. And so when you then layer that with what the Chinese general highlighted, some of the same dynamics.

What an anthropologist who in his speech actually apologizes, said, this is not what I want. This is not what I wanted to come up with this data. The data are the data. You can't lie about the fertility rates and the infant, uh, mortality rates. They are what they are and here's what they're saying.

And I'm sorry, America. And so that's what we highlighted. And I, it didn't make me happy to highlight it. But it is what it is, right? Uh, I don't, uh, it's, it was harder to write. It was harder for me to write than it was for you to read. If you can believe that.

Erik: Well, Luke, if I had to write the executive summary of Todd's writings, I could do it in six words. The Luke Gromen moment is upon us, or, or I guess I should probably translate that to your frame of reference, which is the phase of the Luke Gromen. Uh, I don't know. Uh, evolution. We're hitting the acceleration point.

We're going from, from the, happen slowly at first to the then all at once, we know that Emmanuel Todd, who has a pretty darn impressive track record, basically thinks that this is a, uh, a very pivotal moment in history. I wanna know what Luke Gromen thinks. This, uh, moment is going to mean how turbulent could things get in financial markets, and most importantly, for, for this audience, you know, who are gonna be the winners and losers.

Obviously gold has been a big winner here. Uh, I think we're headed into, you know, the, the famous line about inflation is investors always forget that inflation is really, really good for the stock market. In the beginning, at the beginning of the inflation, is that what's driving this stock market and how long until we get to the bad part of the inflation as far as the stock market, and for that matter, any other markets that come to mind.

Luke: Yeah I, you know, I think there's probably some investors that'll listen to this and say, well, oh, you know, never short America. Right. And look, I agree with that. And that's also just a comforting platitude. It's a cop out, it doesn't fit, do anything to fix the problem. And I would also say like, which America?

From 1940 to 1980, what was good for GM was good for America. And from 1980 to 2020, what was good for Goldman Sachs and what's good for the treasury market is good for America. And now what's good for the defense industrial base, the working class, the middle class is, I think we're, I think we're like two years into that is a 40 year stretch of that.

What's being good for America. So, you know, I, I think we're going through this phase change. I think it's an early I think we're early in it and I think it's important to say, look, we're not saying short America what we're saying. Short, the real value of long-term treasuries and short the dollar against gold Bitcoin and stocks because the US' own military saying the US is four years past the we're out of options date.

And so I think what's gonna happen is we are gonna run this economy so hot and I think we're gonna repress the real value of long-term treasuries, so much versus gold and Bitcoin and stocks and look, that will ultimately fix the problem. Uh, it might create some others that we can touch on in a second, but I think it's really important that, you know, recalling COVID, the US got debt, the GDP, you know, after, after the, the Stimuluses and everything initially and the economy was shut down, debt to GDP blew out to 130%, if I recall correctly.

And the US got that right back down to 118 or 117% in just a couple of years. Recall that at the peak in COVID, I think the 12 trailing 12 month deficit was running at $3.3 trillion. They got it down to $1.4 trillion or so in, I wanna say, like 18 months. And how did they do it? Simple. 8%. CPI fed QE with rates at zero into rapidly rising home prices.

50 to 70% year over year gains in the s and p, which gooses consumer spending at goose's tax returns. So all they're gonna have to do is run inflation hotter for longer and the deficit will quickly fall to something sustainable. US nominal GDP is gonna soar. Uh, we'll be able to reshore wages.

Will do, uh, w will be able to rise. The release valve will be the dollar, the real value of long-term treasuries, I would think that stocks, I think stocks will soar in dollar terms. They've already started to fall in gold and Bitcoin terms and I think that's gonna continue. Same thing with home prices.

You know, since COVID home prices, I think are up like 65% in dollars they're down like 40% in gold terms, down, like 95% in Bitcoin terms since COVID. So now what I'll say about all that is what I just laid out, that they are gonna run this thing so much hotter than anybody realizes. That's the optimistic case, and that's why I say what's normal for the spider's, chaos for the fly.

Look, if, if you're a, you know, if you're a boomer and you got, 80% of your money in, in long-term treasury bonds, like you're gonna go from eating steak to hamburger to, you know, kibble and bits and, and that's, sorry. Um. And to be honest that makes some sense, right? Boomers are getting 70% of all time record tax receipts.

The, the, the elderly boomers in silent generation are getting 70% of all time tax receipts for entitlements. They, you know, we can't raise taxes, so we're gonna inflate 'em. We're gonna inflate 'em. So that's the optimistic case. I hope we can get through this without a real domestic political convulsion.

I am admittedly less confident about that after the assassination of Charlie Kirk, after the assassination of the, um, UnitedHealthcare, CEO Brian Thompson, I, and, and maybe more importantly, the polarized political reaction to those assassinations. That really as shocking as those were, those were like a double dose of shock was the reaction and the polarized reaction.

So. Look, if, if I'm wrong and we can't hold it together as a nation, and I don't know exactly what that means, but if we can't then I'm gonna be dead wrong about stocks going up in this. You're, you're I'll be really right on gold Bitcoin, but I'm be dead wrong on stocks because, you know, I think right now we have a, a moment to try to gather ourselves and, and come together.

But the longer we don't do that, I would again really reiterate, foreigners have $62 trillion gross and $27 trillion net in dollar assets. They are so long dollar assets. We saw post Liberation Day. What happens when just a little bit of money leaves the United States stocks down big 10 year treasury yields up big bonds down big dollar, down big, right?

So that was just a little bit of money that moved out of the US Post Liberation Day. If we get an honest to goodness political convulsion here. Wow. That is gonna be that's the fed's worst nightmare. You're gonna get stocks down, big bonds down, big dollar down big. And then what do you do? You raise, you know, you raise rates.

Ugh. You cut rates. Ugh. And, and so that is to me, something I'm watching very closely for signs, hopefully, that we calm things down or if we don't. But, I'm hopeful we can get this, you know, sort of the easy way, right? Which is, I put easy way in quotes on my notes here because it's, look, it's, it's not gonna be easy, but it's the easier way when you make really bad, long-term decisions for 40 straight years.

Sooner or later you'll run out of room to kick the can. And we're there, right? For a number of different reasons. We're there. I think ultimately what it means for markets is, I think inflation's gonna run so much hotter than consensus thinks. I think it's entirely possible that it's reported as sort of slightly elevated and, frighteningly the release valve, if they do that will be more domestic political tensions.

And so, uh, I, I think. I think we're in for a bit of a, a bumpy stretch here within sort of this, this fourth turning dynamic.

Erik: Luke, as you've been describing all of this, it's basically forming an analog in my mind that I'd like to run past you. And this pertains specifically to this question of the state transition from, you know, slowly at first until suddenly all at once.

And I guess I, I'll draw an analogy to the pandemic. Back into the end of 2019, there were plenty of people on the internet that, you know, know about these things that were starting to talk about something's going on in China. The rest of us didn't understand that significance and couldn't. Possibly be expected to.

Then there's a state transition that happens next where, okay. Jim Bianco was probably the first guy in finance to really understand the scope of this, where other, other people in other fields. But right around the end of January, 2020, it was, uh, January 30th, 2020 that we dropped everything and, and re-planned macro voices in order to get Dr.

Chris Martinson on to talk. He was one of the people who had been talking about it since 2019. But. It wasn't really any kind of wake up to what I'll call the second tier of people. You know, at first it was just the Luke Gromen writing about this stuff 10 years ago. That's like Martinson writing about the pandemic in 2019.

Nobody paid attention, nobody cared. Nobody got it 'cause it, it just wasn't registering yet. Then in somewhere around the beginning of February, there was this middle period where it wasn't just one or two guys, it's like 20 guys now it's the smartest guys in finance like Bianco that are all over it. But they're being ridiculed left, right, and center as alarmists.

You know, I was, I had all kinds of hate mail for doing that, that show on January 30th saying that we were irresponsible, fear mongers and you know, yada yada yada. And then that went on for a few months and one day, snap. Everybody knew that it's a global pandemic. Nobody questioned it. And it's like, oh my gosh, everybody's panicking.

I feel like this US dollar secular decline thing, I think we went from the only people like Luca writing about it to the 20 guys, like as smart as Jim Bianco have figured it all out now and I don't think we've yet gotten to that sudden everybody gets it moment. Does that resonate for you? Am I on the right track and well, what could happen when we get to that moment?

Luke: No, I think that, I think it's exactly right. And the reason I think people aren't there yet is it's, it's a little bit cross discipline, right? When you're in our, our business, you're focused on markets and that it, and, and, doing what I do, uh, owning my own business, I have the luxury to, write about what I think is interesting.

And so I have a bit of a cross-disciplinary approach that I think is somewhat unique. And the reason I bring that up for this is. I think there's still a lot of, of, like, I, I think we're no longer in the denial stage of, of sort of, you know, China 2025, you know, when they rolled that out, right?

People are like, oh, ha ha ha. Like, no one's laughing about that anymore. They're not in denial. Um, they're a little bit angry still, right? Oh, they're cheating and they're, they're overproducing and they're manipulating their currency and like, boohoo you know, compete. I think what we're really in this bargaining stage, and that's, to your point, like there's a recognition, but it's not, the bargaining stage is still around.

Well, we can get a, we can get the Europeans and we can sort of block out China and the bricks and, and, and, and it we're, we're only looking at it from one side and nobody is really doing, I. Sort of the deep look of supply chains to go, okay, break your supply chains down, break your trade balances down, and see how much of it ever touched China.

And if they, at some point they're gonna do that and they're gonna go oh my God. Oh my God. Like there that, and that will be sort of that moment. And I, the sense I get is, the old, the old famous, uh, saw, right? The pro amateurs study tactics, professional study logistics, you know, the bargaining stage was taught talking tactics.

Right. You know, you know, BeIN's talking tactics around, well, we just gotta get this group and we're gonna isolate China. The logistics are the guys within the US military and intelligence communities. And I, I just get the sense that they've done the digging on the supply chains and like.

They know we don't have the leverage. They know, and whenever that common knowledge goes from sort of, you know, the, the special knowledge, like you were talking about, sort of the isolated, you know, 20 guys to Oh my gosh. Yeah, then I think it's gonna, things are gonna happen really fast because, you know, to me the conclusion is just so crystal clear.

Look, we cannot win this trade war. The treasury market will blow up first every time. You can game it out however many times you want it. In the end, the only way it works as if the Fed or the treasury basically buy much of the bond market and, and yield curve control it, and. Historically when we've gotten into these tense situations, as the military warned about in 2012, right, we rely too much on our military historically, you know, geopolitics, geopolitics in the, in, in, since two thou, from the year since the year 2000, has been like, don't do anything to mess with the rules based global order.

'cause the American military will show up and kick your head in. That's geopolitics since the year 2000 in, in, in 10 seconds. Whoa, US military critical components are now made in China. So that too, there's still denial are, you know, some, some anger not even really bargaining yet. When you put those two cross discipline things together, which is our debt's too high, our supply chains are all touching China, even if we want to pretend that they don't, and our military critical components can't, we don't have the industrial base anymore.

Those three things together lead you to a conclusion either. We're gonna go to nuclear war and there's no winners there. I think it's uninvestible. I hope that's not how it's gonna go, but let's set that aside. Or we're gonna run this super hot and the market's gonna wake up and go, oh my God, I can't own bonds.

I can't own long-term bonds. I need to own gold. I need to own stocks. I need to own Bitcoin. I need to own, anything but bonds. Uh, anything but dollars. And, and, and that's not even and anything but dollar's. Not even really fair. Right? Anything but bonds. Uh, because I think dollar stocks, I think you're gonna be fine.

I don't know when that moment's coming, but like, I don't think it's years away anymore. I think we're, I think that's, you know. I think it's six to nine months away because then I can overlay that with the fiscal situation and look like I can overlay that, you know, the fiscal situation. We're right now with receipts at all time highs, we have true interest expense, which is interest plus entitlements, plus veterans Affairs.

It's a hundred percent of receipts and receipts are highly sensitive to the stock market. So that like we're, we're to the wall there, we're seeing the US, economy on the consumer side actually slow, which is really weird because, and it's really bifurcating, right? The bottom 50% are really suffering and the top 10% are, you know, it's, you know, party on Wayne, party on Garth, and.

That then reverberates into the geopolitical side, right? You're starting to see people writing articles like what is going on in America after the last two, three weeks? And so it could be a geopolitical trigger, I don't know. Or not a geopolitical, but a domestic political trigger. I don't know. Or simply just a, a spooking of foreign investors, right?

We have so much foreign money here. 62 trillion gross, 27 trillion net. If they start to get spooked about the domestic political situation, do they take five, 10% of their money home? Then what happens? Uh, so yeah, I think we are like right on the cusp of exactly what you described. And there can be domestic political, there could be market, there could be trade, there could be geopolitical, there could be any number of things, uh, that could spark it.

Erik: Luke, I was fascinated by your mention of military and digging into supply chains and so forth. I wanna share a quick story with you. I was recently surprised to be invited to speak at a supply chain conference. So I, do a zoom call with the organizers. I say, guys, I'm really flattered, you know, thank you.

But you've misunderstood. I'm not a supply chain expert. I really don't know very much about it at all. I'm not qualified to speak at that kind of conference. But boy, I would love an invitation because I'm very curious to learn more about the people who do the things that you described, the people who are analyzing things like, Hey, we're about to start a war with China, but we get, we're completely dependent on them for rare earth elements and for almost all of our medications and for all these other things.

I would really be fascinated to attend that and learn from the experts who is analyzing these things. 'cause I don't know that much about it. And they just looked at me like, Eric, you don't get it. We do know exactly what your qualifications are. The answer is nobody that goes to our supply chain conference is looking at any of those things, and we want you to come and point out that they should be.

And I'm like, wait a minute, or what? Supply chain people are not focused on that. Well, I gotta believe they are in the military, but, you know, that would be classified and so forth. It sounds to me like most of the people in the sup in the commercial supply chain industry are not really focused on the things that you're talking about.

And boy, I I agree with you that they should be,

Luke: I mean, you know, it's one of these things like I, I have a good friend who work for a, a major global international freight forwarder. And so someone in that seat is gonna know, and you know, when you talk to folks like that it's.

What, what they highlight are some of just, you know, what I would highlight are some of the, like seven or eight of the 10 biggest container ports in the world are in China. And it took them 30 years working at the fastest pace in human history to build them. And then there's a whole scale and network around engineers and factories and roads and infrastructure.

And it's simply world class across the board. And they've, again, 30 years working the hardest, fastest pace, in, in human history. And that's kind of where I, I say sort of like the bargaining side, right? When I hear those things I say, well, we're gonna move it all to Vietnam. Well, sure, you're gonna move some to Vietnam, you can move some to India.

You can't move it all. Well, why not? Because literally you can't fit it. And, and even if you could fit it which you can't, it's gonna take you, do you think. The Indians are go, are gonna work faster than the Chinese did. Like I remember being an investor in a, in a Chinese spa, the Indian management team come in, they go, Luke, you have to understand in India, you know, the British invented administrative or admin, uh, um, administrative stuff, and the, uh, the Indians perfected it.

Like it is just, you know, it takes longer to get stuff done there. So you're, you're like, best case you're talking, if you did it as fast as the Chinese, you're talking about 30 years isn't, you're not gonna do it that fast. And even if you could fit it, which you can't, and even if you could done in half the time the Chinese, which is still put us 15 years, which you can't, you still have the elephant in the room, which is the global bond market, which is to say like, all this stuff is in China and optimized the way it is for to, to keep inflation down, to support the bond market.

That's why we did this. That's why we did this at the end of the day. So if you want to do it, it's there. It's going to be inflationary and probably wildly so, which wouldn't be a problem except the debt levels in the west in particular are so high that, 10, 20, 30 basis points from where we are today.

Maybe in some cases, you know, the US maybe 60 basis points on the tenure starts to trigger a debt death spiral. Rates up, stocks down and that we've seen happen multiple times in the last five years. Japan, same story, Europe, same story, uk. So that's where I kind of look at this, you know, and I think it's a great summary you highlight of just like.

There's still this bargaining phase of, well, we just need to work really hard and we can move stuff out of China. We can cut China off. You know, like, you know now without a frigging 83 DeLorean and a flux capacitor that goes 88 and you go back in time, 40 years and you undo the stupid stuff, the short term focused corporate profit maximizing stuff that you did to break unions, uh, and support the bond market for 40 years under the guise of neoliberal economics.

You do that like, great, hey, if you've got a time machine, let me know. We can have this thing fixed, you know, six months. But failing that there's like, it can't happen. And so I think once we go from bargaining to the depression of like, oh God, then you're gonna realize like, okay, well they're either gonna let everything collapse, they're not gonna do that.

They're gonna print money. And they can't go to war, right? That's another way out. They can't do that conventional. Hopefully they're not gonna go nuclear. They're, they're gonna run this thing so hot. They have to, that's the only choice. And I think it, I guess I would just finish by saying like, I think the whole discussion around Fed independence and Steven Myron, I think it's totally off base with, like most US investors are playing by the old rules.

You know, I've been doing this 30, 32 years. Most people that have been doing it as long as I have, they're playing by the wrong rules. They're playing by the old rules. They don't understand like, is is inflation to how should they, it doesn't matter. The choice is bring this stuff back and blow up the bond market on a real basis or don't and lose, like, those are your choice.

This whole debate around should the Fed cut, should they raise, are they independent? Are they not? It's noise. It's noise. The variant perception is they're doing to the Fed what they are doing. Because they have to, because of what we just laid on the supply chain front. The bond market has to be anesthetized to, to, for the US to get back on its, you know, on the right track.

Again,

Erik: Luke, I can't thank you enough for another brilliant interview. It comes as no surprise that you're right at the top of our listener rankings for top, uh, guest of all time. In terms of total downloads, frankly, uh, I think you're writing in your Tree rings report pretty much speaks for itself. We've got two examples of that linked in the research roundup email from September 9th and September 12th.

Uh, for people who wanna find out more about what you do or are interested in subscribing and so forth, tell us what you do at Forest for the Trees. How do people sign up?

Luke: Sure, absolutely. You can find out more about what we This email address is being protected from spambots. You need JavaScript enabled to view it. or for both for institutional and mass market products. And, uh, uh, on x at Luke Gromen, all one word.

Erik: And don't miss the two samples that are linked in the research roundup. Email Patrick Serna and I will be back as Macro Voices continues right here@macrovoices.

Erik: Joining me now is Gavekal, co-founder Louis Vincent Gave, Louis, I  think everybody in our audience already Knew. We're gonna do a countdown from the five best guests. Louis Gave, gotta be in there somewhere in the middle at number three. Lots of pressure on two fantastic interviews that we just followed before that, there was one from you the timeless piece. So you're on the spot, buddy. You gotta outperform that somehow. Where are we gonna start? Equities we're pretty much certain everybody said to, to roll over pretty much anytime now, except they went the opposite way. And it seems like quite a few other markets.

A lot of reflation, gold lots of things up. Copper, not so much. Where's the action here? What should we be thinking about? 

Louis: Thanks for having me on Eric, and I'm very flattered to to have made the top five. I'm a very flattered to podium that sound like a bronze medal.

That's that's, that's pretty exciting. So thanks thanks a bunch. Yeah, look to your point, the world feels very reflationary right now, right? I think when you look at markets, you find that pick any major market you care to to pick. You'll find that financials are typically outperforming.

Yes, to your point. Precious metals have definitely broken out on the upside, but metals in general have been doing pretty well. I think you find that emerging market debt is massively outperforming developed market debt. You'll find that equities have started to outperform value is no longer sucking wind.

It feels pretty reflationary. And to be honest, I think that reflects a number of economic realities. The first and perhaps most important economic reality is that in all the major economies, policy makers are following very reflationary policies. I think if you start off with the us, which is obviously the most important when Trump came in.

For about six weeks we were promised Doge and tightening a fiscal belt and, slashing of government payrolls, etc. But it seemed to have lasted about as long as as one of my new year resolutions. Four to six weeks and then it goes on into the dustbin, I think when I look at the US today, what you have from policymakers is, a promise to go pedal to the metal. And, Bessent said it himself in his April interview, he said, look, we're gonna grow out of our debt situation and we're gonna put pressure on the FED to give us more money to do the US is following Reflationary policies. China is following massively reflationary policies. Few people realize this, but the budget deficit this year in China will probably be about 10% of GDP, give or take. For China's never run budget deficits this big, and this is occurring at a time when interest rates in China are at record lows, so in China as well, you have very stimulative policies, and unsurprisingly, Chinese equity markets continue to grind higher. Then, you look at Europe you really have pretty much the same setup except perhaps for France, Britain, where those two countries are trying to do some kind of fiscal consolidation, but it's very small at the margin.

And then in Japan, you obviously the Prime Minister just resigned. And the two leading candidates are both promising easier fiscal policy and more spending. So it's like the two guys the girl and the guy running, it's more and even more anyway, everywhere around the world, policy settings, you remember that spinal tap it's like these go to 11.

It feels like everywhere around the world. The dial is set to 11. And that's only, I think, part of the reflationary picture. Another massive part of the reflationary picture. The one that matters a lot for us in emerging markets, is the US current account deficits. The US current account deficit a year ago was 3.6% of GDP.

It's now 6% of GDP. That's the fastest deterioration in the US current account deficit on record. It means that concretely the US today is sending to the rest of the world $2 trillion. Every year, $2 trillion in cash to the rest of the world and the rest of the world takes that money and then, it can decide to reinvest it in the us it can decide to reinvest it at home.

But increasingly, I think what's happening is, on the other side of that US current account deficit, you have countries that increasingly feel that maybe they don't need as many US dollars to trade as they did before. Because most of the growth in trade is actually occurring in emerging markets.

We're now in an environment where. You get lots of excess dollars. Dollars is drifting lower, which is always reflationary for emerging markets. And then finally, I'm sorry for a long-winded answer, but finally, you also have a massive change of policy in China where instead of adding excess capacity onto excess capacity, which is what they did essentially since the semiconductor embargo of 2018, what you and I discussed in our previous interview, what they're now doing is a policy of anti-evolution. It's that's the new buzzword in China. Cracking down on excess competition. And so as essentially you stop lending to. Industry to add excess capacity on top of excess capacity.

I think that's actually pretty reflationary for everybody else. If you're a Japanese automaker, a Korean ship builder, the fact that China might be done adding excess capacity, at least for a year or two, gives you a little more breathing room. And so unsurprisingly, industrials are now outperforming everywhere.

Korea's outperforming, Japan's industrials have been doing fine. I think, yeah the markets. You could say are feeling very reflationary but all that corresponds to an underlying economic reality. 

Erik: Louis, my mental model for what reflation are all about is reflation usually set up fairly long lasting trends in asset markets and as traders trends obviously are our friends, as long as you get in on the game fairly early.

So when I look at some of these reflationary trends, clearly gold is trending up. It's part of your reflationary hypothesis. Makes perfect sense. Gotta go long gold. Wait a minute. Gold's, more than doubled, almost tripled in the last few years. Is it already at the end or are we just getting started?

How do you tell when you know there's a reflation, it's already run a long way, where's the entry point? 

Louis: It's the old story, right? If best time to plant a tree was 20 years ago, and, second best time is now. So I think for gold we are in a structural bull market for gold, partly because, the view of a lot of emerging markets of the dollar shifted massively with the Russian invasion of Ukraine and the and the seizure of all the, all of Russia's assets. You and I discussed this many times in the past. So is it time to, to let go of gold? Look I think we're starting a new easing cycle from the Fed.

I think we're in a US dollar bear market. These are usually, tailwinds to gold. They're not headwinds to gold. So I, given that I am a bear on the US dollar, I'm not gonna tell you to go sell your gold. Now, having said this, there's no doubt today that gold is expensive. When you look at gold relative to oil, when you look at gold relative to copper, to silver, to platinum, when you look at gold relative to US wages, when you look at gold relative to US house prices on any historical measure, gold is expensive.

But yes, it has momentum. Yes, the fundamentals are good. Yes, you can play the reflationary environment through gold. I think at this juncture, there's probably better assets to own, to play the global reflationary environment whether copper, whether energy I think these probably have more torque now and more upside potential.

But, to your point, gold is in a bull market and in a bull market, there's two things to do. You either buy it or you stand aside and look at it, but you definitely don't short it. So yeah gold is in this strong bull market. You've got buyers that are essentially price insensitive like global central banks.

You have very little increase in supply because gold miners have been deprived of capital for 20 years. It's, I think it's pretty hard to stand in the way of that bull market. 

Erik: Louis, let's move on to US equities, both the S&P and also the broader indices. So many really smart people, whether it's Goldman Sachs, Mike Hartnett, lots of really, high profile voices saying, hedge, baby hedge.

We're headed into that difficult time of year. You don't know what could happen in October. Could be a crash. Oh my God. Seems like the market is just loving that wall of worry and climbing right over it. Should we expect this trend to change? Is it long in the tooth? 

Louis: Look, my, my own business partner Anatole Kaletsky just published a couple pieces on this very idea that yeah, we may be approaching a, a top on, on US equities.

And behind that idea is I think the main. The two main threats to the reflationary environment I've described because I do believe we are in this, global reflationary environment, but if we want to take a step back and think, okay, what could go wrong to this unfolding reflation?

I think what could go wrong? Is one of two things. The first thing that could go wrong to this global Reflationary environment is is a US recession. And, I think that the reason you might fear US recession is the, there's increasingly a lot of anecdotal evidence that the low end US consumer is being squeezed.

If you look at say the fast food sale, the, the latest corporate releases all the fast food guys pretty much had. Very poor numbers. So did a lot of the specialty retail Vegas numbers were also pretty poor. The, all the cardboard sales are about as ugly as they've been for a decade. There's little anecdotal signs here, there and everywhere that I think between, rising cost of of housing because you've got very rapidly rising cost of home insurance. Obviously higher mortgage rates, but also higher local taxes that is, the, I think the low end guys are getting a squeeze rising cost of car insurance because with the tariffs. Obviously replacing a car now costs more, so that gets reflected in car insurance. And you look at your car insurance costs and they have gone up a lot. I think the low end consumer in the US and the mid middle range consumer in the US is getting squeezed. And of course consumer consumption is such a big part of the US economy, which incidentally, is more or less the Trump policy. Let's not beat around the bush. The whole Trump policy is we wanna bring production home to the us. We want to, cut back on, on consumer. We wanna swing back towards the producer. And so if that's the policy, should we be surprised that, consumption in the us which is the real driver of US growth starts to stall a little bit.

So I think that's your first big risk to to the sort of reflationary environment that, that I've described. I think that the second big risk is the, perhaps the growing realization in the market that, you know. You've had tremendous excitement around artificial intelligence. Chat, GPT was released in November, 2022.

Since then, the US stock market has gone from 40 trillion market cap to 65 trillion market cap. Put things in context, that 25 trillion market cap is bigger than all the other markets in the world combined. Outside of China the total market cap of China is roughly 18 trillion. All these other markets Germany, France, Britain, etc, they're below five. Japan's at about seven. So the US has added more than the rest than the total value of the rest of the world combined. It's been simply unprecedented. The wealth creation that has occurred in US equities in the past. Two and a half years and under underpinning a lot of this because over that period, S&P 600 small cap index and mid cap index have done very little.

It's essentially been the 50 biggest stocks that have ripped higher underpinning. All of this is really the excitement around AI and the hope that AI was gonna leash unleash a new wave of productivity and a new wave of profits. But we're now almost three years in and the profits have yet to materialize.

The CapEx is definitely materialized. The capital spending has been off the charts, but. Will these guys who made the hundreds of billions of investments actually make money from all these data centers and all these, massively expensive chips that they bought? Or will that end up being essentially write-offs?

And of course, if it's write-offs, then that'd be pretty bad news for the US stock market. It'd be pretty bad news for the US dollar, again, you go back to the Reflationary environment and you think, okay, what are the two big risks? One of them is that essentially AI doesn't fulfill its profit promise.

The other said, the US consumer starts to feel the squeeze and starts to hold back. These for me, are the two big risks in the system today. Now, either one of these risks means that the US equity market goes down. It also means probably that the Fed eases. It means that the US fiscal spending goes up higher, all of which ends up leading to a weaker US dollar.

So interestingly. Of course, depending how bad the recession is or how bad the AI face plant is, but you could conceptually argue that to the extent that these, you have these two risks, should they materialize but not materialize in too severe a way. All you end up with really is, lower feds fund rates, more fiscal stimulus in the us, weaker US dollar, and that combination actually turns out decently reflationary for the rest of the world.

It's, an interesting juncture because I completely get the argument for lightning up on US equities. Yes. US equities are expensive. Yes. They've had a hell of a run. Yes, they are overbought. Yes. There essentially held up on the premise that one, the US economy won't have a recession at a time when that premise is at least debatable.

And two, they're held up on the premise that. Profits on AI are gonna be magnificent. And the scope for disappointment there is quite high. But meanwhile, if you see that, does that mean that Chinese equities crater? Does that mean that Latin American equities crater does that mean that Japanese equities crater?

I'm actually not sure in fact all those markets could do quite well because. Essentially the NASDAQ would stop acting as, the big liquidity suck that it's been for the past 10 years or so. 

Erik: Okay, Louis. So big picture. The trend is reflationary wanna be on assets that are gonna benefit from that trend and continue on that trend.

Stock market seems a little tired, probably not the right place to put new money into. That begs the question, okay, what is the trade that benefits from that reflation that's been beat up that you can buy cheap? How about high grade copper? The US contract, the one that got absolutely annihilated when president Trump changed his mind five or six times about tariffs on copper.

Louis: Yeah, and you'll probably change it another five times before, before this interview's over, 

Erik: but we're still way below the 200 day moving average. And you know that chart got absolutely clobbered and it seems to me it should benefit and eventually recover. I guess some of it of that, real froth well above five and a quarter or so was probably due to tariffs anyway, but at least getting back to 5.40 or so. That ought to be just a matter of retracement, but it's not happening yet. 

Louis: I agree. I think when you look at the world's reflationary forces around the world, you have parts of the market that have been, that continue to participate. We mentioned the financials, obviously gold and the other precious metals, silver, all that stuff.

And other parts that have completely not participated. If all you had were energy charts, if all you had were the copper charts, to your point, you would say, what are you talking about, reflation? I don't see it. It's nowhere near to be found. I think, some of that is linked to the fact that Chinese growth has remained disappointing.

Let you know, let's not beat around the bush Chinese growth for all the stimulus, etc. China is still going through some level of balance sheet recession and, some digestion of the past few years, policy mistakes or whatever else you wanna call it. So you know, that I think has weight on copper.

It's weight on energy. And part of it perhaps is also frankly the lack of policy visibility in the United States. Who, who today wants to build a new factory? You're just joking. Oh, you'll change it five times again by the time this po this podcast is done. But if you're. An industrialist in the us an entrepreneur.

This is no laughing matter, having this lack of visibility really I think prevents you from really doing big investments. Now copper is, the typical metal for large infrastructure investments for. For large capital spending for factories, for all that stuff.

And whether you're in Vietnam, whether you're in China, whether you're in the us, Mexico, you're dealing with the level of policy uncertainty that you've never dealt with before. So for now, I think a lot of people are still sitting on their hands and. This policy uncertainty won't stay forever.

At some point, the US administration will say, okay, we have a deal with Vietnam and this deal is good for the next 10 years, and so on and so forth. And then perhaps it'll be a little bit like a coiled copper spring. And quite frankly, I think the opportunity in copper today is an attractive one.

Just as is perhaps the opportunity and energy. Now I know energy has been a dog with fleas and. It's been a, a drag on most people's portfolios and including mine. I've been probably too bullish on energy for the past few years. Here we are in a reflationary world and and usually, and it as the world reflates energy at some point starts to participate.

Erik: If you've got uranium in your energy basket, you're doing just fine. 

Louis: Yeah, no, actually, it's not been that bad. 

Erik: But but yeah, I agree on the oil and gas, it's it hasn't quite jumped onto the trend yet. Louis, as we're talking about things like copper, which are absolutely essential to running the global economy and the international trade of them is essential to the continued operation of the planet.

Let's talk about. The formative escalatory rhetoric. I think we're still years away, hopefully from kinetics here, but awfully strong rhetoric about US and China going to war over Taiwan at some point. I really hope that doesn't happen, but I had a call last week with a bunch of supply chain experts and I was asking them if we're about to go to war with China.

What are you supply chain guys doing to figure out how the heck we're gonna replace our complete dependence on China for our pharmaceuticals and for so many other things? You guys in the supply chain business must be all over that. And they said, no, Eric, the reason we're calling you is because we're wondering, nobody in the supply chain business is thinking about that.

We're wondering who is. I said, oh, I thought it was you guys. So Louis who's thinking about this? 

Louis: I think the Chinese are thinking about it. You and I discussed this before in, in 2018, when the US essentially cut off China from semiconductors, China then decided, okay we have no choice but to build self-sufficiency in everything because whatever we're dependent on the west for today is a point of weakness that the west will press on in times of stress and or simply press on to prevent us from growing, which is of course, what the US was doing in 2018 with the semiconductors. Followed a period of seven years where China invested in all of its money in industry and none of it in real estate. And you see this very clearly in, in the bank loan data.

And that leads us to where we are today. And I think when you look at China's, I would say posture on the global stage, you've had a dramatic evolution in the past seven years. In 2018, essentially when Trump comes out swinging against China, China takes the punch. It knows it, it has no choice but to take the punch again in 21 when there's the Anchorage meeting and, Blinken and Sullivan and accuse Wang Yi of all the crimes and and all sorts of things.

Again, China takes the punch and then comes 25. Trump comes back in and starts punching against everybody against Mexico, Canada, Europe, India and China. And China is the only real country that, stands up and says, you know what? You want to go? Let's go gloves off. Let's have this fight. You put tariffs on me.

I put tariffs on you. You put an embargo on your semiconductors, I'll embargo my rare earths and I'll embargo my magnets. And at this point, I think the US realizes, hold on. We're now three weeks away from GM plants shutting down 'cause they don't have the magnets.

We're now two weeks away from the Lockheed Martin and Raytheon plants not being able to produce missiles. And this is a real problem because Israel and and Ukraine are firing these missiles at a pretty heated clip. So what you find is all of a sudden the US has no choice but to meet with China and Geneva.

I think back down, and it brings you to, to the sort of equilibrium that that we're in now. Now you mentioned Taiwan. What I find fascinating I'd invite your listeners to do a Google trend search. Where you can, like Google searches the number of mentions of something in the media and to do it for the US media.

And you'll find that in the past four months the mentions of Taiwan have simply dis. And six months ago, 12 months ago, we kept being told that, it was either next week or the week after that China was gonna invade Taiwan, etc. Now nobody talks about it. It's just completely dropped off as a topic and, again, do a Google trend on it.

And I find this fascinating. Because essentially to me, it confirms that the US and China have now reached a sort of stable equilibrium where China doesn't want the relationship to get worse. Because the main concern of the leadership in China is always to keep domestic stability.

It's always to keep domestic peace so that they have no real incentive to pick a fight with the us. But the US now is forced to realize that actually it can't pick a fight with China because if it does, China's gonna stop selling it. The components it needs for the missiles that it would need for the fight with China.

So it, the US is now in a sort of catch 22. And I think this is why, you just saw the Pentagon release a paper highlighting that, you know what the days where the US could essentially. Keep the peace in Asia are now over in the new age of drone warfare of hypersonic missiles.

The US fleet can't be protected out in Asia, and in this paper suggested that the Pentagon should just have a strategy of focusing just on the western hemisphere, on the Americas continent, essentially building Fort Monroe and focusing on just this, and so I think that, the scope you mentioned, the kinetic war, the scope for a war between China and the US is now going down very fast.

Which is of course very bullish for China. One of the big reason everybody thought China was uninvestible the reason we live in a world of A, B, C, anything but China was this belief that, we were gonna have a conflict as this belief dissipates , what you find is, Chinese equities that had spent five years de-rating continue rerating absolutely every single day.

But more importantly, what all this shows is that. While the US supply chains are now very vulnerable to you mentioned the pharmaceuticals, I mentioned, the magnets, the rare earths, etc , while the US supply chains actually very vulnerable to potential outside shocks the Chinese supply chains are now following a massive seven year effort.

Extremely resilient. And so I think that's an important shift in the world that we live in. 

Erik: Louis, the things that you describe all suggest to me that we really ought to be avoiding any kind of conflict with China or any other country for that matter. What should I make of this picture, which nobody in the west seems to be paying attention to, but it freaked me out.

You've got. Putin with Modi on one shoulder and Xi on the other shoulder with a look on their faces that just says, this is the propaganda picture that's meant to send a message to the west that you guys better not mess with us because we're going to respond together. That was the way I res, I perceived that picture.

Obviously, I'm reading a lot of meaning into the look on three guys' faces. And I then last, last week Dr. Anas Alhajji told our listeners about the power of Siberia pipeline, which sounds like a massive infrastructure investment to further build the economic connections between China and Russia.

Should the US be concerned that I mean is this, these forces coming together to come and get the us or are they coming together to defend themselves against a perceived threat from the us? 

Louis: Or maybe they're coming together to, to do stuff together and the US is less involved. But yes, look, I think these were all very powerful moments and very and to be honest, world changing moments.

First of all, to your point, Modi, Xi Putin, they looked really happy together on stage. They looked really happy, you all smiles, all hugs. They weren't French kissing, but it really wasn't that far off. They really seemed keen to be together. Now. I think this is of course, to your point, a super important message for the world because if we think in terms of, the mega trends that might reshape the world for the next decade or so in the Western world, I think we focus pretty much all of our time on two massive trends.

And I'm not saying these trends are bs they're very real trends. But the first one of course is AI. That's it's, how much is that gonna change the world? If it really changes the world, how much does that change the workforce? What does that mean for our welfare states, etc.

Lots of questions around the impact of AI. I think that the second big mega trend that, that everybody focuses on is the growing realization that most OECD countries and especially the big ones, the France, the Britain, the US Canada's fiscally are cruising for a bruising. That, even in periods of economic boom, they're still running budget deficits of 5% 6% of GDP government debt keeps on expending fiat currencies keep on getting debased at an accelerated pace.

These are the two big mega trends when I meet with Western investors. This is all the two things they want to talk about. And, that's why gold is going up the way it is. That's why Bitcoin has done what it's done, etc, etc. But let us imagine. For a quick second.

Now you could say, this is science fiction. It's not gonna happen. But given how they were hugging each other on stage, let us imagine a mega trend where the Russian, Chinese and Indian economies start to integrate more with each other. You start to see more trade, you start to see more exchanges, more trade in their own local currencies and so on and so forth.

University exchanges or, you name it. Now here's here's what's fascinating, why I think this could be an extremely powerful trend. Russia, for all intents and purposes, is the world's biggest commodity producer. It produces everything, oil, natural gas, coal, iron ore, you name it.

Copper silver uranium, Russia produces it and it produces it typically cheaper than anybody else. China is the biggest producer of machine tools by long shots. It's the biggest producer of consumer goods by long shots, and it has the cheapest cost of capital in the world today. And India, of course, now has the deepest pool of cheap labor in the world.

'cause labor is no longer cheap in China. Let's not kid ourselves. So imagine you match the cheapest commodity producer with the cheapest capital goods, cheapest cost of capital. And the cheapest labor. You put all this together in a pot, what comes out could be really powerful.

And, here's something funny for you. If you take the top 30 market caps in the world the top 30 companies by market cap. You find that 24 out of the 30 are American. And then you think, okay, if the big macro trend of the next decade is the integration between these three guys Russia, China, India, how many of the top 30 companies will benefit from that integration?

Maybe Tencent, maybe Alibaba, maybe Saudi Aramco. And that's about it as you go through that list, maybe Samsung. But as you go through that list of the top 30 if you think, most people have equity index portfolios, and if you think, okay the big macro trend of the next 10 years will be AI, then you know, then you're fine with your index.

You're exposed to this, you're exposed to plenty. What if AI turns out to be a bust? And the big story of the next 10 years is that economic integration between the three. And here, you and I have discussed this in the past as well, I always say, if Hong Kong is really the center of the world, it's the center of the, at least demographically speaking, within a five hour flight of Hong Kong, you have more than half of the world's humanity.

That lives there. Now you could say, yeah. So what? Who cares? It's always been the case. What? What's changed? I think what is changing right now in front of our very eyes is that, a generation ago. Two thirds of that half of the world population. Within that, it's called the Valeriepieris Circle, where more than half the population lives.

Two thirds of that population was rural people living in the countryside, very little disposable income living pretty much lives not that different from their grandparents' lives and their great grandparents' lives, etc. Now two thirds of that population is actually urban. Now the reason this matters is economic growth tends to happen in cities.

This is where you have universities, this is where you have businesses, people exchanging ideas, etc. Now, all the cities in that valley, Pierre, is circle where essentially independent islands. Barely talking to one another. Still to this day, there are no direct flights between Mumbai and Shanghai, or between Delhi and and Beijing.

It's now, there's, I think there's 24 daily flights between New York and London come back in five years and 10 years. How many direct flights between Mumbai and Shanghai? It'll definitely be more than zero. I'm pretty much willing to bet a lot on that. And so as you get these flights, as you get more telecoms, as you get canals and roads and ports built as you get exchanges this is where the growth I think will happen.

And to be honest, if all you are doing is owning an index fund, then you're not gonna be exposed to it, at least not for a long time until the indexes start to reflect this growth. And by then, you'll have missed probably at least half of the party. 

Erik: Louis, while we're discussing China Chinese equity markets are starting to rip.

Is that the beginning of the trend to jump on? 

Louis: Yeah, you look, I think the Chinese equity bull market started in earnest in January 24th. That's when the government stepped in to, to put a floor under the market, and they've stepped in a couple times since then. Essentially signaling to the market, look, each time this goes down 10%, we'll we'll buy in and I think the, there's a lot of drivers to the unfolding equitable markets. The first and biggest driver simply is the difference between. Today's dividend yields and the cash, the money that that the interest rate that people get for cash at the bank you know that differential is basically 3.5%, 4%.

And so this means that each time the market dips a little bit you do see Chinese savings. The individual savings, which are very high 'cause they're no longer buying real estate. They've just been, so shell shocked. They've kept a lot of money at the bank. As soon as stocks fall 10%, the the Chinese savings come in and buy all the high dividend yielders, whether they're PetroChina or China Mobile or or Bank of China.

All these companies that, people know the government isn't gonna let go bankrupt. Still offer dividend yields of 5%,6%, sometimes seven, 7%. So I think you do have this rotation and as long as the government is perceived essentially to backstop equities that will continue.

And as long as you have this very high positive differential between, again, cash yields on bank deposits and dividends on the other. But I think there's other drivers that are increasingly emerging. You just discussed, the fact that the US China relationship is probably now finding a sort of even keel and isn't gonna deteriorate from here.

I think we're gonna get confirmation of this in late October when President Xi and and Trump meet at the APEC meeting in Seoul. And. If anything mildly friendly comes out of this will be a massive green light for a lot of foreign investors to participate in the bull market in China.

And last year China was the best equity, best performing major equity markets. I. This year, again, it's it's outperforming the us it's actually outperforming most markets. I think there's, I could wax lyrical. There's other drivers to the unfolding bull market.

But the reality is Chinese bull markets typically end in one of two fashions. We are in a bull market today. The market has essentially doubled since January 24. And most Chinese investors are very momentum driven. Things go up, they buy more.

They're, they, they're very momentum driven. And Chinese bull markets typically end in one of two fashions. The first way Chinese bull markets end is the governments decide that enough is enough. They crack down on margin loans. They raise interest rates. They sometimes, they.

They crack down on sectors they don't like, like the education sector or, Jack Ma goes missing for six months. And when the Chinese policymakers make it pretty obvious that we don't want stocks to go up anymore because we're worried about, feverish speculation. That's definitely a time for you to get out.

Now, today there's absolutely zero sign that it's the case. Quite the contrary, given the weak domestic growth, they're doing everything they can to prop up and boost asset prices. So right now the government is fighting in your corner. You don't have to fight the government. The other big, usually the, the end of Chinese equity bull markets come around when you see massive equity issuance when as equity prices go up, you start to see a bunch of IPOs, you start to see a bunch of rights issues essentially companies saying, you guys like this paper here. Here's a bunch more of and.

Almost 30 years in China. I've often said that perhaps the best indicator for the Chinese equity market is how thick your copy of the South China morning post is. Because when there's the IPOs and and rights issues, etc, you get like full page advertisements. In the in the South China.

And so the thicker your South China morning post copy is the more worried you need to start becoming. Today. The reality is, yes, we've seen a pickup in IPOs, but it's hardly being a liquidity drain, especially when one contrasts with the amount of liquidity that central bank is still pushing in the, like I mentioned, the budget deficit of 10% of GDP, etc.

So for now, yeah, I think we are in a bull market in China. The next leg of the bull markets will most likely be driven by Trump and Xi meeting in Seoul some kind of arrangement. I would imagine that part of the arrangement will be a mild revaluation of the Reminbi that will give even more confidence to local investors.

Right now we're in a pretty positive cycle. Most people are looking at it from the outside and, they, most people feel why do I need to be, why do I need to bother with China? US stocks are doing great. European stocks have been doing great, good for China, nice for them to have a bull market, but I don't really care.

Not my problem. But I think this is where, the big opportunity is today. 

Erik: Let's suppose we wanna pursue that big opportunity, take a heavy position on Chinese equities as an American investor. Some people would say, Hey, that's a suicidal thing. Maybe the trend is there, but from a geopolitical standpoint, if US goes to war with China over taiwan or anything else, it's entirely reasonable to predict that one of China's moves might be to essentially confiscate any, overseas investment until it's over or something. Are you taking a risk there? Would you worry about that? If you're a, say a US institution thinking about a big position in Chinese equities, do you worry about a nationalization or war risk, or is it just, too far of an outlier?

Louis: Look, I first, I think if China and the US go to war, we'll have more to worry about than just our portfolios. 

Erik: I agree with that. 

Louis: What you're talking about is World War III, Armageddon. So at that point in investing for Armageddon, seldom works. Now, because by the way, if they do go to war what's Nvidia worth?

Let's assume they do go to war and TSMC, is the first thing destroyed in this war? How does Nvidia produce chips? Where does Apple produce its phones? What is Tesla worth? So if you think, if you're. Per worldview is us and China are gonna war, are gonna go to war.

Ergo I'm gonna own Nvidia, Apple, and Tesla. You're gonna have a nasty surprise the day that hypothetical war comes around. Now, my view is much simpler than this. Is. Not only is a war between them, unthinkable it, it also isn't gonna happen because like I mentioned, the US can't produce rockets.

It can't produce cars without China's help. And it's gonna take at least 10 years, if not 15, for the US to be able to produce its own magnets for the US to be able to produce its own rare earths. And that's if they start now with a massive industrial policy and epic industrial policy and billions, hundreds of billions of dollars in capital investments and essentially building rare earth refineries in the US at a time when, you know the not in my backyard. This is, which is one of the most polluting thing you can do at a time when the not in my backyard forces in the US are so high, etc. Bottom line how can the US go to war with China when it can't produce weapons without China's help?

And if you can't answer that question cogently, then you know that they can't go to war against each other.

Erik: It's pretty darn clear by that description that they can't, why are they talking so aggressively? So much rhetoric about going and doing it. I don't get it. 

Louis: Because how do you sell the next aircraft carrier?

How do you sell the next, F35? How do you sell the next big weapons project without an enemy? You need, the US military industrial company, the US military budget is a trillion dollars a year it's more than the next 10 countries combined, and it's the US can't cogently be invaded by anybody.

And how'd you justify that? You need to say, okay China's gonna invade Taiwan, or China's gonna invade South Korea and, you need to create the boogeyman the scary guy. Otherwise you have no US military industrial complex. 

Erik: So when you see US senior military officials that are actually writing papers saying, look, war with China, we should just accept it.

It's inevitable within the next five years, you think what they're really saying is, we need to pump up the defense budget. Let's invent a boogieman so that we get some public support. 

Louis: That's one way to look at it. But I think increasingly, look, I think with this new administration we have a more isolationist administration than we've had in a long time.

I think you, you have an administration that acknowledges that the US has fought two wars in the past 20 years to very unsatisfactory results at great costs in blood and treasure. That if the US can't win in Afghanistan, and if the US can't win in Iraq, what are the odds that they're gonna win in China?

The reality is that wars between superpowers are essentially wars between industrial systems. That, that's the simple reality. And, you look at World War II, and this isn't to take away from the courage of American Marines who stormed the Normandy beaches, etc, etc.

They, you needed the courageous soldiers and the US had them, and it was tremendous. But the reason the US won the Second World War is that. The US outproduced, Japan and Germany by a factor of five when it came to tanks, when it came to airplanes.

There's a great book on this called Valley Forge, which I would recommend to all the readers.

The second World War, and again, I'm not taking away from the valor of American soldiers or Russian soldiers or British soldiers or anybody but the second World War was won in Michigan. It was won in upstate New York. It was won in the US rust belt. That could produce more trucks, more planes more than anybody else.

The reality today is that. There is only one global manufacturing and industrial superpower, and that is China. You look at China's manufacturing exports. China's manufacturing exports are now greater than the US's The Japan's and Germany's put together manufacturing exports. So you take the next three.

China still does more than the next three combined, all this to say that we can't go to war with China like we the western world. We can't go to war with China. It'd be absolute madness. It'd be just as stupid as Japan bombing Pearl Harbor. You awaken a giant that can outproduce you 10 to one.

It's not gonna happen. 

Erik: Louis, I can't thank you enough as always for another terrific interview. Before I let you go, let's talk a little bit more about what you do at Gavekal. What services are on offer there for our institutional listeners and for our retail guys? Where can they follow your work?

Louis: What do I do apart from bitching about the US military industrial complex? The no jokes aside. Yeah, we we publish research. We manage money both for institutions and for private clients. You can find the best place to find us is at our website Gavekal.com. I happen to be on Twitter, but I don't tweet all that often.

But people can still follow me on Twitter mostly. I just make silly comments on Twitter, so don't hold that against me. But if you have a short fuse, maybe you don't want to to follow me, but the the best place the more serious place to, to keep in touch with with what we're doing is our website Gavekal.com, G-A-V-E-K-A-L.com.

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.

 

 

Erik: Joining me now is Energy Outlook Advisors, managing partner Dr. Anas Alhajji. Anas, I have to tell you, I'm so excited to get you back on the show because first of all I think a very strong compliment to you that you're not really even a macroeconomics guy. You're an energy guy, but you're one of the most valued among our listeners, on this macro podcast because of all the excellent interviews you've given us, and you've also been named the number three most influential voice in energy markets. So you're actually a bigger name in energy than Dan Yergin, although you come on Macrovoices. Whereas Dan likes to play hard to get congratulations, sir.

Let's move on to, the topic of the day is the group of eight OPEC Group of eight met this past weekend. They're talking about unwinding the production cuts and basically increasing oil production. Apparently all of the sudden Saudi Arabia is seemingly leading the way on an effort to bring energy prices down.

What's going on? 

Anas: Sure. So let me explain this, especially for the audience who are not familiar with these issues people are familiar with the name OPEC, which is the organization of petroleum exporting countries. OPEC is this year is 65 years old. And OPEC in 2015 when the prices, when old prices collapsed.

They looked around and said, okay, I cannot do it alone. And the reason why they couldn't do it alone because there was major producers who are not OPEC members, that includes Russia, Kazakhstan, Norway, of course, the United States. And they said, look, I'm not going to cut production. I'll leave prices down unless non OPEC producers come to me and literally cooperate with me and all of us will cut. And that resulted in what is known right now as OPEC+ because 10 countries being in this new group or added to this group. So we had 13 members from OPEC+ 10 members from outside opec. The total is 23, and that's what we call OPEC+.

Part of this new group is Russia and Kazakhstan in 2022, late 2022, all demand was not as high as they expected. Growth in all demand was weaker and inventories started building. As a result, they met and they decided trim by 2 million barrels a day. So we have this cut from the whole group, OPEC+ of 2 million barrels a day from late 2022.

Here comes 2023. The market was weaker. So eight members, at that time it was nine. But Gabon basically withdrawn. They met and they decided to voluntarily cut production by 1.65 million barrels a day, a 1,650,000 a day. And the whole idea was, it'll be only few months and then I'll bring it back. But the situation deteriorated further.

And in November, 2023, they met again. They decided to go for a cut of 2.2 million barrels a day, starting January, 2024, and ending in March, 2024. So just for those who are new to this, I have three groups. I have OPEC, I have OPEC+, and I have the group of eight. And I have three cuts. The first cut is 2 million barrels a day is done by OPEC+, and the agreement now is not to bring it back until early 2027.

And then I have the first voluntary cut, which is 1.65 million barrels a day that was extended until early 2027. But we know now from yesterday that they changed the date to October, 2025. And then I have the 2.2 million barrels a day cut, and they are already done the N one, all of that. And they are, they will be completely done by the end of this month.

So the 2.2 is already out of the way. They are left with 1.65. It was designed to come back online in early 2027. They decided yesterday to expedite that, basically bring it forward and start in October, 2025. So that's what happened on Sunday. If you go a back a week ago, this was a surprise.

If you go back to Thursday or Friday, it wasn't so they agreed to start doing this, but there was some conditions to that. And one of the things they've done is they did not give any guidance for the future. So although they took 1.65 divided by 12 months, which means that their plan is to do it over 12 months.

They ended up with 137,000 barrels a day in October. Additional production ceiling, and I'll explain that in a minute. They did not say anything after that, but they are emphasizing the point that we are going to go month by month, and we are going to assess the situation. We can stop unwinding.

We can cut or we can expedite. What they did with the previous 2.2, so all the options are still on the table. In this case, the idea of unwinding is extremely important because the 2.2 again was designed to come back online on April, 2024, and they delayed it for a year. And for this 1.65. It was supposed to be only three months, and it's been there since it's been there for a year and a half.

The justification for it is very important and is very important for the audience to think to, to understand what are the triggers for these unwinding OPEC and OPEC+ ministers. Cannot talk about prices. They took this decision based on lawyers' advice in 2016, so they cannot talk about prices. They cannot react to prices.

In general we end up with situations when, let's say prices decline in one day by four or $5, and I'll get those messages and I'll get the comments on Twitter. Where are the Saudis? Where are OPEC cuts? Why they are not responding, why they are not making statements?

Again, they cannot talk about prices. That's number one. Number two, everyone has to understand that the Saudi price. The average monthly has nothing to do with the changes during the day. It's the average monthly, so this is very important to realize. So the idea here is, okay, what are the triggers? There are two triggers for unwinding. The first one is a major decline in inventories, global oil inventories, and the second one is strong growth in demand.

What we've seen that when they decided to unwind in April, they looked at the inventories and inventories were low and they declined substantially. So the first condition is met.

The second one is a growth in oil demand. And according to OPEC and their view, especially the V8 or we call that the group of eight or the V8 V for voluntary, they saw an increase in demand and that increase in demand, part of it is related to the sanctions, especially on Venezuela, Iran, etc.

And the reason why it's related to sanctions, because we always have companies and traders who panic. They want to make sure that they have enough supplies. So the demand for oil from the group of eight increase, especially from the Gulf of Saudi Arabia and its allies increase. So for them, the two triggers are met and then they decided to unwind, and that's what we've seen.

Then they expedited that because they saw the situation can handle the additional oil. At the same time, they want to get rid of the headache of overproduction coming from Kazakhstan and Iraq. Now for the one, the 1.65 that they agreed on yesterday, the question is very clear. Anyone who is looking at the data, I'll say, look, I need to do this and I need to do this for various reasons.

One of them is among the whole. Group of 23 countries, only four can increase production. And here I would like to emphasize the point that the unwinding and the numbers, we hear about the 2.2 and 1.65. These are for production ceiling, these are for quotas. These are not actual productions. Actual production is way lower because some countries cannot increase production.

On the other side, what matters to the market is not really production. They talk about production because OPEC Charter, when it was written in 1960, it talked about production and they are still with it. But what matters to the global oil market is exports. And if you look at OPEC+ exports. They are about half of the headline number.

So in this, so we know that the headline number is 2.2 million barrels a day, but what we saw in the market is about half of that. Now, the situation for 1.65 is going to be even a lower number or lower percentage simply because there are fewer countries that can add production. 

Erik: Anas, you mentioned only four countries are capable of increasing production.

I'm guessing that starts with Saudi Arabia and United Arab Emirates, who are the other two? 

Anas: Iraq and Kuwait. But Iraq and Kuwait capabilities of increasing production forward is also limited. So a few months from now and it's over they'll max out. And everyone else is maxed out, including Russia.

So that will leave only Saudi Arabia and the UAE. And here I would like to point out to the audience that it is not necessary that Saudis and the Emiratis will increase production up to the maximum anyway. They are free to do it because they have no agreement but. They may not do it. And if we look at Saudi Aramco, based on history, it is very comfortable producing between 10 and 10.5, 10,500,000 barrels a day.

And right now they are probably around 9.4, 9.5. So they can add probably 500 to a million. And that's really the range of comfort for them. 

Erik: Now, back in April when the decision was first made to unwind the 2.2 million barrels, that was basically a panic moment in markets. Everybody was bearish saying, okay, this is gonna crash oil prices.

I think you were the only voice that I can remember, at least for from that timeframe, going back to late April, early May, and we had you on Macrovoices on May 8th talking about this very issue. You were very outspoken saying not only is it not bearish, but it might. Even be bullish. And sure enough, it seems like the price action has actually supported your very, uncommon view.

What happened there? How were you able to see that? Why is it that that you were able to see something people didn't see there? 

Anas: Yes. The analysts who were bearish, basically, they did not, look at the real situation on the ground, for example. The Hajj, which is the pilgrimage that we talked about in that show on May 8th, where millions of Muslims fly from around the world to go to Holy City of Mecca and Medina.

In Saudi Arabia oil consumption increases substantially within Saudi Arabia. Because of that. So gasoline, diesel, jet fuel, oil, etc, because you're talking about millions of po of people going to the same place at the same time. So they usually it takes a year to plan for these things and that increases the demand within Saudi Arabia.

So they need that oil, but the world is not going to see it while those analysts counted the increase. And or the unwinding as a net supply to the world. While the world did not see any of that at the same time, they missed another point that most of the increases, especially in the first period that oil was already in the market because of cheating.

So what they did in April and May basically just legitimize that cheating. So it was on paper, so they missed that point too. Then they missed the third point, which is the demand for oil increases substantially in the summer. And that demand could add up to about 1.2 million barrels a day. So basically domestic consumption between hedge and domestic consumption.

And oil was already out there that most of the unwinding. So it was clear from the beginning, but they did not see these things. 

Erik: Now Anas, you have used the phrase manufactured bearishness in some of your tweets and substack posts lately. Why are you using that particular phrase? What do you mean by manufactured bearishness?

Anas: You look at the IEA forecasts and they predict that next year we'll have the largest surplus in history. Right now they are talking about a surplus of 1.8 million barrels a day. You look at Goldman Sachs, Morgan Stanley JP Morgan, etc, and there are some really strange stuff going on here because the same narrative that the IEA is pushing, the same narrative is being pushed by the Chinese oil majors, which is very strange.

The Chinese oil majors basically are going public in English, broadcasting the view that oil demand in China is going to peak gasoline demand in China is going to peak, and that's what the IEA is saying. So to have a Western organization saying exactly what Chinese companies are saying, that's the first question mark there.

The second one is the Chinese are talking about peak oil demand. Peak gasoline demand. That means they have the forecast and they know what's going on, but they will never, ever release the actual numbers. What does that mean? That mean they are broadcasting something to the rest of the world, to the old producers, to the companies, to the US and everyone else what they wanted to broadcast.

Otherwise, if this was a normal thing, they would have published the actual numbers. So if you look at the IA forecast, for example, I'm please allow me, because I want to take my time show showing the evidence here. The first thing is the IEA. When we talk about 2025 and 2026, I'm just going to give you an example how this is manufactured.

The IEA predicts that US oil production will increase by 560,000 barrels a day in 2025.

We already have the data for the first half of the year, and there is no way you can get to 560. So what they did is they exaggerated US oil production, but the story is not on the production side. The story is on the demand side, according to the IEA. US oil. Oil demand would increase by 60,000 barrels a day in 2025.

You look at the data for the first six months, they are not double that. They are not triple that. They are quadruple that quadruple. And then you move to 2026 and all of a sudden they say, oh, there is no growth. Zero growth. Us all demand in 2026. No one on earth believed that except them. So right here we have several hundred thousand barrels a day that's being taken out and counted as surplus while it is an actual consumption.

So that's one. But the IEA expect. All demand to grow by I think 680,000 barrels a day, which is extremely low. Our number is 1.1 and OPEC number is 1.3, so you can see that the diverse is really large. But why we have the concern here, we have the concern on two fronts. First of all, we have something called circular information.

Circular information is when you have. Why spread news all over the world and people think, wow, this must be real because I'm hearing it from all over the place. But when you do investigate the source, you find out it came from only one source and then. Most of the media and social media, etc they will be coating like in a chain, like I'll say I heard this from CNBC and CNBC coded, CNN and CNN coded ABC and ABC quoted Wall Street Journal.

Wall Street Journal quoted the International Energy Agency. So we have circular information. Where is the problem? I'll go back to this point of circular information in a minute. After I explain where the problem is, you go back and look at the forecast of global oil demand by the IEA in 2022. The IEA discovered that all their numbers and all their estimates of global all demand where were way low and they revised up all demand back to 2007.

To 2007. So we're talking about 15, 16 years of data that's been underestimated all this time.

Then you move, so that was from 22 back then in May. This May last May, the IEA announced that, sorry, and they did not say sorry. Of course they'll never say sorry. But we underestimated demand in recent years, so we are going to revise up the numbers for 2022, 2023, and 2024, which is a continuation of the the era from 2007 to 2021 by how much?

350 million barrels, the total adjustment in those three years. 350 million, but that's the underestimation of demand by the IEA. So you start from 2007. They were wrong all the way to 2024. And just two weeks ago in its latest report, they said we are revising up Mexico's oil demand by a hundred thousand barrels a day and listen to this, back to 2020.

So what is the problem? First of all, we have a proven record of underestimation for almost 18 years. So why do we have to believe they're low estimate right now? While all the other evidence point to higher oil demand than their number? But to go back to that circular information. This data since 2007, does be revised.

Not every analyst paid attention to it. So many computers at many banks still have the old data and they are still using them. So back to that circular information, it the data being published by one source is still in news, and therefore when they do the forecast in term of growth could be correct. Is wrong,

so we do have a serious problem.

Erik: I wanna move on to India, China, and Russia, starting with India because the spin that the Western press has put on this is basically what's going on with the 25% tariffs. Why did the Trump administration just impose 25% tariffs on India? The reason they did that, according. To the news flow is it's all about the Russian oil.

Russia has been selling oil to India. They feel that's working around tariffs. So now the Trump administration is going to punish India for buying Russia at it, please. So now the Trump administration is going to punish India for buying oil from Russia according to the news. But according to Dr. Anas, you don't think that's really what's going on.

So what is going on? 

Anas: First of all, we have the 25% tariff, which is the general tariff on India, and then the Trump administration added another 25% because India is importing oil from Russia and Navarro, the White House advisor basically, accused India of supporting Putin in the war in Ukraine by buying Russian oil.

He was very vocal about it, and almost on daily basis, he kept talking about it, tweeting about it, giving speeches, giving interviews, etc. And right now the tariff on India is 50%. Here is the problem. Yes. India imports about 1.8 to 2 million barrels a day of oil from Russia, from, but that was by design.

And the design did not come from India. It was the G7 and the Europeans who designed that. So when they import the sanctions in the sanctions itself, that for the first time they agreed on this, they said that the EU and the United States basically can import Russian oil if it is modified and modified in the old business mean it is refined, all they need to do basically is find another third party to do that. India and China basically did that and some other countries. But the idea here is the Biden administration has no problem with it. Even Secretary Blinken at the G 20 meeting in New Delhi, basically he defended India for buying Russian oil above the what they call the price cap of $60.

So that was by design, but here is the issue that why it is really not about Russian oil imports. If the issue is importing from Russia and paying them, and therefore you are supporting Putin's war in Ukraine, then we have a serious problem because US imports from Russia this year increased over last year.

The second point is the EU still imports massive amount of natural gas via pipelines and large amount of LNG from Russia. In fact, if you, we just released a report the day before yesterday, and in that report it shows that in August, 12% of GA imports of the EU came from Russia, but no one accused the EU of supporting Putin's war and China imports everything from Russia since they import the crude.

They import coal. They import natural gas. And the Trump administration did not accuse them of supporting the war in Ukraine. But here's the bigger story. The bigger story is Turkey. Turkey imports the Russian gas and send it to Europe. Turkey, import the Russian crude and send it to Europe.

Turkey, import the Russian petroleum products. Send them to Europe and Turkish exports or petroleum products to Europe is larger than that of India. And what's strange about it is Turkey does not refine that, that those products, Turkey basically just transmit those from place to place while India, at least they refine it.

So why they pick on India in this case, it just does not make sense. There is more to the story than Russian production. For those who do not know, we still import enrich uranium from Russia until today. 

Anas 

Erik: I wanna broaden this picture out because on one hand we can talk about the supply and the demand and the cuts and the so forth, but it feels like the mood has changed.

It feels to me like OPEC+ and the group of eight were really working on an agenda that was not cooperative with the United States. It feels to me now, like some deal has been cut and for some reason the Saudis want to support President Trump in trying, at least in the short term. To bring energy prices down.

Quite frankly, that makes me wonder if they're doing that because they think energy prices are going up later because of perhaps some geopolitical things that they see on the horizon. So what's the broader picture of what's going on in and how the influence model has changed from the Biden administration to the Trump administration and the decisions that are being made?

'cause I have the sense that. The relationship has gotten better with the us but at the same time, they're preparing for maybe a relationship that gets worse over time. 

Anas: A few things here. If you want to talk about expand this to various areas including politics, I would be happy to talk about that.

The issue here at this, that first of all, oil prices declined in 2025. Mostly because of President Trump policies, not because of the unwinding of production by the group of eight. And to prove this point, the unwinding started in April while oil prices declined earlier, and even when the unwinding started in April.

The supply of OPEC+ declined in April and May. We did not see the increase until June. Even when we saw the increase in June. It was a portion of the what was expected, and then it declined in July and August. So you cannot claim the large decline in prices on the decision to unwind. The reason was the trade wars, the tariffs and other policies, the immigration policies, the visa policies, the treatment at the airports etc. We have even clients basically refusing to come into the United States for fear of being mistreated at US airports. The student visas, as because the, of the demonstrations, because of Gaza and others.

So that reduced travel substantially and reduced all demand. Why this is important. Because if you go back to our reports at the end of 2024, jet Fuel was the brightest spot in the energy complex, and now it tanked because of those policies. So that's the first part of it. The second part of the story is Bloomberg published something about.

Saudi MBS, the Crown Prince is going to visit with Trump in November, and therefore he wants to make sure that the oil prices are cheap, etc. Let's be clear on this because it is very important. Do the Saudis want to lower prices? No. Do they want to please Trump by lowering prices? I don't think so.

They can't please them in different ways. They can't just de dedicate a certain amount of investment like they did with the one, trillion or have trillion, whatever amount they want to invest, and that will be enough. It's not gonna be the oil, but what the Saudis want. We've seen this several times before, and I'm glad you asked this question because the point I'm going to mention is important for everyone to remember all the time.

What the Saudis want, and they've done it before, is to isolate oil from any discussions. They don't want to discuss oil. They are MBS is going to be here in the United States for a certain purpose, and they want to focus on it. When Trump visited Saudi Arabia. They wanted to focus on why he's there. They don't want oil to be the main issue.

When the president of China visited Saudi Arabia or the president of France, etc, they always makes made sure that oil is not on the table. So if by increasing production and keeping prices at current levels. That will isolate it. That's a big win for Saudi Arabia. The other issue is, and this is a reply to the Bloomberg article, when they mentioned that this is a political decision.

So what oil is a strategic commodity? Oil is a political commodity. It's always been. In fact, oil and LNG right now are part an integral part of US foreign policy. Why they are not saying anything about it. In fact, even if you want to look deeper into this, the US is using LNG and oil as weapons, and they are using, of course, the sanctions and everything else.

These are weapons and they are not saying anything. Why? When Saudi Arabia basically look to them as if they are low ending prices, all of a sudden it's something strange. But the main point here is. The Saudis want to isolate oil from the discussions. Oil is not on the table. And if that's what it takes, then they will do it.

The other issue here I would like to mention is when we talk about market and market surplus and what the analyst missed, there is a very important issue related to India of course, and the sanctions on the refinery that we have people saying, look. Inventories are not really that low. Like what OPEC is claiming.

Look at oil on water. It's the, all those guys even in, in April who predicted that oil prices would decline to 30, they missed the point. And I'm going to mention a real story here that tells the whole idea about two months ago there were six. Oil tankers carrying Russian Urals going to India.

Those six tankers belonged to a certain company. By the time the first tanker arrived to the Suez Canal, the Houthis hit a ship in Red Sea and sank it. So the Norwegian insurance company refused to insure the shipment. They told them, look, if you're going to go through the Red Sea, I'm not going to insure it.

So the company decided to reroute the six tankers around Africa. So imagine going back after they went through the Mediterranean, they have to go back and go around Africa to go to India. That increased the time to arrive to India by about three weeks. So oil on water went up. For those who focus on it as increase in inventories, all they see is increase in inventory and therefore we have a problem in the market.

No, this has nothing to do with the fundamentals of the market because if you want to do the balances right, then you have to subtract those six tankers from three weeks earlier to have the balance, right? So they missed that point. They added those. They the they did not subtract those tankers. They added them as , oil on water.

So this is one of the big problems. So whenever we have new sanctions imposed, we end up with this confusion in the market and tankers stop in their place. Basically, they get stuck at sea until they get more information from their management on what to do. So every time we have new sanctions. We have delays in shipping, and then oil on water goes up.

This has nothing to do whether we have surplus or not. In fact, we have a shortage because they are not arriving to their destination, and the analyst missed that. So in the case of the 18th round of sanctions by the EU, when they impose the sanctions on Nayara energy, refinery in India, there was a lot of confusion for about a week.

All the shipments going to NARA stopped and all of a sudden someone can claim, look, oil and water is going up, storage is going up. There is no demand. All of these things are political issues. They have nothing to do with the market fundamentals at all. And the other issue that is important to this discussion when we talk about politics that when MBS comes to visit Trump, of course, like we've seen in Riyadh, we have those major investments, we have major joint ventures, we have all kind of things, etc. And if you look at oil in that discussion, or even if it's brought to the table, it's something small relative to those big contracts, whether the defense contracts, the AI contracts, etc. Oil looks really small relative to it. 

Erik: Anas, let's move on to where this is headed a little bit further down the road, because some news that I found very interesting is China and Russia have agreed to develop what I think it's called the Power of Siberia 2 gas pipeline. So gas pipeline from Russia to China.

New investment. Now I thought that idea was dead. What happened? Why was it resurrected? And particularly I got a feeling that it fits into some strategy that I'm not fully, grokking yet here. Do you, have you figured this out? 

Anas: Yes. I think your feeling is absolutely correct. There is a big story in fact here early in the nineties when Russia basically they started reviving the economy after the collapse of the Soviet Union.

They realized that they have a lot of gas. There is not enough market in Europe for it, so they try to talk to the Chinese about a pipeline. So the idea is really old. It did not catch any any interest until 2007, 2008 when the Putin administration basically agreed that it should do that.

But nothing happened. But when. The the Chinese basic Chinese economy was picking up and economic growth was very strong. We're talking about 11%, etc. They needed the gas, so they agreed on one pipeline. But what we ended up with the case where Putin goes to Crimea, he annex Crimea, and the EU and the US and the G7 imposed sanctions on him, and that affected.

Gas sales to those countries. And he wanted an outlet and the Chinese outlet was there. So it was the sanctions that imposed in 2014 that opened the doors or opened the floodgates of Russian gas to China. So we had two pipelines. The Power of Siberia, one and Power of Siberia three and Power of Siberia two was proposed.

It's a massive pipeline but the Chinese. Found themselves in trouble because they said, look, I don't want to repeat Europe's mistake with Russia. Europe depended heavily on Russia and they got stuck. I don't want to repeat the same mistake to maximize my benefits and enhance my energy security and enhance my national security.

I need to diversify my inputs. So I'm going to buy LNG from all around the world, including United States. They ignored the Power of Siberia 2, from the Russian point of view. When Europe or exports Europe declined by 80%. They looked at the map and said, okay, the only two places I can send pipelines is Europe and China, and if Europe is not there, then I'm going to, I'm putting all my eggs in one basket in the Chinese basket.

If we end up with political problems, I am a hostage to that. And if the Chinese economy tanks, then I have to pay a very heavy price for it. So I need to diversify, but I cannot send pipelines to other places. So the only way to diversify gas exports is to focus on LNG. So they started building LNG plans just like the United States to export gas.

With the idea of diversification. So they built TML and then they built the Arctic LNG two. And after they finished Arctic LNG two, they, their interest in the Power of Siberia 2 basically became very weak. They were not interested because Arctic LNG 2 basically was the way out. So it wasn't So when you said it's dead.

Yes, it was dead because China has no interest and the Russians have no interest. China wants to diversify imports, Russia wants to diversify, export, but everything changed this year. First, we have the trade wars and we have the tariffs, and as a result, China stopped importing LNG from the United States last February.

So no zero imports of LNG since February. Remember, they wanted to diversify. They wanted to go everywhere, including the United States. Now, the United States basically being cut because of the trade wars and the tariffs. Now, China wants to sign contracts. Before their idea was, I'm going to sign contracts with the new emerging LNG companies in the United States.

Part of the diversification. Because of those trade wars and the tariffs, they did not sign it. Now they want to go somewhere else. Australia is maxed out. The only two places where they can get LNG is Qatar and UAE, United Arab Emirates, which is in the Gulf. And they did sign those contracts and the Trump administration got pissed off because of that, because they thought that they would get more contracts from China.

All of a sudden, Israel. Started hitting Iran and we started the Iran, Israeli Iran war. That was not a surprise for political analysts who were predicting this to happen for the last 20 years, and this is really not the big issue for China. The big issue for China was when the United States suddenly hit Iran, so in the Trump administration hit Iran and they hit them really hard.

That's when China basically started paying attention. Why? Because all of a sudden the western press, especially in the United States, started promoting the idea of Iran closing the Hormuz Strait

And China looked and said, hold on just a second. I cannot import LNG from the United States. Now I have those contracts with Qatar and UAE, and now I cannot import from them anymore. What is the alternative? The alternative is power of Siberia too. So that was the major change. And this fit with the Chinese policy of reducing energy imports via sea.

So they wanted ev all the Seaborn imports, or the Seaborn energy import to decline substantially. And the reason why, because they think if there is a war. Or there are sanctions or closure of Malacca's trade. Then they are ready. So they are building this massive inventory. Right now we are speaking about the highest oil inventory ever in China, 1.1 billion barrels.

And they have inventories of everything, being built. So for China, it was the US trade policies. The tariffs and then the US attack on Iran, and then the promotion, and I emphasize the word promotion of the idea that Iran will close the Hormuz Strait. If you look at it from a Chinese point of view, it's not Iran who is going to close the Hormuz Strait.

It's the US who is going to close Hormuz Strait, and therefore they needed the alternative. And the alternative is Power of Siberia 2, from the Russian point of view. Again, they had weak interests before. All of a sudden they have strong interests. Why? Because the US imposed sanctions on Arctic LNG two and all the tankers associated with it, and now Russia got stuck.

They want to diversify exports, but they cannot because of the sanctions. What is the alternative Power of Siberia 2. In a sense it was the US policy, whether you look at the trade wars, the tariffs, or the attack on Iran the promotion of the idea of closure of Hormuz Strait that pushed those two, two countries to cooperate together and to start building this pipeline.

And related to that, something we covered in the previous two shows, if you recall. And the question I raised, and I'm going to raise the question without answering it, the question I raised was the following. Most of the Russian Urals crude goes through the Red Sea, but not a single LNG tanker from Russia go through the Red Sea.

Every single LNG tanker have to go around Africa. Now in the summer, some of them basically go through the northern route northern route. But, for most of the year, they go around Africa, Qatar, when they, when it sends LNG to Europe, historically it went through the Red Sea. Now it goes around Africa.

So why no LNG shipments going through the Red Sea since January, 2024? Kind of one, one and a half shipment in a sense. One of them from Oman going to Turkey, but I'm mentioning this just for accuracy, but in general, there were no shipment, no Russian shipments going through at all. So why oil is a right to go, but LNG is not.

And now you look at what China is doing and the idea of LNG in the Gulf and the closure of Hormuz Strait, you, you start having an idea on how that LNG War. Is playing. So yes, you are right that this came out of nowhere. It was a dead idea, and now it became the center of attention simply because of the US policies.

Erik: Now if you look at the electric vehicle adoption rate data coming out of China, it's awfully impressive. The thing is, I don't think you believe that data, from what I've seen on your social media and so forth, what's going on there? Number of EVs on the road in China. Why would they exaggerate that?

Anas: We have a serious problem as we discussed in previous shows, because the media keep reporting. Sales. Sales do not matter. What matters is the number of EVs on the road and those who promote EVs or obsessed with EVs, they always literally mention sales and that's it. But they don't focus on ideas like I, my neighbor basically just bought a new ev new Tesla to replace the old Tesla.

Yet, they're still counting it as something new. So really you can see it's part of the PR for EVs to focus on sales. But what matters is we have to focus on the number of cars, or at least registrations in every country rather than the sales. But in China, we already have several scams being investigated, by the Chinese government.

And yes, or the day before yesterday, I learned about news scam in addition to the two that I knew about before. So I'm going to go over them quickly here. The subsidies to EVs in China are given to EVs in China, so the, those EVs have to be sold in China. So the first one is, of course, they have to create a system.

The, they have a tax system, they have a rebate system, and they have to create this bureaucracy, of course, to work it out. So how to define a new car that deserve a subsidy. Somehow they ended up with an exact definition that is controlled by a barrack, and the exact definition is you have to have zero mileage on it.

And some smart Chinese guys said, okay, that's fine. So they go and buy all those old junk EVs at a very cheap price, take them somewhere, play with the diameter, and basically bring it to zero. And then they bring all those old EVs. Count them as new and give them a new registration and then get the subsidies and the gang, whoever operating on this, basically they'll split the money.

So new vehicles being, or old vehicles being reported as new ones, and some of them probably sold multiple times. So that's number one. Number two, again, the subsidies are given to what is registered in China. So what they discovered was. Couple of manufacturers had an agreement with dealers or some shell companies belong to them.

They will literally take those cards from the factory and sell them to that entity and that entity within 30 minutes will have a registration and insurance on them. And immediately, of course, they will cash in on the subsidies and a few hours later, those cars will be on ships going to the rest of the world.

Whether Brazil or Kenya or Europe or any other place, what that means is those cars are counted twice. One in China and one as export. And the recent one I heard about a couple of days ago that all you get to do basically just show a purchase of the car. So some manufacturers basically c created their own companies and they buy from themselves, but under the new entity and they just park the car in parking lots and cash on the subsidy and that's it.

So the numbers are exaggerated regardless. And I know that some of your loyal listeners heard me saying this several times. Regardless of that, even if you take the headline number, you take the maximum number, you look at all of that and you look at the number of cars on in the world worldwide right now, it's about 50 million EVs on the road.

And the impact of that in term of replacement of all demand is only, and that is the direct replacement, only 1.3 million barrels a day. And that's it. All this talk about peak all demand does not make any sense at all because the impact on all demand is highly exaggerated. 

Erik: Anas, I can't thank you enough for another terrific interview, but before I let you go, I wanna talk a little bit about what you do at Energy Outlook Advisors.

Your substack has become really the the talk of the industry. Tell us a little bit more about what you do, where people can follow your work and what services are on offer. 

Anas: Thank you. Thank you very much. In fact, I was surprised that although. The Substack newsletter. We have a newsletter and we have the Daily Energy report.

The newsletter is intended for institutional investors and the Daily Energy report is for institutional investors and individuals. And it's cheap enough for individuals basically to, to subscribe to it. But I was surprised that the Energy Newsletter, although it is energy, it was classified among the top 15 business newsletters on Substack.

Which is a great honor, basically to be associated with some of the top people in the business. So that, that was really something made me really proud and happy. So we have those two. We have the newsletter, we have the the Daily Energy report. Of course all of those are sisters to Attaqa Attaqa in Arabic means energy, which is the number one media outlet.

In the Middle East and the Arab world that focuses on on energy and it is a very prominent publication. But the, aside from those really the big business for me is the speaking engagements. And now this is the time when companies plan their events, especially for their investors at the end of the year or the board meetings, etc, when they look for speakers.

I already have two two kind of speaking trips around the world coming up. But for those who are entrusted, especially to schedule speeches for the end of the year, I'm still available. 

Erik: Patrick Ceresna and I will be back as Macrovoices continues right here at macrovoices.com.

Erik: Joining me now is Bianco research founder Jim Bianco. Jim, congratulations on uh, being the first of the five finalists that we are interviewing in our countdown to episode 500. I wanna start by clearing the air because I get almost as much credit as you get for having called. The COVID pandemic back in January of 2020.

I got it from you. I, I do take credit for being very smart. What I did was I was smart enough to know better than to not take Jim Bianco seriously. That's pretty much where my, uh, my expertise started and ended. Tell us a little bit about how you got that call. So right back, uh, five years ago, since we're, we're starting with your track record here.

Jim: Thank you Eric, and I'm honored to be, uh, one of your five finalists. It was, it was back in January of 2020 when. I saw COVID and I got very worried that this was gonna be a real big problem when I saw what was happening in China. And that was in January. And then you'll remember the markets ran to a new high in February and for a while there it looked like it wasn't gonna work.

And then it all came crashing down. But I also remember, I think it was late January, early February, 2020, I was on a podcast with you and I think Ben Hunt. And, uh, the, I forgot which podcast it was, to be honest with you. And we were talking about it back then at the time, and we were very worried, uh, that it was going to become, um, a real problem.

So, uh, that's kind of where the or origins of that came from. And I might add, as we go through and talk about some of these topics one of the underlying themes I've been using is that event, the COVID shutdown and restart of the economy. Is the biggest economic event of our lifetime. It is bigger than the financial crisis nine 11, the inflation of the early eighties.

It is really the thing that you could really, as I like to say, we are in a post COVID economy and too many people like J Powell keep talking about the economy normalizing, uh, or going back to pan pre pandemic levels. It's not, that's an old cycle. We're in a new cycle altogether. So that was. And continues to be a major event that people need to start thinking about that whether or not we're past the, the virus, which we are is, are we in a new kind of economy, a post COVID economy? And I think we are.

Erik: Jim, I couldn't agree more. So let's move forward into today's economy and talk about one of those examples of something where people might be expecting it to work one way, but it might actually work a different way. And that is the hottest topic going right now, which is the FED rate cut.

Everybody wants. Why does everybody want their rate cut? Well, obviously the expectation is you sure you, you cut short-term rates, that's gonna transmit into bringing down lower long-term yields, right? That's how it works, isn't it? Everybody knows that.

Jim: Except that's not the way it worked a year ago because when the Fed did cut rates a year ago, you did see that long-term yields went up.

Uh, you know, the fed cut a hundred basis points and long-term yields went up a hundred basis points. But you go, going back to the whole post COVID economy thing, if you listen to J Powell, if you listen to John Williams, the New York Federal Reserve President. They, in fact, John Williams gave a speech on this the week before we're recording, where he said it's very clear that he still thinks that the Fed's neutral rate is down around 3%.

And he said that's because nothing has changed, since COVID, that all of the metrics in all of the understandings of the economy are still the same. And J Powell seems to be saying that. A lot of people seem to be saying that. The sub 2% inflation world that we had for a decade plus before COVID is still in effect.

Even though we're now in month 54 of having inflation above 2%. Don't worry, we're still in a po. Uh, we're in a sub 2% world even though we're almost now five years into, before we've, the last time we've seen sub 2% inflation. So there is this. Resistance by a lot of people to say that the economy has changed.

Now I know why There's resistance. They, the reason that there's resistance is they'll scream at you, okay, how's it changed? You know, I need chapter and I need verse, and I need stanza, and I need to know exactly how it's supposed to work. And the answer is unsatisfying. I don't know all of the answers. I just know that the old playbook you were using from 2019, that one isn't working.

The new playbook that we're gonna be using post 2020, we're still in the process of writing it. So I still don't know exactly how it's gonna work or what is gonna be the, uh, rules of the road. I just know the old ones are not.

Erik: I agree with you. The old ones are not. I just wanna confirm, so you're saying cutting rates looks like maybe the risk is cut, short-term rates, higher yields.

You're saying you don't really have a solid explanation for that other than the expectation that you cut short term yields to long-term, ain't gonna work or hasn't worked recently?

Jim: Well, yeah. Let me be specific. I ba I guess I must have, uh, not explained myself well enough. The reason that you see last year when the fed cut rates.

Higher long-term yields, and you see it with the ECB cutting rates and the Bank of England cutting rates higher. Long-term yields is the market I still think is worried that we're in a higher inflationary world, and if we're in a higher inflationary world, cutting rates is supposed to be stimulative.

And what the fear is, is that we'll just stimulate more inflation and we already have too much of it to begin with. That's what you're seeing with higher long-term yields. Compensating for that expectation of more inflation. Now I gotta be clear, we're talking about three-ish percent inflation to four-ish percent inflation.

Long-term. You know, it might be higher, some periods might be lower. Not sub two. And why does that matter? Because in a three to 4% world of inflation and core, CPI is 3.1. So we're getting to the bottom end of that range. Again, we've been slightly below it for a little bit while, is that what suggests that four-ish percent inflation, uh, four-ish percent interest rates is about neutral?

It's about where interest rates should be. Well, that's where we're at. We're at four and a quarter on the funds rate. If the FED is gonna ramp up and start cutting rates, they keep saying that we're mildly restrictive. They're using their pre COVID models to make that statement. But if, if I'm right in this post COVID world and we're at neutral now, they're gonna go too easy and they're going to spark an inflation concern.

And that's what you've been seeing with long-term yields with all the central banks when they cut rates that long-term yields go up.

Erik: Okay, so the risk is that with an inflationary backdrop, that's where cutting short-term rates can result in higher long-term yields, potentially creating the reverse effect of the one that was intended.

So it's about the inflationary backdrop that really is driving it. Jim, it seems to me like the Trump administration does not share the view that inflation is a problem. Is this a setup for them to, uh, essentially shoot themselves in the foot by unleashing inflation? By pushing for this, uh, this cut.

Jim: Yeah, I think it is. You know, you're right. Trump has been very clear that there is no inflation. Inflation has been vanquished, and actually it hasn't been, like I mentioned earlier, we're at 3.1% core inflation. In 2019, 3.1% core inflation would've been absolutely unacceptable by any metric from the Federal Reserve or the federal government.

But today, now they're trying to tell me that 3.1% is no inflation. It's not. And again, why is that important? Because if it's 3% inflation plus some kind of premium on top of that, which the Fed calls our star, we don't have a lot of room to cut rates nor. Should we be cutting rates? But I also think the other problem is, and I'll, I'll tread very lightly here 'cause I don't wanna upset too many of my friends in the real estate business.

The absolute worst person to ask about interest rates is somebody who's in the real estate business because they would argue to you that the proper interest rate is zero and they should go to zero, and they should stay at zero all the time when you have an affordability crisis. We should have interest rates go to zero.

When you have falling prices on houses or real estate in general, that is alleviating your affordability crisis 'cause affordability. Crisis is home. Prices are too expensive. When they go down, interest rates should go to zero. When home prices are too expensive, interest rates should go to zero. That's the problem you have with somebody in the real estate business telling you where interest rates should be, is that they always think that they should immediately be going down and they should be staying somewhere near zero all the time.

And I won't just indict Donald Trump. I'll also throw Bill Pulte, the head of the financial, the FHFA, the, uh, regulator for Fannie Mae and Freddie Mac. He's been echoing similar sentiments too that interest rates should be on their way to, you know, something approaching zero immediately.

Erik: Jim, we've got the jobs report coming out Friday. That'll be tomorrow on the day that this podcast drops on, uh, on Thursday. We recorded this interview just for our listeners edification back on Monday of this week. Tell me about the jobs report, what your expectations are, but particularly how does that relate to the border? Something that might not be obvious.

Jim: I think that what we need to understand about job growth in the United States or any developed country is you have to start with two major factors that give you job growth. One is productivity. How productive is your economy? If it's more productive, it has room to hire more people. And the second thing is, what is your population growth?

This is what the Fed refers to as the supply of labor. Now, what's happened in the last four months or so? Four months now, pushes this back to April or May. Is the border's been shut? Trump has been talking about, that there's no more immigration coming into the country through the border.

And as a matter of fact, with all of the arrests of undocumented workers by ICE, there has been New York Times highlighted this about a week ago. We might be seeing net negative immigration for the first time in a hundred years. Net negative means more people are leaving the country than are entering the country.

The last time that happened was in the, during the Great Depression, uh, when a lot of, uh, Mexican workers left the country because there was no more job opportunities. Now, if we're having net negative immigration, let me throw in one other statistic. The fertility rate United States is at an all time low and has been for decades.

So all of our population growth. Is really coming from immigration. Well, we don't have any more immigration. We don't have any more population growth. So all you've got then is productivity to basically drive job growth. Now the American Enterprise Institute and Jed Kolko over at, uh, the Peterson Institute.

Uh, he's the former, Jed Kolko is the former head of, um, of Chief Economist at Indeed and Trulia. They've put pen to paper and have made the case that with this low level of immigration growth and with our kind of average to slightly below average productivity growth, that by the time you get to next year that the break even rate for jobs. This is a statistic we don't really talk a lot about because we've never had to. How many jobs does the US economy need to create? Well, the American Enterprise Institute is saved by 2026, which is only four months away. It could be as low as zero, or most likely could be 10,000 jobs that anybody, anything above 10,000 jobs a month is enough.

Now, the problem with 10,000 jobs a month is. President Trump just fired the head of the BLS accusing them of rigging the numbers for political purposes. I don't think they were doing that at all, but the premise there was 19,000, 14,000 jobs in May and June, 35,000 on a three month average was. Too low, unacceptably, too low.

And this is the hardest thing for people to understand is no, if we have no job, if we have no population growth, that's enough jobs. That's all we really need to be creating. And my fear is going back to the Fed, if they're still of the opinion. And I think Chris Waller, who's been one of the leading voices on the Fed, pushing for a rate cut, still thinks that this economy should be churning out a hundred plus jobs a month consistently.

Now you could do that. This month, you know, when we get the August numbers at the end of the week for a month or maybe two, but consistently without job growth, the only way you're gonna get that kind of job creation is if you take people that are not in the workforce and get them into the workforce.

Quick statistic, we always have this statistic called labor force participation rate. That is the percentage of the population between the ages of 16 and 64 that are, have a job. It's about 62%. The other 38% are either students, military, incarcerated, housewives. There's a reason they don't, they're not in the workforce.

They're disabled, uh, or they're independently wealthy. They don't wanna work well. They get those other 38% into the job market. You're gonna have to raise wages. That's wage inflation. That's just another level of inflation. So I think that the supply argument is, the problem with this is, and you'll hear this economist look at the numbers and go, 19,000 jobs a month, panic, the economy's going into recession, but they're not yet.

Really get their arms around the idea, what if the border's closed and we've got no population growth. Maybe that's enough. That's all we need. And if you're gonna try and stimulate this economy into 80,000 or a hundred thousand jobs a month consistently, you're just gonna wind up producing inflation.

Erik: Jim, you make excellent points, but hang on. President Trump's gonna go the opposite direction and say The fact that there's a low jobs report absolutely commands that we have to cut rates right now. Is that a setup for essentially unleashing inflation?

Jim: It could be it could be very much because he would be using that mentality that, 'cause let me back up.

Pre COVID, we never, ever talked about what is the potential number of jobs the economy needs to create. 'cause population growth was fairly stable, immigration was fairly stable. It was the same number, year in and year out, around 80,000, a hundred thousand jobs. And we just kind of got used to the whole idea that that's what the economy should do.

Well. 21 to 23 when we had millions of people coming into the country. There was an argument to be made that that number had ballooned up to 150 to 200,000 jobs a month. And that's why we weren't, even though we were printing 120,000 jobs at beginning of 24, we weren't creating enough jobs because of the ballooning population growth.

And that's why we saw the unemployment rate go up. That was last year when the Fed panicked about the unemployment rate was rising and that we need to do something and cut rates on that. Well, this year we got the opposite. Now that we've got no population growth, the unemployment rate is not rising.

It's the same level, 4.2% as it was exactly one year ago. That is a sign that labor demand is okay. It's just that the supply is weighed down. There's also one other thing that Trump has been doing, which I think is uh. He has been criticizing the Fed. And about a month and a half ago he wrote on X, uh, or excuse me, on uh, Truth Social that was reposted on acts like a handwritten note to J Powell with all of the central bank rates.

And he circled on all the countries that have zero. And it was like Cambodia and Japan and some other countries that are very close to zero. And he said, we're the hottest. We're the best country. We should be here with these countries, not down here at 4% where we are. The error that he's making is he's thinking that the United States is like the mortgage on Trump Tower.

The lowest rate goes to the best mortgage. Why do you get a low mortgage rate on your, on your office building in Manhattan? 'cause you have high occupancy and you have a desire for people to wanna be in there. In other words, what I'm trying to argue is. You have very little credit risk. He's arguing that the US has very little credit risk.

I agree with him. It has practically no credit risk that the federal government is gonna default, especially as a reserve currency. We'll print the money to pay you back, but we're not gonna not pay you back. Where interest rates for sovereign yields are set is not on credit risk. It's set on growth, inflation expectations and supply, and those are the things that are holding our rates up to 4%.

So when he's trying to argue, we're the hottest country, everybody wants to be here, what he's trying to say is, we're good credit risk. So it's just like the mortgage on Trump Tower. It should be lower than the mortgage across the street because it's a more desirable property and therefore it's less risk.

That's not how you set sovereign yields and that's what he's gonna have to, resolve in this issue. And I think that the market, understands that. And that's why we're seeing long-term yields still stay in this mid to high forest area. 'cause it's not about us being the best credit risk.

It's not about whether or not we're bad creditors in the UK or the, or France, or Canada or Japan. Japan has, you know, got interest rates that are still with a one handle, one and a half percent, and it's all because of their growth and their inflation aspects and their supply situation to suggests a much lower interest rate than the United States, not about credit or their ability to pay.

Erik: That's the basic theory, isn't it? Of, of macroeconomics is that, uh, on a relative basis, at least the performance of, of one country's economy versus the other, it's the strength of the economy that determines the relative interest rates. The higher interest rate goes to the stronger economy. No.

Jim: That is correct, and that is the way it works.

And that's why I use the word develop countries. Now, when you get into developing countries, that's what you know, then you can get into a situation where there can be a credit risk because there can be default. Venezuela famously is defaulted. Um, you know, some African countries have famously defaulted as well too.

So it is, it's a relative strength on your economy. So interestingly, when Trump says, we're the hottest economy in the world. I wanna say, you know what, you're probably right. And that's why interest rates should be going up, not going down. And Eric, there's another thing in, in, in this conversation that I should throw out there.

We've kind of gotten trapped into this mentality that interest rates lower, always good, higher, always bad. That is not the case when it comes to government yields. It's fair value is always good. When you deviate from it too low or too high, bad things happen. So the cost of money, which is what an interest rate is, it's to borrow money, you have to pay you have to pay for it to borrow money.

You wanna make sure that is at an appropriate level for your economy. If it's too high. You're paying too much. You're going to retard the amount of borrowing because that's the base level, the government yield and then you know, bank loans and corporate bonds are, have some other credit risk premium on top of that.

And then there's not gonna be enough borrowing in your economy and you're gonna slow it down. If it's too low, you're gonna overstimulate too much. Borrowing too much speculation, and you're gonna wind up with bubble markets and or inflation. So you wanna strive to be in that kind of middle. Fair value range.

So what I'm arguing here is down is not always good when it comes to interest rates. It's good if you make the case that we are fundamentally too high relative to the economics, and I don't think we are with a 3.1% core inflation rate. And that if you're going to force it down, I know everybody say, well, this is good.

Rates are going down. But it might not be because it could be too stimulative. Just like when rates go up, it might not be bad because maybe your economy's speeding up. You have a little bit more inflation, and they should be going up.

Erik: Jim, let's back out to the big picture of the Trump administration's policy goals and what they're trying to accomplish.

'cause let's face it, look at what happened with tariffs. They said there was gonna be some tariff action, and then we got shock and awe, one of the, the biggest tariff negotiation campaigns ever. Then they said they were gonna hold some of the previous administration, uh, officials to account for bad actions.

Now we've got what seems like a, a massive, uh, accountability, shock, and awe campaign. I think the next shock and awe campaign. Is yet to come, and I think it is one which will be under the command of financial Delta Force Commander, uh, Scott Bessent, who has already installed his spec ops commando Stephen Miran in the Fed to be the inside man there.

Don't forget, Stephen Miran is literally the guy who wrote the paper on the Mar-a-Lago Accord. And I think what they're doing, I'm not sure who they're gonna put into, uh, the Fed and other places, but I think what they're doing is they're installing the commandos that are going to do, uh, an assault or a take down on the global financial system and re-architect it.

To their own liking. And I think that's going to involve crypto integration, not central bank digital currency, but a stable coin based crypto integration. And I think it's probably gonna leave Don Jr. Doing pretty well in his crypto business. I know it sounds crazy. Is that nut case conspiracy stuff?

Jim: No, not really. I mean, there's a lot to what you just said, especially Scott Bessent played by Jason Statham in the next movie that they do about this. Uh, but I don't, he'll, he'll really appreciate I said that. But, um. I do think that you're right. Stephen Marin is the author, the architect of the Mar-a-Lago Accord.

He wrote last November when he was at Hudson Capital which has been kind of like one of the papers that's been driving what the, the Trump administration is doing. And there is a desire to wanna try and re orient. The entire financial system in to be more aligned with the trading system that we have.

And there's no doubt that crypto is going to play a big role in that, which is why they've been pushing, you know, the passage of the Genius Act and they've been pushing the Clarity Act, which is supposed to clarify regulations. But I think where you're going with this is what are they gonna do with the Fed?

Because you know, what we've got is we've got. Michelle Bowman and Chris Waller. These are two Trump 1.0. Uh, appointees, which have been basically those are the two that dissented at the July meeting. Calling for a cut. Chris Waller has been leading the forefront at the Fed for a cut. Adriana Kugler left the FED early.

She wasn't supposed to leave till January. She left in August, presumably. The reason is is that she wanted to return to Georgetown to be so she didn't lose her tenureship as a professor there. She couldn't wait till January. She had to be there before the school year started. So that means that Stephen Marin goes in as a third fed governor and now they're trying to fire Lisa Cook for cause.

Assuming that they get that done, and I'll assume they will, that would give Trump four appointees of the seven on the Federal Reserve board. Now, why is that important? For a number of reasons and including one of them will eventually become the new chairman in May of next year when Paul's term is done.

But I think it also is, gives them the ability to. Shape the Fed the way they want. 'cause a lot of people don't realize this. And be honest with you, I had to be reminded of it, that every Federal Reserve bank president has a term that, uh, it runs five years, it ends at the end of February and years beginning in one in six.

So in February of 2026. All 12 Federal Reserve Bank presidents terms expire. Now, that's been a formality for a hundred years. Their boards would reappoint them, and then they have to be approved by the Board of Governors. They need at least four of the seven votes to approve them. And in the last a hundred years, there's never been a no vote of any bank president ever.

Well, now the theory is they're all going to expire. Their boards will all put them up for renomination. And if Trump has four of the seven governors, they could start saying no. And effectively firing some of the bank presidents, the more hawkish ones or the ones that are not aligned with their policy with, uh, their policy aims.

And they could then force those boards to go back and find somebody that would be acceptable. To get past the Board of Governors and that could help remake the Fed as well too. Now, let me be clear. This is a possibility when you have four governors. It's not a certainty that they're going to do this.

And again, I'll remember the reason you've never heard this before is that no fed governor is ever voted no on the reappointment of a FED president. Uh, but that is something that has been floated out there as well, so that they could be remaking the Federal Reserve. The most important of the central banks into the image that they want.

So this is why you hear people talking about a loss of independence. So why is the market so sanguine about this possibility? I think twofold. I think one, it's still all theory and we'll have to see if this is actually a little bit too you know, we're, we're a little bit too over our skis with these theories maybe that they're not that gonna be that aggressive.

Second of all, I do think that the central bank has not done itself any favors with the way that they've conducted their policies over the last many years, not the least, which was cutting rates last September, 50 basis points. That was the first time in. Decades that they changed policy before an after Labor day in an election year.

Let me be clear on what I just said, changed policy. If they were hiking, going into Labor Day in election year, they could keep hiking. If they were cutting, they keep cutting. If they were holding, which is what they were doing going into Labor Day, they would keep holding. No, they reversed and they cut and they cut by 50.

And so. When Trump yells at them that they were political trying to get his opponent to win, you could quibble whether they weren't or were doing it or weren't doing it, but if they wanted to do it, try and sink the election for 'em. That's exactly what they would've done is an aggressive rate cut right after Labor Day.

And so the timing of it doesn't, the optics of it doesn't look good at a minimum as well, so. They've not done themselves any favors. So when the fed, when economists and fed officials keep, were fretting about Central bank independence, and I've heard some of them say, and the market doesn't seem to be bothered by it.

I don't know why. And it's like, 'cause you've done a pretty good job of showing yourself is to maybe not being as independent as you'd think you are and the market is. Open to the idea that the Federal Reserve needs change. And so if there's some change at the Fed, it will embrace it. If there's too much change, meaning a loss of independence, that the president is gonna start running monetary policy, it might get worried about it, but it probably get worried about it later on.

So what I'm trying to say is. I kind of agree with you. It's a red flag that or maybe a red flag's a little strong. It's a yellow flag. It's a yellow flag right now that could become red as this situation unfolds. And so, no, I don't think it's, you know, outlandish what you just said.

Erik: Let's talk about the role of digital currency and how it's going to evolve.

We started with the Bitcoin community, hopeful that maybe someday Bitcoin would compete with government issued money and, and you know, compete with the US dollar for global reserve currency status. I took the, the uncommon view that that was not likely to happen. The Central Bank digital currency was more likely to be invented, which it was.

But what I didn't see coming and what I think is now happening is the realization by the Trump administration that they can basically replace the Petrodollar recycling system with a stable coin. Recycling system that ties everything into US treasury demand, but still uses the Bitcoin blockchain in order to tokenize those assets.

Is that where we're headed? And if so, what would that mean? Both for, uh, the people in the Trump administration and for the rest of us?

Jim: Yeah, I think, you know, that is a way that we're headed. If, if there was one quibble I would give with that, it would be, maybe not the block, the Bitcoin blockchain, but the Ethereum or the Tron blockchain.

That's why you've seen over the last two months. Bitcoin's unchanged, Ethereum is up 70%. Now what they're attempting to do is with a stable coin, and the Genius Act also had another provision in it that really re relaxed the regulations for building payment systems. So. The analogy I've heard is the stable coin is the rails.

We're going to build rails, we're gonna build railroad tracks. And after those railroad tracks are built, we'll come to trains and the cars that will follow it. So if we're gonna build these payment system, these payment rails in order to, um, effectuate change, um, payments that then everything else will follow.

And the, the thing about the payment system, what they're hoping for is. That, uh, you know, let me give a another statistic here. 80% of the world has a mobile phone, 80% even in the least developed countries in the, on the planet, the majority of the population has a mobile phone. Why is that important?

Because everybody has access to an electronic wallet, even in poor countries. So what they're offering is, here's a stable coin. It's tied one for one to the US dollar. It's a digital representation of the dollar. You are in a country where you've got shaky banking systems. You've got currencies that are constantly devalued.

We're going to give you this tool that you can use that's on a decentralized platform and is permissionless so no one can take it away from you. No one can hack it or anything. You could store your wealth on that system, and we're hoping. That this will attract a lot of money that people will wanna, you know, instead of using the bank account, whatever bank, whatever country they're in, they will use this a stable coin, which will then be backed by a one for one by a treasury security, and then we'll create extra demand for treasuries.

Now I got two small quibbles with it. Understand argument well.

That's not gonna be the case for American investors and European investors or developed world investors. If Americans like you and me and everybody that, most everybody that's listening to this podcast, or even if you're European, you say, yes, I wanna keep my money in a stable coin. Well, where was it already?

It was already in a regulated bank that was backed by something. Like a US treasury. So you're just, you're just substituting it to another treasury backed security or treasury backed instrument. So there's no new net demand. So in the developed world, there's not gonna be a whole lot of new net demand in the developing world.

I could see that de that demand coming, but is there trillions of dollars? Of wealth that is being sitting around in Africa and Asia and in Southern Africa, Southern Asia, and Latin America. That's looking for a more stable banking system to park it in. I don't think there is that much money out there.

There was, they wouldn't be developing countries. So I think that the amount that they could very well get is going to be much smaller than they think. But let me also throw out something else about this whole idea about. Building rails that you know, payment rails that you will use a stable coin then to, um, be the medium of exchange on that payment rail.

We are living in a digital world and we have an analog banking system, and let me explain where we should be if we were, think of email and texts. You can send as many emails as you want and a lot of us do send bulk emails to lists or texts, and they're free. The marginal cost to send one is free and they arrive instantaneously.

Why isn't our payment system like that? Why can't I send money to everybody instantaneously and for free? And let me go you one step further. Why is it that if I agree on my paycheck, a certain amount of mon money per month, why am I paid lumpy once a month? Why am I not paid in real time? All the way through the month.

Every second, every microsecond, every minute I get money goes into my account for the amount that we agreed on that you're gonna pay me per month. Furthermore, my rent. My mortgage every second, every minute money goes out of my account for the agreed upon amount for rent. Now, why am I arguing that?

That's the kind of payment system we have, which we don't have with ACH, the Automatic Clearing House, or the Swift system, or this new FED NOW, we can't handle anything like this because ultimately, why do we all pay monthly service? Why do we all pay monthly fees to Netflix or to whatever else that you wanna pay?

Because that's the only thing our banking system can handle. We should, ideally, I'll use streaming services as my example there. You should have no account on a streaming service. You should connect your wallet. You should then watch something and every minute. Uh, you know, it takes a penny or two out of your account or a sub penny if it's a, if it's a lesser popular show, even a less than a sub penny.

And as long as you're connected to watching it, you pay. The minute you stop watching it, you stop paying. You go to the New York Times and you wanna read a story, oh, that looks interesting. Click on it. 3 cents comes out of your account. Or 5 cents or 10 if it's a more popular story, but you don't have any monthly fees.

That's the way we should be paying it. What I've tried to describe is a payment system similar to the way we send texts and the way we send emails. We could send an unlimited number of them is whenever we want. They arrive instantaneously and there's no marginal cost. So if I wanna get paid every second, and if I wanna pay every second, I should be able to I could send a text every second if I want to.

Why can't I get paid every second or send a payment every second without it incurring an economic cost. And that is the type of system that I think the digital economy wants. So I'm all for, what we're trying to do with this system now is the Trump administration, you know, trying to get in there with their world, the, you know, financial coin and everything else.

Sure they are. And the day we're recording, though. Wall Street Journal is saying that they've amassed $5 billion in wealth because of it. And yes, that makes me a little bit uncomfortable that they're doing that, but that doesn't detract from the idea that what they're trying to do is a worthwhile effort.

And it's so much of what Trump does is like this. The idea behind it is a very good one, the way he goes about doing it. Makes me wanna question it, you know, and stuff. Firing the BLS chief, I think the BLS has got some problems and if you wanna fire the BLS chief, I don't have a problem with it. But then accusing them of being political and partisan and trying to make them look bad and everything, that's when I start having par problems.

And then you're gonna replace them with a partisan who's just gonna basically monkey with the numbers so that they make them look good, as opposed to saying that there's been some real problems at the BLS with the way that they do this data and maybe we ought to fix it. So the intention, the idea there, you kind of agree with then it's the execution of the way they wanna go about it.

That makes me really question it.

Erik: Jim, final question. Think about the way they've taken this shock and awe approach to other policy objectives such as tariffs. What do you think the next shock and awe things might be? What are, what are the things we might be shocked with as they move forward on this agenda of doing something to reshape the global financial system?

Jim: Well, let's not forget immigration too, that they've done, you know, shock and awe on immigration as well. But I do think that the next shock and awe, if I had to guess, would be in the realm of taxes. Trump has talked about tariffs are gonna be this new thing called the External Revenue Service. He believes that they're gonna raise trillions of dollars in tariffs.

All right. Maybe they do, maybe they don't. I don't know if they are, but his, ultimately, what he's been arguing is that he wants to go to this idea where we could get rid of the Internal Revenue Service and replace it within an external revenue service, and therefore we don't have to ever pay taxes again.

I don't see us raising that. That's $4 trillion a year that the Internal Revenue Service, uh, raises. Could there be a reduction in taxes because of, of tariffs? Sure. But an elimination, that's a little bit too much for me to see, um, as well. And finally, as long as I'm on tariffs real quick I still have a question about how.

Successful this is gonna be is, I've joked, I've joked a lot about that. If Trump could find a way, all tax policies, always. We need to get some other rich person, not you to pay for our taxes. We're taking it to the ultimate extreme now. The other rich person, not you, to pay our taxes now as a foreign.

Through the form of tariffs. And furthermore, Trump wants me to believe that we're gonna get a lot of it from China so that they, they could take all that tariff money they got from China to buy weapon systems to protect us from China. And I said, you know, if he could pull that off and eliminate the external revenue service.

The Internal Revenue Service with the External Revenue Service, then let's just put him on Mount Rushmore right now. But I say that sarcastically thinking that, that it's, it's not gonna be the as big as it is. So while they got all these big plans on taxes, alright, I don't think they're gonna go all the way to no income tax, but I would not be surprised if you are going to see before the end of Trump's second term, some radical restructuring of the current tax law.

Based on the idea that we are getting some tariff revenue and that they could start making changes.

Erik: Well, Jim, I can't thank you enough for another terrific interview and for all of the previous terrific interviews you've given us over the years, making you one of our top five all time macro voices.

Guests, before I let you go, please tell our listeners a little bit more about what you do at Bianco Research, how people can follow your work, and what services are on offer for our institutional investors.

Jim: So two things. Um, my, my original job was I am a macro researcher at biancoresearch.com. You could follow me at Bianco Research on YouTube, on X Twitter, and at Jim Bianco on LinkedIn.

We do offer an institutional product. If you wanted to request a free trial, you could go to biancoresearch.com and take a look at it. Uh, if you're not a research, if you're not an institutional service. I do try to post a lot on, um, social media. The second thing we do, uh, is we do manage an index called the Bianco Research total return index. It's a fixed income total return index. Biancoadvisors.com. You find out more about the index. It's designed to maximize fixed income returns because that's ultimately where I start and still believe I still am as a bond guy. And there's an ETF that tracks our index. It's the Wisdom Tree Bianco Fund, WTBN is its sticker symbol

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.

 

Erik: Joining me now is Michael Every, global strategist in Economics and markets for Rabobank. Michael, it's been a while since we had you on, obviously the really big topic this week is going to be the Trump Summit with Putin. Now we should let our listeners know we're actually recording on Sunday evening US time.

So it's just after the wrap up of that session our listeners are gonna have three or four days of news flow that we don't have yet in terms of what's happened afterwards.  I hate to put you on the spot, but based on what we know now, immediately after the the wrap up of these sessions, we don't even have all the news flow out.

What's your take on the big picture of where this is I is headed? Are we about to wrap up and maybe wind down this Ukraine war, or is this just President Trump as he puts it, weaving his deals and maybe not really expecting anything to happen quite yet?

Michael: In this job you and I are both paid to try and look well beyond three, four or five days.

So yes, there is gonna be news flow between what we're recording now and when people will hear it but hopefully what we have to say still has value over that particular, time gap. The view that I have is that it's likely to be not the end of the war per se, but the end of a phase of the war, and we could.

We could address it as a pause to refresh. And then the issue is who is it refreshing? Because obviously we all want a cessation of the terrible violence, President Trump does. Russia certainly does in terms of the fact that its economy is struggling at the moment and it needs that breather.

Ukraine is being ground down. Everybody benefits from the fighting, pausing. But where we go afterwards is a very different question. And I think there are multiple scenarios. But the most likely ones, which, we can unpack are that I think it's probably good for the US on balance. It may be a disaster for Ukraine or it could be very good for Ukraine.

And it could be very bad for Europe or extremely difficult for Europe, but something that it emerges stronger from in the end.

Erik: That's a lot to unpack, isn't it? There's a whole bunch of things that could go one way or the other way, depending. So we better dive into the, depending on what.

Michael: Basically I've been saying for a long time, that Trump would attempt to introduce what I've been calling a Noxin strategy, which is a reverse Nixon, because in foreign policy circles, they've been talking about a reverse Nixon.

I said NOXIN, that's an Noxin where you try and. Make nice with Moscow in order to peel them away from Beijing, which is of course what Nixon managed to do with Beijing vis-a-vis Moscow, albeit after they had already had a spat. And here the two haven't had a spat yet. So that makes geostrategic sense. Except of course at Moscow and Beijing are currently very tight.

And so I've also been making the quip for many months. That Noxin wouldn't work because it starts with no, and it's got Xi in the middle of it X I. So that still remains the underlying assumption, but that doesn't mean that Trump can't manage to patch things up with Russia to a certain extent by taking themselves out of the Ukraine loop and giving them some breathing space on that, both Russia and Ukraine.

So I think what we'll see at the summit between the UK EU leaders, president Zelensky of Ukraine and Trump on Monday. DC and it's Monday here in Asia as I'm speaking to you is Trump basically saying, look, the deal is going to be this, the land that Russia has already taken is going to remain in Russia.

Ukraine cannot get that back. Realistically, certainly not Crimea. And realistically, most of the other territory too is now effectively Russia. So the greater likelihood is that the border is drawn a along the river, Dnieper. And then there are questions over certain pockets like Donetsk, Oblast, for example, which Russia doesn't control all of, and Ukraine would say why do we have to give up all of that particular province when Russia Army controls half of it, Etc Etc.

So there are a few questions of where the line draws, but pretty much it's gonna be around 20% of Ukraine is going become Russian at this point, which is a victory for Russia. But for those expecting the US to say we're gonna, we'll fight Russia, absolutely. To get that back, which Europe has been very vocal about too.

Clearly, that isn't in the US grand macro strategy interest. They want to pivot to Asia rather than fighting Russia over Ukraine, which is of marginal concern for them strategically. So that's not gonna happen. And for those who say the US and Europe together should be sanctioning the hell out of Russia.

And putting secondary sanctions on everybody else who deals with Russia such that Russia has to surrender well, they have to understand. That means putting secondary sanctions on China, which means if you think you have an issue with tariff inflation coming ahead in the US it'll be enormous because you would have to basically lock China out of the global economy straight away to punish them for dealing with Russia.

And if anybody wanted to do that, they could have done that for the past couple of years. Nobody wants to, they're too integrated. The pain would be too great. So those sanctions are simply not gonna happen. I'm not saying whether this is a good thing or a bad thing, I'm just describing it. And the US isn't gonna step up militarily.

So then Ukraine is gonna turn around and say we need a security guarantee. We can't just sit here and give up 20% of our land for peace with Russia, because Russia can then use that pause to re-arm, which certainly will, and we'll come back and nibble again and again, and start taking more and gradually eat us whole.

So then what's the security guarantee? What's that gonna look like? And here, I think the US is going to say, Europe, over to you. We will sell you as many weapons as you need to defend Ukraine. So that's good for the US military industrial complex. That helps Europe also build up its own factories, again, which are really struggling at the moment, but very much as part of US focused Pentagon focused.

Supply chains supply. So that kills any hope of European strategic autonomy. Europe becomes a subset of the US from an industrial perspective. And at the same time, the US is already leaning on Europe and others as part of trade deals and saying, we expect you to invest hundreds of billions of dollars in factories in the US which surprise, surprise will be making inputs or directly those weapons, which it sells to Europe.

So it's what some, including myself are calling reverse Marshall Plan. Europe is helping to rebuild the US rather than the US rebuilding Europe after World War II. Now the the roles are reversed. So if that happens, then effectively the US can pivot to Asia.

It's selling lots of weapons to Europe. Europe is really subsumed into the US economy. It has to invest in the US and it has to buy from the us. The US is in a better position, and I think we'll discuss this shortly to roll out stable coins and Europe won't be able to say no because its economy and its security framework is based on the US so we can't reject them.

Hopefully Europe then says with that backing we are prepared to put troops on the ground in Ukraine and ensure that the 80% of Ukraine remains, a buffer state between Europe and Russia, but it remains perfectly safe and viable as an entity. And if it does that Ukraine may not, have a future in Europe in the immediate future or in nato, but it could certainly, exist If Europe doesn't do that.

If they can't agree, who's going to decide who's going to pay, how they're going to pay and who's going to fight? Because that's very much on the cards now, or at least in principle. Who would fight then? Who is gonna defend Ukraine? And then really you see that 20%. 20% of Ukraine becomes 20%, a 20% peace in our time.

If you think back to Neville Chamberlain, and it may mean only 20% peace, P-E-A-C-E in our time, which is an extremely worrying backdrop. So I've tried to give a very brief summary there. Lots to unpack, but there are huge implications for lots of different markets and for geopolitics as part of that.

Erik: What I found most fascinating was you used the phrase, pivot to Asia talking about where the US may redirect.

Some of its military might. It seems to me like really the Iran and Gaza conflict is going to acquire more US attention than China will, at least initially. Am I reading that differently than you are? Or how do you see Gaza and Iran fitting into the chronology of all of this as the US. Pivots toward Asia.

Michael: Remember the Middle East is part of Asia. Technically it's Western Asia. We often tend to overlook that what we've already seen play out in the Middle East vis-a-vis Iran. And what continues to play out in Gaza is the US attempting to put down a very strong footprint as minimally as possible from its own side.

And, but it doesn't want boots on the ground. It doesn't want any repeat the two Gulf Wars, but nonetheless, ensuring that oil rich, energy rich region stays very much in its pocket, not in Russia's and not in China's. And that is critical in order to gradually advancing towards China. And I would say again, just as what the US may be about to do today, my time tomorrow your time as we're recording.

Vis-a-vis Ukraine, which is gonna up upset a lot of people, particularly in Europe. But what I think is geo strategically advantageous for the US overall, and I'm not saying that as a moral judgment, I'm just saying that, objectively looking down helicopter view from above, they've achieved the same thing in the Middle East.

Because while again they may be very unpopular in terms of what's transpired recently, the actions vis-a-vis Iran demonstrated to Beijing. And to Moscow. When push comes to shove, even if the US doesn't want a major war, as Russia is currently carrying out in Ukraine, it's prepared to use enormous targeted force to get what it wants.

tIran was strutting around, a few months ago as part of an alliance with China, with with Russia, with North Korea, and trying to expand regionally by its proxies. It's really been put back in its box. It's rocking on its heels. And in fact, if you read them at least news, you'll see that at the moment, Iran is close to running out of drinking water completely.

And I'm not exaggerating that they really are running outta water. So on that basis what Trump did in striking Iran's nuclear program helps the lay footprint, which says to them at least, look, we are still here to stay and we expect you to be in our camp fully. Except Iran, of course, but Iran's gonna be in that box when push comes to shove.

If push comes to shove, oil is going to remain priced in US dollars, and we're not going to let China make any further inroads there. So I think people have failed to join the dots on what's already been achieved there, and Gaza still grinds on. It's a horrible process. Process. Once that eventually is resolved and hopefully very soon, then I do think you'll see a regional. Realignment politically, which will further back that US footprint.

Erik: Now, meanwhile, as all of this geopolitical stuff is going on in parallel with that, we've got essentially musical fed chairs where we're having a very, public and visible process talking about who might be the replacement for Jay Powell.

At the same time, Steve Bessent seems to want 150 to 175 basis points of cuts on Fed funds, and I get the impression that somebody has an idea to essentially re-architect the Petrodollar Recycling system as a stable coin recycling system. How do we integrate those things? It seems like there's this economic agenda that the President and Secretary Bessent are working at the same time as this big geopolitical agenda.

How do we reconcile those two things and figure out what the market does in between?

Michael: Great question. Let me try and unpack that like this. First of all, I have to rewind back to something we spoke about last time I was on your show, which is we can't look at any one policy area in markets or geopolitics.

Separately, we have to see all of them now as interlinked because we have left the previous world of economic policy where you talk about monetary policy, fiscal policy, foreign policy, and we've entered the world of economic, military, and political state craft where the economy, the military, and of course politics are all integrated together and every element of the economy is integrated together to try and achieve key strategic national security and foreign policy goals. So what I was just describing in terms of how the Middle East fits in with what's going on in Ukraine, vis-a-vis targeting China, and I think many people can probably join those dots once I've, put them on the page the way I just did. You have to understand too that the larger question that's always asked there is what is GDP for and clearly in the US cases to make sure that we stay number one and China is a long way behind relative to us and we stay global hegemon, that's what GDP is for. So if we accept that, what's the fed for? I can assure you it's not about 2% CPI. And it's not about purely maintaining financial market stability. It's not about maintaining a certain level of unemployment. And it's not even about maintaining, moderate borrowing costs longer term, which actually is part of its remit and people tend to overlook.

It's far more concretely about helping the US achieve that particular goal. Now, if you're a market purist, you can say the best way to do that is to keep CPI at 2% and low unemployment, and I would say rubbish, absolute rubbish. It may be a subset in certain fair weather, but your central bank with the enormous power that it provides has to be cognizant of what the US grand macro strategy is.

And has to work alongside the Treasury and the White House. It's quite insane to imagine that you're implementing a grant macro strategy similar to a wartime footing and the Central bank saying we're not part of this. We're just gonna look at 2% inflation. It's quite frankly, ludicrous when you describe it like that.

So very clearly, we have pressure being put on the Fed in terms of the floated appointments of the next FED chair. Many months before Powell is due to, to step down. And even some of the names being floated as current FOMC members, which would be incredibly awkward. Imagine you're sitting alongside in a meeting knowing you are gonna replace him in nine or 10 months.

What's that gonna do for dynamic? But this is all being done not just to pressure interest rates lower, which is clearly something that the US needs to do to keep paying its bills easily. That is a subset of it. I think most people in markets can understand that. But more broadly, to get someone sitting there who understands all the tools they have available to them, such as Fed swap lines, for example, and realizing that they can be used very effectively as a weapon.

And at the moment, the Fed doesn't do that. And I'm strongly of the view that at some point soon it'll start to do that. Now, let's go to the second part. I apologize, I'm going on a long time here. The stable coins issue, you mentioned the petro dollar. Now of course, that doesn't really exist anymore. It's been replaced by the Euro dollar, which is just the broader international usage of fiat dollars everywhere.

And the key point there is that offshore parties lend dollars to each other. They lend them into existence and you create a huge pile of offshore liabilities for the dollar, where only the actual US has the ability to create those real dollars. So you have anywhere, like no one knows exactly, but it could be 120 trillion of offshore liabilities in dollars.

And actually you only have around 7 trillion in FX reserves abroad. It's a terrifying ratio. And of course, the US via the FED And the treasury can, step up and pump liquidity in whenever they need to. But they're the only ones who can do that. Everyone else can rehypothecate, but the only actual dollars they've got are those 7 trillion and half of them are in China and can't be touched.

So that's already a powerful weapon. But the quid pro quo for that is that the rest of the world gets to create those dollars and in creating them part and parcel of that process very often is earning them from the US via trade and that has absolutely, even though you'll have a long list of other people on this podcast saying it isn't true, it's that has helped to deindustrialize the US because when the US runs large trade deficits, which are a quid pro quo for the fact that everyone internationally needs and demands these dollars, that sucks jobs and industry out of the US.

It's not the first country to experience it. It won't be the last. But it's an exorbitant privilege, which comes at a cost. And right now that cost means it can't actually produce enough military hardware on scale to maintain the top dog military position that it's used to having. For example, you've got a magnificent navy, but you are gonna be retiring ships far faster than you can build them at the moment.

So the long run horizon for us military power doesn't look good vis-a-vis others. If we carry on the path we're on now. Okay, so now we get to stable coins. What are stable coins? I was a skeptic of them for the longest time as I was most things crypto, because I couldn't see what the point of them was.

I understood what they were doing, but I couldn't understand why they were doing it. If you're now gonna create a legal framework, which you have with a genius act whereby US dollar stable coins must be backed one-to-one by T-bills, you are creating. A demand for both T-bills at a time when the US is funding itself more and more at the short end of the curve, and a demand for stable coins one-to-one.

So they both feed each other. Now it's good for the US front end of the curve, as I said, and that's good for, its for its fiscal framework, even if it would look very dodgy anywhere else. But it also means that stable coins can start to be used in international trade. The US could. Quite literally at some point soon turn around and say, right when you sell to the US we are only going to transfer to you a stable coin rather than the US dollar.

And the US could lean on Saudi Arabia and the UAE, who are now much more in its pocket again, after having bombed Iran and say, we want you to tell everyone who buys oil globally, they have to pay you in stable coins. Bingo. You've just managed to recreate demand for stable coins internationally, the way there's demand for the dollar now, and how does that benefit the US?

One for one, you have to start getting demand for T-bills while you do it. And alongside the tariffs that the US has got and the promises of innovative, inward investment from all the countries who are in the new trade deals, it's put together. You gradually start to build those countries and those economies into a US dollar or a US stable coin block.

Because people at home or even private businesses in Europe around the world will start having stable coins on their phone in an app outside the banking system. So you can absolutely not dedollarize as people are talking about, you can ize and the great joy of stable coins above and beyond. The fact said that they're one to one with T-bills is you can turn them on and turn them off.

You get to control the on off-ramp for them. So effectively you have created a walled compound within which your allies are forced to effectively dollarize and become part of your supply chain and value chain, which helps reindustrialize you to help keep you top dog militarily. So it's a pretty clever package if you see all of it together, but you are going to need a fed chair who understands how to play that game.

Erik: I'm gonna push back a little bit on this because I see it a little differently, which is, I agree with you that in the short run, stable coins, clearly the, especially with the Genius Act legislation are one-to-one, creating that demand for US dollars. Replacing the Petrodollar system, if you want to think of it that way, we've got the US dollar demand, but longer term, it seems to me what you're also doing.

Is you're training all the central bankers and other holders of reserve assets around the world about stable coins and how to use them. Once you've done that, it's so easy to just switch out of your US dollar backed stable coin into a bricks, backed stable coin or some other stable coin that's tied to some other currency.

So I see it as creating an off ramp further down the road to make it very easy to get. Out of the one stable coin into a different one if there's a competitor. I look at this as why is there no replacement for the US dollar? 'cause there's no viable alternative and I think we're creating one.

Michael: It's a good point, but let me push back on your pushing backing, If I may, in the part and parcel of what I think the US will be doing via this, is trying to create the largest network effect as quickly as possible. And as we know from anything tech related as well as finance, once you've got that network effect, it really matters.

It will be very hard, without Chinese style fi, Chinese style firewalls for countries all around the world to prevent people just having. US dollar stable coins on an app in their pocket. So countries that previously would never allow the dollar to circulate would, could effectively dollarize.

But I do think very specifically, number one, the US is aiming to use this for allies only. I actually don't think they want geopolitical rivals using this. They don't mind trying to maybe undermine them and have it in private sector pockets, but they don't want the governments having anything to do with it or having any kind of official role.

So I do think it's deliberately. Leaning towards a bifurcation. That's part of the strategy to make sure that there are US centric, US stable coins, supply chains and value chains and the other, and we don't go near the other. And secondly, while the BRICS can talk about it and the technology isn't that hard, I mean there are very technologically capable block.

If you look at India and China in particular, putting it together. So it works on the ground, so that you actually have. Economic block where supply matches demand, where you have upstream and downstream demand and where you don't have some countries running vast surpluses and everyone else running vast deficits because the US will be attempting to narrow its trade deficit by doing this so that its allies run more balanced trade with it.

So it's a more balanced US-centric block. The power is with the US, but not via running deficits the way it is now. I don't see how the bricks can replicate that. I've made that argument in detail for many years. If you do a very boring trade breakdown of who exports and imports what to whom within the BRICS, it's a very simple story.

Nearly all of them are major commodity producers. China buys the commodities, makes everything else, and sells them to everyone else. Now, on one level, you can call that hub and spokes, but it isn't good for India , an I within the bricks it doesn't help anybody else industrialize, and it means everyone else runs balance of payments deficits over time.

So it's one thing to say the bricks can adopt it. Sure. It's another thing to actually do that on the ground. And even if it did, as I started my, my argument here by saying the US wouldn't be unhappy with that, provided they get the lion's share of all the countries that they want, by hook or by crook. That's the kind of bifurcation, I think they're perfectly willing to live with.

Erik: Now, Michael, you've described this concept of a grand macro plan that sits behind the various day-to-day events in the macro economy is Steve Bessent architecting a grand digital asset plan, which incorporates stable coins and of strategic Bitcoin reserve and a Fed chair who understands this stuff and a bunch of other things.

All is part of some concerted strategy that comes together towards some unified goal. I'm starting to get a feeling there's more to this than just president Trump's son is interested in Bitcoin. It seems like it's getting bigger than that pretty quickly.

Michael: I've given you two very long answers, so now I'll give you a short one.

Yes.

Erik: Okay, Michael, that's fair enough. Let's move on to another topic that I think you'll have a little bit longer answer for, which is, okay, look, European Union and United States really since the end of World War II, that relationship has been pretty darn tight through thick and thin. Is it winding down and ending?

Is it changing in a permanent way? It feels at least in my lifetime, relations between US and Europe are, not looking really comfortable.

Michael: There's certainly not, if we actually go through the history of it, we've had repeated episodes like this. I vividly remember the whole episode with with Freedom fries rather than french fries and silly things like that.

So we've been here before, but maybe not to this extreme. And the ironic thing is everything that Trump has told Europe to do, stand up, spend 5% of GDP on defense. Stop only exporting to us buy things more, more from us. Narrow that trade imbalance are things that every previous US president all the way back to Kennedy had been saying too.

And yet they didn't happen for decades and decades. Now, I'm not trying to praise Trump, I'm just saying that's subjectively true. And Europe is now reacting to it. Now they're bitterly resentful and very unhappy. But they are. Finally pivoting under pressure. Now from the European side, there is much talk, and frankly, Europe does specialize in rhetoric.

Much talk about the fact that they're gonna try and strike out and achieve strategic autonomy. Now, the shopping list for that is very long. The bill is absolutely exorbitant, and I've always said the possibility of achieving it was like walking a razor's edge. You could do it. But incredibly hard to do and it's a very dangerous fall.

I decide. And if we look at what's likely to transpire in Ukraine today, or vis-a-vis Ukraine, I'm sorry. And if we look at the backdrop vis-a-vis stable coins, which is really accelerating quickly. I think the shopping list and the shopping bill for Europe to achieve strategic autonomy is now ridiculous.

I I don't see it as realistic anymore. So while Europe may be sullen and angry and resentful, I think that ironically the relations between the US and Europe will grow tighter, but not as equals. Europe will absolutely be, subsumed into a greater US production system. And as effectively the lieutenant responsible for guarding Europe within a, within a US security umbrella.

And they won't like that. They'll continually to be chiding about it, and that's completely natural. But I don't really think they have many realistic alternatives at this point. To put a specifically. I sat through many angry conversations with Europeans telling me that they absolutely would not spend 5% of GDP on defense on nato.

They all are, except for Spain and I think maybe Luxembourg, maybe Belgium too. Mostly they are and then Europe. Absolutely. Telling me again and again, we will not sign an unfair trade deal. We're just not going to do it. They did. We can be given the next set of, we are not gonna do X, Y, Z, in instructions and, and the real politik tells me that. Yes, they will.

Erik: Now, meanwhile, the Financial Times, I think used the phrase inflation nutter to explain who they feared might be put into the Fed position next, at the, US Federal Reserve. When. The FT is talking about the perspective next. Fed share as an inflation nutter tells me that their editorial perspective may have become a little bit I don't know, reserved about the, their perspective on US monetary policy.

What feels to me li like we're in this Europe is stuck. They have no choice but to cave. So they're gonna cave, but they're not gonna forget this. Is the feeling I'm getting. What could they do if they're gonna not forget this to eventually act on it?

Michael: Nothing. Now I'm being flippant, but let's, we have to be realistic. And i,

Erik: But I just wanna clarify. Are you disagreeing that they're really not gonna like it? Or are you just saying there's nothing they can do about it?

Michael: There's nothing they can do about it? No they really don't like it. But listen. I am absolutely on board. I want all listeners to understand this.

So I'm on board with very valid criticisms that appointed many of the things that the Trump White House is doing offending recent norms. Okay? I completely get that. I've worked in markets in nearly three decades. I fully get it. What I don't get, and I always try and point out in equal measure, is the absolute hypocrisy of the people saying that about not pointing out how equally ludicrous things have been done by many others that they didn't criticize at the time, and are still being done by many others that don't criticize too.

We have a slew of central banks that are cutting interest rates right now when there's no sign whatsoever. The core inflation is fully under control when there's absolutely every sign that the macro environment that they're living in, particularly in terms of the need for rapid re armament, is going to be inflationary, highly inflationary in some sectors, and yet interest rates come down.

Now you could say they dunno what they're doing. Fair enough. That's very valid criticism, but I don't see that as headlines. I don't see the financial time saying this Central Bank doesn't know what it's doing. Or you could say that they're just preferring to look the other way and hoping somehow that by lowering interest rates, they can paper over all the cracks and that everything I'm describing in terms of a grand macro strategy won't be necessary and we can just carry on doing things the way we always have, which I rather flippantly refer to as because markets.

Which, even as someone who's worked in markets, as I said most of my life, and having, a markets discussion here I still think is idiotic. The world is not about because markets, there are far larger battles at play, literally at the moment. And markets come secondary to that.

They don't determine the outcomes. So yeah that commentary, I just wanted to make that feedback on it. But there's nothing really that the rest of the west. Because if they were going to do something about it, it would revolve around a massive structural change in their political economy, but then they're exporters and they net export to the us.

Fair enough. If they want to massively expand domestic demand so that they don't need to rely on exporting to America anymore. There you go. Now you can suddenly be more in control of your own destiny if they decided to spend. Three or four percentage points of GDP on their military for the last 20 years rather than on social spending.

And I'm not making a value judgment. That's just what they did. They wouldn't be in a position to be begging America for help with nato. They'd be standing on their own two feet. If they'd acted more strategically in terms of energy resources, a long time back like China did, they wouldn't have be any kind of domestic energy shortages or energy price issues.

So all those choices were available to them decades ago. They didn't make them. And now when you put that conflation of different issues and problems together on the plate, and you say you've gotta digest all of this in order to really do something against America, it's almost impossible to conceive they're gonna do it because in order to win, they would've to get involved in a multidimensional spat with America, which would hurt them far more than just having their wings clipped, which is what's happening at the moment.

Erik: How should we interpret President Trump firing the head of the BLS? Obviously, his critics are saying, look, he didn't like the data, so he is, don't like the message. Shoot the messenger or castrate the messenger in public ceremony to make sure the next messenger knows better than to, to make that mistake.

But wait a minute. I think you've pointed out in some of your writing, the BLS was pretty darn screwed up. Maybe firing the BLS head wasn't such a bad idea after all.

Michael: Yeah, look again, in terms of commentary, I absolutely understand why the market is freaking out about the fact that the head of the BLS was fired and that we've got a new guy in who, is not exactly a fan favorite, shall we say, within the statistics industry.

Fair enough. And that certainly fits a certain profile of, banana Republic style economy, but equally, as you were just alluding to. From to my mind when I'm talking to people who, work in markets, those who understand the BLS have been a banana, a public style joke for a long time anyway, even with the best of intentions sit in one camp, and another ones I prefer talking to and everyone else who thinks that every piece of data you're getting from America is absolutely kosher, transparent, completely trustworthy, and absolutely captures what's really going on.

I really don't have any time for them because they dunno what they're talking about. It's not been like that for the longest time. One very simple fact, and again, I'm not trying to be political here, but let's look at the payrolls report. We all know how important that is. Markets still revolve around it.

I presume they probably always will, unless they stop publishing it, which is what the new guy is threatening to do. But it's a joke. Payrolls is a joke as a number. You've got like a nine digit. Say 50, 60 million, something in that particular range. That's the official number anyway. You're talking about a monthly three digit change, and the market trades off of the derivative of that, which is normally a two digit differential from a three digit number based on a nine digit number.

This doesn't mean anything. It's a rounding error, and we're taking it as some kind of signal. They're constantly revising it. It's based on a birth's deaths model where they assume jobs into creation. It's got a very low survey feedback right now. So they're having to impute or guess more and more it doesn't capture structural changes in the economy.

And most incredibly, of course, and again, I'm not trying to be political, but it's a, it's a widely accepted fact. Anywhere between 10 and 20 million people arrived in the US in the past four years who aren't officially in the statistics, but are somehow being captured. Or maybe they're not.

In which case we're not even capturing 10 to 20 million people. Either way, it's a joke. But no one seemed to be prepared to say, this month after month, traders all sit down, wait for that number to come out and trade off the back of it because it's what we do. It's just what we do because markets, it doesn't fit into a grand macro strategy.

So I certainly hope we don't go the Banana Republic route, where every single month we get a great jobs figure and everything's wonderful. That would be a joke. I certainly think what we have now is also a joke, and it would really behoove both America and the rest of the world and everyone to have really good real time economic information that we could use to try and understand where our strong points are and where our weak points are.

Erik: Let's try to assimilate everything that we've talked about into outlooks for markets. It seems like a lot of the things that we're discussing are related to geopolitical risk, hedges, things like gold, Bitcoin, Ethereum silver and so forth. I've been trying to decide where some of those risk hedges are headed anyway.

'cause on the one hand, you can make the argument if we're really maybe about to wind down the Ukraine war, that should be risk off for gold you know, it's a risk hedge, we should be unwinding it. But wait a minute, if what we're doing is winding down Ukraine so we can pivot to the next war in a bigger theater, that's not time to, to sell your hedges.

So is this, a bullish or bearish moment for precious metals and other hedges?

Michael: First of all, as I don't give investment advice. So full caveat on that, we're just having a hypothetical discussion. I think you frame it very well. In the, when you see the word peace coming through, one's initial market reaction might be in one direction.

But if you take a bigger picture view and understand that's only part of resolving one issue, and actually by the way, passing the buck to Europe and saying yours so that you can then focus further east and that the underlying pressures for a bifurcation of the global system. Which is what I keep emphasizing here arising then, yeah, it still makes a lot of sense to be looking at all kinds of hedges for all kinds of products in all kinds of ways.

The very simplest kind of market call that you can see ahead is the fed's gonna be forced to cut rates, ergo everything goes up. Yeah. Obviously there's some very simplistic validity to that as if things haven't already gone up enormously anyway, which they have. But we are entering uncharted territory.

Because nearly everyone who's working in markets now, and I think I made this point to you last time we spoke, it just by dint of their age, has spent all of their working career in an environment in which it was a one world economy, one market. And sure, there were certain areas where you had to get in or get out of tactically, but the assumption was everything was fully integrated.

And it's just, where do I pick up yield? We're going to be heading to a world where certain sectors can't be traded or where returns are fixed by the government, either at a higher or low level, usually low. And where certain environments are just completely, untouchable. For example, if you look at what's happened at Bridgewater recently reading that particular headline and suddenly, reversing position on China, very belatedly by the way.

We can probably expect to see a lot more of that happening if we are moving towards a world in which one has to make geopolitical choices, which will be part and parcel of currency systems and clearing systems. And payment systems. So if you're going to be within a US stablecoin system, maybe you don't get to be in other systems.

And if you're in other systems, maybe as I said, you don't get to be in stable coins. Or if you do, it's via a VPN being naughty in the background rather than with any kind of government permission. And, will markets find a way? Sure, markets will find a way, but it's not going to be the same, flat world structure where you've got a world map on your wall in most offices and you can put a pin in where whichever part you like.

It's gonna be complicated. And one very clear example of that, just to wrap that point up, is, previously few years ago, tariffs weren't an issue unless you were dealing with one particular complicated emerging market where you have a lot of paperwork to do. You didn't worry about what the tariff was.

It was gonna be so marginal, you could ship from A to B. Have you seen the table of US tariff rates now? But the exemptions and potential changes coming up and country by country, sector by sector, it's a telephone book. And that's absolutely deliberate. That's the strategy. Make it complex, therefore make people do things more locally.

And where you are doing things more locally. Money will eventually change hands more locally.

Erik: Michael, before we close, let's touch briefly on oil prices. We're on the low side at least compared to the last year or two. Are we headed higher as some people think? We got plenty of backwardation in the markets, so I'm not sure what to make of this.

Michael: We have a really interesting standoff in terms of the go-to research on it, like the IEA versus OPEC+ and what they're, what they're both printing. I think, again, no geologists whatsoever, so I'm not gonna get into that side of it. You need to look at the geopolitical backdrop. Now, obviously, we had that spike earlier in the year around Iran, and of course prices came way off once the US got in and got out and sent that message without getting sucked into a war.

And I think we need to recognize that low energy prices are a key plank of the Trump grand macro strategy. How that's going to work out within the US energy sector, because obviously low prices mean people don't wanna produce and Trump doesn't wanna be importing. He wants the America to be exporting or at least producing, even if prices are low.

That remains to be seen. There will have to be some jiggery-pokery to get that to work. I can assure you there will be, but the secular envelope. Is that Trump wants to see low energy prices because most upstream commodities to him energy, most and many others are seen as inputs to more value added production downstream.

So in other words, let's get cheap inputs so we can make more cheap outputs and more of those outputs. It's no longer every sector of the economy from upstream to downstream being equal. Because markets. some people now are just not as important as others. Some people are there basically to do the equivalent of serving you drinks for very low tips and that's unfair. It's not very nice. That's the way life is.

Erik: Michael, I can't thank you enough for another terrific interview, but before I let you go, tell us a little bit more about what you do at Rabobank, how people can follow your work, and what your Twitter handles and so forth are.

Michael: Sure. As global strategists in economics and markets, my job is to think cross asset, cross geography, and cross disciplinary, to be honest.

To try and draw out what are the big picture themes. So it's not just about whether you're, long this or short that, that's not specifically what I do. It's to try and draw all dots together to say what is actually happening. And if you assume that's what's happening logically, what would then flow on from it?

So your narrative building to an extent rather than telling people how to manage money. But it's been a very very successful strategy for the past couple of years in that, not. Seeing the bigger picture has really been problematic and I think it's gonna be more and more important going forward.

Even if I'm talking my own book a bit, doing that talking my own book there. In, in terms of where you can follow me, I am on LinkedIn, for Rabobank clients Rabobank knowledge would be the place to go and check out, but you do need to be a client to get our good stuff there. And I enjoy conversations and interaction with people on these topics.

On X and my handle is @themichaelevery, all one word. And yeah, please do just come and join that conversation 'cause I'm always keen to interact with others and to see what you are thinking because when you've got a global role, the more input you have, the more voices you have, the better your view of that picture becomes.

Erik: Patrick Ceresna and I will be back as Macro Voices continues right here at macrovoices.com.