Viktor Shvets

Erik:  Joining me now is Viktor Shvets who heads up Asia-Pacific and global equity strategy for Macquarie Investments in Hong Kong. Viktor, it's great to have you on the program. As a first time guest, I've been asking all of our guests to tell me about inflation versus deflation, which it seems like it's just the big debate in finance that keeps coming back. How do you see this? Are we as many of us think headed into secular inflation or is it just a false alarm?

Viktor:    Well, it's neither of those things. I personally say the inflation-disinflation pendulum. In other words, swinging from one side to the other and returning very quickly back to disinflation will be the story of almost the rest of our lives. If you have a career that is going on for at least the next 10 years, that's going to be your story. And the reason for that Erik is very simple. The last 20 years was very straightforward. From my perspective, this was a period of extreme financialization, a period of extreme digitalization, and also extreme globalization. All of those forces were incredibly disinflationary. And so the only time inflation had any chance was during recoveries like when you recover suddenly from global financial crisis or dotcom. But otherwise, inflation really had no chance at all.

Now, the next 10, possibly 20 years will be different. We're not going back to 1970s. Today's world is so dramatically different. Demographics is different, debt levels, financialization are different, government policies are different, technology and its impact is different. So we're not going back to 1970s. But, whatever is going to happen in next 10-20 years will be different to the previous period. Why is that? Well, we still have a lot of disinflation, the backdrop remains disinflationary. 20 years from now, everything will be at zero. And where does it come from? Well, demographics is mildly disinflationary, you have financialization and debt, which is highly disinflationary. And of course, we have technology and information age.

But unlike the previous 20 years, going forward, there are some inflationary elements. What are they? Well, essentially three. Number one, unlike the previous 20 years, where we essentially just manipulate digits of information and data. The next 10 to 20 years will be much more capital intensive. In other words, we'll be starting to manipulate physical matter, atoms. It's example of that will be alternative energy and transportation platform, elimination of factories on a global basis, and supply and value chains. It's going to be infotech merging with a biotech, it's going to be a robotics, automation. So it's a completely different environment. Now, it requires a lot more investment. The last 20 years, there was no need to invest much money other than into intangible assets. The next 20 years actually requires more investment. Now that investment which we're going to make in this digital age, creating physical things, so I touched as I said elimination factories, supply chains, robotics, automation. That investment ultimately will be very disinflationary. But initially, it could actually be inflationary. So that's number one.

Eric Peters

Erik:  Joining me now is Eric Peters Chief Investment Officer for One River Asset Management. Now you know that part but Eric is now also the CIO for One River Digital and we'll be asking him about that, too. Eric, it's great to have you back on the show. I have been asking almost every guest that we have the same opening question, which is look, inflation. Janet says transitory, I say secular. I've been asking a lot of guests this but I really want to point something out. A rule of mine Eric, is you don't listen to the most well spoken, cool sounding pretty girl on CNBC. You listen to the people who actually saw stuff coming before they happened.

 

You told me I think two years ago that you guys had become convinced at One River that secular inflation was coming. And I think you were launching a fund just to focus on inflation as a trend. A thematic inflation fund, is that right? And I guess what I'm most interested in what were you thinking back then when nobody was talking about inflation? Why did you see it as an issue? I guess Hugh Hendry was telling me about inflation then but not too many people. You saw it before then. How is what you thought was going to happen then compared to what has happened. And what do you guys think is coming next, since you kind of got it right so far?

Eric Peters:  Erik, it's great to chat again and thanks. Thanks for having me back. And I'm sure I'm not the most articulate person. So I guess I'd rather be a little early than articulate. But, you know, on the topic of inflation. It seemed to us inevitable, but to really to explain that, I think we kind of have to go back into what had caused disinflation, or at least very, very low and stable inflation, which is really the paradigm that we were in. And there are a few major macro drivers that have played out, honestly, over the course of my entire career and so I started in 1989. And, and so at various points in time, we've, and it's accelerated post 2000. But we've seen increased globalization, we've seen successive use of monetary policy to support the economy at every bout of economic weakness. We've seen this incredible proliferation of ever accelerating technology.

And so you know, all of those things together have created an environment where there's been a lot of leverage that's been built into the system. Wages have come down for the average worker, and a lot of jobs have been moved offshore. And yet, financial assets have done incredibly well because these dynamics are really, they really are beneficial to capital over labor. And the consequence of the kind of the complicated interaction between all these different forces. So globalization, the rise of faster technology, without which, incidentally globalization wouldn't really have been possible at this scale. The offshoring of jobs and just pressure on labor relative to capital with a central bank that was prepared and maybe even eager to step in and just support the economy at every wobble led us to a place where asset prices were very expensive financial asset price were very expensive.

Daniel Lacalle

Erik:    Joining me now is Daniel Lacalle, a fund manager for Tressis Asset Management. Daniel, it's great to have you back on the show. It's been too long. I've been asking everybody about inflation. A lot of people, myself included, think maybe this is the beginning of a secular inflation. Of course, Janet assures it's just transitory. What do you think?

Daniel:  Thank you very much, Erik, thanks for having me. Always a pleasure. I don't think that inflation is transitory. More importantly, I think that perceived inflation, what you and I, what our listeners do see in terms of inflationary pressures are not going away anytime soon. Because it was a trend that already existed before COVID-19. The Fed always, the Fed and central banks always look at inflation thinking that it's transitory. That it's going to be that is because of supply chain disruptions, etc. But when you look at the components, what you see is that. For example, we are seeing many commodities and many metals in which there is ample capacity. In fact, overcapacity like for example, aluminum going through the roof anyhow. And we're seeing that the food prices and the food price index that the FAO publishes reaching new highs that were already reached before COVID-19.

 

So you know the first question that we need to ask central banks is what do they measure as transitory? One year, two years, three years? And the second thing that we need to ask central banks is, are you really taking into account all the inflationary pressures because they're not taking into account house prices. They're not taken into account in some developed economies, Texas for example, utility bills, etc. So I think that the inflationary pressures that we have seen throughout the recovery are more sticky than what many would fear.

Philip Verleger

Erik:  Joining me now is Phil Verleger, founder of PKVerleger LLC, and also editor and author of Notes at the Margin. Phil, I've really been looking forward to getting you on the show because you have been analyzing the oil business literally for 55 years. So you're a veteran of this business. Let's start with our really big picture of hey, they're people telling us that this entire industry is going away. There are people that have been saying for decades, of course, there's problems with fossil fuels. But now we've actually gotten to the point where the IEA, the International Energy Association, which is supposed to be our own industry body to promote this industry is telling the world that the entire industry needs to for ever stop looking for new oil. Just keep the wells we've got and then we're going to shut. I guess the idea is a suicide, shut down the entire industry and make it go away in favor of something else. I do think Phil, we've got to get eventually off of fossil fuels. But I don't think it's going to go down the way a lot of people seem to be talking. How do you assess this? Is the industry really coming to a slow motion end or what's happening here?

Philip: No. The industry, well, the industry is probably past its peak. I don't think we will see oil consumption ever get back to the levels we saw, say in 2019. The International Energy Agency is an intergovernmental organization that Henry Kissinger formed, and I actually I was working at the Council of Economic Advisers under Jerry Ford, when it was formed. So it was designed to deal with energy shocks. And what they have done is been following the oil market and energy markets for 50 years. They came out with this net zero 2050 forecast. I don't know why and I've done a lot of forecasts. And you know, one of the things I was taught when I started looking at economics after doing my economics degree, was if you're gonna forecast, forecast often. Well, this is just kind of a one time forecast, which is a mistake.

 

The other thing we always teach students is never put a number and a date on the same piece of paper, and they really blew it here. Now, if you read through it in the back, they also have a scenario where we get to net zero, maybe by 2100, which is probably more likely. But it's a disconcerting projection. It is knock people off, it's really affected the industry. I think it's going to make it harder to raise capital when capital is going to be needed and it's just wrong. Oil use is going to go down. It won't go down as rapidly as they think it will. The economic assumptions they have in it are probably wrong. Because you can't forecast out 30 years with any accuracy. And there's probably going to be a good deal more carbon capture because if oil prices keep going up as they are right now, it will become more and more profitable to sequester oil, the way Occidental Petroleum wants to do in the ground. That's we've been doing with enhanced oil recovery for as long as I've been around. And so what the IEA said is a distraction, I guess is the way I see it. A real distraction.

Steve Keen

Erik:  Joining me now is Professor Steve Keen, formerly a professor from a university in London. Now, professor at large teaching economics on the internet via Patreon. Steve, it's been way too long. It's great to have you back on the show. But you know, you have been one of the most outspoken guys talking about why too much debt really leads to a macroeconomic prognostication or diagnosis or forecast, whatever you want to call it of ongoing deflation.

My big question to you is, boy, it seems to me like the politics have changed and we maybe are back to the late 1960s and facing and incipient not just little whiff of inflation. But I think secular shift to a really big inflation, that's going to be a big deal. Am I crazy? What do you think?

 

Steve:  Well we suddenly got a shock coming through from the supply side of things. I mean, COVID has obviously disturbed global production chains around the planet. We're seeing signs of that as well with climate change, with Taiwan running out of water and therefore not able to supply the chips to the world. So if you've got big increase in, you know, their essential, highly transformed manufacturing input. then you have a range of other commodities, I believe copper and nickel. The two that are showing signs of supply disruptions. So all this stuff meant you're going to get a supply kick, cost of production kick coming through. Which, you could actually like into what happened back in 1973-74, with The Yom Kippur War, the OPEC blockade, and the increase in oil prices from $2.50 a barrel to $10. And then the same in 1979-80, when they went from $10 to $40.

 

So definitely there's a price hit coming through from the supply side of the economy. But what is different this time around is that when that happened in the 70s. You had an absolute mother of all booms on, which was credit finance. And you also had unemployment so low. I mean, it was an insensitive recorded level in America is running at about of the order of 4%, 3% to 4%, which is comparable to what they are calling the unemployment numbers these days. But frankly, the numbers were more honest back then. There has been so much hiding of unemployment in the not looking for work section of the statistics I think you've pretty much got a double the unemployment rate to make it comparable to what was actually being properly recorded back in the 70s.

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MACRO VOICES is presented for informational and entertainment purposes only. The information presented in MACRO VOICES should NOT be construed as investment advice. Always consult a licensed investment professional before making important investment decisions. The opinions expressed on MACRO VOICES are those of the participants. MACRO VOICES, its producers, and hosts Erik Townsend and Patrick Ceresna shall NOT be liable for losses resulting from investment decisions based on information or viewpoints presented on MACRO VOICES.

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