Transcripts
Erik: Joining me now is Jeff Snider, the principal author first of the MacroVoices Eurodollar University and now of the Eurodollar University podcast. Jeff prepared a terrific slide deck to accompany this interview and I strongly encourage our listeners to download it because we're going to be making extensive references to the graphs and charts that it contains.
You'll find the link for the download in your research roundup email. Now, if you don't have a research roundup email, just go to our homepage at macrovoices.com. Look for the red button that says looking for the downloads. Jeff, it's great to have you back on the show. We decided instead of talking about today's markets and so forth, to do kind of a timeless episode, talking about the US dollar. Why it is still at the center of the global financial system despite the fact that ever since 1971, the US has kind of been frustrating some of the other countries around the world by maybe overstepping the authority that it gets from having the dollar at the center of the global financial system, yet it still remains king. And particularly, I think a lot of people would really like to better understand what causes the dollar to go up or down against other currencies. Now, if you pick up a macroeconomics textbook, pretty much what we're taught is that interest rate differentials are what control currency values.
So for example, if the Japanese Yen pays a much lower interest rate than the New Zealand dollar, then you can expect international investors to borrow yen at very low interest rates, sell them in order to buy New Zealand dollars, and get a much higher rate of return on New Zealand Treasury bills than they had to pay in order to borrow the Ten. That's of course known as a carry trade. I got a feeling Jeff, you're gonna tell us that there's a little bit more to it than just that when it comes to the US dollar.
Erik: Joining me now are Mike Alkin, Principal and Chief Investment Officer for Sachem Cove Partners, and Adam Rodman, who is Founder and Chief Investment Officer for Segra Capital Management. Why don't we start with Mike, give us a quick perspective on you guys both run funds in the nuclear space. What specifically do you do Mike? And we can contrast that with Adam in just a moment so our listeners understand how you guys both come at this.
Mike: Sure. Thanks Erik. So we are in the hedge fund business for over 25 years and back in 2015 started to look at an opportunity that I thought there might be a disconnect between the narrative and the facts in nuclear power and uranium. And so after a couple of years of doing deep dive due diligence on the industry, started the fund to express the view to invest in the nuclear fuel cycle. And that could be investing in physical uranium, proxy for physical uranium, it could be investing in the uranium mining equities, or private investments within the uranium space which we also do. So that's what we do. It's 24/7, the nuclear fuel cycle.
Erik: Okay, so Mike's business is entirely about the nuclear fuel cycle. Adam Rodman, how do you look at this opportunity space of investing in nuclear?
Adam: Yeah, sure. I'm not as tenured as Mike but about 15 years in the hedge fund business. Founded Segra Capital as a generalist fund always focused on, you know, kind of parts of the global markets that we thought were underappreciated or undervalued, and not dissimilar from Mike, around, you know, four or five years ago thought we were getting to a critical point in nuclear powers role and I guess take the energy transition and pivoted our fund to focus more or less exclusively on nuclear and nuclear-related opportunities. We've since kind of grown the offering under the Segra Capital umbrella. So we run a long-biased, but long-short hedge fund that looks at all things nuclear, including the nuclear fuel cycle, as Mike pointed out, and we also have a series of private funds dedicated to the space in addition to being in the midst of launching a commingled venture and growth equity fund looking at advanced nuclear and all related opportunities.
Erik: Joining me now is Bianco Research founder, Jim Bianco. Jim, it's great to get you back on the show, I want to start with something that's really been bugging me because as I tried to figure out the equity market and just the general macro landscape, I can't reconcile this thought that I've had for more than a decade now, which is I always said, what's eventually going to break things and bring about the end game is when inflation finally starts to run away, because that's what will tie central bankers hands and suddenly, we won't be able to paper over all of our problems with printed money anymore. I'm shocked. First, I was ridiculed for even thinking inflation could ever come back. And now that we've got it, it doesn't seem like anybody sees it the way I do, which is, this is a fundamental game changer. It means that the bailout mechanism isn't going to work anymore. I don't perceive most market participants really seeing the situation that way. So it makes me wonder if I've got it wrong. What do you think?
Jim: No, I don't think you've got it wrong. I think a lot of people are in that camp. That, you know, as I like to call them, the last year's transitory inflation is this year, inflation has peaked crowd. If you look at surveys of central bankers, you know, their outlooks or Wall Street's outlook, there's a common theme no matter what developed country you look at. Everybody's got inflation peaking about now and they've all got inflation returning to 2% in the next 18 to 36 months, depending on who you're looking at. But what they all have is inflation is they believe, a one time surge because of the pandemic re-opening and then it will go away forever. And they're still using the playbook of the 25 years through 2020. Whenever there was a problem including 2020, and it looked like the world was going to end in March or April of 2020. Here come the central bankers, and if the Fed has to buy $100 billion worth of bonds a day, which is what they were doing at one point. They will levitate markets and they will make every problem go away. So that's where that complacency is. This inflation is a one time thing. It's going to go away. The printing presses could come. The fiscal authority could come or maybe they'll change the rules or whatever. And whatever perceived concerns or problems we have will disappear. So don't worry about it.
Erik: Joining me now is Dr. Anas Alhajji, former chief economist for NGP Energy Capital Management, which for anyone who's not familiar is the premier private equity fund in the oil and gas space and former professor from the Colorado School of Mines, the University of Oklahoma, and Ohio Northern University. Anas, it is great to have you back on the show it has been too long and boy, we are overdue for a crude oil special. It's great to have you back.
Anas: Absolutely, absolutely.
Erik: I want to start by sinking up. We talked a lot about this last time and I'm not going to spend a lot of time on this subject. Anybody who's interested who didn't catch your last interview should go back and listen to that one, because it's as relevant as it was the day it was recorded. But I want to just kind of follow up on our last interview, after that interview and watching what's happened in the market, I have become convinced that the world is in a global energy crisis and I'm going to make a bolder statement than we made in that last interview. I'm going to say that, although the recession may hide this, and it might be years before people really figure this out. I do not believe that it is possible for the world to return to pre-pandemic normal in the sense of energy demand going back to where it should be naturally, you know if normal growth path had continued, and there hadn't been any pandemic. I make the argument that it is not possible to get there because the energy supply needed to do that simply does not exist. And furthermore, in order to solve that problem would take several years because you'd have to start making much more investment in new oil and gas production. And I think we have a really, really serious problem. Everybody's talking about this European energy crisis. I don't think there is a European energy crisis. I think that Europe just happens to be feeling it the hardest, and what's in Europe now is going to get worse. And I think it's coming to the rest of the world. Am I missing something because that's a pretty strong statement that there's no way out.
Anas: Yes you are missing something but the other way. The crisis is 10 times worse!
Erik: Oh, it's worse than I think?
Anas: It is 10 times worse than what you think.
Erik: Joining me now is Lakshman Achuthan, co founder of the Economic Cycles Research Institute, Lak prepared a slide deck to accompany today's interview. Listeners, you'll find the download link in your research roundup email. If you don't have a research roundup email, just go to our homepage macrovoices.com. Look for the red button above locks picture that says looking for the downloads. Lock, it's great to get you back on the show. Before we dive into the slide deck, I want to start with a super novice topic because it seems like we need to revisit it. Given a lot of politics lately. Let's start with the definition of what a recession is. I actually surprised myself recently, before President Biden changed the definition so to speak, I had said on the air that the neighbor definition the official National Bureau of Economic Research definition of a recession was two consecutive quarters of negative GDP growth. And I have more aggressive fact checkers than Donald Trump. So I was overwhelmed promptly, by listeners said, nope, you got it wrong. That's not it, you should get Lak back on the show, in order to teach you what in a recession really is. And that was before President Biden repeated my mistake. So let's start with recessions. But really as investors, what are the key things we need to understand about how recessions? What role they play in economic cycles and what they mean to us?
Lakshman: Thank you so much. And I'm really grateful to your listeners, and to you for asking the question and really wanting to understand what a recession is, I certainly find it fascinating. You know, they call it the Achilles heel of the free market oriented economy, which is not a knock on the free market. But it's just a feature of, kind of ebb and flow that we have, when we allow a free market to run, which is what we're generally trying to do. So a recession, first and foremost, one of the things is it's not a statistic, it's really a process. And I think that that trips people up. Certainly, it's easier if you could boil it down to a rule of thumb, like two negative quarters of GDP back to back. And that's a decent rule of thumb isn't a bad one. But it's not a necessary nor a sufficient condition for recession, defined as this process, that a free market goes through a business cycle. So we're literally talking about a contraction, a recession is a contraction when the level of economic activity falls on, so it's contracting. And when we say economic activity, we have to define that or we don't actually have to define it, we know we have to remember what it is. My mentor, Geoffrey Moore, his mentor was a man named Wesley Mitchell who defined what a recession is, and he helped set up the NBER. So it's a pronounced, pervasive and persistent decline in broad measures of output, employment, income, and sales. And so, we do have broad national accounts on those four different types of measurements of broad economic activity. So you can think of GDP or industrial production for output. The jobs data, there's lots of different jobs data, nonfarm household, all kinds of different job activity, labor market activity data, there's broad income, and there's very broad sales much broader than retail sales, aggregate sales data for the economy. And in retrospect, because these are government data series, in retrospect, after the revisions are done and those can take many months or even a little longer, when those revisions are done, you can see with some clarity, when the peak and the trough and the level of activity occurred on a pronounced pervasive and persistent basis.
So in the current environment, the thing that I think needs to present itself which has not presented itself yet for a recession to kind of be underway, is clear evidence of falling labor market activity. We have some evidence of that, but not clear evidence of that. For example, household has fallen a little bit but nonfarm has not. And it won't be a recession unless there is a contraction in jobs, the level of jobs are falling. Same goes for income, sales and output. So that's broadly speaking what a recession is. That's the target the business cycle. Wesley Mitchell had named his book where he outlined this the business cycle, the problem, and its setting. And so that's the world, that's the pool we're swimming in. We’re trying to figure out what's going on inside of that environment. And to do that we track the coincident data that helps define the cycle. And then more importantly, I think, for investors and speculators and decision makers, is what are the leading indicators doing, which we'll certainly get into the reason recessions can be important for investors or business managers, is because of what they do to demand growth, primarily, which can impact earnings growth. And the fact that it's pronounced, pervasive and persistent. Meaning it's not just one section of the country, or one sector of the country. It's pervasive, meaning it's hard to hide from it. There are some kind of non cyclical, less discretionary areas, but they probably get tagged a little bit, too, during recessions. And so let me stop there, just having set the table with it with the definition.
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