Transcripts
Erik: Joining me now is Rosenberg Research founder David Rosenberg. Last time we had Rosie on the show he was a bear in a room full of perma-bulls. David, I think there was something to what you told us that maybe stocks don't just go up all the time, after all. Give us the rundown here. What's going on? Why is it happening? How come other people didn't see it as early as you did? And what do you think is coming next? Is this over? We just had David Tepper, when I should let our listeners know we're speaking on Tuesday morning, since the market is moving very quickly. From our perspective, market has been falling. We're looking at about 3960 on the S&P right now. David Tepper covered his shorts that caused the market to rally dramatically for all of about a half an hour and back down again this morning. What's going on? Where's this headed? And how much further down do we have to go?
David: Well, you know, back to your initial comment about, you know, what is it that the bulls didn't see at the turn, was they just didn't take their own advice. Because, you know, through the previous two years, of what was a parabolic move in the stock market, the mantra was don't fight the Fed. But you see, that works in both directions. And so what's wrong about the bulls staying longer in the game than they should have was that they're fighting the Fed in the other direction that the Fed is. If you're long only investor, the Fed isn't your friend anymore. At some point, they will become your friend. The point I was making all along was that, you know the 4800, call it peak on the S&P 500 at the start of the year was a real fictitious peak. We had no business being there. And so what's happened these past three years, three years in a row of unremitting policy easing by the Federal Reserve. 2019, the Powell pivot cut rates three times. We expanded the balance sheet after telling everybody in 2018 how he was going to move the funds rate above neutral, never came within 50 basis points of that and the Fed was going to shrink the balance sheet, but they did the opposite in 2019.
And then in 2020 of course we have the pandemic and the lockdowns and we get double barreled rate cuts, and then unprecedented balance sheet expansion with the rates to zero. So in 2021, the easing by the Fed wasn't about interest rates, it was about ongoing balance sheet expansion was continued to stimulate the animal spirits in the stock market. You can't go back in history and find too many times when for three consecutive years, the Fed was continuously easing monetary policy. And so you see what happened was when you look at the stock market, it's the product of two numbers. Earnings and the multiple that investors are slapping on those earnings. And that gives you the S&P 500 price. So you see what happened was that from the end of 2018 to the end of 2021. The S&P 500 practically doubled in a three year span, which hardly ever happens. I mean, it happens, happens usually at bubble peaks like back in 2000. And when you do the arithmetic. 70% of this three year bull market that of course included the bounce off the march 2020 lows, but 70% of the three year bull was multiple expansion and only 30% was earnings growth. I'm not going to tell you that earnings weren't good. But earnings were really the two big player in this equation.
In a normal bull market, the main actor is earnings growth. Earnings are 70% of the driver for valuations. And the multiple is the other 30%. And we reverse that in that three year period from the end of 2018 to the end of 2021. So, you know the Lord giveth and the Lord taketh away. And so when you have really a multiple-led bull market that has been predicated on Fed policy tailwinds, you have to know that when those tailwinds become headwinds, that 70-30 split between multiple and earnings are going to switch chairs at the table. So I just saying naturally that if we get that mean reversion of really what a true driver of the market is, which is not predominantly multiples, but predominantly earnings. We're going to get to 3600 and run away to 3600. I'm just not convinced will necessarily stop there. But that's just the arithmetic of what a normal market would have taken the S&P at the peak. We had no business being at 4800. And now we're paying the price for the fact that the driver of it, which was fed policy, that movie is now we’re winding in the other direction. And that's the story.
Erik: Joining me now is Josh Crumb. the former head of Global metal strategy for Goldman Sachs where he worked with Jeff Currie. Now founder and CEO of Abaxx technologies. Josh, I've been so looking forward to getting you on the program because quite frankly as I told Grant Williams on your own smarter markets podcast, I don't think most of the finance industry has really figured out this digital asset thing. What's going on is a whole bunch of guys are looking at cryptocurrency and how they can trade it, what can we do with Bitcoin, so on and so forth. And they're also looking for what I would consider to be low innovation ways to make a buck doing something else with digital assets.
And as I told Grant Williams, I think what we need to do is step all the way back to what is the reason that we allow these capital markets to exist in the first place. In the case of the stock market, it's supposed to be to promote the efficient formation of capital to finance the growth of businesses, and thereby to create more prosperity across society as a whole. And I would contend that if we really stepped back and looked at what is the finance industry, and how could we apply this new digital token technology to it, what I call Secure Digital Bearer Assets, what should it look like? And how could we actually make the planet a better place using this technology? You're one of the very few guys I know who's actually involved in a business that's trying to take on that big picture. So I want to start at the very highest level, what is the finance industry today? What's wrong with it? And how could we make it better by applying technology?
Josh: Thank you, Erik and thanks for having me. Look, I'm really looking forward to this discussion, because in many ways that has been sort of the the arc or trajectory of my career is looking at these types of macro problems. So you know, maybe just as a very quick background, I'm actually a mining engineer, and come from sort of an engineering systems background educationally. But I'm also an economist and you know, have thought a lot about and worked in the finance industry, you know, really thinking about these big macro economic systems. And, you know, after I left Goldman, one of the first things that I really got into was the Bitcoin white paper and thinking about this new call it you know, triple entry, you know, Ledger accounting and really what what that would do to finance. I'll admit that I was never particularly interested in Bitcoin as an asset, you know, as a new digital gold, you know, having a metals background having a gold background, I think there are different commodities with different forms of utility.
So I've never actually, you know, looked at at Bitcoin in that way. You know, that this is a new, low risk store of value. Now I don't want to stop start this podcast off on the wrong foot. I actually think there are some absolutely revolutionary aspects to Bitcoin itself. And not just the Bitcoin technology, but the actual proof of work and the ledger system that comes out of that. But you know, you know, just in the in the nature of decentralized timestamps and decentralized computing, I think it really is revolutionary. But I think it's probably important to focus more on the finance aspects, you know, capital formation, rather than get into, you know, sort of a heated political argument about layer one or layer two technologies, you know, I think we can naturally get into some of those aspects. But I really wanted, you know, I think you would agree, you know, we want to focus on capital formation and what decentralized computing and digital bearer assets, you know does to that. So, you know, maybe just to step back for a second, I actually believe that there's still a lot of misunderstandings of some of the core concepts in finance itself. How these financial systems work, where they came from, and ultimately, you know, it's an ever evolving system. The finance of you know 200 years ago was very different from the finance of today. The finance of, you know, two decades ago was actually I would argue, in many ways very different from today. So this is a constantly evolving system that really evolves with our political systems. And most importantly, I think it evolves with our information technology systems, and just you know, what voices are heard, and what information is sort of spread, spread around around the world. So anyways, that's a lot to set up. So I'll leave it there for a second and see, you know, see what's the best way to take this conversation forward?
Erik: Joining me now is Ole Hansen who heads up the commodities desk at Saxo Bank. Ole prepared a terrific slide deck for today's interview. Listeners will 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 and click the red button that says looking for the downloads. Ole there have been times since I've known you that we've actually intentionally not booked you on MacroVoices because we just felt like the commodity sector was kind of quiet and there wasn't much to talk about. This is not one of those times. Holy cow! Where do we start? We've got World War Three. We've got a I think a secular inflation that had begun before World War Three. A lot of people are saying that the commodity supercycle catalyst was actually the pandemic that was going before we got to World War Three. Where do we start and how do we reconcile this big picture? Let's just start at the highest level, how should we think about everything happening in the commodity space?
Ole: Well, thank you Erik for inviting me back. I think ultimately, I think we just have to start by once again just realizing that commodity market is a finite market. Supply and demand needs to be balanced on a daily basis. That basically means when one is out of whack, we do get some big moves. What we've seen for quite a while now is that the market has increasingly become worried about the supply side. We had the stimulus driven surge in growth following the pandemic. Then we had Putin turbocharging commodities, sanctions and war creating a large mismatch across several commodities. And that was really what took us through these record highs that we actually booked the record high as late as last week. If you look at the Bloomberg commodity index, but since then, things has turned on a diamond and we've now we have to throw another lockdown another outbreak into the equation and this time, obviously, with China, where the lockdowns are spreading. China is key producer and key consumer of commodities basically thrown the whole thing into a little bit into disarray right now once again. And I think on top of that, also very aggressive expectation for how high interest rates will go in the US, thereby also adding some downward economic growth projection. So we've seen the market switch from worse about supply to worse about demand. And that's what we really looking at this time. And then that obviously raised the question whether it's over, we can take that a little bit later. But from my perspective, that's really where we are right now.
Erik: Joining me now is Mike Green, chief strategist and portfolio manager for Simplify Asset Management. Mike, it's great to have you back on the show. It's been way too long.
Mike: Aw Thanks Erik. It has been too long.
Erik: I told our listeners when I interviewed Dr. Pippa Malmgren that long before I interviewed Pippa, a couple of different very senior people who I respect a lot had told me, quote, World War III has already begun. And Mike I want to now bring you out of the closet as the first guy who said that to me and what you actually told me I think a year ago now was you said, World War III began a full year ago. So that would be two years ago now at this point. Something that I realized, I didn't really take that seriously at first. And the reason is, for me personally those three words World War III equate directly to certain nuclear Armageddon that ends humanity forever. And I thought that was too extreme of a conclusion to come to. And I was a little bit surprised by it. After reading Dr. Pippa Malmgren's piece on what she meant by World War III has already become, she's not talking about nuclear Armageddon, she's talking about a whole new kind of warfare that is fought primarily on digital battlefields. And it really is the nuclear superpowers at war with one another. But she doesn't think that it's necessarily headed toward that nuclear Armageddon scenario. So let's start by clarifying what precisely did you mean when you said to me a year ago, that World War III had begun a year earlier than that?
Mike: What I meant by that was that we had entered into a period of great power competition, and that we were going to see the world begin to fracture. And unfortunately, that seems certainly more true today than it was back then I would argue, in many ways, the Trump tariffs on China were kind of the slap in the face that opened up this whole idea of, we're actually going to begin to compete quite overtly. I think the odd thing about what happened under the Trump administration was that Trump himself was very uncomfortable pushing forward a narrative that might harm the stock market right or might harm his popularity. So there is this weird dynamic where within the administration I was hearing a very clear change in tone and recognition that we had entered into overt competition, particularly with the Chinese, to a lesser extent with the Russians. And I would suggest that it doesn't have to mean Global Thermonuclear War, right? This can be a limited engagement, but it absolutely is involving a whole globe competition that is similar to, you know, the Napoleonic Wars of the 19th century and the 17th century to a lesser extent, the competition between France and Great Britain that manifested itself in the French-Indian wars to turn that into the first global dynamic, etc. This time around, it began in the trade trenches. But long before that, it was already happening, as you note in digital cyberspace, where China was basically doing everything that they could to steal every critical technology, and propel themselves forward in a, you know, a very fast moving way.
The irony is that this is actually very similar to the way that World War II develops, right, it doesn't start as a giant global conflict. It begins as a series of effectively border skirmishes. Right. And, you know, I find it a great irony that we're seeing the exact same type of dynamics that occurred at the start of that kind of 1937 to 1939 transition where it became clear that we were re-entering World War II. The armament had already been started. The US government and the UK Government were actively working to get their multinational corporations to withdraw involvement from places like Germany and Russia. You know, you saw the US suspend diplomatic relations with Russia in the beginning part of 1937 as Stalin had consolidated control and it became clear the extent of their spying operations against the United States. You know, this just feels it feels the exact same way, right? Now does it go kinetic nuclear? Man, that's, uh, you know, that's the bad outcome, right? But it does very much feel that the world is fracturing and fracturing for many of the same reasons. The global superpower has had to pull back, right? It is not playing the role of global policeman and as we see in US cities all over the place, when you reduce police enforcement, crime spikes, and some form of loss of Law and Order is what's happening around the globe right now.
Erik: Joining me now is Bianco Research founder Jim Bianco. This is a special episode of MacroVoices, this came about after Jim appeared on the show back in February. Towards the end of his interview, I asked Jim about the long term impact of decentralized finance, the trend that's become known as DeFi, Jim reacted by saying, Oh boy, I could do an hour on that subject alone. And holy cow, the listener response was overwhelming. So congratulations, Jim, you suddenly have a whole new following of DeFi enthusiast who can't wait to hear what you've got to tell us about the future of finance and what decentralization will mean to it.
Jim: Well, thank you. Yeah, it is a fascinating subject. And a lot of epic changes, I think are on the horizon.
Erik: Now, I want to just first set the context for our listeners that I asked Jim to talk to me a little bit off the air about what the best topics to ask him were about. And he gave me just a hit list, a bullet list of what topics we might discuss that conversation went more than 45 minutes. So Jim has about 217,000 hours of content in his head, I'm going to have a little bit more to say about how we might get more of that out at the end of this interview. But to just set the scope of this, we're gonna start by talking about currencies, not in the sense of what's going on right now with Bitcoin and other cryptocurrencies, because so many other podcasts have addressed that, so well. What I'd like to do is talk about the long term vision of what digital currency is going to mean to the global financial system. And from there, we'll move on to decentralized assets as they apply outside of currencies to other financial instruments.
But Jim, let's start with the big picture of the Bitcoin guys invented something really profound - truly digital cash, the ability to have a bearer instrument, which is represented inside of a computer so it can be transmitted across a network. And when we transmit that value across a computer network, it's not like a check or a claim against an account someplace, it truly is a transmission of financial value in the here and now, just like handing somebody $100 bill. Now, the way that I think about this is, for decades now going back to the 1960s, when Valéry Giscard d'Estaing, the French finance minister at the time, later became president of France, coined the term "exorbitant privilege" to describe how the United States as issuer of the global reserve currency kind of got an unfair deal, or at least unfair for the rest of the world, in the sense that since you have to have a global reserve currency, and one country has to be the issuer, whoever gets to be the issuer kind of gets an unfair leg up on everybody else in the world. Now, it seems to me, Jim, that decentralized currency systems create the potential of at some point, replacing the US dollar as the world's global reserve currency, with a supranational digital currency system, probably one that is controlled by a consortium of central banks, rather than by Bitcoiners. It's possible that Bitcoin could evolve into that. But what I'd like to ask you about is what it would mean, if we had a global reserve currency system that no country owned or controlled, that basically allowed everybody equal access to that currency system. And perhaps it's designed to allow central banks to administer monetary policy within their geographical domains. But the overall currency system isn't owned by any one nation. Is that a benefit? And do you think we're headed in that direction? And particularly, how do you think the United States government is going to feel about giving up that unfair advantage, according to the French that they've had for really, any years now?
Jim: Well, taking the last part first, it's fairly clear that the US government is not in favor of any of the above. Because they are at the top of the heap, they have, we the United States have the exorbitant privilege that the dollar is the reserve currency. And you're correct, everything is priced in dollars, everybody needs to use dollars. So we've immediately if nothing else, think about crude oil or commodities, we immediately buy them in our, in our currency, we bear no currency risk. Europeans have to buy him in dollars, they have to convert their euros to dollars, they always bear a currency risk every time they do it. Because they don't know what the exchange rate will be, at the time that they need to do the transaction. We do know what the exchange rate is going to be because it's priced in dollars. We just don't know what the price is going to be. We just bear that risk. But everybody does.
If you do move to a global permissionless, meaning that no one can alter this system, or no one can override the system global currency. What you wind up doing is making it fair for the rest of the world because One of the problems the current global financial system has, is it's more of a tiered system that if you're further up the list in the United States is at the top of the list, you get more privileges, better, cheaper financing, better access to markets. As you move further down the list, you get less access, things become more expensive. And you wind up having also the possibility of being punished, or rewarded by the more important players, Europeans, United States, to give an example, depending on whatever your behavior is. And so what you're seeing with a digital currency is a push towards doing it. And in the United States, there's a belief that what Bitcoin or these digital currencies represent, is a bunch of you know, bros in Starbucks's in San Francisco that are trading these things. And there is that, but really, if you look at a company called chain analysis that looks at adoption rates of Bitcoin and digital currencies around the world. And they look at it by penetration of the population, only one country in the top 20 is a developed country. And that's the United States at number eight, the other 19 countries are all developing countries, emerging markets as well, too.
So you're seeing the adoption rate, really what's pushing this is Asia, Africa, the Middle East, knowing that they've been at the short end of the stick having not to have access to world capital markets, or to banking services at a reasonable rate. And wanting to have that. That's why you're seeing the adoption of places like in El Salvador, and potentially in Argentina, as well, too. Because they have been shut out of the capital markets, they need the permission of entities like the World Bank, or the IMF to do certain things. They are punished if they do things that displeasures, the first world or the United States, or the IMF, or the World Bank. And so that's why they want some kind of system like that. So what you're seeing is an outgrowth of a global currency. And you're right. For purposes of this discussion, let's leave off the technology and just assume or take that it's there, it exists, that at the currency level, it can't be hacked, and it is immutable.
Now, later on, when we talk about protocols, meaning I build a DeFi protocol, on top of that currency, we could borrow or lend it or trade it, that could be hacked, just like your bank could be robbed. But that if your bank is robbed does not mean that the dollar itself is invalid. Bitcoin, or whatever digital currency we come up with is not invalid, if your protocol gets hacked, so want to make that separation. But beyond that, I do think what you're seeing is a lot of the rest of the world very excited about the idea of a digital currency because it gives them better access. And they're not subject to being censored in ways that they are now.
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.
