Transcripts

Erik:     Joining me now is Viktor Shvets, Head of Global and Asia Pacific strategy for Macquarie. Viktor, it's great to have you back on the show. Last time we had you on, the episode was titled, The Inflation-Deflation Pendulum. And at that time, there was still a huge amount of debate, a lot of people thought there was going to be no inflation. And of course, sure enough, we've gone from a situation where everybody questioned whether there was ever going to be any inflation to a lot of people now think it's running away and it's going crazy from here. Is it still a pendulum and where are we in this story?

Viktor:   Yes Erik, I still believe we are in the pendulum. I think the last time we spoke and I tend to look more at G5 inflation, which is US, UK, Eurozone, Japan and China, which is much more representative of a global inflation requirement. I think I was arguing that inflation will peak at the very end of 21, early 22 at around 4%. Now, we now have December numbers, and it actually in December was 4.5%. So did we have a much more significant surge? and the answer is yes that particularly applies to US, to a lesser extent the UK. But we did have a much much stronger sort of jump in inflation. The question, however, is why do we have inflation? I usually tell us people, were you really concerned in December 2019 that we're going to run out of people. Were you really concerned in December 2019, that suddenly we will have shortages of goods? Well, the answer is that you did not. And if you think of real global demand, it's only slightly ahead where it was at the peak of December 19. More so in the case of the US less so in other countries. But what actually happened? We had a collapse and recovery. Now that recovery mostly shifted towards goods, depending on the country, the goods demand is about 10 to 20% higher than what it was prior to COVID. So if you think about the trend line, we're about 10-20% higher. But if you look at services demand, it's about 10% lower than it was in the past. So it's not necessarily that we have explosion of demand. But rather we had a significant relocation of demand between goods as well as services. And so as a result, we suddenly start running out of truck drivers, our warehouses are bulging. Suppliers could not properly estimate what demand will be. And so they are underinvested or they go out of business or they were hoarding. And so the result was, to me that most of the inflation we have experienced, it's still the case that demand and supply curve have not moved in tandem or in unison over the last couple of years.

And so the question becomes, as we go forward, do you think that's going to happen, or that's going to get fixed? Now, if you think of most numbers, whether it's New York Fed, a global supply index, whether you look at ISM indexes globally, including US, what you started to see is some easing of pressures. around November-December. It's really picked looks like around October. Now, nobody could argue that if suddenly we have another COVID, or we have another sets of disruptions, it can get worse. But at this stage, it looks like it's starting to ease. So the question to me as we progress through 2022. Yes, G5 inflation was higher. As I said, it's I think it's going to peak around four and a half. I don't think it's going to go much higher. The core inflation is about three, I think it's going up a little bit more in the next couple of months. But beyond that, it really comes down to the fact, can we get demand and supply curves moving relatively in unison? My answer is yes. And I think the last time I spoke on your program, I was saying by the middle of 22, a lot of supply and demand issues should get much easier. And by the end of 22, we're going to get surpluses of goods rather than shortages. The only exception to that will be anything to do with digital economy. In other words, cobalt lithium, rare semiconductors. But most of the other things, I believe we're more likely to be in surplus by the end of 20 to early 23. The other big question mark, is that can you continue stimulating demand, that's when you go to fiscal and monetary policies. And my view remains the same that we picked in the fiscal support around July August of 2021. We've already been coming off for about six months, but that sort of erosion will accelerate as we go through 22 and 23. Pretty much every country wants to control their deficits wants to control their debts.

So if you think of again, G5 economies we peaked at about 11-12% fiscal deficits in 21. That's going to be down to maybe around 6% in 22 and maybe closer to five in 23. Now, that's a biggest fiscal contraction since World War Two. And unless something terrible is going to happen, I think that contraction will be a real. Nobody is going to go for primary surpluses, nobody is going to be doing crazy stuff that we used to do. But nevertheless, fiscal delta will remain very negative. And the same applies to monetary delta. Almost every central bank is now believing that they are behind the curve, which I disagree with. But nevertheless, that's what they feel and so monetary delta will be declining exactly the same time as a fiscal delta. And so without fiscal and monetary support, without really cyclical recovery, the way we had nearly 21 I think both reflation and inflation will start coming off. And so both growth and inflation at the end of 22 will be lower than at an earlier part of the year. Now how far lower? I think G5 will end up with probably around 2%, down from 4.5%. Even more inflationary countries like US and UK, probably will have inflation at least 300-400 basis points lower.

Now, how can we go wrong in this thesis? Well, a couple of things can go wrong. Number one, supply and demand curve don't move together. There are other disruptions, things happen, and you just can't get ahead of the curve just like we couldn't in 21. The other problem will be if central banks as inflation persist into early 22. Just overdue sayings in other words, they really commit a sequence of policy errors that will very quickly extinguished both growth and inflation at the same time. And the third area is really external factors. We did that we can't control things like geopolitics. Nobody is factoring in right now anything to do with Russia versus Ukraine, or South China Sea or anything else. So don't say a question, Erik, I'm stealing the pendulum. I'm basically arguing that without public sector, without strong fiscal and monetary support, disinflationary forces are stronger than inflationary. And so if you remove those props, inflation will go down, our gross will go down. And the question then becomes really whether you should start stimulating again into 23.

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Erik:  Joining me now is 42 Macro founder Darius Dale. Darius has prepared an outstanding chartdeck to accompany this week's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you're not yet registered. Just go to the homepage macrovoices.com, click the red button above Darius's photo that says, looking for the downloads. I want to let our listeners know, this particular slide deck is a lot longer than we're going to have time to cover in the podcast. We're doing this intentionally because there's so much value that is contained in this particular slide deck, which I wanted our listeners to see even though we won't have time to cover all the slides in the podcast.

Now, Darius works from a systematic approach to macro investing where he tracks what growth is doing, what inflation is doing. And he kind of makes a grid that says okay, when inflation is going up and growth is going down, okay, these circumstances are going to exist. So there's four different possibilities there. Darius, most of our MacroVoices listeners already know your system, but for the benefit of newcomers, what's the best place to learn about the basics of that system before we dive into the meat of it?

Darius:   Yeah, absolutely Erik. I appreciate you guys having me back on. Happy New Year and all that stuff even though Larry David tells us we can't say this past the 7th. I'm violating the rules here. But in terms of finding that presentation, we put that together on our YouTube channel, we'll make sure the link is included in this week's Research Roundup.

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Erik:    Joining me now is Things That Make You Go Hmmm... founder and editor Grant Williams. Grant, it's great to have you back! First interview of the new year. I want to send the way back machine all the way back 13 years ago this week, it was 2008 coming into 2009. We hadn't gotten to the final bottom in the stock market yet. You and I and a lot of other people really thought that that financial crisis was about too much debt. And we thought that the proposed remedy, which seemed to be creating more debt was not going to be sustainable. And we made a lot of arguments back then saying look, you can't just have the central bank propping up asset markets indefinitely. That's not sustainable. At least that's what I said, I don't want to put words in your mouth. I know I said it wasn't sustainable.

Gosh, it's been a dozen years Grant and they're sustaining it so far. At least, that's the way I see it. How should we think about the fact that although I still don't think it's sustainable long term and I think that they're driving us into what could be a really big inflation trap. Definitely, they could sustain things longer than I thought back 10 or 12 years ago. And it seems like in the eyes of a lot of people, but all of us skeptics got it wrong. And central bankers have proven that there really is a perpetual motion machine of finance here in the form of central bank largesse. How does this go from here? What do you think is on the horizon?

Grant:     Well first of all, Happy New Year to everybody listening.

Erik:  What a way to say Happy New Year! Did I just give you a great introduction or what?

Grant:     It's a great question. I mean, look, you're right, I think I would bracket myself with you as saying that. If you put a gun to my head 12 years ago and said paint me a picture of life at the end of 2021 and asked me whether that was realistic, I would have said hell no. But, you know, I think the piece of the puzzle that perhaps a lot of people missed was that the market just wouldn't care about anything but liquidity. They wouldn't care about valuations, they would come to mean nothing to people, and that they would be happy to pay crazy multiples for things with either no profits or no chance of making profits for the foreseeable future. And I think that's the part that it was really hard to foresee ahead of times, because you know, that stuff has always mattered. And let's face it, regardless of any kind of suspension of that belief for the time being, we all know that it does matter.

If you're buying the shares in a company, you're buying those future cash flows, and if they're negative, at some point, that is not going to work out. Now, while the vast majority of market participants have the belief that either the Fed has their back, or there's going to be ample liquidity, low rates forever, and a bunch of people forced into putting money into the market as a place to get any kind of return that they can't get the bond market, then, you know, look, it can be sustained, and it has been sustained. The problem with that, as you've pointed out, and numerous guests on your show have pointed out is that you're just creating a bigger and bigger problem that will have to be faced on the day when all of this suddenly matters again. And, you know, it could be rising rates that make it matter, which is why the return of inflation is such a big problem. It could be some kind of collective awakening that makes people realize that they've paid the wrong price for all kinds of different things. Who knows? It could be something that none of us have thought of and generally that's the way these things tend to work out. But I agree it's amazing where we've gotten to and if you look at how we closed 2021. You know, there's this idea that markets are closing on or around the highs, it's going to make new highs.

If you look at some of the data, which is pretty extraordinary, you take away the top performing stocks from these markets, the NASDAQ for example, the average distance from the 52-week high of all stocks in the NASDAQ is 40%. 40% below the 52-week high while the index is just three and a half percent below the 52-week high. You go through all of these, you go through the S&P and the average stock is almost 12% below its 52 week high, the market closed at or within half a percent of its high. You know these are strange divergences that have been covered up by a small group of stocks which have priced in the sensitive buyers because they've been shoved into just about every ETF you can possibly think of and you know, at some point, you sound like a broken record saying this because we don't know when that point will be but financial sanity and financial gravity will return at some point. It just will be that way you cannot suspend your disbelief forever. So you know, does it happen this year? I would say we have as much chance as we do it any other January, the first trying to predict that, but this is why it's so important to understand what the return of inflation does and why it's such a dangerous phenomenon at the best of times, given the setup right now, the return of inflation creates a whole different set of problems because of this inability by central banks to raise rates by any meaningful degree to combat it. So I think this year, there's going to be a moment when the central banks are going to stare down the barrel of a gun, and have to decide what to do. And, you know, we can talk about what their options are, they're getting fewer by the week. And at some point, I suspect there's going to have to be some extraordinary monetary policy of the non-QE kind, rather, of the capital control, credit control kind which nobody wants.

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Erik:     Joining me now is Gavekal co-founder Louis-Vincent Gave. Louis, it's great to have you back on the show. I want to start with the big picture of where we stand in markets. Seems like the recovery was on and then we got the Omicron scare. I don't know what your take is but I've been looking at the data and as far as I can see, it's gonna be a while before the death toll climbs above zero. I don't think this is really the problem that the White House would like to make it out to be for some reason. What do you think's going on here and what does it mean for markets?

Louis:    Hey, you know, roll out the usual suspects, right? We've had really a few ugly weeks, right? You got energy down 20%. I think last I checked that the Russell 2000 growth was basically given up all of its gains for the year and was roughly flat for the year. Think you got Bitcoin that more or less lost a quarter of its value? And I think behind all this, you've had a lot of things get slaughtered. Right? A lot of former, you know, beloved names of the general public, whether your Zoom videos, your Beyond Meats, your PayPals, your Spotifys, your Mercado Libres, or your Alibaba as pinned wood roads. So yeah, it's been a bit a bit of a bloodbath. You know, is it? It's, you feel a little bit like, you know, we allowed the usual suspects, right. So you've got, you know, COVID or Omicron as a potential suspect. You obviously have, you know, Fed sounding more hawkish as another potential suspect. And then you have, you know, continued China's slowdown and Evergrande finally, you know, slowest moving bankruptcy in the history of slow moving bankruptcies, sort of hitting the wall again. So, you know, you, I think you can find quite a few, quite a few usual suspects.

The reality, though, perhaps the simplest explanation is, you had a lot of things that were priced for perfection. And perfection is a hard, hard status to achieve. So if you look at a lot of the things that got absolutely smoked, it's a lot of things that were, you know, frankly, really, really over valued. And again, that only works, you know, if you buy things that are massively overvalued, that can only work for so long. Meanwhile, you know, if you look at the Russell 2000 value, it's still up double digits for the year, and the correction has been nowhere near as bad as the Russell 2000 growth. So I think for me, the interesting question is, alright, is the sort of massive growth bubble that we've experienced, really, since the start of COVID. Is it now running out of steam? And I think the answer is, you know, and I don't think that's linked to COVID. I don't think that's linked to China. I think the answer to that is linked to, to your view of Fed policies, as you look ahead.

You know, if you think the Fed continues to inject tons of money into the system, then there's no reason to think the growth bubble rolls over. If you think okay, you know, 2022 will be most likely a year where markets, you know, Fed starts raining stuff in, but also possibly, where market starts pricing in a post 2022 environment of just less of marginally more fiscal restraint. You know, if you assume that the Democrats are going to get a walloping in November, which seems to be on the cards, then do we have an environment like we did from 2010 to 2016, where a Republican Congress just refused to expand spending. So then you move from an environment of super easy fiscal super easy money to marginally harder money, and definitely tighter fiscal. And yeah, that's all of a sudden, maybe all the very expensive stuff starts to struggle. I think that's where we are.

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Erik:     Joining me now is Jesse Felder, founder of The Felder Report and Jesse has prepared a terrific slide deck to accompany today's interview. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, that means you're not yet registered at macrovoices.com. Just go to the homepage macrovoices.com, click the red button that says looking for the downloads. Jesse, it's great to have you back on the show. I know you've been listening in recent weeks to our other guests and the raging inflation-deflation debate that we've been having. What do you make of all this and where do you stand on the battle?

Jesse:    Well Erik, thanks for having me back on the show. I have to first applaud you for putting together just this fantastic resource. Your last few episodes that I've listened to just provide a terrific balance of you know, regarding the inflation debate. It's been a terrific panel and I've gotten a lot out of it. But I do come down on the side of inflation in terms of that debate. And I think it's more interesting to discuss the secular inflationary forces rather than cyclical. I don't think they're, you know, after the latest readings we've seen, you know, for CPI and PPI today that anybody's debating about, you know, cyclical inflation at this point. But to me, you know, when Rosie brought up the three Ds of disinflation. That was something that was very fascinating to me, because I see those same dynamics as having shifted in the last 10 years from disinflationary forces to inflationary forces.

If you just start with demographics, I think the IMF put out a thing, a report, you know, three, four years ago pointing out that demographics in the United States actually globally, everywhere but Japan, you know, we're seeing these increasing age dependency ratios of you know, more retirees than working population, and that is an inflationary dynamic. I think something, one of the things that people don't really appreciate, is that in the wake of the financial crisis, I think we had a lot of baby boomers who were forced to stay in the workforce. They weren't able to retire because their retirement accounts took a hit and so they had to stay in the workforce longer than they otherwise would have kind of artificially increasing the supply of labor for a period of time acting as a disinflationary force. But what we saw with the pandemic was a total reversal of that, where all those folks said, hey, look, my retirement accounts now 300%, whatever front, you know, in the last decade, and I can now afford to retire, and I don't want to stay at work and get sick. So all those folks retired, and then you had, you know, even further to that degree, a bunch of people who maybe were going to retire 5-10 years from now, who thought you know, what, I've just done so well, with my retirement accounts. Why don't I retire early. And so we're seeing this dramatic decline, I think in the working population relative to the non-working and that is an inflationary force, putting pressure on wages. And I think that's one of the factors we're seeing right now that's a secular push. That's, you know, in place, but it's been exacerbated by the pandemic.

You know, when you talk about debt as another disinflationary force. I think that's true for folks like me, and you Erik, who, you know, if we get too indebted, we have to cut back on our spending and hurts demand. But that's true for everybody but the federal government who can, you know, print money to monetize the debt. I think that's another thing we've seen as part of the pandemic is this, you know, when debt-to-GDP, you know, gets to where it is, it's typically problematic for countries that can't, you know, get away with money printing. The United States government has been getting away with it for the past, you know, a couple years now. And obviously, that's not disinflationary at all to be issuing $4 or $5 trillion dollars of new debt and having the Fed you know, buy it all up is has not been disinflationary, it's been absolutely inflationary.

And I think the final thing that Rosie brought up, and I'm a big fan of his work. He talks about disruptive technology. And I think that's been true for a long time, too. But if you look at what's happened in the economy, in the last 10 years, we've seen a concentration of economic power in fewer and fewer companies. You know, who's disrupting apple today, who's disrupting Facebook today. Facebook and Google are maybe a good example of companies who have their finger on the pulse of who in social media is going to potentially disrupt Facebook? Well it's Instagram then we will just by them. And you know, same thing with Google. And so they've been able to make 1000s and 1000s of acquisitions to essentially shore up their position, their monopoly or duopoly positions that have really prevented from disruptive tech from exerting a disinflationary impact in recent years. And I would say, Amazon is probably another example of this. Who's disrupting Amazon? Nobody. In the pandemic, we saw that you know, sales already off of a huge base, go up 40% or something insane, you know, we've never really seen a company of that size, see that type of growth. And they just have such a strong position in the market that they can't be disrupted. I think we're seeing this in wages, too, with Amazon, there was a good article in the Wall Street Journal recently, that pointed out that, you know, with Amazon paying $18 starting wage in its warehouses. It's putting pressure on every other employer across the country to raise wages. And they're telling, you know, all these small towns, they were telling, you know, the Wall Street Journal, and whoever else cares to ask it, we're paying 12, 13, 14, 15 bucks an hour and we have to go to 18 just to compete with Amazon and try and get workers. And so this is actually feeding through into prices for the first time, since the creation of the internet. We're seeing internet prices increase. They've been in decline for a long period of time as as technology was a disruptive force. But it hasn't been so we're seeing, you know, inflation even in internet prices.

So to me, that also just points to the fact that disruptive technology is no longer that factor that it once was. I think there's one final D and that's deglobalization. That's also exerting an inflationary impact now. I think we saw global trade peak in 2007. It took a hit during the financial crisis and has been in decline ever since. And obviously, Trump's trade war was an important, you know, chapter in that saga of deglobalization. And the pandemic has been another one where I think a lot of countries, especially the US have noticed that this just in time manufacturing is potentially a national security issue. And that we need to go from just in time to just in case so that we don't have the shortages of really crucially important items to the economy and to our healthcare system and whatnot that we've had in recent years. So I look at these three days, and I call them the four Ds of inflation. And I think they're all pointing towards higher inflationary impulses in the years ahead.

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