Transcripts
Erik: Joining me now is Ole Hanson who heads up commodity market strategy for Saxo Bank. Ole has prepared a fantastic slide deck for us listeners. You'll find the download link for the slide deck 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 that says looking for the downloads.
Ole before we dive into the slide deck. I know you've been reading a lot about inflation. I don't know if you caught David Hay on this program, recently coined this phrase greenflation, which I think perfectly explains how the goals of ESG are wonderful, but the way they're going about it by villainizing the energy industry is really I think, setting us up for a big price shock in the future. Did you catch that interview? And what are your thoughts generally on secular inflation?
Ole: Well, good afternoon, Erik and thank you very much for having me and inviting me back. I fully subscribe and we as experts fully subscribe to the to the non-transitory inflation outlook. And the energy surge that we've seen this year. Our general commodity surge was seen as part of that process. Obviously, we come out of the pandemic, we've seen the global economy, which has been absolutely overstimulated search and demand for power around the world. And we end up with shortages all over the place. But part of that is also the transformation and then the intense focus. You can almost argue that it's quite clear that back in the 50s, and 60s, we had an arms race. It was all about developing nuclear technology and governments were throwing billions of dollars into it.
This time around, we have another arms race, and that's the climate. And that's basically leading to billions of dollars being thrown into those efforts. And you can sometimes worry a little bit that that money not being used in the in the smartest way. But it is obviously also trying to send signals to the market then signals to population that something is being done. But we've seen this year how, especially in Europe, and also in Asia, how we suddenly came short on power because we didn't have the gas we need and the wind and the sun was not producing the amount of energy that we had expected. And it just highlights how we can be left exposed and in the coming years is a development, we continue to see because the transformation will require a lot of energy, it will require a lot of mined metals. And if the companies are producers, mining companies aren't being villainized. And banks are not prepared to lend him the cash or investors not prepared to put the money. And then obviously we do have a transformation which is just going to go become ever more expensive.
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. We had the big day today on Wednesday afternoon. We're recording this the day before this podcast airs with the Fed announced that they're intending to do what? Why don't you give us the full briefing of what the Fed did today and what it means and what you see on the horizon?
Mike: Well, I think the easiest way of just describing what happened today with Jerome Powell's testimony in the release statement is that the Fed came out more dovish than I think people had broadly expected them to. They indicated that yes, they will begin tapering. They have the ability to either back off or to accelerate against them. But I think the most important piece of information that came away from it was the Fed's continued emphasis on the fact that they believe inflation is transitory, and importantly, even in the labor market, which has traditionally been thought of as a key driver of the Fed's behavior that they do not see us as having normalized or come anywhere close to reaching full employment. And they're largely discounting many of the wage pressures that they're seeing.
You know, Powell was relatively humble in terms of the certainty of where they are, but I think it was somewhat unequivocal that this was a very dovish presentation. And the real question, I think is going to be how credible does the Street view the uncertainty around whether they should hike or not. Right? The direct words were when we reach full employment, then we'll figure out whether we're addressing the inflation components. Whether we've adequately met the inflation objectives. And I think that's a pretty important statement for one of the very first times you almost would have expected something like this out of you know, if a labor economist like Yellen, but Powell very clearly came out in favor of let's let the economic environment run hotter, as we tried to get people back into the labor force.
Erik: Joining me now is David Hay, founder and Co-CIO of Evergreen Gavekal. David, it's great to get you back on the program. I've been asking everybody the same question as an opener, which is okay, inflation, are we talking secular structural inflation, which is what I think or do we believe Janet and their friends in the government who say, it is transitory. So I want to get your take on that. But particularly, you've been writing about something called greenflation. What the heck is greenflation?
David: Well, firstly, thank you very much for having me on the show. It's a privilege, especially since I just listened to your podcast last week with one of my heroes, Luke Gromen. And he did not talk about re-inflation last week, even though he's written on that somewhat. So I appreciate the opportunity to talk about that. Because I think it's hugely important. And I think it plays a significant role in this debate about whether inflation is transitory, as the Fed is saying, or it's much more enduring, which I'm with you on that and Luke. And, you know, frankly, based on the Fed's forecasting record, which is horrific. And I think the fact that they're saying it's transitory is probably a pretty strong indication that it's not. Maybe once they finally concede that it's here for years, that'll be the time to take the other side of the trade.
But basically, the idea of greenflation has to do with the reality that the planet is involved in a great green energy transition. And just one key element to this, which I think is inarguable is that this is the first time in human history that we're moving from more efficient fuel sources to less efficient fuel sources. And I'm aware of, you know, of all the environmental reasons why we're trying to do that. But that doesn't change the fact that it's extremely daunting to make this happen, and especially on the very ambitious and I'd say, overly ambitious and unrealistic timeframe that policymakers around the world are trying to achieve. And we're seeing the wages of this already, with tremendous energy inflation occurring in Asia and Europe. I think most Americans are unaware. We have natural gas that's doubled. Natural gas is trading for around $6 per million British thermal units, MMBtus, but in Asia and Europe it's $30 or more. So you've got, you know, really a shocking amount of energy inflation occurring and real risks of rationing, and outright shortages that could take lives if the winter is cold as a lot of forecasters are predicting in Europe.
So, you know, we've got this war on fossil fuels, where you get a number of American cities that are trying to prevent natural gas being utilized, and fighting the transmission of hydrocarbons, you know, pipeline shutdowns, even existing pipelines. There's the New Yorker gave the platform to a Swedish professor. He's written a book on how to blow up pipelines. He's avidly recommending that people go out and blow up energy pipelines. It's just unbelievable that he would be given that kind of a forum. But regardless, I mean, obviously, we know that US policy is very anti-fossil fuels. So guess what, this is the first time in history that we've seen huge price spikes without a supply response. So we're still around a point in this country where the drilling rig count is inadequate to offset the decline rate in the shale area, which is, of course, where we've had the tremendous growth of both natural gas and crude oil is because of shale. That is, you know, Erik, and a lot of people don't. Shale has an extremely rapid decline rate. So you have to drill a lot just to stay even. And that's hard to do when you've got pressure from your investor base about ESG. And you've also got pressure to not make those investments, but rather to buy back shares, which these companies are doing. So all these things are feeding this green inflation type of thing. And it's not going away, it's going to be with us for years to come. Whether it's right or wrong.
Erik: Joining me now is Forest for the Trees founder Luke Gromen. Luke, it's been since January that we had you on the program. Really great to get you back. I've been asking everyone about secular inflation. Now everybody can see that there is inflation. My question is, is this really transitory the way the government would like us to believe or are we seeing the beginning of a structural inflation that's going to last many years?
Luke: I think it's the beginning of a structural inflation that's going to last many years. I should probably say thanks for having me back on to start. But the reason I think it's structural lasting for many years is I think if you look at a lot of the key factors that have been disinflationary over the last 20 years, 30 years. A lot of them are going in reverse. So you know, whether you go back 10 years, we've seen a disinflationary impulse in oil and commodities, in no small part tied to US shale. US shale has been the biggest marginal producer of oil for the last 10 to 15 years. We are seeing that it is getting hard, if not impossible, to increase production at lower prices. And so we've been talking about peak cheap oil that is a structurally inflationary component to commodities.
I think if you look at another big one, globalization, globalization has been extremely disinflationary or deflationary for 20 plus years. Very clearly that is going in reverse and so if China and US trade was deflationary, or disinflationary, the breakdown of US and China trade relations, it strains credulity to think that that too, is deflationary. I think that's a very inflationary secular inflationary impulse. I think when you look at even things that are a little bit more counterintuitive, to me, I think they also point to a secular inflation. So for example, it's often pointed out that in the US demographics are deflationary that old people don't spend as much. I would question that a little bit, particularly at the consumer level. And the reason I say that is, if you look at US deferred compensation schemes, whether they be 401-Ks, or 403-B's, or IRAs. All of these programs effectively amounted to the sterilization of inflationary US deficits over the last 30-40 years. And in plain English, people could put away 10-15% of their income. And instead of having that income in pocket now, the reward was you got tax deferred status. So you put that money into assets, instead of putting that money in your pocket where you would have spent it and where it would have been CPI inflationary right away.
And so effectively, we were sterilizing inflation with these deferred compensation schemes for 30 or 40 years. Fast forward to today, you've got whatever it is 70 million baby boomers, there's an article in the journal last year, or earlier this year, noting that the estimate is that the boomers control roughly is $35 trillion in assets. And now they're all getting to an age where they have required minimum distributions that it's a technical topic, but for simplicity's sake, and just sort of, you know, good enough for government work, they have to spend about 3% of that money per year. And so again, if deferred compensation schemes were disinflationary, or sterilized inflation that would have been higher for the last 30 or 40 years, and instead, it resulted in asset price inflation, then again, the opposite this $35 trillion coming out secularly is also very inflationary. And so I think there's a number of factors and those are just three. There's probably some others I could come up with. I think they all point in the direction that there is a secular, we've seen a secular shift in the deflation, disinflation versus inflation impulse. So that's some thinking about it.
Erik: Joining me now is Cullen Roche, founder of Discipline Funds. Cullen, it's great to get you on the program. I know you've been on the Market Huddle before. I think this is your first MacroVoices appearance. I want to start with something that's actually been not so much in the financial press but the popular press. Now I know that you are an expert on monetary theory and currency systems. That's what you've studied. That's what you know about. Please help us understand why printing a trillion dollar coin out of Platinum somehow can be convoluted to be a solution to a country that lives beyond its means on borrowed money and doesn't pay back its debt. But seriously, let's try to understand the monetary theory of this because it's in the popular press and nobody's talking about why that would work or even if it would work.
Cullen: So the coin technically from a legal perspective, the Treasury would mint the coin and the Federal Reserve would be able to deposit that coin into the Treasury general account. The way to think of it really, it's like changing the credit limit on your credit card. So if you had a $20,000 monthly credit limit on your credit card, well, what happens with the debt ceiling is that basically Congress decides they're going to spend $21,000 this month, and then we get to the $20,000 limit and Congress is like, oh guys, look, we don't have the ability to actually do this thing that we want to do, because we have this self-imposed credit limit.
Well the coin basically takes that extra $1,000. It deposits it into the account and then all of a sudden, we magically found this money that literally the printing presses already have. And so to me, it's one of these, like legal sort of, you know, loopholes that exists and doesn't really solve anything that is the you know, the root cause of the problem that exists. The root cause of the problem is that the government decides to spend way too much before we actually get to that credit limit. So it's not irrational to have a credit limit, it's irrational to put in a credit limit, and then say, you know, we should only spend $20,000 this month, but we're going to pass a bunch of legislation that requires $21,000 of spending. It makes no sense the way we go about this. And so this should all be done in a more proactive way. If we want to be more, you know, fiscally prudent about the way we go through all of this, that should be done at the congressional level, before they actually appropriate all of this spending that necessarily needs to be funded either through debt issuance, or a coin after the fact.
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