Transcripts
Erik: Joining me now is Alhambra Investments Chief Investment Officer Jeffrey Snider. Jeff has prepared a terrific slide deck to accompany today's interview. Registered users will find the download link in your research roundup email. Now if you don't have a research roundup email, it means you haven't registered yet at macrovoices.com. Just go to the homepage at macrovoices.com Look for the red button that says looking for the downloads.
Jeff, I am really really looking forward to this interview with you because you are one of the absolute smartest guys that I know and you particularly understand the dollar funding system internationally. And for any listeners listening who are perhaps new to MacroVoices and are not aware. At macrovoices.com/edu for Eurodollar University, you can find a detailed series where Jeff explains the entire international global US dollar funding system, the Euro dollar system, which I think is going to play a role in today's discussion. The topic of which will be inflation and particularly Jeff, just about all of the smartest macro guys I know have kind of flipped from the deflation camp into the secular inflation camp.
Just last week, we had Ole Hansen on this program describing how the lack of investment in oil producing resources is likely to lead to a very significant oil price shock to the upside in coming years. And of course, oil prices, energy prices are one of the biggest drivers of inflation. I think we've gotten to the point Jeff, where the last two men standing are you and Dr. Lacey Hunt. We're trying to get Dr. Lacey Hunt back on the program. Our producers are working on that. But let's start with our own Jeff Snyder, who knows the Eurodollar system. So well. Why is it Jeff with everybody else saying hey, look, secular inflation is just so clear. There's so many reasons to think that the MMT crowd is going to keep printing money, debasing currency and so forth, has to lead to runaway inflation someday. You're saying no you don't see it? How come?
Jeff: Well, there's two things here Erik. By the way, thanks for having me back on to try to explain what's going on here. Because I think, you know, inflation is the one topic that everybody wants to talk about for very good reason. And when I say you know there isn't inflation happening this year, people are like, wait a minute come on. The CPI is at 6.2% in October, which is the highest been 30 years. How can you possibly say there's no inflation? And the answer is we have to define our terms. We have to we have to be specific about what it is we're actually talking about. And the one part of it is what you just said, Erik, which is, you know, debasing the currency, money printing, and that gets to the heart of what we're really want to talk about. But there's other things involved too, specifically to start with, you know, when we look at the CPI. Is the CPI always talking about inflation? Is it always reflective of actual inflation? Or is there possibly very different underlying circumstances that could be creating consumer price bubbles or consumer price deviation? That's the first thing.
When we look at the CPI, is the CPI really just an inflation index or is it a consumer price index, where consumer prices could be moved by other factors that aren't inflation? And you know, it's understandable why people would think that it's only the other. That CPI is always inflation, because that's really how everybody talks about it. And it's true, not just to the public, but also central bankers and economists. You know, they do all sorts of studies, for example, about the CPI and what's the best predictive model of the CPI because, you know, obviously, we have a good interest in trying to figure out. If we do see consumer prices rising, is it going to last? Is it going to go on forever? Is there any sort of secular trend there? And so these academic models, take a look at the CPI is if every CPI is exactly the same and so their conclusions are usually about what is the best predictor of the CPI? And I don't think that's really the right question to ask because, again, there are different types of situations where consumer prices could be reacting or be responsible from other different factors. Very different factors that lead to very different conclusions and all sorts of different implications.
So if we get into the slides here, that's really our goal here. It was started on slide three is we look at the CPI, we look at consumer prices, what we're really interested in is, is it just consumer prices rising or is inflation responsible for why consumer prices are going up? And what the you know, the academic, economist, you know, mainstream orthodoxy tells you is that there really isn't a good way to sort out predictive CPI values. It's really pretty much a crapshoot. They figured the best methods is by using professional economists who use econometric models. You know, things like the blue chip economic survey because they have a more, at least a decent track record of predicting the CPI.
And you look at some of the other factors, they looked at, you know, some of the other ways of predicting consumer prices. Among the worst they say is financial markets, or bond yields, which is kind of a, what we're trying to get at here, which is do bond deals predict the CPI or do bond yields react only to inflation in the CPI. And so that's really where we're gonna start. If we go to slide four, throughout history, consumer prices have been driven by very different factors at very different times. We're very much familiar with the 1970s and the great inflation. And so we're kind of led to believe that anytime the CPI accelerates, it's because of inflation. As you said before printing too much money, currency devaluation, that kind of thing. But in truth, you have to go back before 1955. But usually, when the CPIs went up, it had nothing to do with monetary printing. It had nothing to do with money printing or excess currency. And a perfect example of that is 1950-51.
We had what was essentially a very classic supply shock, which was, you know, the North Koreans invaded South Korea on June 24 of 1950. Within a couple of weeks, American consumers went to every store they could find and started buying everything imaginable, because they understood that pretty soon, the US government was going to start redirecting economic resources until the warfighting effort when the US finally joined the Korean conflict. And so it was very much like World War II where consumers understood that the availability of goods is going to be restricted. And so it created this massive bottleneck, where consumers went absolutely nuts buying everything they could possibly buy, while it was still available. At the same time, the supply side was not able to keep up with that demand, because number one, it was a shock or a true shock in the fact it was unpredictable. But also as more and more resources were taking away from the consumer sector and channeled into the defense industries. It was again, supply just could not keep up with demand.
And so in terms of small economic prices, from around July 1950 to February 1951, the Consumer Price Index accelerated to at that time, which was at an annual rate of more than 12%. So it wasn't money printing, it wasn't you know, the currency devaluation even though the Federal Reserve was convinced that it was. The Federal Reserve actually provoked a political crisis to gain its independence from the Treasury Department, because those at the Fed were absolutely concerned this rise in consumer prices was inflationary, therefore, it was going to continue unless they were able to gain independent monetary policy. But they again, they got the inflation thing wrong. They didn't look at the CPI as a supply shock. And the level of CPI puts what we're seeing today to shame. Again, the annual rate of 12%. That was a massive burst of consumer price inflation. But it wasn't really inflation. It was actually just a surprise shock.
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.
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