Erik: Joining me now is Harley Bassman, famously known as the Convexity Maven and more recently managing director for Simplify Asset Management. Harley prepared a terrific slide deck to accompany today's interview. I encourage you to download it as we will be referring to the graphs and charts it contains throughout the 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 at macrovoices.com. Look for the red button above Harley's picture that says looking for the downloads.
Harley, it's great to get you back on the show. I think the subject that's on everybody's mind is okay, inflation, bond yields WTF over what is going on here. Because it seemed for a while like we really were seeing a breakout well above 3% on the 10 year yield. A lot of people were concerned, okay, this is the beginning of the end. The 35 year bond bull market is clearly over. We had a blow off top and it's all downhill in price, uphill in yield from here. But then we got this recent upside surprise on CPI inflation which normally you'd expect that to spike treasury yields much higher, and it didn't. So does that mean that the bottoms in on price and the top is in on yield and we're back to a bond bull market and is inflation really transitory or not? How do we tie this all together? You pick whether you want to start with inflation or bond yields and how do we make sense of those two things together?
Harley: Erik, thank you glad to be back on the show. You know, I've been in the non-transitory camp, the inflation camp for a while. That's a simple U of Chicago grad who believes in monetary policy, you know, Milton Friedman, and you print a lot of money, you print money faster than the growth of the overall economy, you're gonna get inflation and thus we have this. You know, the transitory people, they will be right. Okay. It's just a matter of when. I mean, in the grand scheme of things, we'd like this transitory so they're not wrong. They're just, you know, a bit early. I think you've hit on an interesting concept, which is mentioning inflation and interest rates in the same sentence. I think what's different this time is maybe they're not linked as in the past, for a variety of reasons and the guests might be scratching their head. I think it's possible to say that we're going to have continued inflation that's maybe not nine print, but certainly six till the end of the year. That's pretty easy to to go and say that. The question is well will rates move anywhere near that point? And the answer might be no for that, for a lot of stuff. But not, not least, which is the Fed is happy with a negative real rate. Negative real rates are great for the economy and great for the stock market. So the Fed might well keep that. And the uncertainty of course of this. I'll join everyone else. If the yield curve, that's what we can't figure out. You know, usually the yield curve inverts. And luck spent a lot of time on this because all your guests talk about it, it usually inverse before the second to last fed hike right at the end, here it inverted basically before the first hike. And that's what we can't figure out and the curve is right, we will have a recession. Are we in one right now? Unclear but it's gonna come. And so the market basically is trying to digest this cognitive dissonance of the curve versus your lying eyes of inflation.
Erik: Joining me now is Jeff Snider, Chief Investment Strategist for Atlas Financial and author of the Eurodollar University. Jeff prepared a terrific slide deck to accompany this week'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. Click the red button that says, looking for the downloads just above Jeff's picture.
Jeff, we've had so many guests on the program talking about secular inflation. Inflation not being transitory expecting it to be persistent. And of course, that leads to all kinds of follow on predictions from there. I've been looking for contrary views, and I knew I could count on you for one with respect to the inflation call. So let's dive into your slide deck and go through the big picture of why you see this macro economy a little bit differently than the inflationists that we've spoken with.
Jeff: Well Erik, it's no wonder why so many people have thought that inflation is going to be a continuing problem because obviously it has already been a problem. Consumer prices have accelerated wildly as everybody knows, particularly in the energy markets over the last year. But for me, it was always a question of and we had this discussion last time it was on last year, I think, where was it actual monetary inflation? Is this really inflation? Or is this a transitory supply shock and I know people hate that word transitory because in the modern perception at least, attention spans being what they are, you don't associate with maybe a multi-month or even multi-year period with the word transitory. But yet, in macro timescales, time and again, we've seen throughout history that transitory can last a lot longer than maybe you think it is. So we start with the fundamental possibility of whether or not consumer prices were rising as being caused by excessive money printing, currency, whatever you want to call it, or through other reasons. And for me, the monetary system did not change at all in 2020 and 2021, despite the fact the Federal Reserve went nuts with quantitative easing. But the monetary system has been telling us all throughout the last couple of years that it was not inflation, that it was a transitory supply shock. And now the markets are all uniformly describing now in July of 2022 the downside of the supply shock rather than continuing secular inflation.
Erik: Joining me now is Lyn Alden, founder of Lyn Alden Investment Strategy. Lyn produced a terrific slide deck to accompany today's interview. I strongly encourage you to download it as we will be referring to the charts and graphs that it contains throughout this interview. Listeners who find the download link in your research roundup email. Apologies if it may be delayed a couple of hours after the podcast this week due to some production issues. Please bear with us there. Once you've got it though, I think you're gonna love the graphs and charts that it contains. If you don't have a research roundup email, just go to our homepage macrovoices.com and click the button that says looking for the downloads. Lyn, it's great to get you back on the show, I know you've been writing quite a bit about a subject that's very much near and dear to my heart, which is crude oil and energy in general. Why don't we start with the big picture. What's on your mind with respect to energy. I don't want to taint it too much with my own views. And we'll get into some of those other views a little bit later on.
Lyn: Thanks for having me and happy to be here. And so energy is obviously one of the key things affecting all markets, not just obviously energy markets, but also impacting everything else, because energy touches pretty much everything in our lives, financially, and otherwise. And so you know, my view of the energy market over the past year or more has been that supply side issues are starting to come to the forefront. And that this is obviously going to cause significant inflationary pressures both for the energy sector directly and then also for the broader economy. And so, generally speaking, commodities go through these very large CapEx cycles. There's periods of time where you know, commodities are structurally over supplied, prices are low, nobody wants to invest. There even you know, in more recent terms, there could be other reasons why they don't invest like an ESG overlay onto those financial reasons. But for a variety of reasons, nobody wants to invest in the space. But then over time, if that not occurring, eventually you work down the existing supply, right? So wells start to run dry, demand starts to slowly creep up over time, until you go back above equilibrium. And so then you start to get rising prices and then more and more supply comes online. And some of those take many years, you know, for the bigger projects to bring online, until eventually they over build, you know, cause a period of oversupply and low prices again. They start the whole cycle again, and this is a pretty long term cycle. And so my contention for a while now has been that we're entering, you know, a decade of much tighter commodity supply in general and energy supplies specifically. And we're starting to see that manifest this year. And my view is that it won't be a straight line. So I'm not trying to say, you know, chart oil on a week by week basis and make those specific calls. It's more about the fact that, you know, in the years ahead, through ups and downs, that we're looking at structurally higher energy prices, most likely.
Erik: Joining me now is MI2 Partners founder Julian Brigden. Julian prepared an excellent slide deck to accompany this week'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 Julian's picture that says, looking for the downloads.
Julian, it's been a long time. Like last time I spoke with you, you said something nobody else was saying, which is get ready, put your seatbelt on inflation is gonna get serious. And everybody thought you were crazy. What has happened as one of the people who saw this coming, how has it played out? And how's it gone differently perhaps than you were expecting?
Julian: So, I mean, to be honest, it's been more powerful than we thought. And more persistent than we thought. We wrote at the start of 2021, the first report, we wrote, I think the fifth of January or something 2021, that inflation would be the most important variable of the year and indeed, it was. But kind of we got to the beginning of ‘22 and end of ‘21, we were expecting some base effects to kick in. And then just things continued. And I think the problem is Erik is that we've started this process, should I think of sort of non-linearity, right? I mean, the world, we're very used to a world, companies, central banks, and it was interesting listening to the Sintra conference where we had Powell, Bailey, and Lagarde on. And it's really worth listening to, if your readers can listen to this. You know, they talked about the world structurally changing now, right? Structurally changing. And I think, we're so used to as market participants since the Great Moderation started in the mid 80s, this kind of period of relatively benign, relatively predictable, relatively forecastable, if you want to call it the nice sine wave around the long term trend of economic growth, where, your grower kind of two and a half and central banks come in and cap a little bit and we roll over to sort of half and then they cap it a little bit on the bottom. We kind of stay in this is predictable. So this increasingly volatile world where things just don't respond in the way that you had thought, right?
And even we who said we were extraordinarily aggressive on the inflation story, we're caught out by just how powerful these forces appear to be, because base effects should have started away on inflation starting really at the end of the last year, and didn't and so something else is totally going on. So then you have to sort of step back and go what is it? So is it companies just deciding after 30 years of never being able to push through price increases to go like, screw it, now we can jam through it? I think there's an element of that, right? Or is it just all these normal relationships that we assumed that would happen? Break down? I mean, there's a great chart. So as you can see from the next slide on page two, you can see this excess stimulus model, where you look at the breakout of inflation, right? And you can, you can take this thing back to 1926 I think, that's quite a long time, not even you and I have that old Erik. And you look at a range of typically inflationary tops being between max between like 5.4 and 6.4% base CPI in the US. If you break that, the lowest next print that we saw, was 9.4. And the average was over 13%. And there's been very few periods of that Erik. But the point is, it's material, right?
So things have just totally broken down and the world isn't acting normally. I think it was I said, I think that Sintra conference call was hugely important. Because all three central bank governors, all acknowledged that this concept that we are necessarily returning back to that nice benign world where you had globalization, high productivity, all of those factors weighing continuously on inflationary pressures, maybe over for quite some time. And I think that is material. So look, I can see some signs of benign inflation or should we say, peaking inflation, okay. In the US some, but I think there are, I don't think it's necessarily the case that it's a guaranteed and in fact, we've got some models that suggest and maybe I'm being a bit too cute, but they go back to the 1960s. But if I look at the size of the stimulus, and I think this is really the key point here, and you can look at that the next slide, and you can see that. You can see that if I look at the stimulus and the size, it was five times bigger than anything that we've seen in postwar history Erik and it suggests when you use it to try and forecast inflation, it doesn't see a peak until Q4. Right now, I don't want to get too cute on this. But you can see it's actually measuring what they call detrended core CPI. So is looking at the change over running baseline. So in actual fact, that peak is where it shows sort of five or six on the right hand side of the screen is actually a nine and a half. But the point is, is even if some of these other factors start to weigh in, I think we're looking at extraordinary inflation pressures and high sticky inflation pressures, probably well into Q4. And the implications for other assets are pretty damn clear, I'm afraid.
Erik: Joining me now is 42 Macro founder Darius Dale. Darius prepared a terrific and very extensive 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 Darius' picture that says looking for the downloads.
Darius, the last time that we had you on macro voices was January 13 of 2022. The S&P was at $4700 or so just a little bit off of its all time highs. Everybody was just singing the Goldilocks story of how everything was great. You actually used the word crash to describe what you thought might be coming for the stock market in 2022. I think you're the only guest in that timeframe that we've had who used that word. So biggest question in my mind is okay, you definitely get some credit for seeing that something was coming. But I think that what we've seen so far has been a very big sell off. But frankly, it's been pretty orderly. So is the crash that you were expecting. Did that already happen with the big sell off that we've seen or is the crash yet to come? And if so, how bad could it get?
Darius: Hey Erik, thanks for having me back on. And I really appreciate the very kind introduction. You know, I don't consider myself there was others making crash calls back then. But we certainly I believe we came to that conclusion through a variety of very rigorous and repeatable quantitative processes. And so, I'd love to unpack them in terms of what they're seeing today. Because obviously, you've either made money on the crash call or you didn't at this point.
Erik: Ok so think the crash is over then?
Darius: No, absolutely not. I think we're sort of, you know, let's call it inning five to six maybe in terms of the market cycle downturn. In terms of the market pricing in what we think are simultaneous slowdowns in liquidity cycle, growth cycle and profit cycle. I think and we can unpack these things in either order. But I think we're probably somewhere between inning four or inning five in the liquidity cycle downturn. I think we're somewhere similarly in inning four to five of the growth cycle downturn with a significant slowdown ahead of us still. And we're likely, somewhere between inning one and two of the profit cycle downturn. And I think the earnings recession is not something that should be discounted by the average investor, and in terms of materializing over the next several quarters.
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