Transcripts
Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.
Erik: Joining me next on the program is Dr. Lacy Hunt, Chief Economist for the Wasatch-Hoisington Treasury Bond Fund.
Dr. Hunt, I’m so excited to get you in the program because we’ve had so many notable people calling for the end of the 35 year secular bull market in bonds, and a lot of guests we’ve had in the this program haven’t really wanted to take sides on this issue. I think you’re not going to have that problem because you have a very strong view. So, is the secular bull market in bonds really over? And if not, why not? And particularly, I know in the slide deck that you send us, there’s an excellent slide showing the velocity of money that’s been in freefall, not just since the great financial crisis, but really since the late 90’s. So, how does that play into the story, and how does it relate to your expectations for the continuance of this bond market?
Lacy: My view is that the secular low in long treasury bonds is not at hand- doesn’t mean that rates cannot go up, they have gone up quite a number of times since 1990 when this bull run started, but they’re not going to be able to stay up. The economy is too fundamentally weak.
The main consideration for believing that the trough is not at hand, is that nominal GDP growth and also the inflation rate is not yet at its secular low. There have been many transitory swings that will continue to be transitory swings, but the critical factors that determines the nominal GDP of both working lower experiencing considerably slower growth and money supply, and at the same time the velocity of money is in a major downtrend.
Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.
Erik: Joining me next on the program is Professor Steve Keen. Steve is of course Professor of Economics at Kingston University in London. Steve has also been probably one of the most prolific and popular guests that we have had on the program. So, if you enjoy today’s interview, I strongly recommend that you go back, Steve has been I think either two or three times on the program before and those interviews are as relevant today as they were when they were recorded. So, Steve I think we should start with the French elections because that’s been on everybody’s mind and you certainly are in the right neck of the woods to cover that. How do you see both the situation with the first election going the way that it did and probably more importantly in terms of the follow-on, how does this frame the overall picture of European contagion risk, you know, are we still looking at Brexit having been the beginning of the end for the EU or would a Macron victory maybe suggest that things are coming back together?
Steve: No, I think Macron is just a continuation of Hollande by another name and somebody who actually supports the Neo-liberal economic policies rather than being forced to do them, this saline was done by the European Union and its Maastricht treaty rules. So, whatever, because the issues are still there with the Euro, hobbling France over the policies and limitations on government deficits, the attempt to cut spending with austerity and so on and every, when you attempt to save, the very dollar you save is actually a dollar less in GDP because dollar less expenditure is a dollar less income, so it’s totally counterproductive policies because Macron is likely to follow those policies and actually enhance them with his ideas to sack large numbers of public servants and try to balance the budget even faster, he will simply amplify the support for Le Pen at the next election if she loses the runoff election and because that’s still not necessarily a given because even if the polls called this election very accurately, the next one depends upon who turns up to vote for their less unpopular candidate and they only if Le Pen is guaranteed to have her full support continued, there is no necessary guarantee that Macron is going to pull support either from the centre-right or the centre to extreme left and he needs to do that to beat Le Pen in the next round, so but if he doesn’t, she will be back in five years’ time stronger than ever.
Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.
Erik: Joining me next on the program is Martin Armstrong from Armstrong Economics and Martin thanks so much for coming on the program, I'm particularly interested to get your views on equities because we've had so many bearish guests, we've been looking for someone with a well-considered and intelligent bull view to counter that.
But before we go there why don't we start with the U.S. dollar because I think that some of the international capital interactions are going to play into your equity view. So, what do you see in the U.S. dollar? Some people are saying it's rolling over, the rally is done, other people are saying it's just taking a pause.
Martin: Now it's just basically in a temporary pause right now because of the French elections, actually you have people that are just diehard pessimists and you have other people that are optimists and. In the case of the euro the optimists, it's more like-- I used to have an old professor who explained the difference between the two, he says they're on top of the World Trade Center and a good wind blows them off, he says pessimist immediately starts praying, the optimist says he’s passing the four fourth floors well so far so good.
Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.
Erik: Joining me next on the program is noted author Danielle DiMartino Booth who wrote of course the book Fed Up which has gotten a lot of attention recently. Danielle, I read your book cover to cover this weekend and I'm really glad that I did because frankly it's not about what I thought it was going to be about and I found it much more interesting than I expected. I want to come back to that later but I just want to share with you, reading the book just kept reminding me of this movie that I saw years and years ago it was a documentary about the space shuttle Challenger disaster and of course NASA’s party line was this was unforeseeable it was just a horrible unforeseeable terrible disaster.
As it turns out there was actually an engineer who at every turn was trying to warn people saying look there was badly scorched solid rocket boosters, there was blow by past the O-rings that clearly indicates that we have a flight risk problem, we need to do something, there was just one problem, this wasn't one of NASA’s Ph. D. scientists, this guy only had a master's degree he was a lowly engineer and they would not take him seriously.
Danielle, you are that guy, but twenty years later at the Fed and it's not O-rings things this time, its housing crisis and it's amazing it was amazing to me reading the book.
Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.
Erik: Joining me next on the program is Lance Roberts CIO and Clarity Financial and executive editor of realinvestmentadvice.com. Lance I really appreciate your coming on the program, I've been looking forward to this one and I just want to acknowledge for our listeners something I really respect about your style is I talk to a lot of our guests about this phenomenon that as far as I'm concerned, this whole bull market that we've seen since 2009 has really been driven by Fed liquidity and I get lots of head nods and mm-hmms and so forth. Your case you just go straight to let's put together a chart book and talk about hard data look at the charts and graphs.
So, I strongly recommend that our listeners download the book of charts that you sent us and why don't we jump right into it and talk about this because I think you share my view that this whole bull market has really been driven by liquidity but why don’t we start with page three of the download, talk us through this, what are we seeing here and is there any reason to think anything other than central bank liquidity is what's been driving this bull market.
Lance: Well you know the answer to your question is yes, a big driver has been central bank liquidity and of course from that there's been some other inputs in that which has certainly been beneficial to the extension of the bull market but if we extract out the liquidity that was being brought in by the central banks and of course the QE program specifically what you'll see is that the S&P would be trading probably closer to 15 or 1600 rather than 24 or 2500 and that's the extent to which the Federal Reserve interventions have done by injecting liquidity through the system.
But it's not been just the QE programs, there's also been a variety of other bailouts that have occurred along the way that have also helped fuel growth in terms of earnings and again there's a big differentiator between what's happened in the economy, really since 2009, if we take a look at earnings growth which is what happens at the bottom line of a balance sheet, that's grown by over about 230% during that nine-year period that's in total right.
So, if we go back to 2009 and look at earnings growth in total since that period of time, earnings growth at the bottom line has grown by about 230% but revenue what happens at the top line has only grown by about 23 to 25% so what's happening inside of balance sheets is because of the repeal of the FASB rule 157 which by the way is still repealed and allows banks to mark assets to fantasy values rather than having to mark them to fair market value, this has boosted earnings, this has created a lot of growth, of course, the wage cuts and cost reductions and productivity increases by corporations by tax write offs etc. have all gone down to the bottom line and created a push in earnings that really is not as a real as it sounds when you consider the slow growth in revenue that you've had at the top line.
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