Transcripts

Erik:     Joining me now is GaveKal co-founder Louis Vincent Gave. Louis, I've interviewed you quite a few times over the last several years. And if there's anything I've learned, the best way to approach an interview with you is take whatever the one really big macro theme of the day is and ask you to sort of frame that in terms of what the markets are telling us. Just one problem. I don't know how to decide! There's so many big macro themes, from geopolitics to energy to everything else. What's the biggest theme in your mind and what should we talk about this week?

Louis:    Well, first thanks again for having me Erik. I really enjoy our conversations so thank you so much. To your question, to be honest, I'm as confused as you are. And I want to say this and really no modesty today. It is very hard to parcel things out. As you point out, you want to strip out the signal from the noise and all that stuff. But I think there's so many moving parts right now that I think any investor, the first thing we have to acknowledge is to be very humble, to accept that we're going through things that, probably no investor below 75 has gone through and you know, I've got a whole list, I'm happy to rattle off. But, the first thing and I know, you've done a number of episodes on this, but, we're going through the end of the peace dividend, right? I know, you've called it world war three. Some people call it the start of a new Cold War. Either way, we have the end of the peace dividend in here. I love what our mutual friend Luke Gromen pointed out the other day is if truth is the first casualty of war, then bonds is a close second. War is always and has always been inflationary, whether a Hot War or a Cold War. So that's for me as a first important, obviously, big marker. Wherever you care to look in the world every meaningful economy is increasing its defense spending. Whether in Europe, in China, obviously, in Russia, obviously in the US. And military spending is fundamentally unproductive spending. You’re spending money on a bunch of things, high priced items that you hope you never use. So that's a first dramatic shift. Unless you were investing 30 or 40 years ago, you're not used to rising military budgets, you've always had sort of shrinking military budgets.

Now against this, the second massive shift is, most countries are going through a very important demographic transition. Most countries are aging and aging fast. The big pools of excess labor in the world that used to be China, India, Mexico, places where women would have 2, 3, 4, 5 children per women now have less than two children per women. And so we are going through, you know, an aging in our societies, and just looking globally across the world. We no longer have somebody like China adding an additional 20 million workers to the workforce every year. And for me, that's a paradigm shift. I know a big theme of yours has been the energy transition. And it's been one of mine as well, we've talked about this before, my go to line is that economic activity is energy transformed. And really the story of the past 250 years, the story really of rising wealth levels, rising disposable incomes, is fundamentally a story of humanity, always moving to more efficient methods of producing energy. You know, you start with coal, you move to whale oil, you move to oil, you move to natural gas, you move to nuclear. And for the past 10-15 years, we've decided, let's move away from all this and move towards more inefficient energies. Wind, solar, and we need to do this because otherwise we're going to destroy the planet. But in so doing, there's a tremendous economic economy cost and economic cost is, you know, means lower living standards. Higher energy prices means lower living standards. So we're going through this energy transition. And that's another big uncertainty out there.

But for me, perhaps the biggest, most important structural question is whether the monetary system such as we've known it for the past, really 70 years since World War Two is in the process of changing and you and I have talked about this before, but cutting off the biggest commodity exporter, namely Russia from the US dollar system, I think basically amounted to cutting our nose to spite our face. I know we don't like Russia, I know they're bad people. I know all these things. But the fact that we're now seeing deals for oil, deals for iron ore, deals for coal being done in Renminbi, Rupees, Thai Bahts. I think we've started a structural shift and the global monetary system and these things, of course, don't happen overnight. But that to me adds a lot a lot of uncertainty in the world that we live in. And then against that you have all the cyclical uncertainty. So you got these, for me these big four structural forces that add just enormous uncertainty for lack of a better word.

And then you got the cyclical stuff, you've got a Fed that's tightening, while on the fiscal side in the US, you're still running massive budget deficits, municipalities, state federal level of spending money willy-nilly. You have the second biggest economy in the world that had been locked down for three years that is reopening. And a Chinese government, I know we talked about the Xi pivot. Last time around, most people looked at the Xi pivot thinking, okay that was just the opening. It's not just that. It's getting rid of the red lines on real estate lending. It's recapitalizing the local authorities to get local infrastructure spending again. So you got all these things going on. And what fascinates me is that most people you talk to only want to talk about the Fed all day, every day. Because I think as you know, through the years of QE, through the years of zero interest rates, we raised an entire generation of investors to just worry about what the central bank was doing, and to basically build all their investment decisions on that one factor, on what is the Fed doing. I think, given all these forces that I've just described, what the Fed does actually matters less and less. We’re seeing it now right? The Fed is tightening but, meanwhile, inflation stayed strong. And growth in the US is actually not as bad as people thought it would be and growth around the world, as you know, and inflation around the world are turning out to be still decently high. So I think against all this uncertainty, you have to be very, very modest. You have to look at the markets and say what messages am I getting from the markets today?

And personally, the message I'm getting is, bonds are done for. We’re now entering a second year where US Treasuries are losing money. OECD government bonds serve no purpose in portfolio. We're now entering the second year where emerging market bonds are up, outperforming OECD government bonds. For me, these are important, important messages. Energy stocks are volatile, but they continue to do pretty well in spite of an energy price that has remained stubbornly low. And that, to me is a big mystery. Why isn't energy rallying more but again, we have to be modest. There's dramatic shifts going on in the economy and to think, you know, I love to work with decision trees. It's like, okay, you ask a question, you go, yes-no, etc. But when you have 5, 6, 7, 8 questions and each time you have a yes-no answer, your decision tree gets to be too many branches. It's like being a chess player. I was a very modest chess player in my youth, I could think maybe three, maybe four moves ahead. The great chess players think eight, nine moves ahead, and they've got everything mapped out. Unfortunately, I was never that guy. And so um, in all honesty, I find today very, very tough.

Read more ...

Erik:    Joining me now is Dr. Anas Alhajji, founder of Energy Outlook Advisors and noted keynote speaker and general expert on energy markets. Anas prepared a 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 above Anas's picture that says looking for the downloads. Anas, it's great to have you back. I wanted to ask you back because we've just passed the one year anniversary of the beginning of the Ukraine war with Russia. Let's start with the lessons learned to date from this experience in with respect to energy markets. What were the surprises? What have we taken away? What have we learned?

Anas:  Thank you very much for having me, Erik and it's always a pleasure to come back to MacroVoices. We learned several lessons in oil and gas and other lessons in even macro economy and related issues like in international trade. But when it comes to oil, one of the main results of what we've seen in a year of conflict is the change in the direction of international trade in energy sources. And specifically, we are talking here about oil, gas, and coal. Just to give you an example of this change. India's oil imports from Russia in December 2021, were only 1% of the total imports, the total oil imports of India. So it was 1% in December 2021. In December 2022, it jumped to 21%. And right now, it is about 24%. Simply because we have this diversion where oil start going to Asia instead of Europe. For China and by the way, and this is a good lesson for listeners right now, because this is one of the most important outcomes of this war is we have to be very careful with the data. And I will emphasize this point one more time. And the reason why because whenever we get data from India, or China, or Saudi Arabia, or any other country, these are the official data. But the market is somewhere else because we have a massive black market on one side. And some countries like China are importing the Russian oil through a third party. So they show that they are importing oil, let's say from Malaysia or Indonesia or other country. But really that is Russian oil.

So if you look at the official Chinese data, we see a jump in oil imports, until almost June or July. And then it dropped and people think well, China is not importing that much from Russia, while China basically is importing massive amount from the black market, and another amount coming from third countries. So we've seen this change in direction, while we've seen African and Middle Eastern countries, exporting to Europe to replace the Russian crude. So the first result is the change in direction of international trade and energy resources that applies to natural gas and it applies to coal to. The second result is the filling of the Chinese strategic reserves. China used most of its strategic reserves in 2021 to prevent prices from reaching $100. And they were hoping that because of the seasonality that global oil demand will decline in the first quarter of 2022 and with that prices will decline and with that they can refill and Putin goes to Ukraine, prices go through the roof and the Chinese got stuck. But they got lucky. Lucky on two fronts. First, they were able to get the Russian crude. And the second, they had the lockdowns. So from one side the demand declined substantially. On the other they were able to get the cheap crude they were dreaming off. And they were able to refill their commercial inventories and their strategic petroleum reserves. Until the end of the year of last year 2022, they had 1.1 billion barrels of reserves, that's commercial and SPR, underground and above ground. And although the commercial inventories declined in recent months, the level of inventories of total inventories in China today is higher than that of the United States, despite the fact that the US consumption is higher than that of China by five to 6 million barrels a day. So the first result is change in direction of trade. The second result is the filling of the Chinese strategic reserves. And as you recall from our previous Interview, the implications of the Chinese filling up and reusing that are huge.

Read more ...

Erik:     Joining me now is MI2 founder, Julian Brigden. Julian, it's great to have you back on the show. I want to start with inflation. A lot of people are saying that it's topped. Okay, my question is, well, we all know that inflation was driven, at least partly by pandemic effects. That's probably why we got so high. But even if it's topped, does that mean we're going back to 2% or does that mean that we're really in a new regime that is going to be more inflationary?

Julian:   So I mean structurally, we don't know that for definite, right. But if you ask me the likely path of the dots over the next decade, and are they structurally inflationary? My answer would be probably yes. Now, I mean, my analogy has always been the sort of late 60s into the 1970s, to some degree. And even then, in that period we saw four big waves of inflation. The point is, if you never rang, we never were truly successful in ringing out the inflation. And so each sort of low was slightly higher after that initial burst. And that's kind of the world I think we're living in. Right here, right now that would almost certainly suggest that we are and this has certainly been our view. And since late summer, last year that inflation has topped, at least for now. And it is coming down. I think there is a couple of things that the bulls don't quite understand about the relationship between inflation and nominal GDP. And how just even if we were to wake up tomorrow morning, and inflation would be zero, the Fed would still be raising rates. Because I think, the equity boys myopically focus on that inflation component of nominal GDP and don't look at nominal GDP in aggregate, that's very important. So bottom line, I think  it is coming down. Certainly headline, I can see quite a lot of stickiness in core and services. And that means the labor market has to be addressed and that's a different question Erik.

Read more ...

Erik:     Joining me now is ECRI co-founder Lakshman Achuthan. As usual Lak prepared a terrific slide deck to accompany this week's interview. You'll 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 at macrovoices.com. Just go to our homepage, click the red button above Lak picture that says, looking for the downloads. Lak, It's great to have you back last time that we had you on I think last summer sometime, you had growing conviction toward a recession call. And it seemed that I that was my view at the time, too. It still seems to me like even though maybe we've got Jay Powell making a victory lap claiming that he is achieved some sort of soft landing. I'm not necessarily persuaded that there's still no recession coming. I think it's just taken a little bit longer than I expected. How do you see it? And what are the cycles telling you?

Lakshman:    Erik, thank you so much for having me back. We do still have a recession call on that hasn't changed. And as you said, we did talk last summer, we were talking about how we were building that recession call. The conviction around that recession call. And if you'll recall, it was predicated on our leading indicators of major sectors of the economy and, and we had a strong downturn in the goods sector, in manufacturing and construction. And, you know, that's pretty much happening. That's that hasn't gone away. And on top of that, you get more aggressive fed tightening. I think most people's recession forecast that we saw last year, was built upon the kind of surprisingly aggressive fed. You know, quote, unquote, surprisingly aggressive fed starting around July when they started going 75 basis points per meeting and hiking. And that's very different than our recession call our recession calls not built on that.

And so, as you mentioned in the in the lead in with the Fed, approaching some sort of, you know, victory lap or whatever, and then the market kind of getting excited about the potential for that. There's the idea that there's a soft landing. Now, that may be possible if your entire recession call was predicated on the Fed tightening. But if, like ECRI (Economic Cycle Research Institute) that I don't think there's a lot of places like ECRI actually, that we're doing it based on the drivers of the cycle. Those are still cycling down. I mean, our analysis is different, because we've been doing this a very long time for several generations. And so there's a lot of advancements in how you monitor the drivers of the cycles. And watching those the recession call is in full effect. And we should get into that. I mean, I think that's an interesting part of our of our discussion that we could have today.

Read more ...

Erik:     Joining me now is Eurodollar guru and Eurodollar University founder Jeff Snider. For anyone who's not familiar with Jeff's work, he is known for his terrific graphs, charts, and slide decks. And this week is no exception. So be sure to download Jeff's slide deck to accompany this interview. Registered users will find the link in their research roundup email. If you're not yet registered, just go to our homepage at MacroVoices.com. Click the red button above Jeff's picture that says "Looking for the downloads."

Jeff, it's great to have you back on the show. Before we dive into the slide deck, I just want to start with the high-level picture because inflation is on everybody's mind. We've had a number of people who have expressed this transitory view that basically inflation was entirely about supply chains and the pandemic ending. It was a flash in the pan, it's all going away, and we're headed back down to 2%. There have been some other guests who have said, "Well, wait a minute, we've got a new inflationary trend. Reshoring of critical industries is going to be inflationary. There are other secular inflation causes that are going to allow us to come off of those high numbers after the pandemic, but we're not going back down to 2%. We're going maybe down to 4% if we're lucky." Then just last week, we had Alex Gurevich say, "No, forget about 2%. We're going negative. We're headed into a deeply deflationary event." Now, the last time we had you on, you said, "Well, it's a little more nuanced than all of that. The price increases are probably likely to continue, but it's not monetary inflation that's causing them." So this is all kind of a big jumble in my mind. Before we dive into the slide deck, just give me the big picture rundown. How should we be thinking about inflation now in these post-pandemic times?

Jeff:    Yeah, well, first of all, thanks for having me back. I always look forward to coming on MacroVoices and chatting with you because we get to talk about all this interesting stuff because we live in such interesting times. And I think that is probably the big question on everybody's mind. We went through a consumer price shock that lasted probably longer than most people were expecting, myself included. And now, maybe we're seeing some progress in it, but what really comes next? Is it just a transitory disinflationary period? Are we going to see long-run trends rise well into the future? There's, I think, enormous questions and uncertainty, I think it's certainly in the public mind about what really comes next.  Now, let's see CPIs starting to come down a little bit. I like how you said that my view is usually more nuanced, because usually, over the long run, the way consumer prices behave can be very different from one time to the next. But as you already pointed out, from my view of the monetary perspective, that kind of precludes long-run secular inflation, because we still don't see the type of money excess that you would need or require, in order to lead into something like the 1970s all over again. Because really, that's all inflation is, genuine inflation is nothing more than excessive currency creation, chasing too few goods. 

I fall into the camp where you, and so many others, think about consumer prices over the last couple of years as being transitory because they were due to simple economics, where demand shifted, in part by government intervention, went further than supply could service. Therefore, again, simple economics, prices had to adjust. But in adjusting to higher prices, it creates this continuity in the overall macro global economy, which has to be worked out one way or the other. Either, the economy has to come roaring back at some point to allow for consumers and businesses to pay for these higher, especially basic necessity costs. Or those higher prices will be the cure for the higher prices, because eventually, the economy will have to fall off because of too much activity being redirected to the least productive parts of the system. And I think that's what we're seeing right now. We can get into the slide deck for it, but big picture, in general terms, it's I don't see anything that looks like the 1970s.  In fact, this is a question going back to the 1970s that officials and economists had wrestled with at the time. And I always use this quote from former Federal Reserve Chairman Arthur Burns in August of 1971, that quite auspicious month back then, where he recognized that, you know, okay, we had consumer price increases, we had genuine inflation up until the recession of 1970. And then everybody expected that the recession would tamp down on those consumer price pressures. And after we got through the 1970 recession, that would be the end of the whole affair. But that's not what happened. And so in August 1971, Burns testified to Congress. He said, "A year or two ago, it was generally expected that extensive slack and resource use such as we've been experiencing would lead to significant moderation in the inflationary spiral. This has not happened either here or abroad. The rules of economics are not working in quite the way they used to," except he was wrong. The rules of economics were working fine, what he was missing. 

I think what a lot of people are missing today is the underlying monetary issue. Burns and the Federal Reserve back then, they had no idea what was going on in the Eurodollar system. They really didn't have much idea what's going on in the banking system, either except that the banks were making tons of new loans all the time. And that was what was creating the next wave of what will become the great inflation. But without that monetary expansion in 2022, into 2023, we should expect, as Burns was in '71, that if we do have a recession this year, and I believe we will, that should be enough to reduce the supply shock pressures and bring consumer prices back down. But the question is, what does that mean? Does it mean that consumer prices or the CPI goes back to 2%? As you alluded to? Or is there a little bit more nuance there, where consumer prices might fall a little bit as we go through maybe a deep recession, and then come back up to more of a lower and disinflationary level in between? I think that's the major question that we really should be wrestling with right now.

Read more ...