Jeff Snider

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.

Alex Gurevich

Erik:     Joining me now is HonTe Investments fund manager Alex Gurevich. Alex, it's great to get you back on the show on this fed day. We're recording on Wednesday afternoon, just minutes well, maybe an hour after the Fed made their announcement that they hiked 25 basis points as expected. There was also a Fed press briefing and as Jay Powell began speaking, you actually tweeted in reaction to something he said, please tell us about that.

Alex:   It's good to be back. It's always fun to talk to Erik. I am puzzled by the Fed's actions. I listened carefully to the press conference, but it doesn't make a lot of sense to me. I am not one to criticize the Fed, but their statement that "there are consequences of our tightenings, and the full consequences of all our tightenings have yet to be felt" is spot on. Due to policy lag, we cannot fully experience the consequences of the tightenings that have occurred over the last year.  Now, even without the full effects of those tightenings, we're seeing inflation, every possible measure of inflation, decelerating and coming down. And the biggest input to estimate future inflation is inflation itself. So, as inflation is coming down, it creates less and less momentum for future inflation. Meanwhile, the tightening has yet to filter through the system.  I am really stumbled. I don't understand how people could be concerned about inflation at this stage and not deflation. I know I am sounding very forceful. Everything in the markets is a probabilistic statement. So when I say things with such confidence, all I mean is that one outcome is, in my opinion, more likely than the other. Of course, any outcome is possible. But why people right now worry about inflation more than deflation totally eludes me. Maybe you can help me with that a little?

Viktor Shvets

Erik:     Joining me now is Viktor Shvets, global strategist at Macquarie Bank. Viktor was born in Kyiv, Ukraine and has lived in Hong Kong and China for the last 20 years. So needless to say, he has quite a bit of perspective in terms of different cultures and the geopolitical situation that the world now faces. Viktor, it's great to get you back on. I listened into our interview from one year ago, which was also about one month before the Russian invasion of your home city of Ukraine, which at the time when you were born was still part of the Soviet Union. The world has changed quite a lot. In our last interview, we discussed geopolitics. You predicted that politics would no longer contain geopolitics, and the geopolitics would become a bigger issue as time moves forward. Needless to say, you got that call, right. Any particular reflections on the Ukraine conflict and what it means to the global economy?

Viktor:   Well first, thank you very much for inviting me. I still think that geopolitical and social polarization problems that we have been experiencing for the last 10 years will continue to build over the next 10 years, maybe 15 years, maybe longer. I really can't see how politics will be able to control either social tension, polarization tension, or geopolitics for a long time to come. But the interesting thing for me is not so much whether geopolitics will remain contentious, or social pressures will remain contentious. But rather, geopolitics and politics are more of a process. It's not an event. It doesn't mean that we kill each other every day, it doesn't mean that we confront each other every day, it doesn't mean that it blows up every day. I usually tell my fund management friends that it took Hitler 15 years to come to power. So it's a process, not an event. And so from an investment point of view, I think it's extremely valuable to try to identify periods where you think social and geopolitical pressures will really build up and create major problems, economic problems, political problems, disrupt supply and demand. And times when those pressures will be relatively subdued. In other words, instead of exploding, they're more likely to simmer. So the ultimate destination is still not good. I do think those pressures will build. But I think in 23 and 24, there is a possibility and a strong possibility that those pressures will become a little bit less pronounced. And there are reasons for that.

First, if you look at Russia-Ukraine, my view certainly for the last 12 months, was to say that whatever Russia wants Ukraine to do, Ukraine will never accept and whatever Ukraine wants Russia to do, Russia will never accept. That basically implies a stalemate, neither side wins. And yes, you're going to have regular attacks, particularly at the time when the ground is solid. So that's usually in winter or summer, but at the end of the day, neither party can succeed. Ukrainians are not weak, they're strong, and they're determined, and Russia always looks weaker than it is, and always looks less capable than it is. And I think Russia will also continue to be a very strong opponent. So what it basically means for 23 and 24 in my view, the bulk of the economic, political and geopolitical impact of the Russia-Ukraine war is already behind us. The other question is, there's no destruction of either state, but the question is, at what stage will we start drawing our dotted lines on the map, because there is no resolution, there is no final resolution to this conflict. But it doesn't mean that the fighting goes on forever. Eventually, there will be some kind of not reconciliation, but at least dotted lines, whereby you sit here and I sit there and we agree to disagree, and 23 and 24 ought to be that period for Russia and Ukraine.

At the same time, if you look at other geopolitical hotspots, such as the South China Sea and Taiwan, I actually think through the next two years, The same would apply to Taiwan, in a sense that one of the lessons China learns from Ukraine is that number one, Taiwanese are going to fight. Number two, they're going to be armed. Number three, private US companies and the Pentagon will provide them an edge in cyber and cyberspace. I think they have to understand that China needs to restructure the armed forces and make them much more mobile and independent. And of course, they need to address the issue of economy and monetary system. Remember, Russia was isolated for eight years before this war, and even then Russia could not retrofit its system. China is the world's biggest trader. How do you retrofit a system like that against sanctions and other problems you will have in monetary ways? How do you do that? And the answer is, you can't. When people say, well, they should abandon the US dollar and sell US Treasuries, my answer is, by what? What are you going to buy? There is nothing else to buy and there is no substitute for the US dollar. And so China needs time to be able to rebuild trade routes, redirect trading of commodities, through direct trading of products, boom, other people, capital, information, gradually build different settlement systems. And maybe then the economy can be retrofitted.

So one of the lessons of the Russia-Ukraine war, to my mind, is likely to make Taiwan and the challenges less likely, at least in the near term. And so when I look at it, it doesn't mean that there won't be flashes of anger, of course, there will be. People tend to forget, if you think of West Berlin, there were all sorts of heart attacks. It was 1947 airlift, there was 1953 revolution in German Democratic Republic, there was 1956, there was 1961, there was 1968. But ultimately, West Berlin survived through this process. So there won't be heart attacks along the way, clearly, but I think at least in the shorter term, the probability of anything significant flaring up is actually down. And we can look at the Middle East and other in other sort of tectonic plate, globally, that again, I say the probabilities today a little bit less than what there were 12 months or 18 months ago.

So my conclusion from a geopolitical perspective is not to say that everything is resolved, nothing is going to be resolved. It's not to say that we're close to agreements, nobody will ever be close to agreement, but simply to identify, as I said, the times when you have a flare up, and at times when it's likely to become less pronounced. Also, remember from China's perspective, that the only time China would decide to invade Taiwan is if they're cornered externally, and only the United States can do it, and they're unlikely to do it. Alternatively, there is some kind of problem domestically within China, again, through 2023 and through 24. I just don't see it happening. So, to me, from an investment perspective, I think geopolitics will play a smaller role in the next two years than it did in 2022.

Lyn Alden

Erik:     Joining me now is Lyn Alden, founder of Lyn Alden Investment Strategy. Lyn has prepared a slide deck to accompany today's interview. Registered users will 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 Lyn picture that says looking for the downloads. Lyn, it's great to get you back on the show. Last time we spoke, I think oil prices were around $90 or so. And you told our listeners look, you are very, very bullish longer term, but you thought in the short term prices could get all the way down to $70. You totally missed that call. It was $70.08 so you're eight cents off. I think we'll go ahead and score that one as a win. How should we look at it now though? Does that mean the bottom is in at 70.08 or could it be that we've got another wave down and are you still bullish long term? And when do you think this this market turns around?

Lyn:     Sure Good questions and thanks for having me back. I'm still long term bullish on energy, the supply demand situation is still long term very tight. You know, especially on the supply side. And now we have China partially reopening to some degree. We'll see how fast or how slow that goes. But essentially, the long term thesis I think, is still quite bullish for the whole space. In the near term. I think that at these, these lower price levels, it's been de-risked to some extent in the intermediate term. At this point, you know, I'm not trying to call a specific, you know, exact bottom on the market, there's still a lot of like a lack of clarity for the next few months in terms of decelerating economic activity. But I think that as you look out a couple years, I think the situation is still quite bullish. So you know, a lot of this clarity in the near term, but still very bullish long term. And I think a lot of oil equities are attractive, I think a lot of pipeline equities are attractive. And I think also, the underlying is pretty attractive.

Robert Friedland

Erik:     Joining me now is Robert Friedland, who is probably best known as Chairman of Ivanhoe Mines and Ivanhoe Capital but he's also the chairman of a company you might not have heard of called I-Pulse. We'll be talking more about that in today's interview. Robert, it's great to get you back on the show. Our listeners have heard from me in recent weeks that I'm convinced that an energy crisis, a global energy crisis is imminent. I think the fact that we are currently enjoying low crude oil prices is an illusion that won't last very long. But you've certainly been around energy markets longer than I have. What's your take?

Robert:   Well, it's great to be back with you Erik. It's amazing how much the world has turned. We went around the sun once and everything we talked about a year ago has come to be real. The energy crisis you're referring to is not a future phenomenon. It's here now! It has arrived. It's arrived because suddenly the world is at war and war has changed everything. We have such high electricity prices in Europe that smelters that produce metal can't afford to operate. They're shutting down. And that's only an $80-$90 crude oil, but astronomically high electricity prices in Europe. That's an amazing story of how we got there from here. But the energy crisis is already upon us and Russia is a giant crude oil producer arguably the largest, if not the second largest. And now that we've placed sanctions on Russian energy, just the marginal reduction in production has put the world on a knife's edge for energy. We thought that the price of coal was gonna go down, we don't need it anymore. But Glencore made $16 billion mining coal last year, coal prices have skyrocketed. The Germans are burning coal to get through the winter. Angela Merkel had closed about 16 nuclear power plants in Germany.  She was reliant on Nord Stream one and two, Russian natural gas. What a silly thing to do now that that natural gas is no longer available. The minute it got cold in Europe and the wind stops blowing all of Europe is short of electricity. We haven't seen electrical prices this high ever. It's already for Europe, an existential crisis. We haven't seen a major European population be bombed into the stone age. So they freeze in the dark. That's a moral obscenity. But that's what's happening to 40 million people in Ukraine this winter. And the implications are apparent, we are extremely vulnerable to a global energy crisis. Europe itself has only a few remaining natural gas pipelines. There's a natural gas pipeline from Norway to Europe. And there's some natural gas coming from Algeria to Spain and to Italy. But we now know that those ocean bottom pipelines are vulnerable to sabotage, as are all the Internet backbone that goes across the ocean and fiber optic cables. And so all of this fundamental infrastructure is now known to be vulnerable. And every major society is worrying about securing its own supply chain.

So Erik, if we go back to what we were talking about a year ago, in about 2008, we had an integrated world economy. It was just-in-time, everybody loved everybody. If you went to Walmart, everything said made in China. Today we have a just-in-case economy. Every society wants to secure their energy supply chain, their food supply chain, their basic raw material supply chain. The Japanese are rebuilding an army it was just announced last week that Japan's gonna spend 2% of GDP to build an army. They haven't done that since World War Two. Ditto, the Germans haven't had an army worthy of their name since World War Two. The Koreans want their own supply chain, they don't trust the Japanese. The Chinese want their own supply chain. India wants its own supply chain. Europe wants its own supply chain. Of course, America now has its partnership with the five eyes. So as we've balkanized the world economy, it's an insanely inflationary phenomenon. And each group plays to its own strengths and the people that are long energy, want to drive the price up. Vladimir Putin benefits from high energy prices. And now we have a situation where cheap Iranian drones are being bought by Russia and used on Ukrainian civilians. Obscene, obscene destruction of the energy backbone in Ukraine, which incidentally, feeds electricity to Europe. So here comes 1000 cheap drones a you, you might shoot down 950 of them, the other 50 get you. If those Iranian drones were turned on Saudi Arabia, for example, we could have $200-$300 crude oil forever. So I think the first point we need to make is that we should thank God every day, for the energy security the Western world enjoys from Saudi Arabia. Saudi Arabia, as a reliable supplier of energy to the world is literally keeping the lights on. They don't want the price to be so low, that you have less energy production. And they don't want it to be so high that you destroy the Western world economy. But without their responsible role in conventional energy, there would be no hope of making an energy transition. And so, you know, if you take 10 dogs in a room, I think you will observe that those 10 dogs all smell both ends of every dog. And so every nation now is worried about its own energy security and food supply. And that means that we already today in an energy crisis.

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