Transcripts
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.
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.
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.
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?
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.
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