Ole Hansen

Erik:     Joining me now is Ole Hanson, head of commodity strategy for Saxo Bank. Ole has prepared a terrific 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, it means you're not registered, just go to our homepage, macrovoices.com. Click the red button above Ole's picture that says looking for the downloads.

Ole, it's great to have you back on the program. Let's go ahead and dive into the slide deck as we get into page three here you talk about commodities in general,. Give me the big picture of where we are in the cycle because my feeling has been the 2020s are going to be the decade you want to be long commodities. But I also felt like we kind of got ahead of ourselves a little bit in the recovery from COVID. I was thinking there's got to be a big pullback. I know that a recession is coming. At some point there's that buy the dip moment where if you could somehow magically have a crystal ball and know where that bottom point is. That's where you want to go long commodities and stay long for the next decade or so. At least that's been my view. Well, first question is do you agree generally with that view, but the next one is what's your crystal ball say? Are we there yet or should we wait for a recession?

Ole:     Well, I wish life was that easy, Eric, and thank you very much for having me back. It is a very interesting time in in commodities and you're absolutely right, we probably ran ahead of ourselves a bit, just not only from the COVID outbreaks, which just triggered this massive surge in demand for raw materials, but also the war breaking out in Ukraine which added some additional rocket fuels to some of these individual markets. But we have been trading somewhat lower since then we are stabilizing, I would say at this point in time. But the long term outlook I think, is still one where we were we're looking at scarcity of supply of several key commodities where the upside potentials are still there. But it's also difficult for investors right now to navigate this market because we got quite a few contradictions going on. Right now. We have the dollar, which has been strengthening all year, it's creating some headwinds.

We got demand which, which is softening especially in China, but whether it's obviously worries about the recession incoming and the extent to which that will have an impact. And then we got supply also, several key commodities being challenged. We obviously all know the situation right now in the gas market, especially in Europe, but also energy supplies in general. And some of the metals. So timing wise, I think the everyone is right now looking for the rollover in the Federal Reserve's approach to interest rate hikes. And I think that will be a key moment for the commodity sector as well because the market needs some more clarity on the trajectory of the dollar. And if we do see a rollover, that potentially could be quite a quite an event that the market will respond to in a positive way when it comes to the commodity space. But I think what we're finding as well, and what has changed since the outbreak, and then that's some of the themes we're picking up here on page 3 is basically that the world has changed.

The world is... we're seeing breakdowns in trade relationships. We have a new geopolitical situation and it basically means that some of the themes that we like from an equity investment perspective are also themes that really spills into the into the commodity space. We like to use equity themes as our guide to what moves markets here at Saxo Bank and we made these different equity themes, and those are highlight are the ones that we like. And we can also see they are the ones that have been on top in terms of performance, so far to this year, which obviously has been a year with dismal performances across many different themes. But it is the commodity space, it is defense, its nuclear power, its renewable energy, it's probably India sitting nicely in between East and West. And it's obviously cybersecurity. These are all themes that we would like. But our main thesis is basically that demand will potentially slow a bit, but supply will remain tight.

Inflation is going to be higher than we anticipated in the past simply because and I'm referring also to some of the latest update that we had from sultanates at Credit Suisse, basically, he's using these reshoring and rewiring. The reshoring due to globalization, rewiring of the grid, the energy transition. These are real and these will really be quite commodity intensive and over the coming years. And we basically believe that that will drive inflation to a higher level than where we have seen in the past. I think the underlying inflation in the US for the past 20 years has been in the region of 2% We could easily see that at least twice, twice as high over the next decade so four plus and that is something that is not priced into the market at this point. And that could potentially create a revaluation of some of these markets if the market joins us in that in that belief.

Louis-Vincent Gave

Erik:    Joining me now is Gavekal co-founder Louis-Vincent Gave. Louis, I am so excited to get you back on the show, as I'm sure you know, as you're a regular listener. Lately, I've been having trouble finding people to disagree with me and bring a little bit of bullishness to the table. I admit to being the guy who's usually the biggest skeptic in the room. But lately, everybody's telling me it's worse than I think. And I remember at our MacroVoices LIVE event, you were not at all hesitant to call me out when you disagreed on it. I don't remember what I said but I remember the answer was, and people think Luke Gromen is crazy. Remember what I said, but I know you're not afraid to set me straight.

So listen, I am a little bit concerned because it looks to me like we've got a heck of a liquidity crisis on our hand. I see the US Dollar Index running away and people say well, yeah, but that's just because the Euro and the Yen are crashing, that's all! Well yeah, its kidding. That's the problem and I think the reason that the stock market is not outright crashing Louis is because everybody knows the Fed pivot is just around the corner. I don't see why they think that given the data so I'm still in gloomy mode. Set me straight.!

Louis:    Well, first, thanks. Thanks a bunch for having me, Erik. I'd say it's always great to catch up like there's a lot to be gloomy about right now. Right? The world is changing very rapidly in front of our eyes. And yes, to your point on the hope springs eternal, I think today, the one sort of clutch of hope that people can hold on to is the belief that it's okay, the Fed will ride in on its, with its magic cape and turn it around for us, just in time for year end and maybe I can get a bonus at the end of the year. I have my own vision of this sort of hope springs eternal. Except that it's not Jay Powell that arrives with the cavalry. But it's Xi Jinping and let me explain my own sort of Hope springs eternal thinking.

I think there's something pretty odd going on in the world right now. And as you point out, we are in an obvious liquidity crisis, right? All the signs are there. Shrinking central bank reserves, which clearly tells you there's not enough money to go around. US dollar shooting up tells you there's not enough dollars in the system and of course asset prices falling. But the odd thing is, the US current account deficit could not be any bigger than it is right now. I mean, right now the US is sending $300 billion every quarter to the rest of the world. That's $100 billion a month that the US consumer is pushing to the rest of the world. And it's almost like the rest of the world is taking this money and saying, that's not enough, even though that's more than the rest of the world has ever made. So how can we be in a world where on the one hand, the US current account deficit is bigger than it's ever been. And on the other, there's not enough dollars to go around? I've been really struggling with it. It's almost as if the US is sending the US consumer sending money and that money is just going down some kind of black hole and disappearing. And perhaps that is somewhat happening and that black hole happens to be China.

When you look at the US current account deficits. So, the 100 billion a month, 50 to 60 of that goes to China. Now I think historically, the Chinese toy manufacturer or the guy who makes tennis shoes or whatever else on the other side of that trade, would have taken that money. And that money would have been recycled one way or the other decently quickly. Maybe the toy manufacturer takes his girlfriend to Paris and buys her 10 LVMH handbag or maybe the tennis shoe manufacturer buys himself an apartment in Vancouver, or maybe just an apartment in Shanghai. And as he does, he changes his US dollars for Renminbi, the central banks ends up with the Renminbi and puts them back in US Treasuries. That money gets recycled. But and this is perhaps the one of the bigger anomalies in our system that people aren't thinking through enough. What you have today is the world's second largest economy and by far our largest exporter on lockdown still, and I know it's not lockdown. I know it's dynamic lockdown, but for all intents and purposes, each time you go to the supermarket in China, you worried that, hey, they may shut down the supermarkets because somebody just tested positive for COVID and I'm going to be stuck there for three weeks. So that doesn't really generate much economic activity, right? I mean, most people in China right now are going to work, going home, going to the corner store getting food, and that's it.

And so all this money this 50-60 billion a month that China's making is perhaps just sort of stuck there in the system. And I highlight this because today everybody's waiting for the Fed pivot. Personally, I'm waiting for the Xi Jinping pivot because I think there's basically this Chinese zero COVID. Imagine a huge dam that's sort of holding up this mass of liquidity. And this huge dam is China's COVID policies and when that goes, it's going to unleash a wave of domestic growth to begin with. We've seen everywhere that stopped lockdown have big parties, right? The first thing people do when the lockdowns leave is they go to the restaurant, they go visit their parents, they go visit friends, tourism booms. So that's the first thing we can expect.

But the second thing we can expect is probably all of a sudden capital outflows out of China and into assets around the world to be reignited in a way that it's just never been before. Now you know, I was saying, people waiting for the Fed pivot, it's hope spring eternal. I personally, I've been waiting and I've been wrong. I've been waiting for this Xi Jinping pivot on zero COVID for over for well, over a year. You know, I thought it would come with the Olympic Games. I think we talked about it at the time. I thought the post Olympic Games will be a good time for China to reopen. Instead of reopening, we had the super harsh lockdowns of Shanghai. So you know, that crush that hope.

Today, obviously, is the hope that post the party congress, and perhaps pre Chinese New Year, does China want to go through a third Chinese New Year where travel is discouraged and people can't visit their families? That you see a loosening of a lot of the restrictions? I guess we'll know in the coming days. If we do…you know, you're asking me for a bullish argument. Imagine that China moves away from zero COVID. I'm not saying they will, I'm saying imagine, then all of a sudden, the demand for all sorts of basic materials, the demand for luxury goods. I'll give you just an example. I just went around Europe visiting clients and the hotel rooms that used to cost me 200 euros now costs 400 euros, and you can't get room service at night because they don't have enough staff anymore. What happens when the Chinese tourists come back? That probably goes from 400 euros to 600 euros. So we live in a world that's already been inflationary without Chinese demand. If Chinese demand is now unleashed, where do we end up? I guess that's the big question for me for the coming year.

Daniel Lacalle

Erik:     Joining me now is Daniel Lacalle, chief economist for Tressis SV and also CEO of Alpha Strategy. Daniel, I really am looking forward to this interview. I'll tell you, I've got a very extreme view myself on the situation in Europe. I think most analysts are under estimating how bad the situation is. I think the energy crisis is set to get worse. And particularly, I think that these are self inflicted wounds. I think that the problems Europe faces are of European policymakers own making. Vladimir Putin did a horrible thing by invading Ukraine. But he has not caused, as far as I'm concerned, any economic problem for Europe. I think that the economic problems that Europe faces were created by misplaced and misguided sanctions that were supposedly, I guess, in theory, somebody was stupid enough to think that they were going to hurt Russia. In reality, they have hurt Europeans and Americans and only helped Russia by increasing energy prices. Please tell me I'm wrong and it's really not as bad as I think.

Daniel:   Thank you so much, Erik. It's a great pleasure to be here with you. And unfortunately, you're not wrong. I think that the problem in the European Union, it has been fully self inflicted. The European Union was already coming from not a particularly good recovery, the recovery was much slower than that of the United States or other developed nations, also, in terms of productivity growth, very, very poor. So that in itself was a bad start. But when the Ukraine crisis started, the European Union seemed to be implementing a number of measures that seem to forget that the world exists. And that, in that you cannot basically isolate Russia, because there is an entire east to which it can continue to sell its commodities. So the sanctions that were implemented, were, I think you've said the word misguided, which is completely correct is were basically implemented from a perspective of thinking that they would have no boomerang effect on the European Union, which was a mistake.

And second, that they would have massive impact on the Russian economy, without any outlet or without any improvement coming from higher demand from Asia, China, India, etc. So basically, most of the measures were implemented believing that the European Union could have some sort of a policy change that would make it inevitable for the Russian economy to collapse, and without any impact or any significant impact on the European economy. More importantly, when the European Union decided to implement restrictions and measures against Russia in terms of natural gas. What I found absolutely amazing is that they didn't look at the reality of supply and demand situation in the European Union, because the European Union cannot offset the loss of natural gas supplies from Russia. It's the so called dependency on Russian natural gas was a political decision. And it cannot be changed from one day to another, even less so with renewables. So the problem in the European Union right now is massively high energy prices for any US citizen, I just came back from Arizona. And for any US citizen, the prices that we pay for energy are not even something that they will even think of in the worst nightmare. But not just the price of energy is that the economic slowdown was already evident before the Ukraine crisis, that the policies implemented after COVID-19 were actually very negative for growth and that the European Union doesn't have the technology advantage that China or the United States has have in order to is to cement a different type of future. So it's a very difficult situation. It is much worse than what people perceive when I see some of the macroeconomic estimate for the European Union for 2022, and particularly for 2023. They are clearly ignoring that this is not a winter problem. This is a long term problem.

Alex Gurevich

Erik:     Joining me now is Alex Gurevich, fund manager and founder of HonTe Investments in San Francisco. Alex prepared a chart deck to accompany this interview, you'll find the download link in your research roundup email. If you don't have a research roundup email, please just go to our homepage at macrovoices.com and click the red button above Alex's picture that says, looking for the downloads.

Alex, I've been really looking forward to this interview with you. Because, as you know, and most of our listeners know, one of the most important rules of investing is when you have a strong view to seek out smart people who disagree with you, because maybe you're the one who's got it wrong. I have some views about inflation, which I think is not transitory. I think we're at the beginning of a secular inflation. And I'm also getting frankly, pretty darn concerned about some of the macro shock events that we're seeing the the Sterling crash, it seems to me like it's not a big surprise after the policy mistakes, in my opinion that the UK and most of the European Union have made makes me wonder if we're headed toward a real calamity in Europe currency crash, that kind of thing. I know that you're someone who's incredibly smart and gifted and don't share those views. So please help me understand your perspective on all of this. Inflation, is it going to get worse? Is it is it a big deal? And what about these systemic risk events, the Sterling crisis, the seemingly runaway appreciation of the dollar to a blow off top? And a lot of non-usual things going on right now? What do we make of all this? How do you interpret it?

Alex:   Erik well first of all, thank you for having me back. It's good to be back. It's been a while and it's always a pleasure. Those are definitely the subjects you're bringing the salient subjects for the day, like what we're thinking about what we're pondering. Definitely, we were all watching in aw the price action in Sterling over the last few months, and especially over the last few weeks. Yes, I'm actually not sharing the view that European and British economies are collapsing. In fact, I actually relatively positive and positive on euro and positive on Sterling, and I'm positive on stock markets and economic growth there. And I want to try to unfold why. However, having said that, I am positive. I agree with the concerns about the systemic risk there. And I will be the first one to admit, I do not know the scope of systemic risk. I also do not know how post Brexit for example, Britain will recover its current account, because definitely Brexit hurt the current account balance which led to currency depreciation, can they return the balance of payments? What are they going to export right? What does Britain have to make to sell to the world? Those are legitimate concerns. But I'm also going to talk to you about why I'm reasonably positive on this region.

Jeff Snider

Erik:     Joining me now is Jeff Snider, the principal author first of the MacroVoices Eurodollar University and now of the Eurodollar University podcast. Jeff prepared a terrific slide deck to accompany this interview and I strongly encourage our listeners to download it because we're going to be making extensive references to the graphs and charts that it contains.

You'll find the link for the download in your research roundup email. Now, if you don't have a research roundup email, just go to our homepage at macrovoices.com. Look for the red button that says looking for the downloads. Jeff, it's great to have you back on the show. We decided instead of talking about today's markets and so forth, to do kind of a timeless episode, talking about the US dollar. Why it is still at the center of the global financial system despite the fact that ever since 1971, the US has kind of been frustrating some of the other countries around the world by maybe overstepping the authority that it gets from having the dollar at the center of the global financial system, yet it still remains king. And particularly, I think a lot of people would really like to better understand what causes the dollar to go up or down against other currencies. Now, if you pick up a macroeconomics textbook, pretty much what we're taught is that interest rate differentials are what control currency values.

So for example, if the Japanese Yen pays a much lower interest rate than the New Zealand dollar, then you can expect international investors to borrow yen at very low interest rates, sell them in order to buy New Zealand dollars, and get a much higher rate of return on New Zealand Treasury bills than they had to pay in order to borrow the Ten. That's of course known as a carry trade. I got a feeling Jeff, you're gonna tell us that there's a little bit more to it than just that when it comes to the US dollar.

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