Transcripts
Erik: Joining me now is Ronnie Stoeferle, fund manager for Incrementum. Perhaps better known is the principal author of the In Gold We Trust report. Now, this report is a big deal folks, it comes out once a year and it's completely free. You'll find the download link to the report as well as the alternate language versions of the report as well as a video introducing the report and the slide deck associated with the report which is what we're going to focus today's interview on. So I do recommend that you have that slide deck in front of you as we're going to be referring to the graphs and charts it contains extensively throughout this interview. You'll find the download links 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 that says looking for the downloads. Ronnie, let's start with the big picture. You've been doing this for quite a while now. Well over a decade. Tell us a little bit about the history of the report and how we got to where we are today.
Ronnie: Hi Erik. Thanks for having me again. Well actually this is the 16th annual In Gold We Trust report already. I started as a little analyst doing Asian equities in an Austrian bank. And in 2007, due to a mining stock that I had privately that developed really well. It was a 40 bagger, which is kind of a blessing but also a curse because you think okay, well, that's just normal in the mining space. I went to my boss and said well I would love to write a little bit about Gold. And he said, Yeah, go ahead. Gold is always interesting. And yeah, back then I started writing about gold and it still amazes me, it still fascinates me. And actually, this year, we did hit a new all time high. It's 400 pages of research about gold, as there's just so much going on. And I think this is really the interesting thing. Gold is not only about supply-demand, it's about obviously opportunity costs coming from the bond market, from equity markets, from commodity markets. It's about central bank policy, it's about geopolitics. It's about de-dollarization. We cover the topics of ESG. In the mining space, we write about mining stocks, therefore it's still as I've said, it's truly amazes me and I think there's lots of to be honest rubbish, gloom and doom research out there in the gold space. And we want to make a difference and want to make a solid, sober case for gold. And I think that's what's really missing. And therefore, we are getting feedback from all over the globe. We already have 700,000 downloads for this year's report. So it's really, it's a big thing and it wouldn't be possible without the support of my staff. So there's 20 people working on the report now.
Erik: Joining me now is Variant Perception’s Tian Yang is still head of research, but he's also taken over the CEO position. So, congratulations on that Tian.
Tian: Yes thanks, Erik. Great to be back on MacroVoices.
Erik: Variant Perception’s research is some of the best in the industry and Tian's colleagues at Variant Perception were kind enough to share with us, the May 5 leading indicator watch. Now out of respect for Variant Perception’s paying subscribers that is a few weeks old so it's dated but still very much relevant. Tian, I really want to dive into this because you know my take has been I think the Fed is intentionally trying to engineer a recession. But frankly, I'm not nearly as data driven as I should be. So let's dive into the data. Listeners, you'll find the download link for that May 5 leading indicator watch 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 that says looking for the downloads. Tian, let's dive into this and talk about what's going on data wise. Are we looking at just a little blip here or is this a recession coming our way?
Tian: Yeah, that's clearly the kind of top of the mind question for investors right now. We try to measure the business cycle in hopefully in an objective way. And so, often when we think about recessions and business cycle, we're often trying to incorporate both kind of soft financial market data, survey data, as well as the hard kind of economic data right? You know, the raw kind of real economic data and combining the two. So overall, when we look at our models in terms of the cycle. We were still more leaning towards a mid cycle slowdown right now, as of what we can see in the data. The kind of really bad inputs of things linked to liquidity. So as you say, the Fed is clearly tightening financial conditions, you know, straining excess liquidity from the system. A lot of indicators, we try, like the CFI which is a diffusion of global central bank policy, that's very bad. So the liquidity front is very bad. However, in terms of the hard economic data, it is slowing but it's not quite at levels you typically see going into a recession. So typically going into a recession, you tend to see kind of a major drop in building permits, say up to six months ahead of time, you tend to see kind of a huge surge in initial claims off the lows. And so some of these things are starting to slow a little bit, but we're not quite there. So I think as of right now, I think we're still probably more thinking it's more of a mid-cycle slowdown than an outright recession. But obviously, what we need to do is essentially as the data evolves and just see how it plays out.
Erik: Joining me now is Gavekal co-founder, Louis-Vincent Gave. Louis, it's great to have you back on the show. I've really been looking forward to getting you on because you know, you're a guy who is a French guy based in Hong Kong also have a home in Canada. Very international guy. And something that actually surprised me when I asked David Rosenberg last week about the Fed survey, citing 41% of respondents saying that divestiture of US assets was a major concern. Rosie thought it was not really a big deal. And I wanted to get the perspective of a European on this. How do you see this situation? Is it no big deal that in my feeling about this, we kind of abandoned the rule of law and said look, we know Russians are bad guys. So let's just take their FX reserves and these oligarchs, let's seize their yachts not through rigid and aggressive application of the rule of law with a court of order, but rather by abandoning rule of law and saying we don't need a court order. Their Russians after all, we can do whatever we want. Is this going to actually hurt the financial system or am I silly to think that that's a real concern?
Louis: Well first of all, great to hear from you Erik. I have to say I need to do a better job of tracking our conversations. Because each time we talk, it seems something fairly big is happening. I think, one time we had the oil price go negative while we were talking. This time, we've got the NASDAQ down almost 5%. So maybe I need to start buying puts each time you and I are scheduled to have a conversation just buy puts on everything, I guess. But no, look, it's great to catch up. And no, I think it's the way you frame the question is exactly right. I would add one more thing is, you know, we've basically chosen to in essence change the rule of the games on people we don't like. We've changed the rules of the games on the Russian. And we've decided to do so at a time when real returns on Western assets have never been so low right? So you got you know, your real rates, your real returns on US Treasuries is about as deeply negative as it's been in two generations. And it's at this moment that we choose to tell the world, not only are you going to lose 3, 4, or 5% real per year in these US Treasuries or in these German bonds. But if you don't behave in the way that we want you to behave, then you're going to lose 100% overnight. And without due process, without debate in Parliament, without, you know, your day in court. We're just going to grab your football club, grab your yacht, grab your everything.
Now, I do fundamentally believe that this is a massive game changer. Because, you know, the way I conceptualize the world, probably the greatest comparative advantage of the western world is the rule of law and the property rights that derive from that, right? You know, the reason every rich Chinese guy buys a house in Vancouver, the reason every Saudi prince buys a house in London, is not because they think oh returns on Vancouver real estate is going to be better than returns on Shanghai real estate. But it's an essence, it' your safety asset, right? You buy these assets, if something bad happens, I can move to my house in Vancouver and I'll be fine. But now what we've told the world is well if tomorrow, you know Xi Jinping invades Taiwan, then we're going to take your house in Vancouver. Now, if you're the rich Chinese guy who's bought this house, you think well I bought this house for precisely this potential scenario where all of a sudden there's a war in China, and I want to get out, and you're telling me that at this very moment, you're going to confiscate it? Well then this house isn't what I thought it was. And, you know, so that I think is the first massive shift. We've in essence put a big question mark on the safety of a lot of assets in the Western world.
But I would say there's a second, and I think most people that I talked to seem to understand this and are deeply uncomfortable with it. Because, you know, you take the Russians stuff today, tomorrow who's to say that, you know, you know, they're not going to take your stuff for making money on oil stocks and contributing to the climate crisis or the day after tomorrow, why can't we take the assets of, you know, the Social Media Barons because they've created a mental health pandemic amongst our kids. You know like once you can just grab stuff, you know, why stop at just the Russians. There's plenty of other bad guys out there. So you can just keep going down the list of bad guys and indeed if you're a Saudi prince, if you're a Chinese tycoon, you feel most likely that you're not that far down the list of bad guys. So right there, you know, I think by seizing the central bank reserves, we've really completely upends our entire global financial architecture. You know, before 71 we were on a gold-based system. After 71, we were really on a US-Treasury based system. And now we've just told the world the US Treasuries are not what you think they were. And neither is Western real estate. So that's a profound shift.
But there's a second shift, and I'm sorry to drawing on because this is really important. And that is, you know, if you're looking at this from an emerging market point of view, it's the speed at which decisions were made and the process through which decisions were made. You know, I think if you're an emerging market guy, let's say you're a Chinese tycoon, you're used to your government making unilateral decisions without debate in Parliament, without, you know, campaigning on a platform without any of these things. You know that's part of the world you live in. And that's one of the reasons you want to own Western assets. Because in the Western world, the policy risk is just far lower. It's you know, getting anything done is a long process. But again, this has just shifted. All of a sudden, what we've seen is that over the course of a weekend, across the western world, rules can be changed without voters having a say, without Parliament's having a say. And you could say, well we already knew this, because we saw this through COVID. But this is now a confirmation that the sort of processes that we saw through COVID where governments unilaterally decide to do stuff, again, without debate in Parliament, without any kind of, you know, democratic feedback loop can now be applied not only on people's, you know, freedom. I you know, locking down people, etc. But also on their property rights. So again, if you look at this from China, or from Saudi Arabia, or from any one of many emerging markets, you're like well this is just like home. Like, I used to think the Western world was so different. I used to think it was so special, but when push comes to shove and their back is against the wall, it turns out that actually, it's the same thing as emerging markets.
Erik: Joining me now is Rosenberg Research founder David Rosenberg. Last time we had Rosie on the show he was a bear in a room full of perma-bulls. David, I think there was something to what you told us that maybe stocks don't just go up all the time, after all. Give us the rundown here. What's going on? Why is it happening? How come other people didn't see it as early as you did? And what do you think is coming next? Is this over? We just had David Tepper, when I should let our listeners know we're speaking on Tuesday morning, since the market is moving very quickly. From our perspective, market has been falling. We're looking at about 3960 on the S&P right now. David Tepper covered his shorts that caused the market to rally dramatically for all of about a half an hour and back down again this morning. What's going on? Where's this headed? And how much further down do we have to go?
David: Well, you know, back to your initial comment about, you know, what is it that the bulls didn't see at the turn, was they just didn't take their own advice. Because, you know, through the previous two years, of what was a parabolic move in the stock market, the mantra was don't fight the Fed. But you see, that works in both directions. And so what's wrong about the bulls staying longer in the game than they should have was that they're fighting the Fed in the other direction that the Fed is. If you're long only investor, the Fed isn't your friend anymore. At some point, they will become your friend. The point I was making all along was that, you know the 4800, call it peak on the S&P 500 at the start of the year was a real fictitious peak. We had no business being there. And so what's happened these past three years, three years in a row of unremitting policy easing by the Federal Reserve. 2019, the Powell pivot cut rates three times. We expanded the balance sheet after telling everybody in 2018 how he was going to move the funds rate above neutral, never came within 50 basis points of that and the Fed was going to shrink the balance sheet, but they did the opposite in 2019.
And then in 2020 of course we have the pandemic and the lockdowns and we get double barreled rate cuts, and then unprecedented balance sheet expansion with the rates to zero. So in 2021, the easing by the Fed wasn't about interest rates, it was about ongoing balance sheet expansion was continued to stimulate the animal spirits in the stock market. You can't go back in history and find too many times when for three consecutive years, the Fed was continuously easing monetary policy. And so you see what happened was when you look at the stock market, it's the product of two numbers. Earnings and the multiple that investors are slapping on those earnings. And that gives you the S&P 500 price. So you see what happened was that from the end of 2018 to the end of 2021. The S&P 500 practically doubled in a three year span, which hardly ever happens. I mean, it happens, happens usually at bubble peaks like back in 2000. And when you do the arithmetic. 70% of this three year bull market that of course included the bounce off the march 2020 lows, but 70% of the three year bull was multiple expansion and only 30% was earnings growth. I'm not going to tell you that earnings weren't good. But earnings were really the two big player in this equation.
In a normal bull market, the main actor is earnings growth. Earnings are 70% of the driver for valuations. And the multiple is the other 30%. And we reverse that in that three year period from the end of 2018 to the end of 2021. So, you know the Lord giveth and the Lord taketh away. And so when you have really a multiple-led bull market that has been predicated on Fed policy tailwinds, you have to know that when those tailwinds become headwinds, that 70-30 split between multiple and earnings are going to switch chairs at the table. So I just saying naturally that if we get that mean reversion of really what a true driver of the market is, which is not predominantly multiples, but predominantly earnings. We're going to get to 3600 and run away to 3600. I'm just not convinced will necessarily stop there. But that's just the arithmetic of what a normal market would have taken the S&P at the peak. We had no business being at 4800. And now we're paying the price for the fact that the driver of it, which was fed policy, that movie is now we’re winding in the other direction. And that's the story.
Erik: Joining me now is Josh Crumb. the former head of Global metal strategy for Goldman Sachs where he worked with Jeff Currie. Now founder and CEO of Abaxx technologies. Josh, I've been so looking forward to getting you on the program because quite frankly as I told Grant Williams on your own smarter markets podcast, I don't think most of the finance industry has really figured out this digital asset thing. What's going on is a whole bunch of guys are looking at cryptocurrency and how they can trade it, what can we do with Bitcoin, so on and so forth. And they're also looking for what I would consider to be low innovation ways to make a buck doing something else with digital assets.
And as I told Grant Williams, I think what we need to do is step all the way back to what is the reason that we allow these capital markets to exist in the first place. In the case of the stock market, it's supposed to be to promote the efficient formation of capital to finance the growth of businesses, and thereby to create more prosperity across society as a whole. And I would contend that if we really stepped back and looked at what is the finance industry, and how could we apply this new digital token technology to it, what I call Secure Digital Bearer Assets, what should it look like? And how could we actually make the planet a better place using this technology? You're one of the very few guys I know who's actually involved in a business that's trying to take on that big picture. So I want to start at the very highest level, what is the finance industry today? What's wrong with it? And how could we make it better by applying technology?
Josh: Thank you, Erik and thanks for having me. Look, I'm really looking forward to this discussion, because in many ways that has been sort of the the arc or trajectory of my career is looking at these types of macro problems. So you know, maybe just as a very quick background, I'm actually a mining engineer, and come from sort of an engineering systems background educationally. But I'm also an economist and you know, have thought a lot about and worked in the finance industry, you know, really thinking about these big macro economic systems. And, you know, after I left Goldman, one of the first things that I really got into was the Bitcoin white paper and thinking about this new call it you know, triple entry, you know, Ledger accounting and really what what that would do to finance. I'll admit that I was never particularly interested in Bitcoin as an asset, you know, as a new digital gold, you know, having a metals background having a gold background, I think there are different commodities with different forms of utility.
So I've never actually, you know, looked at at Bitcoin in that way. You know, that this is a new, low risk store of value. Now I don't want to stop start this podcast off on the wrong foot. I actually think there are some absolutely revolutionary aspects to Bitcoin itself. And not just the Bitcoin technology, but the actual proof of work and the ledger system that comes out of that. But you know, you know, just in the in the nature of decentralized timestamps and decentralized computing, I think it really is revolutionary. But I think it's probably important to focus more on the finance aspects, you know, capital formation, rather than get into, you know, sort of a heated political argument about layer one or layer two technologies, you know, I think we can naturally get into some of those aspects. But I really wanted, you know, I think you would agree, you know, we want to focus on capital formation and what decentralized computing and digital bearer assets, you know does to that. So, you know, maybe just to step back for a second, I actually believe that there's still a lot of misunderstandings of some of the core concepts in finance itself. How these financial systems work, where they came from, and ultimately, you know, it's an ever evolving system. The finance of you know 200 years ago was very different from the finance of today. The finance of, you know, two decades ago was actually I would argue, in many ways very different from today. So this is a constantly evolving system that really evolves with our political systems. And most importantly, I think it evolves with our information technology systems, and just you know, what voices are heard, and what information is sort of spread, spread around around the world. So anyways, that's a lot to set up. So I'll leave it there for a second and see, you know, see what's the best way to take this conversation forward?
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