Transcripts
Erik: Joining me now is Lyn Alden Investment Strategy founder, Lyn Alden. It's probably no surprise there, given the name of the company. Lyn, it's great to get you back on the show. I know you've been saying lately on X that something you've said before on this program, which is fiscal is more important than monetary policy right now. So, let's start there. Why is fiscal more important? And from there, we'll dive into ‘big, beautiful bill’ and all the rest.
Lyn: Yeah, so thanks for having me back on, and I would caveat that fiscal is more important than monetary policy, currently. There are other eras in macro history. We're in monetary dominance, and monetary policy is kind of the forefront. But in this environment, for years now, I've been arguing that fiscal policy is more important, and there's a couple of main reasons for that. One is that with the existing stock of debt outstanding, as well as the structurally large fiscal deficits, which are partially tied to the existing stock outstanding due to interest expense, that is just a generally more impactful thing for the economy than 50 basis points, or even 100 basis points changes in Fed monetary policy. In addition, it shapes the nature of how monetary policy even impacts me and impacts financial markets. Because if you look over the past four plus decades, really, before we entered fiscal dominance, the main tool that central banks rely on, interest rates, is based on the premise, more or less, that their industry policy will affect the rate of money creation. So, in an era where most money creation is happening from bank lending toggling, higher or lower interest rates can encourage more borrowing or less borrowing. But when the federal government is doing more borrowing than the whole private sector combined—which is currently the case and is an aspect of fiscal dominance—the problem is that they're fairly interest rate insensitive. Basically, the Fed's policies are not really going to adjust what happens to the deficit too much, other than ironically, higher rates can increase the deficit and actually spill more money out into the private sector. And so, that's just a challenge that they find themselves in, where there's really kind of no good answers if you're trying to run a central bank when an economy has over 100% debt to GDP and structurally large deficits. And there, I think there's going to be, continue to be, basically things happening that are different than how most market participants have been kind of trained to expect over the past several decades. And I think we're going to be in this environment for quite a while.
Erik: Joining me now is Larry McDonald, famously known as the author of The Bear Traps Report. Larry prepared a slide deck to accompany this week'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 haven't yet registered at macrovoices.com. Just go to our homepage, macrovoices.com, click the red button above Larry's picture that says, looking for the downloads. Larry, it's great to get you back on the show. Let's dive right into your slide deck. Page 2, you've got Albemarle, I believe that's a Western Australian lithium producer. Why even is lithium on your mind?
Larry: You know, Erik, we love to look, at The Bear Traps Report, we focus on election cycles and some of the best trades, price in really impressive profits before the election or around elections. And in the case of Chile, you have to look at the world. Lithium is in a very good spot now, because you're talking about devastation, what I call “bombed out villages” where there was a left-wing candidate that was perceived to be the winner in Chile, if most of our planet's lithium comes out of Chile, and so SQM and ALB are two of the primary lithium producers. And as you well know, over the last year, what we call hybrids have taken massive, massive expectation market share from electric vehicles relative to where electric vehicles were supposed to be at this point in time. So, at the end of the day, you have a double barrel capitulation, perfect storm for lithium, which what we believe is, is gone through a massive, what we call capitulation cleansing process, where we're coming out of capitulation. And if you look at that chart, when you get a monthly MACD, Erik, a monthly MACD is a wonderful technical signal. It's a sign of what we call, like as I say one more time, the “bombed out village,” where massive seller exhaustion, and we can get into the political dynamics.
Erik: Joining me now is Rosenberg Research founder, David Rosenberg. Rosie, great to have you back on the show. It's been quite a while. Let's dive right into the obvious. You know, everybody's talking about this market. You and I have had our reservations for the last couple of years, but it keeps charging higher and higher. It seems like nothing wants to stop it. What do you think?
David: I think that what we always have to do, is try and assess what the market is telling us in terms of its view of the economy and earnings and interest rates, so on and so forth, and what your own view is, and that's how you can map out whether or not you want to be long or short or anything in between. So, what is the market telling us? The market is telling us that once we get to this July 9 deadline on the reciprocal tariffs, we're going to be met with yet another reprieve from President Trump and, or that we will see a flurry of deals coming to the fore, which haven't happened yet, but the market's telling you that it expects that the tariff file is going to be in the rear view mirror if it's not already in the rear view mirror. When it comes to the geopolitics, the market is clearly telling you that the fear that there would be either a blockade of the Strait of Hormuz, or that the IDF was somehow going to take out some of Iran's oil export terminals, that didn't happen even when the US went after the nuclear facilities energy, which, of course, is their economic lifeblood, was left untouched. So, you removed that worry. And everybody believes that this war between Israel and Iran, just like the tariff file, is in the rearview mirror. And of course, how this relates, most importantly, on this point of the geopolitics, is ultimately what it means for oil prices. So, oil prices coming back down is viewed as basically a tax cut for the US economy and for the global economy. So that part we can easily explain. There's this prevailing view that with Donald Trump's popularity on the rise, now that he can claim a win from that dramatic strike in Iran last Saturday, that now that he has the political tailwinds, that he's going to have a much easier time getting his “big, beautiful budget bill” through Congress. So, all these uncertainties in the market's mind have been put to bed, that no tariff, war between Israel and Iran is now contained, and the road towards, call it fiscal stimulus, if you want, is intact. Fiscal deficits themselves be damned, but that the budget bill is viewed very positively by the marketplace. So that's what we have on our hands. And all the while, the market believes that we're not going to have a recession, and the market believes that even without the recession, inflation is going to fall sufficiently to pave the way for the Fed to cut interest rates. So, this is not a cup-half-full narrative from the stock market. This is a case of the cup-being-entirely-full, and that's where we are today. I have a different view than the markets, and we'll see how it plays out, but that is the signal from the market pricing as we sit here today.
Erik: Joining me now is Carlyle's Chief Strategist for Energy Pathways investment, Jeff Currie. Jeff, it's great to get you back on the show. It's been way too long. You just penned a great article that is all about capital rotation and why you think we're in one now, and Europe is going to be the big benefactor. Tell us more.
Jeff: It's a pleasure to be back. And the piece was focused on European defense, in the sense that it's going to create a need for a large-scale investment in old economy, asset heavy type industries, and the real catalyst to this was the lifting of the debt break in Germany. Now, this piece that we put out is a follow up to The New Joule Order that we put out a few months ago. And in The New Joule Order, we made the argument that the Bretton Woods system is breaking down, the US is retreating, and this is going to have a significant impact on the dollar, energy and military investment. And this piece we put out yesterday was really about the military investment component, but I want to talk about this breaking down of the Bretton Woods system and the retrenching the US. And the way I like to think about it is, if the dollar was the heart of the system and the oil was the blood going through the veins of the system, the US Navy was the muscle of the system. In other words, for the last 75 years, the US has used its military might to protect global sea lanes for global trade. The dollar was used as the medium of the exchange. And when you think about if you had protected sea lanes, you will start importing oil as your primary energy source. It is the most portable, the most storable. And as a result, we had supply chains that stretched all around the world with previous adversaries, and the biggest commodity being shipped was energy. That's your strategically most important commodity. And as the US retreats, it brings all of these into play, and I like to call it bonds, barrels and bombs. The bonds of the dollar, the barrels are the oil, and the bombs are the US military, all three of these are under pressure.
And talking about this now in the context of the capital rotation is, as the US retreats, Russia is getting more aggressive, and as a result, the situation in Europe, it is now existential that they need to make these kinds of investments, and when we look at the potential return in old economy, they're undervalued tremendously. Europe specifically is undervalued by about 40%, and all the complaints about Europe being the superpower of regulation, what did it get out of it? The lowest debt to GDP ratio. It has the highest level of income and wealth equality of the major regions in the world. And instead of having crippling market concentration, like most parts of the world, it has consumer surplus. So, it has all of the requirements, and plus, a steep value discount to track that capital. And I’d argue, what we saw going into the events in Iran and in Israel on Friday is the dollar was weakening tremendously. Part of that is, we saw the outperformance of Europe. I like to point out, since ChatGPT was first announced in November of 2022, Europe has outperformed the US by 20%, meaning what's going on in Europe right now is likely bigger than AI. In fact, AI’s CapEx since that announcement, has been 500 billion. German defense alone is going to be more than 1.5 trillion, already announced. So, this is big. And one last point I want to make here is that when we think about Silicon Valley and AI, they are simply an extension of the US military industrial complex. It started out with DARPA, creating the internet that created AI. Think about Silicon Valley. Where does the name come from? It comes from, they needed to come up with a material that would not melt in a B-70 bomber in a Minuteman missile. And they had, they came up, Fairfield semiconductors came up with the silicon chip, and that's where it came from. So thinking about it, why does Europe not have a Silicon Valley? It never had military industrial complex. So, this is huge, and we think it's going to create a productivity a boost there. And again, going back to the steep valuation discounts, and I think, the point being is, I think this rotation is all underway. And if you put it in context of previous rotations, we saw one in 2000 to 2003, when capital left the dot-com boom and went to bricks again. You know, you had overvalued tech and undervalued commodities in heavy asset, heavy sectors. And then the next one was 2014, 2015, when money left bricks and went back to Silicon Valley for the MagSeven. And again, it was overvalued commodity, heavy asset plays in China, and undervalued tech in the US. Now, we're kind of in the same, in a point here where you have undervalued heavy asset commodity sectors against relatively steeply valued tech sector. So, this is probably a process that's going to go on for a while, and it's pretty consistent with things we've said in the past. But I think the catalyst here is, really, European defense, and the potential there with the lifting of the debt break, they have the spare fiscal capacity. They have industrial capacity. All the ingredients are there.
Erik: Joining me now is Commodity Context founder, Rory Johnston. Rory, it's great to get you back on the show. It's been way too long. Let's start with the crude oil market. Almost feels to me like we're seeing the beginnings of maybe an upside breakout. What do you think?
Rory: We’re definitely at the highest level. I mean, with Brent kind of sitting around $67-$68 a barrel, highest level since the latest sell-off in April, still a decent ways off of kind of where we started, prior to President Trump's Liberation Day tariff announcements and the kind of double tap follow on of OPEC+ announcing this kind of accelerated production increase schedule. But it definitely looks like things are firming up. I think a lot of the kind of teasing, kind of temptation of us dipping into full curve contango, seems to have been at least averted for now. But what's left us with is the fact that the curve is in this very, very weird shape, and in some cases, at least on the Brent curve, kind of an unprecedented shape that you have extreme backwardation now, or at least material backwardation across the first 4, 5, 6 months of the curve, and then you have broad contango everywhere else through. You've seen it, historically, where you have like lighter backwardation at the front. But this kind of juxtaposition of very steep backwardation at the front and broad contango is pretty unprecedented. And I think that is a kind of a flattening of the entire debate in the oil market right now, between these expectations of looseness to come and the reality of kind of still reasonably tight markets by any other way we measure them.
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