Transcripts
Erik: Joining me now is MI2 Partners founder Julian Brigden. Julian prepared an excellent slide deck to accompany this week's interview listeners. You'll 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. Look for the red button above Julian's picture that says, looking for the downloads.
Julian, it's been a long time. Like last time I spoke with you, you said something nobody else was saying, which is get ready, put your seatbelt on inflation is gonna get serious. And everybody thought you were crazy. What has happened as one of the people who saw this coming, how has it played out? And how's it gone differently perhaps than you were expecting?
Julian: So, I mean, to be honest, it's been more powerful than we thought. And more persistent than we thought. We wrote at the start of 2021, the first report, we wrote, I think the fifth of January or something 2021, that inflation would be the most important variable of the year and indeed, it was. But kind of we got to the beginning of ‘22 and end of ‘21, we were expecting some base effects to kick in. And then just things continued. And I think the problem is Erik is that we've started this process, should I think of sort of non-linearity, right? I mean, the world, we're very used to a world, companies, central banks, and it was interesting listening to the Sintra conference where we had Powell, Bailey, and Lagarde on. And it's really worth listening to, if your readers can listen to this. You know, they talked about the world structurally changing now, right? Structurally changing. And I think, we're so used to as market participants since the Great Moderation started in the mid 80s, this kind of period of relatively benign, relatively predictable, relatively forecastable, if you want to call it the nice sine wave around the long term trend of economic growth, where, your grower kind of two and a half and central banks come in and cap a little bit and we roll over to sort of half and then they cap it a little bit on the bottom. We kind of stay in this is predictable. So this increasingly volatile world where things just don't respond in the way that you had thought, right?
And even we who said we were extraordinarily aggressive on the inflation story, we're caught out by just how powerful these forces appear to be, because base effects should have started away on inflation starting really at the end of the last year, and didn't and so something else is totally going on. So then you have to sort of step back and go what is it? So is it companies just deciding after 30 years of never being able to push through price increases to go like, screw it, now we can jam through it? I think there's an element of that, right? Or is it just all these normal relationships that we assumed that would happen? Break down? I mean, there's a great chart. So as you can see from the next slide on page two, you can see this excess stimulus model, where you look at the breakout of inflation, right? And you can, you can take this thing back to 1926 I think, that's quite a long time, not even you and I have that old Erik. And you look at a range of typically inflationary tops being between max between like 5.4 and 6.4% base CPI in the US. If you break that, the lowest next print that we saw, was 9.4. And the average was over 13%. And there's been very few periods of that Erik. But the point is, it's material, right?
So things have just totally broken down and the world isn't acting normally. I think it was I said, I think that Sintra conference call was hugely important. Because all three central bank governors, all acknowledged that this concept that we are necessarily returning back to that nice benign world where you had globalization, high productivity, all of those factors weighing continuously on inflationary pressures, maybe over for quite some time. And I think that is material. So look, I can see some signs of benign inflation or should we say, peaking inflation, okay. In the US some, but I think there are, I don't think it's necessarily the case that it's a guaranteed and in fact, we've got some models that suggest and maybe I'm being a bit too cute, but they go back to the 1960s. But if I look at the size of the stimulus, and I think this is really the key point here, and you can look at that the next slide, and you can see that. You can see that if I look at the stimulus and the size, it was five times bigger than anything that we've seen in postwar history Erik and it suggests when you use it to try and forecast inflation, it doesn't see a peak until Q4. Right now, I don't want to get too cute on this. But you can see it's actually measuring what they call detrended core CPI. So is looking at the change over running baseline. So in actual fact, that peak is where it shows sort of five or six on the right hand side of the screen is actually a nine and a half. But the point is, is even if some of these other factors start to weigh in, I think we're looking at extraordinary inflation pressures and high sticky inflation pressures, probably well into Q4. And the implications for other assets are pretty damn clear, I'm afraid.
Erik: Joining me now is 42 Macro founder Darius Dale. Darius prepared a terrific and very extensive slide deck to accompany today's interview. Listeners, you'll 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. Look for the red button above Darius' picture that says looking for the downloads.
Darius, the last time that we had you on macro voices was January 13 of 2022. The S&P was at $4700 or so just a little bit off of its all time highs. Everybody was just singing the Goldilocks story of how everything was great. You actually used the word crash to describe what you thought might be coming for the stock market in 2022. I think you're the only guest in that timeframe that we've had who used that word. So biggest question in my mind is okay, you definitely get some credit for seeing that something was coming. But I think that what we've seen so far has been a very big sell off. But frankly, it's been pretty orderly. So is the crash that you were expecting. Did that already happen with the big sell off that we've seen or is the crash yet to come? And if so, how bad could it get?
Darius: Hey Erik, thanks for having me back on. And I really appreciate the very kind introduction. You know, I don't consider myself there was others making crash calls back then. But we certainly I believe we came to that conclusion through a variety of very rigorous and repeatable quantitative processes. And so, I'd love to unpack them in terms of what they're seeing today. Because obviously, you've either made money on the crash call or you didn't at this point.
Erik: Ok so think the crash is over then?
Darius: No, absolutely not. I think we're sort of, you know, let's call it inning five to six maybe in terms of the market cycle downturn. In terms of the market pricing in what we think are simultaneous slowdowns in liquidity cycle, growth cycle and profit cycle. I think and we can unpack these things in either order. But I think we're probably somewhere between inning four or inning five in the liquidity cycle downturn. I think we're somewhere similarly in inning four to five of the growth cycle downturn with a significant slowdown ahead of us still. And we're likely, somewhere between inning one and two of the profit cycle downturn. And I think the earnings recession is not something that should be discounted by the average investor, and in terms of materializing over the next several quarters.
Erik: Joining me now is Dr. Anas Alhajji, energy markets consultant and former instructor at the Colorado School of Mines at the University of Oklahoma and one of our favorite oil market experts. Anas, it's great to have you back on the show. It's been way too long. Let's start with the big picture of where things stand right now. A lot of people are wondering why OPEC hasn't done more to increase production in order to bring prices down. My take is OPEC is basically out of spare capacity and maybe doesn't want to admit that although they have admitted it to some extent. What's your take? What's going on here? What is the major factor that is keeping prices so elevated?
Anas: Thanks Erik, and it's really great to be on your show again. We got to look at the mix of economics and politics together when we talk about OPEC and OPEC+ and their decisions. As you know, we ended up with this OPEC+ since 2016, where 10 members including Russia, being added to OPEC. And that's why we ended up with OPEC+ which has 23 countries. It is led by Saudi Arabia and Russia. And this coalition is not only about changing oil production or oil market. The coalition between Saudi Arabia or the Gulf States and Russia is way way stronger than that. And we've seen it in recent months and there are many reasons for that. If you think about it, and if people are wondering why the Saudis and others in OPEC did not really take a strong stand against Russia, think about it this way, the Saudis have a problem in Yemen. And there were resolutions in the Security Council against the Saudis and who did the veto Russia, there was a resolution in the Security Council that the UN Security Council on climate change that would have destroyed the economies of the oil producing countries who did the veto vote, It was Russia. So in a sense all of a sudden, OPEC members and the GCC countries that the Gulf Cooperation Council in the Gulf have a veto power within the UN Security Council or they are not member of it. So why let Russia go when they have this power?
So there are really kind of course, there are other reasons though when it comes to climate change, carbon tax, how to stand to the extremists on climate change in Europe, etc. It is really Russia who can do that. And in fact, if you look around, you'll find out that Putin single handedly without intention has delayed all the climate change policies of Europe for at least seven, eight years. Which means that we have an additional oil demand, we have additional gas demand. That's not being counted in any outlook. And probably within the next few months, as we see the long term outlook coming out of the International Energy Agency, OPEC and the oil majors. We are going to see a revision, an upward revision to oil demand as a result of the failure of those policies simply because of Putin. So this coalition basically is a very important coalition. And that's why everyone was sticking to it. So they agreed to increase production by a certain amount, which was 400,000 at the beginning. And then when they changed the base later on at 432,000 barrels a day every month. And they've been going with this and sticking to it as they go. When Putin went to Ukraine, there was pressure on those countries to increase production. If they increase production, then they are going to anger Putin and then the coalition will collapse. They already invested a lot of money and a lot of capital, political capital in it, they don't want to lose that. So they decided to stick to the plan, increasing production and that's it.
All of a sudden about 10 days ago, when they had probably more than that, when they had the meeting, they decided to forward the end of the agreement. The agreement will end at the end of September where they can recover all the production cut. So they can go back to pre-COVID production by the end of September, at least in terms of ceiling not in terms of actual production and that's what the agreement was. All of a sudden, they decided to end it at the end of August. If they ended at the end of August. Then what you're going to do with the production of September, what they did is they took the increase in September, divided it into two halves and they added one half to July, one half to August and that increase the amount of the ceiling from 432 to 648. There are many explanations for that. Some people think they are extending the olive branch to President Biden that look we are we are already increasing production. Look what we did. At the same time, they were expecting Biden to visit but they did not know when. But if he's going to visit in July as planned right now, because he's supposed to be in Saudi Arabia on the 15th and the 16th of July. By the time they increase production, it will be September. So it makes perfect sense. If they want to increase production in September, because they are free, they are no quota in September so they can really extend an olive branch to Biden and increase production. The only thing is most of that production is not going to see the market simply because we are talking about production, we're not talking about supplies. We are talking about production, we're not talking about exports. Summer demand for oil increases in those countries because they need additional power generation to meet the cooling demand. And this does not apply only to the Gulf nations that apply to nations in North Africa such as Algeria for example, or nations in Latin America or other places they need the extra demand. Of course, there is winter on the other side. But the idea here is there is extra demand and as domestic demand, so their exports may not increase at all, although they are increasing production. Do they have the capacity to increase production? Yes, they still have between UAE, Saudi Arabia, Kuwait, and Iraq, they probably still have about 1.6 million barrels a day of what we call effective production capacity, which means that they can bring online within 90 days and sustain it. So we still have about 1.6 million barrels a day of spare capacity.
Erik: Joining me now is Forest For The Trees founder Luke Gromen. Luke, I've really been looking forward to this interview. You know, it's been fascinating to me since that Fed survey came out saying that an unprecedented 41% of respondents had become concerned about foreign divestiture of US assets. I've had just wildly opposing views. David Rosenberg told me just fade that entire report. It's nothing to worry about. That's, you know, just don't even think about that being an issue. Whereas Louis Gave seemed to think it was a huge issue. And I know that you've probably out Louis Gave because I heard you say in another interview that you thought it was on par with the Nixon moment on August 15 of 1971 when President Nixon effectively defaulted on the Bretton Woods agreement. So, talk about what's going on here with the seizure of Russian FX reserves and also the extra judicial seizure of other Russian owned assets in the United States. Is this a big deal? Why is it a big deal and why aren't many people other than crazy nutcases like you and me taking this seriously?
Luke: Hahaha crazy nut cases indeed, right? Thanks for me back on Erik. I think it's a really big deal simply because the US has a supply demand problem for treasuries. And when you have a supply demand problem, you are trying to make your assets more attractive not less attractive. And so to me, I just think it's a big moment, because it had never been done. I mean, it had been done to some smaller countries, but it had never been done to a G8 nation, it had never been done to a nation on the UN Security Council. Have never been done to the world's biggest producer of commodities, to the world's biggest exporter of energy. And I think we're seeing that it is a big deal in markets. And by that, I think we can just look at the ruble dollar rate doing what it is done, since those sanctions were announced. I mean, we saw the ruble go to whatever it was 120 against the dollar. And President Biden pronounced it dead and buried and called it rubble. And, but that was sort of, you know declaring victory. You know at the end of the first quarter, and the second quarter, the game featured Russia coming out and effectively defending the ruble with gas. And people say, well, the ruble is a one-way market, the ruble, you can't I can't buy and trade rubles. Well, the US made it a one-way market sell side only when they put on the sanctions, right. So you sort of can't have that argument both ways. So, the US made it sell side only one way and the Russia came out and said that's fine. We're going to defend it by saying you gotta have it to buy gas. And so, there's sort of this bifurcated reality where, you know, paper FX traders can't buy rubles or the spreads not within you know, the numbers, not what they see on their screen. And I think that's right. I think I sympathize by that. But the real market, I think that the paper FX market for rubles is a sideshow, the real game is Europe buys $150 billion a year of energy from Russia. And once the US did what it did sanctioning FX reserves and trying to trigger a collapse in the Ruble. It forced Russia to defend the Ruble. And Russia really only has one thing to defend it with and its energy. And so they defended the ruble with energy because of what was done to the FX reserves and we've seen what the ruble has done since it's trading at 60 today. It's up against the dollar, pretty notably on the year. It's the best performing currency in the world on the year. And it's really, it's a two way market. If you need gas, you're buying rubles. If you don't need gas yeah it's still a one way market, but they don't care. They're trying to defend their currency.
So I think when you look at what has happened in the markets as it relates to that, I think that all goes back to this sanction of FX reserves and the implications of that for others which is, now that that weapon has been deployed, everybody else is going to I mean, this is warfare. This is just economic warfare. And so, once your enemy or your adversary deploys a weapon, you immediately if you are smart, if you have a brain in your head, you immediately go about looking to disarm or protect yourself from that weapon. And how do you do that at the very least you stop growing your holdings of treasuries, at the very least, and you look for other alternatives. Clearly, I don't disagree with the point that there are not many other sovereign debt markets... There are no other sovereign markets that are that are as deep and liquid as a treasury market. Of course, Treasury markets had its own liquidity problems in recent years, it's only been deep and liquid at key times or anytime there's been stressed because the Feds been in there injecting liquidity, which is not exactly a great reserve asset characteristic anyway. So to me, I think what we're seeing in ruble, gas, energy geopolitics suggests it was a very big deal. And I think the ultimate outcome is kind of what I lead off with, which is, the US has a structural deficit problem, it needs more buyers of treasuries rather than less, preferably at negative real rates, actually it has to be at negative real rates with our debt levels this high and our deficit levels this high. And the US is out there advertising, hey these aren't safe, we will take them if you are a bad actor. And the reality is yeah Russia is a bad actor. But Japan was a bad actor in the 80s. The Germans were bad actors. At one point, the French were bad actors, the Israelis were bad actors, the Saudis were bad actors three years ago. So there's, you know, who's a bad actor and who's not shifts a lot. And so I think it's just going to touch off, I think, a sort of a slow, steady, relentless bid for physical gold as a reserve asset or a redeployment of surpluses into productive things, right. So instead of the Saudis storing any excess surpluses in treasuries, they'll store them in developing their own country or developing elsewhere, paying Dustin Johnson a gazillion dollars to go golfing, whatever they want to do. But the bottom line is any dollar any surplus that is diverted away from the Treasury market increases the pressure on the Fed to ultimately finance US deficits, because they're the only one with a big enough balance sheet to do it without crowding out the domestic and the global economy.
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.
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