Transcripts

Erik:    Joining me now is Dr. Anas Alhajji, former chief economist for NGP Energy Capital Management, which for anyone who's not familiar is the premier private equity fund in the oil and gas space and former professor from the Colorado School of Mines, the University of Oklahoma, and Ohio Northern University. Anas, it is great to have you back on the show it has been too long and boy, we are overdue for a crude oil special. It's great to have you back.

Anas:   Absolutely, absolutely.

Erik:    I want to start by sinking up. We talked a lot about this last time and I'm not going to spend a lot of time on this subject. Anybody who's interested who didn't catch your last interview should go back and listen to that one, because it's as relevant as it was the day it was recorded. But I want to just kind of follow up on our last interview, after that interview and watching what's happened in the market, I have become convinced that the world is in a global energy crisis and I'm going to make a bolder statement than we made in that last interview. I'm going to say that, although the recession may hide this, and it might be years before people really figure this out. I do not believe that it is possible for the world to return to pre-pandemic normal in the sense of energy demand going back to where it should be naturally, you know if normal growth path had continued, and there hadn't been any pandemic. I make the argument that it is not possible to get there because the energy supply needed to do that simply does not exist. And furthermore, in order to solve that problem would take several years because you'd have to start making much more investment in new oil and gas production. And I think we have a really, really serious problem. Everybody's talking about this European energy crisis. I don't think there is a European energy crisis. I think that Europe just happens to be feeling it the hardest, and what's in Europe now is going to get worse. And I think it's coming to the rest of the world. Am I missing something because that's a pretty strong statement that there's no way out.

Anas:   Yes you are missing something but the other way. The crisis is 10 times worse!

Erik:    Oh, it's worse than I think?

Anas:   It is 10 times worse than what you think.

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Erik:     Joining me now is Lakshman Achuthan, co founder of the Economic Cycles Research Institute, Lak prepared a 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 locks picture that says looking for the downloads. Lock, it's great to get you back on the show. Before we dive into the slide deck, I want to start with a super novice topic because it seems like we need to revisit it. Given a lot of politics lately. Let's start with the definition of what a recession is. I actually surprised myself recently, before President Biden changed the definition so to speak, I had said on the air that the neighbor definition the official National Bureau of Economic Research definition of a recession was two consecutive quarters of negative GDP growth. And I have more aggressive fact checkers than Donald Trump. So I was overwhelmed promptly, by listeners said, nope, you got it wrong. That's not it, you should get Lak back on the show, in order to teach you what in a recession really is. And that was before President Biden repeated my mistake. So let's start with recessions. But really as investors, what are the key things we need to understand about how recessions? What role they play in economic cycles and what they mean to us?

Lakshman:    Thank you so much. And I'm really grateful to your listeners, and to you for asking the question and really wanting to understand what a recession is, I certainly find it fascinating. You know, they call it the Achilles heel of the free market oriented economy, which is not a knock on the free market. But it's just a feature of, kind of ebb and flow that we have, when we allow a free market to run, which is what we're generally trying to do. So a recession, first and foremost, one of the things is it's not a statistic, it's really a process. And I think that that trips people up. Certainly, it's easier if you could boil it down to a rule of thumb, like two negative quarters of GDP back to back. And that's a decent rule of thumb isn't a bad one. But it's not a necessary nor a sufficient condition for recession, defined as this process, that a free market goes through a business cycle. So we're literally talking about a contraction, a recession is a contraction when the level of economic activity falls on, so it's contracting. And when we say economic activity, we have to define that or we don't actually have to define it, we know we have to remember what it is. My mentor, Geoffrey Moore, his mentor was a man named Wesley Mitchell who defined what a recession is, and he helped set up the NBER. So it's a pronounced, pervasive and persistent decline in broad measures of output, employment, income, and sales. And so, we do have broad national accounts on those four different types of measurements of broad economic activity. So you can think of GDP or industrial production for output. The jobs data, there's lots of different jobs data, nonfarm household, all kinds of different job activity, labor market activity data, there's broad income, and there's very broad sales much broader than retail sales, aggregate sales data for the economy. And in retrospect, because these are government data series, in retrospect, after the revisions are done and those can take many months or even a little longer, when those revisions are done, you can see with some clarity, when the peak and the trough and the level of activity occurred on a pronounced pervasive and persistent basis.

So in the current environment, the thing that I think needs to present itself which has not presented itself yet for a recession to kind of be underway, is clear evidence of falling labor market activity. We have some evidence of that, but not clear evidence of that. For example, household has fallen a little bit but nonfarm has not. And it won't be a recession unless there is a contraction in jobs, the level of jobs are falling. Same goes for income, sales and output. So that's broadly speaking what a recession is. That's the target the business cycle. Wesley Mitchell had named his book where he outlined this the business cycle, the problem, and its setting. And so that's the world, that's the pool we're swimming in. We’re trying to figure out what's going on inside of that environment. And to do that we track the coincident data that helps define the cycle. And then more importantly, I think, for investors and speculators and decision makers, is what are the leading indicators doing, which we'll certainly get into the reason recessions can be important for investors or business managers, is because of what they do to demand growth, primarily, which can impact earnings growth. And the fact that it's pronounced, pervasive and persistent. Meaning it's not just one section of the country, or one sector of the country. It's pervasive, meaning it's hard to hide from it. There are some kind of non cyclical, less discretionary areas, but they probably get tagged a little bit, too, during recessions. And so let me stop there, just having set the table with it with the definition.

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Erik:     Joining me now is Brent Johnson, Founder and Chief Investment Officer for Santiago Capital. Brent prepared a slide deck to accompany today's interview. I strongly encourage you to download it is it contains quite a few graphs and charts that we'll be referencing throughout the 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, click the red button that says, looking for the downloads just above Brent's picture. Brent, it's been way too long since we had you on the show. I think it's been over a year now. It's great to have you back. Let's talk about one of our favorite subjects the US dollar.

Brent:   Yeah, it's great to be back good and it would be kind of funny if we didn't talk about the dollar here, especially with what's been going on this year. So I'm happy to be back and happy to talk to you.

Erik:     Maybe we should start with a refresher for people who are not familiar with your Dollar Milkshake theory. A lot of people have been kind of confused by the US dollar. They thought that the debasement of the currency by the Federal Reserve printing so much money in stimulus and so forth, was going to cause the dollar to lose value. But it seems to strengthen when a lot of people thought it was going to go the opposite way. Give us a little bit of a refresher course on Dollar Milkshake theory and how you think about things and how we should be thinking about them.

Brent:   Sure. The best way to think about the Dollar Milkshake theory, because I think there is some misconception about it is it's not just the dollar going higher. I mean, that's kind of the effect of the theory, but the theory is that we are going to enter a sovereign debt and a sovereign currency crisis. And the Dollar Milkshake theory is the framework via which I kind of see that process playing out. A couple years ago, when the dollar was falling post COVID, when they were doing all different kinds of stimulus and monetary support, a number of people said, well, the theory has been invalidated. Now, over the last year, as the dollar has risen, a number of people have said, well, it is validated. And to be honest, what I would say Erik, is neither of those is the case yet, because as of now, we have not really entered a sovereign debt or currency crisis. I still think one is coming. But as of now, I don't think you could either say it has worked, or it hasn't worked. As far as the theory itself, I think we're gonna find out over the next couple years, whether or not is valid or not. But as it is now, we've got a very strong dollar. And we have the potential for some volatility in the crisis, but as of yet, it has not yet really arrived.

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Erik:     Joining me now is Charlie McElligott, process and macro strategist at Nomura. Charlie has prepared a slide deck for anyone who's not familiar with Charlie's work. He's famous for his graphs and charts. So you're not going to want to miss that slide deck. 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 at macrovoices.com. Click the red button that says, looking for the downloads just above Charlie's picture. Charlie, it's great to have you back on the show before even diving into the slides, I want to just start at the really high level big picture. Seems like there was lots of really good reasons for the stock market to be selling off through the middle of June as it was, all of a sudden it changed direction. It's been rallying ever since and most of us don't get it. It seems like the macro data is just getting worse. So does that mean this was just a dead cat bounce and we hit the 100 day moving average and it's all about to roll over or is there some big bullish catalysts that I've missed? What's going on here?

Charlie:   Yeah, so first of all, always a pleasure to speak with you. Thank you for having me back. It's remarkable how many people I talk to around the street, on the institutional side that say at first, I first discovered you on MacroVoices. So thank you and obviously your platform is just wildly successful. I think what happened over the course of the summer and I think last time I was on, we spoke about what a clear trend market this had been. And that's why managed futures CTA trend is the foreign OA champion of the year to date kind of strategy performance. It's not based upon the traditional kind of bond-stock correlation that so much of the kind of the modern investment asset allocation framework is and it works beautifully in times of tail type of an environment. And that trend dynamic over the course of the year, which was very much premised upon that inflation overshoot central banks forced to spastically tighten financial conditions theme was your big shorts and bonds, and then rates and in equities. And then on the long side, your long US dollar, right, as a central bank had to impulse tighten because they're behind the curve, they miscategorized inflation as transitory and it became something that's structurally persistent and then also to long commodities as your kind of inflation hedge.

In June, I would say is when that CPI shock, what was one of the most recent CPI shocks and other upside beat there. I think it saw the mentality from the market shift to, oh dear Lord, we don't have arms around this situation anymore. We do not know where this is going. High inflation tends to mean trending inflation. We've lost the ability to forecast this and where we're going to borrow a line from Back to the Future where we're going, there are no roads. The mentality shifted from that previous focus on inflation upside risk, now to growth downside risks which then kicked off a bunch of second order impact, and then that growth downside risk became this, this sudden corroboration with a lot of growth data as well as things that we mentioned last time we spoke, which were trends in the market that were telling you that markets were pricing increased probability of recession. You know, this immediately created something that looked like the equivalent to a dovish fed pivot. And you had this impulse easing in financial conditions. And I can go on from there as to those second order impacts what that then created and saw this kind of counterintuitive rally in equities that seemingly, as you said, from a top-down perspective had this perfect next leg down kind of story to go that then went completely awry over the last month and a half.

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Erik:     Joining me now is Charlie McElligott, process and macro strategist at Nomura. Charlie has prepared a slide deck for anyone who's not familiar with Charlie's work. He's famous for his graphs and charts. So you're not going to want to miss that slide deck. 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 at macrovoices.com. Click the red button that says, looking for the downloads just above Charlie's picture. Charlie, it's great to have you back on the show before even diving into the slides, I want to just start at the really high level big picture. Seems like there was lots of really good reasons for the stock market to be selling off through the middle of June as it was, all of a sudden it changed direction. It's been rallying ever since and most of us don't get it. It seems like the macro data is just getting worse. So does that mean this was just a dead cat bounce and we hit the 100 day moving average and it's all about to roll over or is there some big bullish catalysts that I've missed? What's going on here?

Charlie:   Yeah, so first of all, always a pleasure to speak with you. Thank you for having me back. It's remarkable how many people I talk to around the street, on the institutional side that say at first, I first discovered you on MacroVoices. So thank you and obviously your platform is just wildly successful. I think what happened over the course of the summer and I think last time I was on, we spoke about what a clear trend market this had been. And that's why managed futures CTA trend is the foreign OA champion of the year to date kind of strategy performance. It's not based upon the traditional kind of bond-stock correlation that so much of the kind of the modern investment asset allocation framework is and it works beautifully in times of tail type of an environment. And that trend dynamic over the course of the year, which was very much premised upon that inflation overshoot central banks forced to spastically tighten financial conditions theme was your big shorts and bonds, and then rates and in equities. And then on the long side, your long US dollar, right, as a central bank had to impulse tighten because they're behind the curve, they miscategorized inflation as transitory and it became something that's structurally persistent and then also to long commodities as your kind of inflation hedge.

In June, I would say is when that CPI shock, what was one of the most recent CPI shocks and other upside beat there. I think it saw the mentality from the market shift to, oh dear Lord, we don't have arms around this situation anymore. We do not know where this is going. High inflation tends to mean trending inflation. We've lost the ability to forecast this and where we're going to borrow a line from Back to the Future where we're going, there are no roads. The mentality shifted from that previous focus on inflation upside risk, now to growth downside risks which then kicked off a bunch of second order impact, and then that growth downside risk became this, this sudden corroboration with a lot of growth data as well as things that we mentioned last time we spoke, which were trends in the market that were telling you that markets were pricing increased probability of recession. You know, this immediately created something that looked like the equivalent to a dovish fed pivot. And you had this impulse easing in financial conditions. And I can go on from there as to those second order impacts what that then created and saw this kind of counterintuitive rally in equities that seemingly, as you said, from a top-down perspective had this perfect next leg down kind of story to go that then went completely awry over the last month and a half.

Read more ...