Transcripts

Erik:     Joining me now is Mike Green, chief strategist and portfolio manager for Simplify Asset Management. Mike, it's great to have you back on the show. It's been way too long.

Mike:    Aw Thanks Erik. It has been too long.

Erik:     I told our listeners when I interviewed Dr. Pippa Malmgren that long before I interviewed Pippa, a couple of different very senior people who I respect a lot had told me, quote, World War III has already begun. And Mike I want to now bring you out of the closet as the first guy who said that to me and what you actually told me I think a year ago now was you said, World War III began a full year ago. So that would be two years ago now at this point. Something that I realized, I didn't really take that seriously at first. And the reason is, for me personally those three words World War III equate directly to certain nuclear Armageddon that ends humanity forever. And I thought that was too extreme of a conclusion to come to. And I was a little bit surprised by it. After reading Dr. Pippa Malmgren's piece on what she meant by World War III has already become, she's not talking about nuclear Armageddon, she's talking about a whole new kind of warfare that is fought primarily on digital battlefields. And it really is the nuclear superpowers at war with one another. But she doesn't think that it's necessarily headed toward that nuclear Armageddon scenario. So let's start by clarifying what precisely did you mean when you said to me a year ago, that World War III had begun a year earlier than that?

Mike:    What I meant by that was that we had entered into a period of great power competition, and that we were going to see the world begin to fracture. And unfortunately, that seems certainly more true today than it was back then I would argue, in many ways, the Trump tariffs on China were kind of the slap in the face that opened up this whole idea of, we're actually going to begin to compete quite overtly. I think the odd thing about what happened under the Trump administration was that Trump himself was very uncomfortable pushing forward a narrative that might harm the stock market right or might harm his popularity. So there is this weird dynamic where within the administration I was hearing a very clear change in tone and recognition that we had entered into overt competition, particularly with the Chinese, to a lesser extent with the Russians. And I would suggest that it doesn't have to mean Global Thermonuclear War, right? This can be a limited engagement, but it absolutely is involving a whole globe competition that is similar to, you know, the Napoleonic Wars of the 19th century and the 17th century to a lesser extent, the competition between France and Great Britain that manifested itself in the French-Indian wars to turn that into the first global dynamic, etc. This time around, it began in the trade trenches. But long before that, it was already happening, as you note in digital cyberspace, where China was basically doing everything that they could to steal every critical technology, and propel themselves forward in a, you know, a very fast moving way.

The irony is that this is actually very similar to the way that World War II develops, right, it doesn't start as a giant global conflict. It begins as a series of effectively border skirmishes. Right. And, you know, I find it a great irony that we're seeing the exact same type of dynamics that occurred at the start of that kind of 1937 to 1939 transition where it became clear that we were re-entering World War II. The armament had already been started. The US government and the UK Government were actively working to get their multinational corporations to withdraw involvement from places like Germany and Russia. You know, you saw the US suspend diplomatic relations with Russia in the beginning part of 1937 as Stalin had consolidated control and it became clear the extent of their spying operations against the United States. You know, this just feels it feels the exact same way, right? Now does it go kinetic nuclear? Man, that's, uh, you know, that's the bad outcome, right? But it does very much feel that the world is fracturing and fracturing for many of the same reasons. The global superpower has had to pull back, right? It is not playing the role of global policeman and as we see in US cities all over the place, when you reduce police enforcement, crime spikes, and some form of loss of Law and Order is what's happening around the globe right now.

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Erik:  Joining me now is Bianco Research founder Jim Bianco. This is a special episode of MacroVoices, this came about after Jim appeared on the show back in February. Towards the end of his interview, I asked Jim about the long term impact of decentralized finance, the trend that's become known as DeFi, Jim reacted by saying, Oh boy, I could do an hour on that subject alone. And holy cow, the listener response was overwhelming. So congratulations, Jim, you suddenly have a whole new following of DeFi enthusiast who can't wait to hear what you've got to tell us about the future of finance and what decentralization will mean to it.

Jim:    Well, thank you. Yeah, it is a fascinating subject. And a lot of epic changes, I think are on the horizon.

Erik:  Now, I want to just first set the context for our listeners that I asked Jim to talk to me a little bit off the air about what the best topics to ask him were about. And he gave me just a hit list, a bullet list of what topics we might discuss that conversation went more than 45 minutes. So Jim has about 217,000 hours of content in his head, I'm going to have a little bit more to say about how we might get more of that out at the end of this interview. But to just set the scope of this, we're gonna start by talking about currencies, not in the sense of what's going on right now with Bitcoin and other cryptocurrencies, because so many other podcasts have addressed that, so well. What I'd like to do is talk about the long term vision of what digital currency is going to mean to the global financial system. And from there, we'll move on to decentralized assets as they apply outside of currencies to other financial instruments.

But Jim, let's start with the big picture of the Bitcoin guys invented something really profound - truly digital cash, the ability to have a bearer instrument, which is represented inside of a computer so it can be transmitted across a network. And when we transmit that value across a computer network, it's not like a check or a claim against an account someplace, it truly is a transmission of financial value in the here and now, just like handing somebody $100 bill. Now, the way that I think about this is, for decades now going back to the 1960s, when Valéry Giscard d'Estaing, the French finance minister at the time, later became president of France, coined the term "exorbitant privilege" to describe how the United States as issuer of the global reserve currency kind of got an unfair deal, or at least unfair for the rest of the world, in the sense that since you have to have a global reserve currency, and one country has to be the issuer, whoever gets to be the issuer kind of gets an unfair leg up on everybody else in the world. Now, it seems to me, Jim, that decentralized currency systems create the potential of at some point, replacing the US dollar as the world's global reserve currency, with a supranational digital currency system, probably one that is controlled by a consortium of central banks, rather than by Bitcoiners. It's possible that Bitcoin could evolve into that. But what I'd like to ask you about is what it would mean, if we had a global reserve currency system that no country owned or controlled, that basically allowed everybody equal access to that currency system. And perhaps it's designed to allow central banks to administer monetary policy within their geographical domains. But the overall currency system isn't owned by any one nation. Is that a benefit? And do you think we're headed in that direction? And particularly, how do you think the United States government is going to feel about giving up that unfair advantage, according to the French that they've had for really, any years now?

Jim:    Well, taking the last part first, it's fairly clear that the US government is not in favor of any of the above. Because they are at the top of the heap, they have, we the United States have the exorbitant privilege that the dollar is the reserve currency. And you're correct, everything is priced in dollars, everybody needs to use dollars. So we've immediately if nothing else, think about crude oil or commodities, we immediately buy them in our, in our currency, we bear no currency risk. Europeans have to buy him in dollars, they have to convert their euros to dollars, they always bear a currency risk every time they do it. Because they don't know what the exchange rate will be, at the time that they need to do the transaction. We do know what the exchange rate is going to be because it's priced in dollars. We just don't know what the price is going to be. We just bear that risk. But everybody does.

If you do move to a global permissionless, meaning that no one can alter this system, or no one can override the system global currency. What you wind up doing is making it fair for the rest of the world because One of the problems the current global financial system has, is it's more of a tiered system that if you're further up the list in the United States is at the top of the list, you get more privileges, better, cheaper financing, better access to markets. As you move further down the list, you get less access, things become more expensive. And you wind up having also the possibility of being punished, or rewarded by the more important players, Europeans, United States, to give an example, depending on whatever your behavior is. And so what you're seeing with a digital currency is a push towards doing it. And in the United States, there's a belief that what Bitcoin or these digital currencies represent, is a bunch of you know, bros in Starbucks's in San Francisco that are trading these things. And there is that, but really, if you look at a company called chain analysis that looks at adoption rates of Bitcoin and digital currencies around the world. And they look at it by penetration of the population, only one country in the top 20 is a developed country. And that's the United States at number eight, the other 19 countries are all developing countries, emerging markets as well, too.

So you're seeing the adoption rate, really what's pushing this is Asia, Africa, the Middle East, knowing that they've been at the short end of the stick having not to have access to world capital markets, or to banking services at a reasonable rate. And wanting to have that. That's why you're seeing the adoption of places like in El Salvador, and potentially in Argentina, as well, too. Because they have been shut out of the capital markets, they need the permission of entities like the World Bank, or the IMF to do certain things. They are punished if they do things that displeasures, the first world or the United States, or the IMF, or the World Bank. And so that's why they want some kind of system like that. So what you're seeing is an outgrowth of a global currency. And you're right. For purposes of this discussion, let's leave off the technology and just assume or take that it's there, it exists, that at the currency level, it can't be hacked, and it is immutable.

Now, later on, when we talk about protocols, meaning I build a DeFi protocol, on top of that currency, we could borrow or lend it or trade it, that could be hacked, just like your bank could be robbed. But that if your bank is robbed does not mean that the dollar itself is invalid. Bitcoin, or whatever digital currency we come up with is not invalid, if your protocol gets hacked, so want to make that separation. But beyond that, I do think what you're seeing is a lot of the rest of the world very excited about the idea of a digital currency because it gives them better access. And they're not subject to being censored in ways that they are now.

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Erik:     Joining me now is Bill Blain, multi asset strategist for Shard Capital and probably more famously known as the author of Blain's Morning Porridge, which is read by 10s of 1000s of institutional investors every single morning. Bill, you are a little different from the average macro investor who will sit in an ivory tower and proclaim to the world you need to be investing in this macro backdrop in real assets not financial assets but real assets. You don't do it that way from your office. You get on a plane, boots on the ground. Why are you in Egypt right now, sir?

Bill:   Great, great question. Um, you know, I've got to come clean with all the listeners. I am taking a week off.

Erik:     Come on! I set you up to say that you're committed to your investors and you'll make all kinds of sacrifices.

Bill:   Yeah, and I am. And you know what, you know what Erik sometimes it's very important to get your head out of the markets and listen to what's going on. But let me tell the whole story. Yeah, I'm taking a week off to go down the Nile because my wife did a degree in archaeology and she's fascinated and I'm getting fascinated in it. But the reason I'm in Egypt is because we're thinking about what the future of investment looks like. And I've got to say, I am very nervous about financial assets. We just had one of the longest blue markets in the equity world that we don't see bonds perform stupendously well since 2007. And everyone's made off like bandits. But of course, we've all got to be realistic. The reason the stock market's been so strong and the reason bonds have been so returning has been distortion caused by Central Bank. The consequences with what they did to keep the world afloat in 2007 with ultra low interest rates, quantitative easing, and then artificially keeping interest rates so low. And then of course, we had COVID.

Now, these are all factors that distorted the markets. We are now beginning to see that correct. And so I think the outlook for financial assets, that's bonds and stocks is no longer as exciting as it used to be. Because as that distortion disappears, as the Fed and the Bank of England reduce their balance sheets, that distortion effect begins to vanish. So you got to think about what kinds of things should I be invested for, for the future in a highly inflationary market. And that's why I find myself in Egypt because we're no longer just thinking financial assets or assets that generation returns such as aircraft used to do before Putin confiscated half of them. But we're thinking about real assets that are going to generate future businesses. So one of the areas we're looking at is what is going to be the future of our business post climate change when we no longer see oil as a primary source of energy but we see oil as a vital commodity for all the goods that we need for the modern economy, like paints, adhesives, plastics, and by plastics, I mean develop plastics that are biodegradable. So there's still a teacher for oil. So we're looking at a big investment that we'll get involved in. And so for the last couple of months, I've been running around the Middle East putting together what looks like it will be a very exciting project. And when we get inked, I will be telling you Erik all about it first because we will be targeting real returns for that. And you need these returns, and what's going to be a long term inflationary scenario that I can see developing as a result of current energy insecurity. So that's why I find myself at the banks of the River Nile tonight looking over the most fantastic view and you know wondering what's going on in the rest of the world?

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Erik:     Joining me now is energy economist Phil Verleger, founder of PKVerleger LLC. Phil, it's great to get you back on the show. It's been way too long. Let's just start with the big picture of the energy market here. It seems to me like, boy, we've got so many factors. A confluence of factors coming together that really looked like higher oil prices could be on the horizon. How do you see this? What's the big picture? What lays ahead?

Philip:   Well, it's complicated like you say, start with a macro economy. Inflation is running 7% in the United States. Well above the 2% target for the European Central Bank. And so central bankers are going to tighten monetary policy. And they're, I think we're headed probably for a recession. It's not clear how severe but they want to bring inflation down. Oil is contributing to this. Metals are contributing to this. Food prices are contributing to this particularly with the war in Ukraine. So what I see is probably a drop in oil consumption. And that may help bring the market back into balance. We are short right now some crude oil, although oil exporting countries could boost production. We're also more importantly, we're short diesel fuel. Diesel is a big problem. Now, we were talking about diesel three years ago in the run up to the IMO standards to take sulfur out of marine diesel. At that time, I was warning of $200 oil. And most people didn't agree with me. I was warning because we have a problem making low sulfur fuel. Low sulfur crude is great to make it. High sulfur crude works only if you have the proper refining capacity. And that right now is being used to the maximum extent possible.

So what this means is diesel prices are up. The margins are I saw someplace that there's something like $60 a barrel and truck drivers are paying higher and higher prices. That's going to pull up crude prices, that's going to add to inflation, that's going to make it harder for central banks to ease off so to bring the diesel market back into balance, you may take a more severe recession. Problem could get solved if the government, US government and the other governments decided to release the light sweet crude oil from strategic reserves. Light sweet crude oil produces a lot of diesel and it can produce it at almost any refinery. But government officials seem to be really stubborn about using it. We've used 5% of the strategic stocks in this episode. And I guess they're not going to do much. And you know, it's idiotic but that's where we are. So we're probably going to see higher oil prices, a significant recession. And all those in central bankers generally don't know the names of oil ministers. The oil ministers are going to discover on exporting countries you're going to discover in two or three years that oh, demand is way down because of the recession. And it may be down permanently

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Erik:  Joining me now is Daniel Lacalle. A fund manager and chief economist for Tressis. Daniel, it's great to have you back on the show. What to talk about? Holy cow! Well, let's see, we have the beginning of a tightening cycle and oh, by the way, World War Three broke out, what do we make of this?

Daniel:    Thanks very much for having me to start. It's a great pleasure to be here. Again, I think that where we are right now is in a very difficult situation. I wouldn't like to be in the place of Mr. Powell these days because on the one hand, central banks need to find a way to put a break on inflationary pressures. And they need to give a clear signal to markets about their willingness to do so while at the same time be extremely accommodative. Because the deficit spending of governments remains elevated. The US government is likely to enter into a third year of record deficit spending. And that means a risk of seeing bond yields going through the roof if normalization actually does happen. So I'm pretty skeptical about this path of seven hikes that has been repeated over and over. Fundamentally because the reality that we have seen in estimates all over the world from independent analysts is one of a worrying trend, which is on the one hand reduction in growth estimates with an increase in inflation estimates.

And what's more concerning to me about what I see from consensus is that those inflation estimates come down very very rapidly in the second half of 2022 to reach a level that seems acceptable for those analysts. And if one makes an analysis of what would be required for that abrupt reduction in inflation to happen, it would essentially need to come from massive destruction of demand, which obviously means that the estimates of GDP are either wrong or the estimates of inflation are wrong. And in that situation, the Fed, the European Central Bank, even more so caught between a rock and a hard place. They need to on the one hand give a clear signal of their willingness to curb inflation. And on the one hand, they need to continue to be extremely accommodative in our market and in a sovereign bond environment in which the issuers and market participants remain extremely complacent.

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