Transcripts
Erik: Joining me now is Santiago Capital founder Brent Johnson. Brent prepared an excellent slide deck for today's interview and I strongly encourage you to download it as we will be referring to the charts and graphs that contains during today'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're not registered yet at macrovoices.com. Just go to our homepage, macrovoices.com, click the red button that says looking for the downloads. Brent, it has been way too long since we've had you on the show. It's great to have you back. Let's jump into your slide deck and talk about a favorite topic of mine when I talk to you, the US dollar. Everybody's asking me I can't decide.
Brent: Well, I had a feeling you might ask me about the dollar, Erik. So that was the first slide that I threw in here. But in any case, it's really great to be back. I always appreciate the opportunity to talk with you and your listeners. It's one of my favorite podcasts out there so happy to jump in. And, you know, the point I wanted to make with this first slide here is I was here talking with you about a year ago, Erik, and the dollar was around 93. You know, and since that time, I've had innumerable people tell me, remind me, try to convince me that the dollar is going to zero. And there's just nothing that can stop it.
However, you know, in the last year, despite printing over $1.4 trillion, despite having a democratic president get elected, despite having a totally democratic congress get elected, despite numerous stimulus plans, a contested elections, and social unrest. The dollar is at 92. So I guess I would say are you sure? Are you sure the dollar is go to zero? I'll tell you I'm not sure about anything, Erik. But, I think it's a very uncertain time. And I think a lot of people who are certain in their narratives may be proven wrong. And so we'll just have to see how it goes.
Erik: Joining me now is Bill Blain, strategist and head of alternative assets for Shard Capital, and probably better known as the author of Blain's Morning Porridge. One of the most intriguing investment blogs on the internet. Bill, it's great to have you on as a first time guests. I've been asking everybody about inflation. Janet says it is transitory. I think my favorite quote that I've heard so far is World War II was transitory. What do you make of this transitory argument? Is inflation here to stay? Is this a secular phenomenon? And what does it mean?
Bill: Yeah, I rather the opinion that inflation is not only here to stay, but the most significant thing that's going on is we have long term inflation is now being imported into the real world from distorted financial assets. Everybody tells me that there's no inflation out there. And what we're seeing is just a transitory spike caused by supply chains breaking down, and things like the chip shortage and people who are anticipating a faster recovery. But what we're really seeing is all the inflation that's been generated over the last 12 years of monetary experimentation, quantitative easing, and buying back bonds and keeping interest rates artificially low, that's generated tremendous inflation in financial assets. And that financial asset inflation is no creeping into the real world.
So you're going to see a whole series effects inflationary moves that occur as a result of that. Plus, I think we're also going into a very different world that is not going to be one where you can easily, simply brush off inflation effects as transitory. I mean, let's just think for one second about some real world events that have just occurred. Like all these climate disasters we've seen in the last month, they cause real costs. These costs have to be paid from somewhere. And that is going to be inflationary in its own right. So I think we really have moved into a new world where inflation is going to start really impacting bottom lines again.
Erik: Joining me now is Darius Dale founder and CEO of 42 Macro. Darius prepared an extremely complete chart deck for today's interview. I strongly recommend that you download it. Registered users will find the download link in your research roundup email. If you don't have a research roundup email, it means you're not yet registered at macrovoices.com. Just go to the homepage, macrovoices.com, click the red button that says looking for the downloads. We're going to be referring to the slides in that deck. We're not going to have time for all of them. But I encourage you to go through all of them at your leisure because it's a really great deck.
Darius, I want to start with a story which you know, when we booked you for this. We said listen buddy, we're really looking for a deflationist because we've had so many secular inflationists including myself, we want to offset that with an opposing view. And you said, sorry, I'm a Model-Driven guy. And my model says inflation, then something changed, because I got an email from you just a couple of hours before we did this interview on Tuesday morning. And you said you might get your deflationists after all. What did you mean?
Darius: Hey, thanks Erik. It's great to be back. So in terms of what changed, we run this dynamic factor model that we use to now cast what we call the dominant market regime or what we believe or how we believe investors should be orienting their risk management exposure. As we show on slide 6 through 13, that system, and it's born out of 42 market indicators that were scoring through the lens of our volatility, just a momentum signaling process. That system finally tipped in favor of deflation, as of this morning Tuesday, July 20.
Erik: Joining me now is Aaran Param, investment strategist for Variant Perception. Aaran, great to get you on the program. Let's start with the big debate in finance. Inflation, some of us say it's secular. Of course Janet says it's transitory. What is it?
Aaran: Yeah. Thank you Erik. Thank you for having me on. I guess. Firstly, it's just worth saying you guys have done a great job getting some very excellent views on both sides of the inflation debate from previous guests on the show. In a nutshell, our view is that inflation risks are higher than they have been in recent decades, and are largely reminiscent of late 1960s, early 1970s US economy. Now, that doesn't mean that we're guaranteed to get a a secular rise of inflation. But the odds of a regime shifts to a world of unanchored inflation expectations and upside inflation volatility are higher today.
In terms of structural risks, I think these are quite well known. We've got the fusion of fiscal and monetary policy working hand in hand. That adds weight to the whole debasement of the currency and unanchored inflation argument. With respect to cyclical risks, I think broadly, we can sum this up in the sense that we've got pent up demands being unleashed onto an economy with the system supply side disruptions. And one area that we've been writing quite thoroughly about this year is housing. So if we were to just break down CPI into its various components. Shelter CPI is about 30%, of headline CPI and about 40% of core inflation. This series hasn't really been volatile to the upside before. But we're starting to see evidence that that's going to change pretty soon. We know that house prices in the states leads shelter CPI by about 18 months and more specifically, that's owners equivalent rent. So with red hot housing data through the pandemic, we're now starting to see owners equivalent rent track higher. And yesterday's data was really confirmation of this starting to happen.
The CDC eviction moratorium expires at the end of June. And that allows landlords to boot up tenants essentially and demand higher rents from new ones. And we've seen asking rents from landlords such high recently, at the same time as vacancy rates are still very, very low. So to us, it's actually very, very strange that we're seeing such a huge divergence between what's actually reflected in CPI versus reality. And to us that really brings into question, you know what's actually real. And that is of critical component for judging inflation expectations. So you know, we can look at things like Shadow stats for instance. These things tell us that the actual inflation felt by households, is probably a lot higher than what CPI is actually telling us. And we can also go through company transcripts. We see that their costs are rising all over the shop, and they don't think it's transitory. And now they're starting to feel the pressure to really pass this on to consumers. And so really, what we're left with is it's inflation expectations are the measure to watch right now. And that is really the propagation mechanism for turning cyclical or quote, unquote, transitory bursts in inflation into a more persistent one.
And of course, there are a lot of measures of inflation expectations. Whether it's from market breakevens, household surveys, professional forecasts or surveys. The Fed has tried to aggregate all of these different measures into one indicator. The common inflation expectations index. That's not actually useful for investors, because it's a quarterly index firstly. And secondly, it's released with a massive lag. So we tried to build one that's pretty similar, and much more timely, and this indicator has been surging from its pandemic lows. And in level terms, it's probably back to 2013 levels, which, of course is an environment with much higher yields. I will say that it's still important to respect the broader deflationary arguments, technological change, debt dynamics, demographics, and so forth. But these structural arguments are quite hard to see in the data. And it's certainly possible that inflation and inflation expectations can spiral out of control with the backdrop of some of the structural headwinds.
In terms of cyclical deflation or indicators. One thing that we're watching quite closely is bank loan growth versus bank asset growth. And this is really summed up the QE era where money growth was surging, but there wasn't really any loan demand to mark this up. And the way the credit cycle works in the data is that supply tends to lead demand. So banks usually step up lending efforts if they expect there to be sufficient demand on the other end. And what we're seeing now is that bank lending surveys, they're showing a sharp easing of credit standards alongside lowering credit spreads. So we do expect loan demands to pick up so some of these deflationary-disinflationary indicators are starting to reverse now. But I think you know, just the final point really to make is more of a thought exercise. You know, I loved reading Stephen Roche's piece recently on the ghost of Arthur Burns where he gives an inside view of the FEDs thinking during the 1970s.
And really it was striking to me that there's a massively dismissive tone to inflation in the 1970s, where the Fed was essentially chalking down high inflation prints to noise transitory factors. So, there are certainly some eerie parallels to today. But I think generally, it's a great exercise just to invert the problem and ask, you know, what if what we're seeing today isn't transitory? And what if we keep seeing these temporary disruptions that cause burst inflation? And what if this is the moment where inflation expectations finally react, and they become reflexive and unanchored? So I think that's broadly how we're thinking about inflation. I think it's important to invert the problem always and think about the other side of things.
Erik: Joining me now is Viktor Shvets who heads up Asia-Pacific and global equity strategy for Macquarie Investments in Hong Kong. Viktor, it's great to have you on the program. As a first time guest, I've been asking all of our guests to tell me about inflation versus deflation, which it seems like it's just the big debate in finance that keeps coming back. How do you see this? Are we as many of us think headed into secular inflation or is it just a false alarm?
Viktor: Well, it's neither of those things. I personally say the inflation-disinflation pendulum. In other words, swinging from one side to the other and returning very quickly back to disinflation will be the story of almost the rest of our lives. If you have a career that is going on for at least the next 10 years, that's going to be your story. And the reason for that Erik is very simple. The last 20 years was very straightforward. From my perspective, this was a period of extreme financialization, a period of extreme digitalization, and also extreme globalization. All of those forces were incredibly disinflationary. And so the only time inflation had any chance was during recoveries like when you recover suddenly from global financial crisis or dotcom. But otherwise, inflation really had no chance at all.
Now, the next 10, possibly 20 years will be different. We're not going back to 1970s. Today's world is so dramatically different. Demographics is different, debt levels, financialization are different, government policies are different, technology and its impact is different. So we're not going back to 1970s. But, whatever is going to happen in next 10-20 years will be different to the previous period. Why is that? Well, we still have a lot of disinflation, the backdrop remains disinflationary. 20 years from now, everything will be at zero. And where does it come from? Well, demographics is mildly disinflationary, you have financialization and debt, which is highly disinflationary. And of course, we have technology and information age.
But unlike the previous 20 years, going forward, there are some inflationary elements. What are they? Well, essentially three. Number one, unlike the previous 20 years, where we essentially just manipulate digits of information and data. The next 10 to 20 years will be much more capital intensive. In other words, we'll be starting to manipulate physical matter, atoms. It's example of that will be alternative energy and transportation platform, elimination of factories on a global basis, and supply and value chains. It's going to be infotech merging with a biotech, it's going to be a robotics, automation. So it's a completely different environment. Now, it requires a lot more investment. The last 20 years, there was no need to invest much money other than into intangible assets. The next 20 years actually requires more investment. Now that investment which we're going to make in this digital age, creating physical things, so I touched as I said elimination factories, supply chains, robotics, automation. That investment ultimately will be very disinflationary. But initially, it could actually be inflationary. So that's number one.
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