Transcripts
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
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.
Erik: Joining me now is Joseph Wang, proprietor of fedguy.com. Joseph, it's great to get you on the show. This was an FOMC week. Why don't we start with what happened? I don't think the 25 basis point hike really surprised anybody but give us the bigger picture. This is one of the most anticipated rate hikes in all of history. The beginning of a cycle that a lot of people have their eyes on. What should we take away from this week's FOMC and what other perspective do you have on what's going on?
Joseph: Hey Erik! First of all, I want to thank you very much for inviting me. I've actually listened to MacroVoices every week for the past few years. So it's a great honor to be here. So today's meeting was as you mentioned, highly anticipated. Again, we're at liftoff again. And what I see is that we're kind of at an inflection point for a global monetary policy. For the Fed, for example, we're hiking today, but not just the Fed. If you look across the pond at the ECB, at the BoE in many developing market central banks, everyone is getting more hawkish, less accommodative, everyone except the BoJ but they got to do their own thing. So today, if you look at the market reaction, you might think that it was dovish. You see equities rallied, you see the two year yield, the one that's most sensitive to Fed policy, the rates went up a few basis points, not much and the 10-year went up a little bit as well.
But if you look at the SCP dotplot, I think what you see is, I think, a much more hawkish response. You see the Fed revising up their expected Fed funds rate by 100 basis points for the next three years. You see inflation expectations rising and expected real growth markdown so basically stagflationary. And the other thing that happened during the FOMC is that Powell seems to be ready to go forward with QT at the next meeting. So when you put those together, in my view, it seems like a rather hawkish meeting. Although to be clear, inflation is very high and the Fed is far far behind the curve. The way that I see this biggest thing that could happen in the coming weeks is that we have a very aggressive quantitative tightening. And that's actually be hinted at by Powell at his house testimony a couple of weeks ago. And that I think, could be a big change for the markets much more so than just hiking the short rate by a couple 100 basis points would imply.
Erik: Joining me now is Lakshman Achuthan, founder of the Economic Cycle Research Institute (ECRI). Lak prepared a short chart deck to accompany 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. Just go to our homepage, macrovoices.com. Click the red button that says looking for the downloads.
Lak, it's great to get you back on the show. Last time we had you on was August of 2021. And at the end of that interview, I said hey you're a cycles driven guy. So why don't you reach out to us when your cycles tell you, you got something new to talk about. You reached out a couple of weeks ago before the whole Ukraine situation erupted on us. And you said you had something to talk about pertaining to an upcoming policy mistake. What's on your mind?
Lakshman: Right! Hey, it's great to be back and thanks for the intro. Basically pre-Ukraine crisis, we were just staring down the barrel of a couple of policy mistake choices. It wasn't whether or not there would be one. it was just which one do you want to choose. And to kick it off, I'd say the first one that we were alluding to probably the last time we were able to talk together is that they could be tightening. The Fed could be tightening into a slowdown and therefore be risking a recession and or market crash. And I guess alternatively, if you took the other kind of door. They could kind of back off and get a bit more dovish. And then under those circumstances, they'd be risking runaway inflation and letting that get really embedded.
And so they had a very very narrow path to try and get to the proverbial soft landing. And not even I think realizing that we were cycling down in terms of growth. And since then, since I reached out, that path has become extremely narrow I would say at this point. And I think it's not too long ago, just a few days ago. So you know, after the the Ukraine crisis kind of kicked up, you know, Powell has said that he's still on track for hiking as needed to quell inflation. So here we are! I think we're staring Ukraine aside, we're staring at some volatility here in front of us from a couple of different angles from a cyclical vantage point.
Erik: Joining me now is Dr. Pippa Malmgren. former presidential adviser and best selling author. Pippa it's great to have you back on the show. Needless to say, this is a week where we need to talk. Thank you for having me as always. Now, listeners, I know everybody is expecting us to talk about the Russia-Ukraine situation. And we're absolutely going to do that. But we're going to start with a bigger picture to frame some context. When we set this interview up. It was long before Russia-Ukraine had even blown up. And what brought this about was two separate MacroVoices guests. People whose names you know well and I'm not talking about random bloggers, but guys who run funds with hundreds of millions to low billions of dollars in them have told me privately off the air because they didn't want to go on record saying they believe that World War III actually started a year ago.
And when I heard that I thought, holy cow, I can't believe I'm hearing what sounds like conspiracy theory from really prominent people in finance. I thought I know, I'll run this crazy talk past my friend Pippa who used to work in the White House and knows how to debunk conspiracy theories. When I said that to Pippa her reaction was, did you read my article on Substack, titled World War III has already begun. Pippa, holy cow! First of all, what is a fair haired patriotic American gal who used to work in the White House doing on Substack, the blogging platform, which is the anti-censorship platform for people like Edward Snowden and Glenn Greenwald, and people who have been censored from other internet platforms. What are you doing on Substack?
Pippa: Well, I haven't been censored on other internet platforms. It's more that it's a great setup that allows a person to really write at length and provide deep dive analysis of situations. And yeah, there's a breadth of opinion on there. But you know, I grew up in Washington D.C. in the heart of politics and my experience was that I know this is maybe horrifying to some people but you need to talk to all sides. And you need to consider all angles right? That nobody has a monopoly on the truth. You have to really understand arguments that don't jive with your own. So I'm very big on listening to people who are way outside my own comfort zone in my attempt to understand what's happening in the world better.
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