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. We had the big day today on Wednesday afternoon. We're recording this the day before this podcast airs with the Fed announced that they're intending to do what? Why don't you give us the full briefing of what the Fed did today and what it means and what you see on the horizon?
Mike: Well, I think the easiest way of just describing what happened today with Jerome Powell's testimony in the release statement is that the Fed came out more dovish than I think people had broadly expected them to. They indicated that yes, they will begin tapering. They have the ability to either back off or to accelerate against them. But I think the most important piece of information that came away from it was the Fed's continued emphasis on the fact that they believe inflation is transitory, and importantly, even in the labor market, which has traditionally been thought of as a key driver of the Fed's behavior that they do not see us as having normalized or come anywhere close to reaching full employment. And they're largely discounting many of the wage pressures that they're seeing.
You know, Powell was relatively humble in terms of the certainty of where they are, but I think it was somewhat unequivocal that this was a very dovish presentation. And the real question, I think is going to be how credible does the Street view the uncertainty around whether they should hike or not. Right? The direct words were when we reach full employment, then we'll figure out whether we're addressing the inflation components. Whether we've adequately met the inflation objectives. And I think that's a pretty important statement for one of the very first times you almost would have expected something like this out of you know, if a labor economist like Yellen, but Powell very clearly came out in favor of let's let the economic environment run hotter, as we tried to get people back into the labor force.
Erik: Joining me now is David Hay, founder and Co-CIO of Evergreen Gavekal. David, it's great to get you back on the program. I've been asking everybody the same question as an opener, which is okay, inflation, are we talking secular structural inflation, which is what I think or do we believe Janet and their friends in the government who say, it is transitory. So I want to get your take on that. But particularly, you've been writing about something called greenflation. What the heck is greenflation?
David: Well, firstly, thank you very much for having me on the show. It's a privilege, especially since I just listened to your podcast last week with one of my heroes, Luke Gromen. And he did not talk about re-inflation last week, even though he's written on that somewhat. So I appreciate the opportunity to talk about that. Because I think it's hugely important. And I think it plays a significant role in this debate about whether inflation is transitory, as the Fed is saying, or it's much more enduring, which I'm with you on that and Luke. And, you know, frankly, based on the Fed's forecasting record, which is horrific. And I think the fact that they're saying it's transitory is probably a pretty strong indication that it's not. Maybe once they finally concede that it's here for years, that'll be the time to take the other side of the trade.
But basically, the idea of greenflation has to do with the reality that the planet is involved in a great green energy transition. And just one key element to this, which I think is inarguable is that this is the first time in human history that we're moving from more efficient fuel sources to less efficient fuel sources. And I'm aware of, you know, of all the environmental reasons why we're trying to do that. But that doesn't change the fact that it's extremely daunting to make this happen, and especially on the very ambitious and I'd say, overly ambitious and unrealistic timeframe that policymakers around the world are trying to achieve. And we're seeing the wages of this already, with tremendous energy inflation occurring in Asia and Europe. I think most Americans are unaware. We have natural gas that's doubled. Natural gas is trading for around $6 per million British thermal units, MMBtus, but in Asia and Europe it's $30 or more. So you've got, you know, really a shocking amount of energy inflation occurring and real risks of rationing, and outright shortages that could take lives if the winter is cold as a lot of forecasters are predicting in Europe.
So, you know, we've got this war on fossil fuels, where you get a number of American cities that are trying to prevent natural gas being utilized, and fighting the transmission of hydrocarbons, you know, pipeline shutdowns, even existing pipelines. There's the New Yorker gave the platform to a Swedish professor. He's written a book on how to blow up pipelines. He's avidly recommending that people go out and blow up energy pipelines. It's just unbelievable that he would be given that kind of a forum. But regardless, I mean, obviously, we know that US policy is very anti-fossil fuels. So guess what, this is the first time in history that we've seen huge price spikes without a supply response. So we're still around a point in this country where the drilling rig count is inadequate to offset the decline rate in the shale area, which is, of course, where we've had the tremendous growth of both natural gas and crude oil is because of shale. That is, you know, Erik, and a lot of people don't. Shale has an extremely rapid decline rate. So you have to drill a lot just to stay even. And that's hard to do when you've got pressure from your investor base about ESG. And you've also got pressure to not make those investments, but rather to buy back shares, which these companies are doing. So all these things are feeding this green inflation type of thing. And it's not going away, it's going to be with us for years to come. Whether it's right or wrong.
Erik: Joining me now is Forest for the Trees founder Luke Gromen. Luke, it's been since January that we had you on the program. Really great to get you back. I've been asking everyone about secular inflation. Now everybody can see that there is inflation. My question is, is this really transitory the way the government would like us to believe or are we seeing the beginning of a structural inflation that's going to last many years?
Luke: I think it's the beginning of a structural inflation that's going to last many years. I should probably say thanks for having me back on to start. But the reason I think it's structural lasting for many years is I think if you look at a lot of the key factors that have been disinflationary over the last 20 years, 30 years. A lot of them are going in reverse. So you know, whether you go back 10 years, we've seen a disinflationary impulse in oil and commodities, in no small part tied to US shale. US shale has been the biggest marginal producer of oil for the last 10 to 15 years. We are seeing that it is getting hard, if not impossible, to increase production at lower prices. And so we've been talking about peak cheap oil that is a structurally inflationary component to commodities.
I think if you look at another big one, globalization, globalization has been extremely disinflationary or deflationary for 20 plus years. Very clearly that is going in reverse and so if China and US trade was deflationary, or disinflationary, the breakdown of US and China trade relations, it strains credulity to think that that too, is deflationary. I think that's a very inflationary secular inflationary impulse. I think when you look at even things that are a little bit more counterintuitive, to me, I think they also point to a secular inflation. So for example, it's often pointed out that in the US demographics are deflationary that old people don't spend as much. I would question that a little bit, particularly at the consumer level. And the reason I say that is, if you look at US deferred compensation schemes, whether they be 401-Ks, or 403-B's, or IRAs. All of these programs effectively amounted to the sterilization of inflationary US deficits over the last 30-40 years. And in plain English, people could put away 10-15% of their income. And instead of having that income in pocket now, the reward was you got tax deferred status. So you put that money into assets, instead of putting that money in your pocket where you would have spent it and where it would have been CPI inflationary right away.
And so effectively, we were sterilizing inflation with these deferred compensation schemes for 30 or 40 years. Fast forward to today, you've got whatever it is 70 million baby boomers, there's an article in the journal last year, or earlier this year, noting that the estimate is that the boomers control roughly is $35 trillion in assets. And now they're all getting to an age where they have required minimum distributions that it's a technical topic, but for simplicity's sake, and just sort of, you know, good enough for government work, they have to spend about 3% of that money per year. And so again, if deferred compensation schemes were disinflationary, or sterilized inflation that would have been higher for the last 30 or 40 years, and instead, it resulted in asset price inflation, then again, the opposite this $35 trillion coming out secularly is also very inflationary. And so I think there's a number of factors and those are just three. There's probably some others I could come up with. I think they all point in the direction that there is a secular, we've seen a secular shift in the deflation, disinflation versus inflation impulse. So that's some thinking about it.
Erik: Joining me now is Cullen Roche, founder of Discipline Funds. Cullen, it's great to get you on the program. I know you've been on the Market Huddle before. I think this is your first MacroVoices appearance. I want to start with something that's actually been not so much in the financial press but the popular press. Now I know that you are an expert on monetary theory and currency systems. That's what you've studied. That's what you know about. Please help us understand why printing a trillion dollar coin out of Platinum somehow can be convoluted to be a solution to a country that lives beyond its means on borrowed money and doesn't pay back its debt. But seriously, let's try to understand the monetary theory of this because it's in the popular press and nobody's talking about why that would work or even if it would work.
Cullen: So the coin technically from a legal perspective, the Treasury would mint the coin and the Federal Reserve would be able to deposit that coin into the Treasury general account. The way to think of it really, it's like changing the credit limit on your credit card. So if you had a $20,000 monthly credit limit on your credit card, well, what happens with the debt ceiling is that basically Congress decides they're going to spend $21,000 this month, and then we get to the $20,000 limit and Congress is like, oh guys, look, we don't have the ability to actually do this thing that we want to do, because we have this self-imposed credit limit.
Well the coin basically takes that extra $1,000. It deposits it into the account and then all of a sudden, we magically found this money that literally the printing presses already have. And so to me, it's one of these, like legal sort of, you know, loopholes that exists and doesn't really solve anything that is the you know, the root cause of the problem that exists. The root cause of the problem is that the government decides to spend way too much before we actually get to that credit limit. So it's not irrational to have a credit limit, it's irrational to put in a credit limit, and then say, you know, we should only spend $20,000 this month, but we're going to pass a bunch of legislation that requires $21,000 of spending. It makes no sense the way we go about this. And so this should all be done in a more proactive way. If we want to be more, you know, fiscally prudent about the way we go through all of this, that should be done at the congressional level, before they actually appropriate all of this spending that necessarily needs to be funded either through debt issuance, or a coin after the fact.
Erik: Joining me now is best selling author and advisor to many financial institutions, Russell Napier. Russell, it is great to get you back on the show, I know you've got a new book out, which I'm really excited to read. It's called ''The Asian Financial Crisis from 1995 through 1998: The Birth of the Age of Debt''. And I'm waiting, actually, for the audio book to come out in a couple of weeks so that I can listen, which is my preferred format, rather than read, but it's available to order right now.
I want to talk first, you know, we've been talking to every guest about this inflation-deflation debate. You were one of the first people to really tell us, hey, it's time to just have a secular shift in thinking because we've got a secular shift toward inflation and you've been a very outspoken deflationists for many years. I've really been looking forward to asking you this. Does the situation in China change your tune because that's turning some people back to deflationists?
Russell: Sure. So the answer in any intermediate timeframe and long term timeframe is no. But, let me discuss the situation in general, because it is currently somewhat deflationary and to get worse before it gets better. The question is why? And the answer is because they have a managed exchange rate, which for many years actually has been keeping monetary policy too tight. If you look at the People's Bank of China balance sheet, it's one of the few that hasn't grown. In fact, it's not much bigger than it was in 2017. Which when you think what has happened in Japan, the European Union, America, the United Kingdom, is quite remarkable. Not many people look at that and say, well, that's a choice of people at the Bank of China. That isn't a choice. It's forced upon them, because they have a managed exchange rate, which controls the size of the PBOC balance sheet. Now there are mitigating factors like capital controls, but that is the bottom line. Broad money growth in China just about over 8% is one of the lowest levels ever recorded. These are the classic situations in which you'd expect to get to some sort of credit crisis and that's what we've got.
Now, obviously, property has been overbuilt in China for many years. Already in the book that the Thai property market was clearly overbuilding in 1993. But we didn't get a catalyst to reveal that until 1997. Well now we have the catalysts for China. And that is that monetary policy is too tight. So here's the bottom line, does China accept this tight monetary policy that has been forced upon it by targeting the exchange rate on the basis that you target one monetary variable at a time or do they do something about it? So here's my call, this is a property crisis. It looks like a property crisis but ultimately, it's an exchange rate crisis. Everybody knows what you do when you have a decline in property prices or a credit crisis associated with risk in the property market. That is the main form of collateral across the financial system and the banking system and the non-banking system. And here's what we do, you cut interest rates and you print money. That's what you do. And there's no reason to think that just because Xi Jinping is unelected that he would follow a different path. So the question obviously isn't timing which we can go back and discuss.
So my view is that we don't go far down the path of in the property market, lower Chinese growth, something that looks like a credit crisis, until Xi has to move to what everybody does in a situation like this. Now, just one more minute on that. It does mean a lower exchange rate. If Xi cuts interest rates and increases the supply of money. It will give you a deflation shock. To the markets, we'll see that as deflationary. But it is actually very inflationary, and is inflationary for three key reasons. Number one, tariffs. There will be tariffs again. So this is not 1994 China everybody, this is a economy. The world will have to cope with the consequences of China pouring cheap products, and all returns into the world. Number two, it's only happening because China is printing a lot of money and it takes a while to get to consumer goods and consumer price inflation but it does get there.
And number three, it kickstarts a huge capital investment boom into the rest of the world as we tried to replace all the stuff we're not buying from China. So that may sound like a complicated roadmap, because it is complicated by the fact that it's difficult to be right on the timing. So there may be one more deflation shock. It doesn't make me want to move away from my call for inflation, nor particularly change the portfolio because I think it'll be very, very quickly. But people will begin to realize that this time, unlike 1994, there's movement on the Chinese exchange that is actually not deflationary, but ultimately is inflationary. And finally, it really does trigger the cold war. It's really a case of forcing everyone to take a side. Do you devalue with China or do you not devalue with China because of the great pressure from the developed world not to do that. So a little hiccup in the road. But that doesn't make me change my portfolio because basically I don't think I'm smart enough or quick enough maybe to know how to play that and getting back in when we have this final wrinkle on the deflationary shock.
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