Transcripts
Erik: Joining me now is Dylan Grice who's probably best known from his days at Soc Gén. But these days, he's co-founder of Calderwood Capital. Dylan, great to have you! First time on the show. Let's start with a question I've been asking just about everybody, which is boy, all of our favorite deflationists have turned into not just inflationists, but many of them secular inflationists who really say this is maybe another late 60s, early 70s, beginning of a big event. Would you agree with that? And if so, what are you doing about it?
Dylan: Well, hello, Erik and thanks for the big opening question. It's a tough one. So to kind of rewind for 10 years, to be brutally honest. I was very much in the construction inflation camp, I was very much of the opinion that we were about to see the whites of inflation's eyes. And that it was going to be the defining characteristic of financial market behavior, really, across the asset classes. It was gonna be the driver of asset returns really, over the next decade. Of course, I was I was thinking this in 2010. And, and I was writing about it a lot. And the fact is I was completely wrong, and so I'm kind of very hesitant to make the same mistake again. And I think, and I look back on it. And I look at some of my reasoning 10 years ago, when I kind of thought that, you know, inflation was about to take off, I actually kind of retrace my steps, and I re-read some of the stuff that I wrote.
And what it actually said was, so back in 2010, when I remember the prediction that I remember making that I wrote. I said in 10 years time, we'll be looking at the whites of the eyes of an inflation problem, and not an inflation not by 100 or 200 basis points, but inflation, which is becoming uncontrolled inflation, which is getting out of control. And so inflation of a kind of four to five percent rate and a rate which was accelerating, Right? So that was my prediction in 2010, for what the world in 2020 would look like. And kind of pandemic aside. 10-year breakevens were 50 basis points lower on the eve of the pandemic than they were when I was making my prediction. So I was just horribly, horribly wrong. And I think, you know, you got to kind of try and understand why you were so wrong before you try and make you know, the same prediction again. So, you know, I guess the kind of the summary answer is, I don't really know, the simple answer is, I'm not quite sure.
Erik: Joining me now is Charlie McElligott who heads up the cross asset macro strategy team for Nomura securities and is very well known for his daily newsletter which is available to institutional investors. Charlie is well known for the quality of his graphs and charts and he's prepared a slide deck for 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 right above Charlie's picture. Charlie, it's been way too long. Great to have you back on the program. As we get started, I want to start with a trend we're seeing which is all of our favorite deflationists have defected and become inflationists. What do you make of this trend where suddenly everybody's an inflationist?
Charlie: It's great to be back and speak with you all again. Look, this is something that I think for the last two years to three years worth of our visits, we've spoken about. Which was this decade plus regime that I call the everything duration trade, the everything duration narrative, where, you know, that post great financial crisis QE response had facilitated this kind of perpetually low yields and flat curves type of a trade. And what benefited of course then were things that had, you know, high sensitivity to low interest rates. And that was, you know, again, certainly everything from US Treasuries of course, to mega-cap tech and secular growth which is a two fold dynamic.
One, you know, secular growth stuff is stuff that doesn't need a hot cycle to grow and in the past decade, we have not operated in a hot cycle. Thus, you know, the bull flattening in interest rates and curves. And further secular growth stocks, you know, which can grow profits, grow earnings in the absence of a hot economic cycle, also then to can have their valuations justified by such, you know, impossibly low interest rates and negative real rates, things like that. So that's that kind of double whammy that facilitated what was momentum over the past, you know, 5-10 year period. Which was frankly, looked like long bond proxies, long duration, long interest rate sensitives, short cyclicals. And the short cyclical stuff was almost just a funding short, and financials and energy and basic materials, industrials, to a certain extent.
Erik: Joining me now is petroleum geologist Art Berman, who, as always has prepared one of his terrific slide decks 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, that means you're not registered yet at macrovoices.com. Just go to the homepage macrovoices.com. Look for the red button that says “Looking for the Downloads” just above Art's picture.
Art, it's great to get you back on the show and to dive into another of your slide decks. But let's start with the big picture. Last time we talked to you, you had been projecting a decline in US production, which was running a little bit late, you said it might run even later than that. But you thought it was still coming at that point. And at that time, when we had you on in January, I think oil was in the 30s. You said it could go to 65 this year, and everybody thought you were crazy, because that number was too high. And of course we got there, not in the remaining 12 months of the year. But within the next 12 weeks we got to that number. So congratulations on getting a couple of calls right. But let's get the update. What do you see from here?
Art: Right? Well, a couple of things Erik. First, I'm gonna apologize for my voice. I have a little surgery. It doesn't sound as bad as it sounds, at least for me. But listeners will have to forgive me. Yeah. So you know, diving into, you know, the end of my slide deck if you like to. On slide seven, I haven't changed this chart since our January discussion, the only thing I've added, which is to say I haven't changed my outlook. Now, I understand that, you know, people are sure I'm wrong, because production is still hanging in there at you know, upper 10 to lower 11 million barrels per day and I may be wrong. And you know, anybody could be wrong.
But the way I look at this is, you know, you've, you got to drill wells to get a certain level of production, whatever you think about, you know, the time shifting and all of that in this chart. You know, we're at 323 oil directed rigs. as of March and we had been between 800 - 900 to support 11 million barrels per day. So, you know, simple math, you don't have to be a petroleum geologist says, you know, you're less than half the number of rigs, you need to support the production that everybody thinks is going to keep on going. And unless there's been some kind of, you know, absolutely magical technological breakthrough that I don't know about, I just don't see how it can happen.
You just don't have enough gas in the tank to get you there. Now, obviously, the part I could be wrong on is when's it gonna happen? Because, I mean, I don't honestly know. I don't think anybody really knows, you know, how many wells are being completed each month. The best we can do is the EIA drilling productivity report, which I study and analyze pretty carefully. And it tells me that, you know, the rig count is still a darn good proxy for well completions and etc. So, you know, I'm sticking to my story here.
Erik: Joining me now is our good friend Jeffrey Snider, Chief Investment Officer for Alhambra Investments and famous for his slide decks. Listeners, you'll find the download link for Jeff's slide deck associated with today's interview in your research roundup email. Now, if you don't have a research roundup email, that means you're not yet registered at macrovoices.com, just go to our homepage at macrovoices.com, click the red button that says looking for the downloads, just above Jeff's picture and just below the green Donate button.
Jeff, the big conversation we're having with all of our feature interview guests is inflation or deflation. And frankly, we've gotten to the point where it's hard to find any deflationists left. We had Steven Van Meter on a couple of weeks ago as you know. We've got you, we've got David Rosenberg scheduled. We're trying to get Lacey Hunt. I think that's all the deflationists that there are at this point. Now I saw that the finance secretary of the Philippines was rushing a $1 bond sale because he wanted to get it done before interest rates skyrocket. That's exactly what he actually said.
So it seems like there's nobody left almost who doesn't think that both inflation and bond rates are headed higher. Richard Nixon once said, we're all Keynesian now butchering something that Milton Friedman had written a few years earlier. But in 2021, it really does seem like almost all of the macro gurus that we know, that we invite on macro voices have turned into what Louie Vincent Gave called inflationistas. Maybe you and Steven Van Meter, and Brent Johnson and, I guess David Rosenberg are the holdouts. But it's getting to be a pretty darn lonely place for you remaining deflationists.
Jeff: Yeah, you know, I think when you think about it, Erik that history has repeatedly warned against some of the things that we're kind of seeing now, these excesses. And I think there's some intuitive sense behind why everybody's starting to think about inflation and only inflation. As you know, very well, Erik, I personally don't equate it to what governments are in central banks are doing to that at all. I don't think I'm alone in that view, though. And I think that's where I really object.
Erik: Joining me now is Jesse Felder, publisher of The Felder Report and former hedge fund portfolio manager. Jesse, it's great to have you back.
Listeners, Jesse did prepare a chart deck to accompany today's interview, you'll 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, look for the red button above Jesse's picture that says, "looking for the downloads".
Jesse, great to have you back. I've been starting all of our interviews asking people about boy, so many smart people have turned into inflationist in the last year or so where do you stand? Are you an inflationista as Louis-Vincent Gave called it or are you still in the deflationista camp?
Jesse: I am in the inflationista camp and, Erik, I gotta say, it's great to be back. You know, it was, I think a little over a year ago when we last spoke here. And you know, right before the COVID crash, and it's kind of been an interesting 13 months since then. But yeah, I am in the inflation camp, I think that we're going to see, you know, to me, one of the things I look at is the, you know, just prices paid components of a lot of these things that we've seen, you know, ISM services came out this week. But businesses of all stripes are all basically complaining about rising cost pressures. And I think we're seeing that in tons of different sectors, from manufacturing to restaurants. I think we're gonna see some pretty strong wage inflation over the next few months, which is one of the things that can be a driver of inflation going forward.
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