Transcripts
Erik: Joining me now is Forest For The Trees founder Luke Gromen. Luke, it's been quite a while, we haven't seen you since October. I'm really looking forward to catching up. It feels to me like a lot of what you said last time we had you on has started to play out. And frankly, if we go to a bigger picture, it feels to me, since I've been talking to you for, I don't know how many years now, I've been waiting for the day that Luke Gromen starts to be proven right on the dollar. It hasn't really happened yet, in the sense of the dollar outright failing or crashing. But boy, it sure seems like the leaks in the dam are starting to show. Do you see it that way? And if so, what do you see coming next?
Luke: Sure. Thanks for having me back, Erik. You know, I was on, the last time we talked was October 5 of last year. And we finished up that show, I said the short run outlook: dollar up, rates up, feedback loop isn't going to be broken unless the Fed significantly or unless the dollar is significantly weakened, excuse me. And to be clear, that could be the Fed or the Treasury. And then I also said, hey, oil is probably going to be weakened meaningfully as well. And so, view coming out of that conversation was that, before too long, Fed or Treasury, one way or another are going to need to resume financing US deficits. And they can call it yield curve control. They can call it QE, they can call it not QE, we're only doing this to help the resilience of the Treasury market. This is a QE, whatever they want to call it, that's what they're going to call it, but that's what's going to happen, is what I said. And I said once they do that, I'd encourage people to call it the stock chart of the Argentine stock market, you know, the peso has been a disaster. But in peso terms, the stock market is up like 5x, in like three or four years. And I think the same thing is going to happen here, except it'll happen in dollar terms. So the dollar is not going to collapse against the peso, but it's going to be really good for stocks, it'll be good for gold. And that's when you'll see gold performance, when you see Bitcoin really perform. So that's what we finished up with on October 5. And so, the short term was like, okay, you've got this, this dollar rates feedback loop that was happening. I didn't realize how short-term short would be, to be honest.
The very next day, you had the first of seven Fed speakers, over the next 10 trading days, start to jawbone the dollar down. And it was like they all had received a Talking Points Memo saying the bond market has started, has done our job for us. The bond market has done our job for us. It was like going to church when I was a kid, it's like a chant. And two weeks later, we wrote a report for our clients that said, Fed just touched off third instance of treasury market dysfunction in past 13 months, US dollar liquidity cometh. That's what the title of the report was on October 17 for our clients and it said, look, Fed has driven Treasury market dysfunction again, and right on cue, it appears the Fed has begun jawboning the dollar down. So, if we're right, we could see a repeat of the liquidity injections we saw in March of ‘23, September of ‘22, March of ‘20, September of ‘19. And a lot of investors seem offsides for that, so feels like that particular report and point, as a follow on to what we had talked about two weeks earlier on the show, bought out pretty well. It said, look, this is going to be really bullish for gold, Bitcoin oil, commodity stocks, inflation. So not only did we get that in terms of the Fed jawboning, but then on November 1, we had Yellen shifting issuance, from the long end of the front end, much more than people expected. When you look at the effects of what Yellen did, it was effectively QE. In other words, if you look at QE, historically, what happens as you have a reduction in duration issuance, you have an increase in liquidity, you have an increase in bank reserves, and you have looser financial conditions and stocks up. And so, what Yellen did by shifting along into the front end by tapping the reverse repo, same dynamics, reduction in duration issuance, bank reserves up financial conditions, loosened stocks up reverse repo down. So, basically, you had the liquidity increase that we thought would come whenever the dysfunction came in the Treasury market.
Fast forward to today, is it the moment? I think we're getting near the moment of whatever it means, to me what that means is, ultimately the Fed and Treasury are going to have to continue to inject dollar liquidity into elevated inflation prints, into strong nominal growth, into low unemployment, because the Fed made the mistake in 2022, of not letting inflation run higher for longer. That was their mistake, this time. It's very ironic. Most investors are saying the Fed needs to be brave like Volcker. They need to be higher for longer but because Volcker was operating with debt to GDP of 35%, today, you know, when the Fed started tightening, debt to GDP at 120%, it’s night and day. To be brave this time, like Volcker, the Fed needed to let inflation run higher for longer because they didn't. Now they're going to deal with the consequences, which is yes, they did generate some near-term disinflation, inflation is off the highs, but they put the US into fiscal dominance, which promises a much worse inflationary outcome. And so I think, to answer your question directly, now that the Fed has put the US into fiscal dominance, vis-à-vis, or by virtue of its aggressive rate hiking, I think inflation is going to continue to pick up. And I think the dollar will continue to weaken in an orderly basis, I don't think it'd be chaotic, I think, an orderly basis between now and the election, and then we'll see what happens after the election.
Erik: Joining me now is Ole Hansen, head of commodity strategy for Saxo Bank. Ole prepared a slide deck to accompany today's interview with some terrific graphs and charts, so you'll want to download that. You'll find the download link in your Research Roundup email. If you don't have a Research Roundup email, just go to our homepage macrovoices.com, click the red button that says “looking for the downloads” above Ole’s picture. Ole, it's great to have you back on the show. The title of the slide deck is Commodity Outlook for 2024. Last time we had you on, you said you thought maybe commodities were bottoming and starting to turn around. How are things looking?
Ole: Thanks very much for inviting me back. Well, yeah, we have been bottoming out now for the best part of a year. And this is really quite an interesting time that we speak again, because I think, if we look at some of the developments that have been seen across commodities, so far this month, we were seeing some green shoots starting to emerge, not only the precious metals, which really kicked off the rally at the start of the month, we're also seeing just recently, some strength coming back into industrial metals. The energy sector is, after a prolonged period of sideways trading, showing signs as well, of wanting at least to try to move higher. So, we basically were asking the question, whether this is it for the correction. And from a technical perspective, it seems like we're starting to break that downtrend that has been in place since the peak back in 2022.
Erik: Joining me now is Arjun Murti, many of you know Arjun's name as a former Goldman Sachs partner. He's now a partner at Veriten. And very much a energy markets expert. Arjun is kind of famous for having made the famous super spike call when oil was at 50 bucks. And he said it was going to $105. And sure enough, that's what happened. Arjun, let's talk big picture, oil market, energy transition. A lot of people have convinced themselves that, you know, it's all over for the oil market, because nobody's gonna need it anymore. I don't see it that way. How do you see it?
Arjun: Erik, I actually have a very similar perspective in the sense that, there's this idea that people know for sure that oil demand is going to peak at some point in the next 5,10, maybe 15 years. I don't think there's a decade, let alone year where anyone can at this point know, when oil demand is going to peak. And I spend a lot of time talking about there's the lucky 1 billion of us, those that live in the US, Western Europe, Canada, Japan, Australia, New Zealand, we consume about 13 barrels per capita. The other 7 billion people on earth use just three barrels of oil per capita and all of them aspire to the types of living standards we have. And I think, is all of that going to be oil use? No. But the idea that we know today, what are going to be the displacement technologies, I push back hard on that. I think there's a pretty strong outlook for oil demand. Again, looking out for the frankly, for the foreseeable future.
Erik: Joining me now is Eurodollar University founder Jeff Snider. Jeff prepared a slide deck to accompany this week's interview. For any new listeners who haven't heard Jeff's interviews before, Jeff is famous for really detailed and complete slide decks, this week is no exception with 77 slides in the deck. We're not going to get to all of them, unfortunately, due to time, but I encourage all of you to peruse the entire deck, Jeff is famous for the quality of his charts and graphs. Jeff, it's been way too long. I think the thing on everybody's mind is, I think there's a framework of macro, everybody understood where the most important thing to watch was rate cut expectations, because if we had rate cut expectations coming out of the system, that had to mean down for risk assets. But all of a sudden, Fed Commissioner Waller said some funny stuff about what sounded almost like a reverse Operation Twist and everybody's got a different mindset. And despite the fact that rate cut expectations are coming off the table, this week, we still got the melt up in everything, particularly gold and Bitcoin. So, what's going on? What did Waller really say? Is Zero Hedge, right? That this is reverse Operation Twist? And if it is, what does that mean?
Jeff: Oh, boy, I mean, while I really opened a can of worms here didn't I. As I was putting together the slide deck, I thought, boy, I'd have to redo all those slides just to go over those because you knew it would be a topic of conversation. As you said, Erik, it's definitely something that people are wondering about, because it doesn't sound like it's anything the Fed has done before. So it's quite natural people would say what is really happened? What the hell did the guy even say? And all he really said was they need to rejigger the portfolio maturity, the Fed’s portfolio maturity, to make it more like it was pre-crisis. That's the first part. Essentially, you go back to before 2008, the Fed SOMA holdings were about a third treasuries and was Fed’s, specifically treasuries, because they didn't have any other assets. And over time, through the various programs, they've had to extend the maturity in the portfolio, repeated QE, in essence, to try to fool the marketplace into believing that there's actual huge amounts of stimulus going on. And then you go to 2019, we had all that funky stuff in the repo market. And the Fed not wanting to engage in the QE, call it not QE, what it really was, but in order to make it not QE, they ended up buying Treasury bills, that proved to be a bit of a disaster, because demand for Treasury bills was so high. And so you get to March of 2020, and the Fed realized that was a mistake. So they stopped buying bills. And so, the build proportion in the summer portfolio has really dwindled, forcing the Fed to buy lots of longer duration assets. And what Waller was saying is like, I would like to get back to more of a traditional style, or at least a pre-crisis allocation to shorter term duration. Then he mentioned some other things like what that would do in a future QE episode, it would allow the Fed to roll off treasury bills as they expire, and then use the proceeds to buy longer dated debt, which would then allow the Fed to do QE as it sees it, but not actually expand their balance sheet. So there's a whole bunch of factors there where people were like, what the hell is this? Is this QT? Is this tightening? Is this an Operation Twist like 2011 And 2012? What is really happening here?
Erik: Joining me now is Bianco Research founder Jim Bianco. Jim, great to have you back on the show. I'm really anxious to talk to you about a tweet thread that you posted a couple of weeks ago, that really caught my attention, because so many people have convinced themselves, look, the fix is in, the Fed has already told us they're going to have a rate cutting cycle this year, it's an election year, you know that the markets are totally going to be supported by Fed policy, because inflation is under control. And besides that, whole debate about inflation is behind us. Now everybody knows it's going back to 2%. You don't think so? Tell us, why not?
Jim: Yeah. I think that what we need to understand about what's happening is, this is an old stuff for people that have heard me before, 2020 was a big deal. It really changed a lot of attitudes. And coming out of those attitudes, coming out of that lock down restarted the economy, you know, the economies of different beasts right now. It is not the 2019 economy. I would argue that what we saw in the last three years was, we had two things happen at the same time. We did have an element of transitory inflation, which came about because of the supply chain restart, locked down first and then restart, got us to 9%. That dissipated, we kind of worked our way down into the low threes. I'm talking year over year CPI, just to keep one measure. And Wall Street then invented a term called The Last Mile, around the middle of last year, to talk about the move from 3% to 2% on inflation, and the Fed could then start cutting. One of the things I've been arguing is, first of all, Wall Street's very good at nowcasting. And for those who are not familiar with the term, nowcasting means forecasting something that just happened and say it's about to happen. Where a forecast is to predict something that hasn't happened, that will happen. And nowcast is, we got to 3% inflation in June of 2023, year over year CPI. That's the low, the low in the cycle was seven months ago. I think we're going to hold that low through the February number, possibly through the March number and maybe even until the fall. And yeah, I understand we’re at 3.1 and this whole Last Mile argument. So we go from 3% to 2%. No, we invented the term right as we hit the low. Now why do I think we hit the low? I think there's three big things. One, is, let's call it the base effect. If you look at the numbers from a year ago, you've got a four tenths that you had in February of ‘23. And you've had a big run up of gasoline prices in February of ‘24. So things like the Cleveland Fed and others that forecast CPI are saying that we should have another four tenths number. Okay, that means we'll have another 3.1. Well, then after that, you look at March, April, May, June, July, there's a lot of 0.1s and a lot of 0.2s from a year ago. So we're going to be dropping some very, very low numbers. And even if we print 0.1s and 0.2s, we're still stuck at 3. If we put 0.2s and 0.3s, we start drifting higher. Gasoline prices are definitely working against us, the base effect is working against us.
Then the other big one that I've been pushing back against is, everybody looks at Owners’ Equivalent Rent. And they say that's about a third of, our shelter is about a third of CPI. And that's got to fall because all the real time measures like apartments.com, Zillow, you know, maybe even Case-Shiller. They've all been coming down on a year over year basis, so that those numbers will come down, because they've been printing four tenths, five tenths, six tenths every month. And that will help reduce inflation. I've said we've got the metric wrong, we should be looking at cumulative gains, not year over year gains. If you look at cumulative gains, the big gains that you've seen in rents and in home prices from two years ago, haven't filtered through into the CPI numbers. So, while CPI is saying that housing inflation is up 18% to 20%. The real time measures are saying it's more like 30%. So you've probably going to see stickier housing inflation, not necessarily rising but stickier, which means you're going to print more, five tenths or four tenths. And that will keep the inflation rate up. So what I'm arguing here is that the inflation rate at 3.1 still isn't taken out. It's June of 2023 low, doesn't do it in February, the runways got some very, very low numbers, that we could definitely see us holding 3%. Now what changes that equation? I like to say, call me if crude oil prices collapse. Call me if the economy takes a serious downturn. Then we could say, okay, now maybe we could see some lower inflation numbers. But if the economy starts looking, and crude oil starts looking the same as it has the last three, four or five months into the next three, four or five months, then I think that these inflation numbers are going to be very uncomfortable for the Federal Reserve Chairman to be talking about additional or any rate cut at this point.
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