1
00:00:10,920 --> 00:00:14,400
Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

2
00:00:14,480 --> 00:00:18,600
Speaker 1: I'm Tracy Halloway and I'm Joe. Wi isn't thal Joe?

3
00:00:18,880 --> 00:00:22,280
Speaker 1: Doesn't it feel like, uh, supply chains are everywhere at

4
00:00:22,280 --> 00:00:25,560
Speaker 1: the moment? You know what? Yeah, so we're recording this

5
00:00:25,680 --> 00:00:30,360
Speaker 1: November one. I saw like three or four, maybe five

6
00:00:30,440 --> 00:00:35,600
Speaker 1: supply chain related Halloween costumes like on Instagram this weekend. No,

7
00:00:35,680 --> 00:00:38,440
Speaker 1: I don't think like kids themselves are excited about dressing

8
00:00:38,479 --> 00:00:41,320
Speaker 1: up as something supply chain related, but it definitely seems

9
00:00:41,400 --> 00:00:43,479
Speaker 1: like for a certain group of adults that was like

10
00:00:43,520 --> 00:00:47,040
Speaker 1: a very like humorous, like you know, spooky thing this year. Yeah,

11
00:00:47,080 --> 00:00:50,279
Speaker 1: I saw a pumpkin that had supply chains carved into it,

12
00:00:50,280 --> 00:00:53,159
Speaker 1: which I thought was phenomenally spooky. But I mean, it

13
00:00:53,360 --> 00:00:56,600
Speaker 1: is true that this is the issue that everyone is

14
00:00:56,640 --> 00:00:59,000
Speaker 1: trying to wrap their heads around at the moment, And

15
00:00:59,600 --> 00:01:02,240
Speaker 1: to be honest, I feel like it's not something that

16
00:01:02,400 --> 00:01:07,280
Speaker 1: most economists have necessarily or most macro analysts have necessarily

17
00:01:07,400 --> 00:01:11,360
Speaker 1: had to think about in detail before. Like obviously everyone

18
00:01:11,400 --> 00:01:15,520
Speaker 1: talks about inflation, people think about what's driving that. Although

19
00:01:15,520 --> 00:01:17,760
Speaker 1: I still maintain that we actually don't have a really

20
00:01:17,760 --> 00:01:20,640
Speaker 1: good idea of how inflation works. But I don't think anyone,

21
00:01:21,080 --> 00:01:26,120
Speaker 1: you know, in preparing to be a macro investor or

22
00:01:26,120 --> 00:01:28,360
Speaker 1: a macro trader or a macro analyst. I don't think

23
00:01:28,360 --> 00:01:30,959
Speaker 1: anyone ever sat down and thought, wow, I really need to,

24
00:01:31,319 --> 00:01:35,479
Speaker 1: you know, start understanding how like dra age works at

25
00:01:35,480 --> 00:01:39,640
Speaker 1: the ports. No, definitely, definitely not. And I mean I

26
00:01:39,640 --> 00:01:41,560
Speaker 1: think that's spot on. And I think there's like two

27
00:01:41,640 --> 00:01:43,760
Speaker 1: things that I've been thinking about. It's like, one is like,

28
00:01:44,360 --> 00:01:47,960
Speaker 1: in normal times, whatever that means, like the supply chain

29
00:01:48,040 --> 00:01:50,760
Speaker 1: is invisible to people, right, like maybe you see trucks,

30
00:01:50,760 --> 00:01:52,960
Speaker 1: but besides that, it's like the product is on the shelf.

31
00:01:53,040 --> 00:01:55,720
Speaker 1: So it's kind of like a bad sign that people

32
00:01:55,720 --> 00:01:58,760
Speaker 1: are like talking and thinking about this because normally it's like,

33
00:01:58,920 --> 00:02:00,640
Speaker 1: you know, you're just expected to just work and the

34
00:02:00,680 --> 00:02:03,080
Speaker 1: stuff shows up, and most of it is still showing up.

35
00:02:03,240 --> 00:02:05,120
Speaker 1: But the other thing is like I think, like you know,

36
00:02:05,200 --> 00:02:08,400
Speaker 1: by and large, from an economist perspective, it's like this

37
00:02:08,560 --> 00:02:12,920
Speaker 1: is like such incredibly like complex systems that it almost

38
00:02:12,960 --> 00:02:14,720
Speaker 1: feels like, you know, you had that great piece on

39
00:02:14,760 --> 00:02:17,880
Speaker 1: the blog about like sawdust and the price of milk,

40
00:02:18,000 --> 00:02:19,880
Speaker 1: and there's all, you know, a little part here goes

41
00:02:19,960 --> 00:02:23,200
Speaker 1: missing and that causes some other industry to miss a thing, etcetera.

42
00:02:23,280 --> 00:02:26,600
Speaker 1: Like it does not feel like economics as we talk

43
00:02:26,680 --> 00:02:31,640
Speaker 1: about it typically is particularly like equipped to like really

44
00:02:31,720 --> 00:02:34,240
Speaker 1: like wrap your head around us at least, like you know,

45
00:02:34,680 --> 00:02:36,720
Speaker 1: by and large, this is not like part of most

46
00:02:36,760 --> 00:02:40,440
Speaker 1: economist tool kit totally. And of course the discussion about

47
00:02:40,480 --> 00:02:43,200
Speaker 1: supply chains and how that feeds into prices and whether

48
00:02:43,280 --> 00:02:46,520
Speaker 1: or not all of that is transitory. It's happening against

49
00:02:46,600 --> 00:02:51,480
Speaker 1: this broader backdrop of just mass uncertainty about where we

50
00:02:51,520 --> 00:02:54,320
Speaker 1: are in the economic cycle, what central banks are going

51
00:02:54,360 --> 00:02:56,960
Speaker 1: to do. And of course you mentioned we're recording this

52
00:02:57,080 --> 00:03:00,560
Speaker 1: on November one, and it is an absolute a massive

53
00:03:00,560 --> 00:03:02,919
Speaker 1: week coming up from central banks. We have a meeting

54
00:03:03,440 --> 00:03:06,200
Speaker 1: for the Bank of England and the Federal Reserve and

55
00:03:06,240 --> 00:03:09,240
Speaker 1: they're going to have to figure out how they're dealing

56
00:03:09,280 --> 00:03:12,080
Speaker 1: with these inflation pressures, whether or not they're going to

57
00:03:12,120 --> 00:03:16,160
Speaker 1: push back against markets pricing in more hawkish moves. We

58
00:03:16,280 --> 00:03:19,840
Speaker 1: just had some massive, massive moves in the bond market

59
00:03:20,280 --> 00:03:23,000
Speaker 1: just last week with everyone sort of pricing in rate

60
00:03:23,080 --> 00:03:26,200
Speaker 1: hikes much much faster than I think most central banks

61
00:03:26,560 --> 00:03:29,760
Speaker 1: would want them to. So it's it just feels like

62
00:03:29,800 --> 00:03:35,880
Speaker 1: this really complicated time from a macro perspective, incredibly complicated.

63
00:03:36,000 --> 00:03:39,320
Speaker 1: One thing that's really striking right now is that the

64
00:03:39,440 --> 00:03:42,680
Speaker 1: job market feels very disconnected from perceptions of the economy.

65
00:03:42,720 --> 00:03:45,200
Speaker 1: The job market is booming in the sense that if

66
00:03:45,560 --> 00:03:48,640
Speaker 1: there's tons of job openings, wages are going really fast.

67
00:03:49,160 --> 00:03:52,920
Speaker 1: In the post grade financial crisis period, the job market

68
00:03:53,000 --> 00:03:55,520
Speaker 1: was the economy. That was really the only thing that

69
00:03:55,640 --> 00:03:59,280
Speaker 1: mattered was the pace of job creation. Now, you know,

70
00:03:59,280 --> 00:04:01,680
Speaker 1: we have all these serve ways of consumers and they're like, yeah,

71
00:04:01,680 --> 00:04:04,280
Speaker 1: the job market is great. We still think the economy stinks.

72
00:04:04,600 --> 00:04:07,400
Speaker 1: That is a very new thing. The other thing, and

73
00:04:07,480 --> 00:04:09,800
Speaker 1: I you know, this is what we'll get into, is

74
00:04:10,240 --> 00:04:13,800
Speaker 1: from a central bank perspective. Right the economists sort of

75
00:04:13,960 --> 00:04:16,880
Speaker 1: mantra is like, okay, still like it's transitory and that

76
00:04:16,920 --> 00:04:19,640
Speaker 1: doesn't mean it's gonna go way right away. But by

77
00:04:19,680 --> 00:04:22,760
Speaker 1: and large this is related to reopening kinks and people

78
00:04:22,839 --> 00:04:26,400
Speaker 1: shifting consumption from services to goods and all that stuff,

79
00:04:26,400 --> 00:04:28,960
Speaker 1: and all that's fine, but that doesn't I think like

80
00:04:29,000 --> 00:04:31,520
Speaker 1: even in mainstream echo that is not to get out

81
00:04:31,520 --> 00:04:36,479
Speaker 1: of jail free card for central bankers because they ascribed

82
00:04:36,560 --> 00:04:41,400
Speaker 1: so much weight to expectations, and so because they're like, well, okay,

83
00:04:41,440 --> 00:04:44,719
Speaker 1: maybe it's just related to uh, the inflation is related

84
00:04:44,720 --> 00:04:47,960
Speaker 1: to supply chains and that will smooth out. But because

85
00:04:48,000 --> 00:04:51,680
Speaker 1: they worry about changing inflation expectations as a driver of

86
00:04:51,680 --> 00:04:55,119
Speaker 1: inflation itself, I think that explains why they're still getting

87
00:04:55,160 --> 00:04:58,640
Speaker 1: like clearly like very anxious all around the world. Well totally.

88
00:04:58,680 --> 00:05:01,200
Speaker 1: And I also think if you say that inflation pressures

89
00:05:01,279 --> 00:05:05,640
Speaker 1: are transitory, than the converse has to be true as well, Like,

90
00:05:05,800 --> 00:05:08,240
Speaker 1: you know, maybe at some point they disappear and we

91
00:05:08,279 --> 00:05:13,640
Speaker 1: suddenly flip into deflation very very quickly. Yeah, okay, without

92
00:05:13,680 --> 00:05:16,880
Speaker 1: further ado, I am very very pleased to we've been

93
00:05:16,920 --> 00:05:20,160
Speaker 1: talking a while. I am very pleased to introduce our

94
00:05:20,240 --> 00:05:22,880
Speaker 1: guest for this episode. He's one of my all time

95
00:05:22,880 --> 00:05:26,920
Speaker 1: favorite analysts and also someone who has been doing this

96
00:05:27,040 --> 00:05:32,320
Speaker 1: sort of granular detailed supply shortage work as a macro analyst.

97
00:05:32,560 --> 00:05:36,520
Speaker 1: We're gonna be speaking with Matt King. He is strategist

98
00:05:36,680 --> 00:05:39,279
Speaker 1: of City Group Global Markets. Matt, thanks so much for

99
00:05:39,320 --> 00:05:41,960
Speaker 1: coming on the show. Again my pleasure. You're much too

100
00:05:42,040 --> 00:05:45,560
Speaker 1: kind as usually in your introduction, so maybe just um,

101
00:05:45,600 --> 00:05:47,599
Speaker 1: you know, Let's start with with what Joe and I

102
00:05:47,640 --> 00:05:52,320
Speaker 1: were just discussing. How strange is it as a macro guy.

103
00:05:52,480 --> 00:05:55,000
Speaker 1: You know, you've been covering the market's global economies for

104
00:05:55,040 --> 00:05:57,960
Speaker 1: a long time, but I don't think until this year

105
00:05:58,080 --> 00:06:00,680
Speaker 1: you've ever really had to dive in to you know,

106
00:06:00,760 --> 00:06:03,000
Speaker 1: shipping rates and things like that. How much of a

107
00:06:03,160 --> 00:06:06,240
Speaker 1: learning process has it been. So there's any number of

108
00:06:06,240 --> 00:06:08,520
Speaker 1: things which are completely different. Likewise, we hadn't really had

109
00:06:08,520 --> 00:06:11,440
Speaker 1: to worry about inflation except in a negative sense until now,

110
00:06:11,839 --> 00:06:13,960
Speaker 1: and I've been deep in the disinflation recamp, and then

111
00:06:14,000 --> 00:06:18,200
Speaker 1: suddenly you're you're recognizing this potential for a paradigm shift.

112
00:06:18,480 --> 00:06:21,880
Speaker 1: So so yes, absolutely they are. I had never had

113
00:06:21,920 --> 00:06:26,920
Speaker 1: to plot inventory curves for European gas storage, for example,

114
00:06:27,000 --> 00:06:30,360
Speaker 1: never mind worry about effects cascading across from one segment

115
00:06:30,400 --> 00:06:32,520
Speaker 1: to another. But what strikes me in all of this,

116
00:06:32,680 --> 00:06:35,200
Speaker 1: so you're you're too complementary about the bottom up work

117
00:06:35,240 --> 00:06:38,080
Speaker 1: I'm doing in a sense, and that I'm terribly interested

118
00:06:38,080 --> 00:06:40,120
Speaker 1: in that. And yes, I'm having conversations with my shipping

119
00:06:40,160 --> 00:06:43,320
Speaker 1: analysts and they're saying, oh, even as you strike deals

120
00:06:43,360 --> 00:06:46,839
Speaker 1: now beneath the current spot price, it's nevertheless double or

121
00:06:46,880 --> 00:06:48,920
Speaker 1: triple the rate that people have been paying over the

122
00:06:49,000 --> 00:06:51,200
Speaker 1: last few years. But what strikes me generally is everyone

123
00:06:51,279 --> 00:06:55,800
Speaker 1: has all these micro explanations for the distortions that we're seeing,

124
00:06:55,839 --> 00:06:58,280
Speaker 1: where the blockages in Long Beach and the and the

125
00:06:58,400 --> 00:07:01,080
Speaker 1: gas prices in Europe and the wind didn't blow enough

126
00:07:01,080 --> 00:07:04,400
Speaker 1: and what have you. And for me, the striking thing,

127
00:07:04,480 --> 00:07:08,240
Speaker 1: it's just the sort of systemic features that nobody's talking about,

128
00:07:08,440 --> 00:07:11,640
Speaker 1: the way that economies have become steadily more specialized in

129
00:07:11,720 --> 00:07:14,640
Speaker 1: ways that are highly efficient to make firms profitable when

130
00:07:14,680 --> 00:07:18,720
Speaker 1: everything works, but are also vulnerable to exactly these sorts

131
00:07:18,720 --> 00:07:22,360
Speaker 1: of breakages. And and again in this assumption that everything

132
00:07:22,440 --> 00:07:24,960
Speaker 1: is transitory or sorts itself out and everything goes back

133
00:07:24,960 --> 00:07:28,160
Speaker 1: to normal. I'm just terribly conscious. Again you were sort

134
00:07:28,200 --> 00:07:30,600
Speaker 1: of hinting at it in in this discussion of how

135
00:07:30,680 --> 00:07:35,280
Speaker 1: how systems behave you know, economics is full of examples

136
00:07:35,280 --> 00:07:37,920
Speaker 1: of systems that are nice and well behaved, and you

137
00:07:38,040 --> 00:07:40,320
Speaker 1: nudge them a bit, and then prices go up and

138
00:07:40,360 --> 00:07:43,000
Speaker 1: demand goes down, and then they come back into equilibrium.

139
00:07:43,360 --> 00:07:45,280
Speaker 1: And yet I can't help but feel exactly as you

140
00:07:45,320 --> 00:07:48,160
Speaker 1: were saying, the economy is a complex system. Supply and

141
00:07:48,200 --> 00:07:51,360
Speaker 1: demand are deeply into linked. We've made the systems more

142
00:07:51,480 --> 00:07:55,440
Speaker 1: in elastic through this specialization process, and we've just given

143
00:07:55,480 --> 00:07:58,320
Speaker 1: everything the most almighty whack. And there are plenty of

144
00:07:58,360 --> 00:08:00,760
Speaker 1: systems in physics that don't behave sensibly once you give

145
00:08:00,800 --> 00:08:03,520
Speaker 1: them an almighty whack, they go into a completely different

146
00:08:03,800 --> 00:08:07,480
Speaker 1: form of behavior, and once they do so, they don't

147
00:08:07,520 --> 00:08:11,400
Speaker 1: necessarily neatly settle down again. And so so I'm I'm

148
00:08:11,520 --> 00:08:14,160
Speaker 1: just a bit conscious that everything we've got used to

149
00:08:14,240 --> 00:08:18,200
Speaker 1: in this whole great moderation and just in time, supply

150
00:08:18,320 --> 00:08:20,600
Speaker 1: chains and everything, there is some risk that we've now

151
00:08:20,640 --> 00:08:22,800
Speaker 1: given everything such a big way that it doesn't simply

152
00:08:22,800 --> 00:08:25,360
Speaker 1: settle down in the way in which the textbooks would suggest.

153
00:08:26,320 --> 00:08:28,239
Speaker 1: I mean, this is what you said about the wind,

154
00:08:28,320 --> 00:08:30,440
Speaker 1: and I was just thinking about this this morning because

155
00:08:30,800 --> 00:08:33,640
Speaker 1: it was actually, you know, obviously with those I think

156
00:08:33,640 --> 00:08:35,040
Speaker 1: it was about a month ago or a month a

157
00:08:35,040 --> 00:08:37,240
Speaker 1: half ago in the UK, there were like three or

158
00:08:37,240 --> 00:08:40,520
Speaker 1: four days where it didn't the wind didn't blow very much,

159
00:08:41,000 --> 00:08:43,400
Speaker 1: and you know, there shouldn't be a big deal. But

160
00:08:43,480 --> 00:08:45,800
Speaker 1: I think we were talking with Jeff Curry over Goldman

161
00:08:46,000 --> 00:08:49,080
Speaker 1: actually made the point it's like, normally the wind not

162
00:08:49,160 --> 00:08:51,160
Speaker 1: blowing for three or four days is just not a

163
00:08:51,240 --> 00:08:54,280
Speaker 1: very big deal. It happens only when things are like

164
00:08:54,360 --> 00:08:57,400
Speaker 1: so stretched, does the wind not blowing for three or

165
00:08:57,400 --> 00:09:00,280
Speaker 1: four days. But because it's like insane like swing in

166
00:09:00,320 --> 00:09:04,280
Speaker 1: the price of you know, natural gas or electricity. And

167
00:09:04,320 --> 00:09:07,360
Speaker 1: then just this weekend of the US like that, it

168
00:09:07,480 --> 00:09:10,400
Speaker 1: was like really windy and Dallas and that's caused this

169
00:09:10,520 --> 00:09:14,960
Speaker 1: huge cascade of cancelations of flights from American Airlines, which

170
00:09:14,960 --> 00:09:18,120
Speaker 1: is headquartered Dallas. And it feels like the thing that

171
00:09:18,480 --> 00:09:21,160
Speaker 1: sort of is going on is, as you said, there's

172
00:09:21,200 --> 00:09:23,960
Speaker 1: all these idiosyncratic events. So there's a drought in Brazil,

173
00:09:24,080 --> 00:09:27,640
Speaker 1: there's no wind in the UK, etcetera. But that when

174
00:09:27,679 --> 00:09:31,840
Speaker 1: the system is strategy, these little things could create rippling

175
00:09:31,960 --> 00:09:34,560
Speaker 1: cast And I think one of the things that's interesting

176
00:09:34,600 --> 00:09:37,120
Speaker 1: about that is you you might almost speculate in some

177
00:09:37,200 --> 00:09:40,000
Speaker 1: of it, Yes, is is small and more open economies

178
00:09:40,040 --> 00:09:42,040
Speaker 1: like the UK that have cut themselves off from Europe

179
00:09:42,080 --> 00:09:44,080
Speaker 1: being vulnerable, But some of it is it is it

180
00:09:44,120 --> 00:09:46,680
Speaker 1: a coincidence that actually some of these supply shortages are

181
00:09:46,720 --> 00:09:50,719
Speaker 1: almost most intense in the most highly capitalist economies like

182
00:09:50,840 --> 00:09:54,000
Speaker 1: the US, where actually, you've had an incentive over decades

183
00:09:54,160 --> 00:09:57,640
Speaker 1: to make everything efficient, to whittle down your infantories to

184
00:09:57,920 --> 00:10:01,559
Speaker 1: you know, to make a nice, lean product, which which

185
00:10:01,640 --> 00:10:03,720
Speaker 1: which again when it works, gives you the super high

186
00:10:03,720 --> 00:10:08,640
Speaker 1: profit margins. But the sorts of redundancy or over capacity

187
00:10:08,679 --> 00:10:11,400
Speaker 1: which you might have built in as a cushion. That's

188
00:10:11,400 --> 00:10:14,000
Speaker 1: exactly what we've taken out, whether it's from supply chains

189
00:10:14,080 --> 00:10:16,400
Speaker 1: or even whether it's from health services and things. And

190
00:10:16,679 --> 00:10:20,640
Speaker 1: suddenly you're seeing the potential vulnerabilities that result. So what

191
00:10:20,720 --> 00:10:24,560
Speaker 1: does what do the supply chain issues actually mean for

192
00:10:24,720 --> 00:10:28,120
Speaker 1: the economy from a very very broad perspective, because I mean,

193
00:10:28,160 --> 00:10:30,400
Speaker 1: this is something Joe and I have been talking about

194
00:10:30,440 --> 00:10:32,640
Speaker 1: this for a while, and I think even last year.

195
00:10:33,160 --> 00:10:35,720
Speaker 1: I mean this was very very early on, but I

196
00:10:35,760 --> 00:10:39,080
Speaker 1: remember writing something in like March because I'm in Hong

197
00:10:39,160 --> 00:10:41,079
Speaker 1: Kong and I was seeing what was happening in China

198
00:10:41,400 --> 00:10:46,000
Speaker 1: and talking about whether or not supply chain bottlenecks would

199
00:10:46,160 --> 00:10:48,840
Speaker 1: end up being like short term good or bad for

200
00:10:48,880 --> 00:10:51,360
Speaker 1: the economy in the sense that you know, you get

201
00:10:51,360 --> 00:10:56,240
Speaker 1: this bullwhip effect. People start over ordering, inventories start building up,

202
00:10:56,240 --> 00:10:58,520
Speaker 1: and then they realize, oh well, actually we've ordered too

203
00:10:58,600 --> 00:11:00,760
Speaker 1: much and then they cut sales. So I don't know.

204
00:11:00,800 --> 00:11:02,520
Speaker 1: It seems like you can argue it both ways. But

205
00:11:02,640 --> 00:11:06,000
Speaker 1: how are you broadly thinking about this in terms of

206
00:11:06,320 --> 00:11:10,480
Speaker 1: your economic models. I think it makes me mistrust the

207
00:11:10,559 --> 00:11:12,920
Speaker 1: models that we built up over the last few years,

208
00:11:13,000 --> 00:11:16,600
Speaker 1: even more than I mistrusted them anyway. I think it

209
00:11:16,720 --> 00:11:20,200
Speaker 1: makes me worry about the return, at least temporarily to

210
00:11:20,360 --> 00:11:23,560
Speaker 1: some form of boom bust cycle. And if I had

211
00:11:23,600 --> 00:11:27,120
Speaker 1: to guess, I would say my suspicion or fear, but

212
00:11:27,240 --> 00:11:30,200
Speaker 1: maybe I'm just being overly negative, is that the price

213
00:11:30,280 --> 00:11:32,800
Speaker 1: increases are a bit stickier and more lasting than we

214
00:11:32,840 --> 00:11:34,880
Speaker 1: would have liked, and then the central banks would like.

215
00:11:35,200 --> 00:11:38,160
Speaker 1: And conversely, maybe the growth is a bit less robust

216
00:11:38,440 --> 00:11:40,679
Speaker 1: than everyone likes to think at the moment. And as

217
00:11:40,760 --> 00:11:44,160
Speaker 1: you say, it's this, it's this capacity to suddenly go

218
00:11:44,240 --> 00:11:47,360
Speaker 1: back to de stocking restocking cycles that we've forgotten about it.

219
00:11:47,400 --> 00:11:49,560
Speaker 1: I almost see it in my own behavior when I

220
00:11:49,600 --> 00:11:52,040
Speaker 1: go to the supermarket. When everything is fully available, you

221
00:11:52,080 --> 00:11:54,480
Speaker 1: buy only what you need, but the moment it starts

222
00:11:54,480 --> 00:11:56,000
Speaker 1: getting a little bit low, you think, oh, maybe I

223
00:11:56,080 --> 00:11:59,120
Speaker 1: better buy an extra one. And it's that potential to

224
00:11:59,240 --> 00:12:03,640
Speaker 1: suddenly change the system's behavior, this in elastic linkage of

225
00:12:03,679 --> 00:12:05,800
Speaker 1: supply and demand, or this this shift back to what

226
00:12:05,840 --> 00:12:09,240
Speaker 1: our German economist are calling a stop start manufacturing cycle. Again.

227
00:12:09,280 --> 00:12:12,240
Speaker 1: It's interesting because you start having these conversations around stagflation

228
00:12:12,240 --> 00:12:14,679
Speaker 1: and everyone protests, well, that's absolutely rubbish. We can see

229
00:12:14,679 --> 00:12:17,320
Speaker 1: the inflation side of it, but demand is really robust.

230
00:12:17,480 --> 00:12:22,000
Speaker 1: And as we see these potential shifts again, I think

231
00:12:22,000 --> 00:12:25,640
Speaker 1: that the the possibility that they end up rippling or

232
00:12:25,679 --> 00:12:29,480
Speaker 1: cascading through the economy and are more lasting even though

233
00:12:29,480 --> 00:12:33,480
Speaker 1: the existing the original problems get picked. That potential, again,

234
00:12:33,559 --> 00:12:37,959
Speaker 1: I think is underappreciated in the nice linear models that

235
00:12:38,160 --> 00:12:58,760
Speaker 1: everyone has got used to. You said something really interesting

236
00:12:58,840 --> 00:13:01,800
Speaker 1: that had been on my mind as well, which is that, like,

237
00:13:02,280 --> 00:13:06,240
Speaker 1: we see the supply chain shortages, and it seems like

238
00:13:06,280 --> 00:13:09,440
Speaker 1: the inflation data worse in some of the more like

239
00:13:09,760 --> 00:13:14,600
Speaker 1: hyper like leading efficient capitalist economies like the US. Inflation

240
00:13:14,640 --> 00:13:19,480
Speaker 1: in the US is higher than it is in say, uh,

241
00:13:19,520 --> 00:13:22,800
Speaker 1: the European Union, And I'm curious, like there is this debate.

242
00:13:22,880 --> 00:13:25,640
Speaker 1: It's like, a, is this just because the European Union

243
00:13:25,720 --> 00:13:28,240
Speaker 1: is behind the US when it comes to reopening there

244
00:13:28,280 --> 00:13:32,200
Speaker 1: are a few months lower with the vaccinations. B Is

245
00:13:32,200 --> 00:13:34,560
Speaker 1: it because of the US like sent out that extra

246
00:13:34,640 --> 00:13:37,560
Speaker 1: round of checks? Like is it a pure demand impulse

247
00:13:37,920 --> 00:13:41,240
Speaker 1: or see? Is it as you say, the drumhead in

248
00:13:41,280 --> 00:13:44,920
Speaker 1: the US is tuned tighter and maybe they're you know,

249
00:13:45,040 --> 00:13:48,920
Speaker 1: the EU economies more vacation time, as everybody knows people

250
00:13:48,920 --> 00:13:53,280
Speaker 1: have more time off, etcetera, aren't as hyper optimized to

251
00:13:53,320 --> 00:13:56,680
Speaker 1: be like working efficient seven And nothing's even opened twenty

252
00:13:56,679 --> 00:13:59,600
Speaker 1: four hours in the most Eropean cities. So I guess

253
00:13:59,640 --> 00:14:01,719
Speaker 1: the exam puple that I was really thinking of is

254
00:14:01,760 --> 00:14:06,480
Speaker 1: simply Japan, where inflation expectations have moved up much less

255
00:14:06,480 --> 00:14:09,680
Speaker 1: than in other markets Euro versus the US. I'd say

256
00:14:09,679 --> 00:14:12,040
Speaker 1: that this thing with running just in time economies or

257
00:14:12,080 --> 00:14:17,760
Speaker 1: running everything lean, maybe that increases the vulnerabilities to suddenly

258
00:14:17,800 --> 00:14:22,320
Speaker 1: supply chains failing. I don't know that that necessarily increases

259
00:14:22,360 --> 00:14:24,440
Speaker 1: the price pressures, or at a minimum that that feels

260
00:14:24,440 --> 00:14:28,200
Speaker 1: indirect to me. The obvious explanation there, I have to say,

261
00:14:28,200 --> 00:14:30,600
Speaker 1: is simply that the Larry Summers explanation, as you said,

262
00:14:30,640 --> 00:14:34,120
Speaker 1: it's it's just you know, you suddenly put in fifteent

263
00:14:34,200 --> 00:14:37,600
Speaker 1: of GDP of fiscal stimulus to an economy which is

264
00:14:37,640 --> 00:14:40,760
Speaker 1: already recovering really strongly, and you combine it with zero

265
00:14:40,840 --> 00:14:44,640
Speaker 1: rates and massive amounts of que it's almost unsurprising. You know,

266
00:14:45,080 --> 00:14:46,880
Speaker 1: there's all this uncertainty as to what the output gap

267
00:14:46,920 --> 00:14:49,400
Speaker 1: really is, but it's just just unsurprising when at that

268
00:14:49,440 --> 00:14:52,640
Speaker 1: point it starts to show up in in higher prices,

269
00:14:53,000 --> 00:14:55,840
Speaker 1: and it's it's really that fiscal stimulus, which which has

270
00:14:55,880 --> 00:14:59,400
Speaker 1: just been disproportionate in the US relative to the rest

271
00:14:59,400 --> 00:15:01,960
Speaker 1: of the world. How come stocks don't seem to care

272
00:15:02,400 --> 00:15:04,840
Speaker 1: about any of this? Yeah, I wonder this too, like

273
00:15:05,480 --> 00:15:10,000
Speaker 1: really basic question. The basic questions are always the best

274
00:15:10,000 --> 00:15:13,440
Speaker 1: and the and the hardest. Um So we have likewise

275
00:15:13,520 --> 00:15:17,160
Speaker 1: been scratching our heads around this, and the obvious thing

276
00:15:17,320 --> 00:15:20,040
Speaker 1: you can point to is the strength of earnings. But

277
00:15:20,240 --> 00:15:24,640
Speaker 1: even and earnings have indeed been completely phenomenal. Even then, though,

278
00:15:24,800 --> 00:15:28,120
Speaker 1: it's sort of interesting that you look at, say, changes

279
00:15:28,200 --> 00:15:32,560
Speaker 1: in earnings expectations and they're still going up, but barely,

280
00:15:33,120 --> 00:15:34,840
Speaker 1: and the rate at which they're going up has rightly

281
00:15:34,920 --> 00:15:37,080
Speaker 1: been plummeting. And so while the guidance has not been

282
00:15:37,480 --> 00:15:39,360
Speaker 1: quite as negative as it as it might have been

283
00:15:39,400 --> 00:15:41,120
Speaker 1: if all of these problems were filtering through. With one

284
00:15:41,200 --> 00:15:43,920
Speaker 1: or two single name exceptions, there still looks like there's

285
00:15:43,960 --> 00:15:49,120
Speaker 1: a big mismatch between again those underlying fundamentals and these

286
00:15:49,160 --> 00:15:51,120
Speaker 1: potential problems. And as you say that that the price

287
00:15:51,160 --> 00:15:53,000
Speaker 1: action and to some extent likewise you can point to

288
00:15:53,000 --> 00:15:55,480
Speaker 1: a narrowing of the stock market performance. But I think

289
00:15:55,760 --> 00:16:00,640
Speaker 1: the big picture explanation, which increasingly i'm minded awards, is

290
00:16:00,960 --> 00:16:04,160
Speaker 1: even as a number of people start saying, oh, we've

291
00:16:04,160 --> 00:16:07,880
Speaker 1: priced in too many rate hikes, when you break down

292
00:16:08,480 --> 00:16:13,200
Speaker 1: the rates market move into inflation expectations on the one

293
00:16:13,280 --> 00:16:16,400
Speaker 1: hand and then real rates on the other, you come

294
00:16:16,440 --> 00:16:21,280
Speaker 1: to this rather remarkable conclusion that actually, all, or even

295
00:16:21,320 --> 00:16:24,160
Speaker 1: more than all in some cases, of the move up

296
00:16:24,160 --> 00:16:26,600
Speaker 1: in nominal rates of the pricing in in rate hikes

297
00:16:27,000 --> 00:16:30,240
Speaker 1: has been inflation expectations. And what that means is that

298
00:16:30,320 --> 00:16:32,640
Speaker 1: real yields are basically still at the loads. They just

299
00:16:33,480 --> 00:16:35,160
Speaker 1: begun moving up a little bit in Germany in the

300
00:16:35,240 --> 00:16:37,760
Speaker 1: UK just the last day or two. But again, as well,

301
00:16:37,800 --> 00:16:39,760
Speaker 1: as one client put it to me, that means that

302
00:16:39,760 --> 00:16:42,200
Speaker 1: we're not actually pricing any tightening at all. It's almost

303
00:16:42,200 --> 00:16:44,640
Speaker 1: as that we priced to stealth easing, and I think

304
00:16:44,920 --> 00:16:48,280
Speaker 1: that goes a long way towards explaining why it is,

305
00:16:48,400 --> 00:16:50,880
Speaker 1: especially in recent years where investors have sort of been

306
00:16:50,920 --> 00:16:53,760
Speaker 1: trained almost, oh, don't look at the underlying fundamentals. They

307
00:16:54,080 --> 00:16:56,400
Speaker 1: haven't got anything to do with the market price. It's

308
00:16:56,400 --> 00:16:58,720
Speaker 1: only about the stimulus, is only about the real yield.

309
00:16:59,000 --> 00:17:00,640
Speaker 1: And they're seeing real yields back at the lows, and

310
00:17:00,640 --> 00:17:03,760
Speaker 1: they're saying, well, therefore there's there's there's nothing to worry about.

311
00:17:03,840 --> 00:17:07,119
Speaker 1: And even as you get this aggressive yield curve flattening

312
00:17:07,480 --> 00:17:10,880
Speaker 1: in particular again, it really feels to me as though

313
00:17:10,920 --> 00:17:14,720
Speaker 1: there's just a mismatch between yield curves increasingly saying hang

314
00:17:14,760 --> 00:17:16,919
Speaker 1: on a minute, we've got a policy era here. And

315
00:17:16,960 --> 00:17:19,480
Speaker 1: then as you say that, the equity market saying, no,

316
00:17:19,640 --> 00:17:22,360
Speaker 1: don't care. The long dated real yield has just gone down.

317
00:17:22,640 --> 00:17:24,760
Speaker 1: Let me increase my estimate of the fair value of everything,

318
00:17:24,760 --> 00:17:27,240
Speaker 1: because I'm discounting my dividends at a at a low rate.

319
00:17:27,800 --> 00:17:30,760
Speaker 1: It is remarkable and I think is increasingly a source

320
00:17:30,800 --> 00:17:33,639
Speaker 1: of vulnerability, and yet as of today it's mostly carrying on.

321
00:17:34,720 --> 00:17:38,200
Speaker 1: So you mentioned real yields, and and this is something

322
00:17:38,320 --> 00:17:41,000
Speaker 1: that we've been asking like a number of our guests

323
00:17:41,080 --> 00:17:44,159
Speaker 1: about and it is true. If you look at real yields,

324
00:17:44,160 --> 00:17:47,840
Speaker 1: so yields adjusted for inflation right now, they look incredibly low,

325
00:17:48,200 --> 00:17:53,440
Speaker 1: particularly when you look at previous sort of periods right

326
00:17:53,480 --> 00:17:58,240
Speaker 1: before or right as the FED was actually tightening monetary policy. So,

327
00:17:58,280 --> 00:18:00,160
Speaker 1: for instance, if you compare them to what was going

328
00:18:00,200 --> 00:18:04,000
Speaker 1: on when we had the Taper tantrum, there's just this huge,

329
00:18:04,080 --> 00:18:07,640
Speaker 1: huge difference. And I guess my question is why is that,

330
00:18:07,720 --> 00:18:10,320
Speaker 1: Like it seems like such an oddity in the market

331
00:18:10,720 --> 00:18:14,479
Speaker 1: that as we expect central banks to start tightening, we

332
00:18:14,560 --> 00:18:19,439
Speaker 1: have real yields that seemed to have barely budged. For me,

333
00:18:19,560 --> 00:18:22,800
Speaker 1: there is a long term story here, and where we're

334
00:18:22,800 --> 00:18:24,880
Speaker 1: going to probably get to is what level of real

335
00:18:24,920 --> 00:18:28,800
Speaker 1: yields really counts for investors. But the long term story,

336
00:18:28,840 --> 00:18:32,359
Speaker 1: the slightly scary story, is the last few cycles have

337
00:18:32,440 --> 00:18:34,520
Speaker 1: not really gone according to plan. At no point, at

338
00:18:34,560 --> 00:18:37,120
Speaker 1: least until now, have the central banks had to raise

339
00:18:37,200 --> 00:18:40,640
Speaker 1: rates to choke off an inflation and overheating an economy.

340
00:18:40,680 --> 00:18:44,639
Speaker 1: And what's triggered recessions has instead been accidental bursting of

341
00:18:44,640 --> 00:18:47,800
Speaker 1: asset price bubbles. And the scary bit is that each

342
00:18:47,840 --> 00:18:51,320
Speaker 1: time it's been a lower level of real yields, which

343
00:18:51,400 --> 00:18:55,520
Speaker 1: has triggered that bursting of an asset price bubble. And

344
00:18:56,280 --> 00:18:58,640
Speaker 1: it's almost as though it's taking a lower and lower

345
00:18:58,720 --> 00:19:01,679
Speaker 1: level of real yields or a larger and larger degree

346
00:19:01,680 --> 00:19:07,920
Speaker 1: of stimulus to keep investors holding on to fundamentally expensive assets.

347
00:19:07,960 --> 00:19:10,960
Speaker 1: And my usual bad joke because that it's been years

348
00:19:11,000 --> 00:19:13,280
Speaker 1: since I've visited any investor in any asset class who

349
00:19:13,320 --> 00:19:15,719
Speaker 1: was buying things because the analyst told the portfolio manager

350
00:19:15,840 --> 00:19:18,560
Speaker 1: it was cheap. It's always the PM telling the analysts will,

351
00:19:18,520 --> 00:19:19,919
Speaker 1: we've just had another inflow, and we've got to put

352
00:19:19,920 --> 00:19:22,840
Speaker 1: the money somewhere, and that The latest example here for

353
00:19:22,920 --> 00:19:25,879
Speaker 1: me is twenty eighteen, which is still my favorite comparison

354
00:19:25,880 --> 00:19:28,240
Speaker 1: with where we are now, where again growth had been

355
00:19:28,240 --> 00:19:29,919
Speaker 1: strong and the West fiscal stimulus in the system, the

356
00:19:29,920 --> 00:19:32,480
Speaker 1: ecty market was making new highs. The FED thought it

357
00:19:32,560 --> 00:19:35,240
Speaker 1: had an appropriate level of bank reserves, an appropriate level

358
00:19:35,240 --> 00:19:37,879
Speaker 1: of monetary policy, and appropriate level of real yields, and

359
00:19:37,920 --> 00:19:39,600
Speaker 1: then all of a sudden, you've got this correction in

360
00:19:39,680 --> 00:19:42,640
Speaker 1: markets out of the blue, and that threatened to seep

361
00:19:42,640 --> 00:19:45,680
Speaker 1: into the economy and and persisted until the FED basically

362
00:19:45,880 --> 00:19:48,000
Speaker 1: turned around a hundred and eighty degrees. And on the

363
00:19:48,040 --> 00:19:50,560
Speaker 1: one hand, that level of real yields was two d

364
00:19:50,680 --> 00:19:53,040
Speaker 1: basis points above where we are today, and it seems

365
00:19:53,040 --> 00:19:55,320
Speaker 1: odd to think that we could again have outflows when

366
00:19:55,359 --> 00:19:57,639
Speaker 1: real yields are so negative. And yet for me, the

367
00:19:57,760 --> 00:20:01,560
Speaker 1: long term pattern suggests the actually and the wobbliness that

368
00:20:01,640 --> 00:20:04,720
Speaker 1: was starting to get in some market behavior and to

369
00:20:04,760 --> 00:20:07,000
Speaker 1: some extent and fun flows at the moment suggest we

370
00:20:07,000 --> 00:20:09,080
Speaker 1: could be much closer to that point than people imagine.

371
00:20:09,680 --> 00:20:12,880
Speaker 1: So I want to go back to something that you said,

372
00:20:12,920 --> 00:20:16,040
Speaker 1: because I think it's worth diving into deeper. And uh,

373
00:20:16,080 --> 00:20:18,879
Speaker 1: you know, you're pointing out that, Okay, we've had this

374
00:20:18,960 --> 00:20:22,359
Speaker 1: big repricing of the short end of the yield curve globally,

375
00:20:22,600 --> 00:20:26,280
Speaker 1: and that means, okay, the expectation is that, you know,

376
00:20:26,359 --> 00:20:28,880
Speaker 1: central banks around the world, the major central banks, are

377
00:20:28,920 --> 00:20:31,720
Speaker 1: going to be hiking sooner than people had expected two

378
00:20:31,800 --> 00:20:34,120
Speaker 1: or three months ago, even maybe even one month ago.

379
00:20:34,880 --> 00:20:40,120
Speaker 1: But as you're saying, that doesn't necessarily imply that they're

380
00:20:40,160 --> 00:20:43,360
Speaker 1: actually getting more hawkish, because if inflation next or if

381
00:20:43,440 --> 00:20:46,879
Speaker 1: if you know, if inflation is expected to outpace those

382
00:20:46,960 --> 00:20:50,800
Speaker 1: gains over the next one to five years, then you

383
00:20:50,840 --> 00:20:55,120
Speaker 1: can have rate increases and yet actually the real yield

384
00:20:55,160 --> 00:20:58,000
Speaker 1: doesn't necessarily uh, real yields can go up, you know,

385
00:20:58,119 --> 00:21:00,960
Speaker 1: actually or they may need to tighten rates in order

386
00:21:01,000 --> 00:21:06,119
Speaker 1: to prevent their being an effective easing. So I guess

387
00:21:06,119 --> 00:21:08,919
Speaker 1: like the risk then for the market or the scenario

388
00:21:09,119 --> 00:21:12,159
Speaker 1: then it feels like people aren't talking about and I

389
00:21:12,160 --> 00:21:15,520
Speaker 1: don't know, you know, is the sort of the disorderly

390
00:21:15,600 --> 00:21:17,920
Speaker 1: rate hike cycle where it's something a little bit more

391
00:21:18,000 --> 00:21:22,200
Speaker 1: like the early eighties, where a bunch of central bankers say, oh,

392
00:21:22,280 --> 00:21:25,280
Speaker 1: this is a serious problem. Rate high grade, high grade,

393
00:21:25,320 --> 00:21:28,560
Speaker 1: high grade hike, intermediate grade hike, anything to stop inflation.

394
00:21:29,040 --> 00:21:31,359
Speaker 1: That would be like the sort of like true like

395
00:21:31,520 --> 00:21:34,880
Speaker 1: hawkers risk that could take down risk assets or where

396
00:21:34,880 --> 00:21:37,520
Speaker 1: where do you wait? Bad scenario. I think it's not

397
00:21:37,640 --> 00:21:40,480
Speaker 1: very likely. But I think it's not very likely because

398
00:21:40,520 --> 00:21:43,480
Speaker 1: I see risk assets crumbling first, and hence we come

399
00:21:43,480 --> 00:21:45,520
Speaker 1: back to this paradox that if they haven't crumbled, then

400
00:21:45,520 --> 00:21:48,600
Speaker 1: you may go down that route. So again, Larry Summer

401
00:21:48,600 --> 00:21:52,800
Speaker 1: has made an interesting comment at our City's Australian conference

402
00:21:52,840 --> 00:21:55,840
Speaker 1: recently that he thinks the the U S economy could

403
00:21:55,840 --> 00:21:58,720
Speaker 1: withstand policy rates going to five, sorry to three or

404
00:21:58,720 --> 00:22:01,000
Speaker 1: three and a half percent before there was a correction

405
00:22:01,000 --> 00:22:04,400
Speaker 1: in the economy. And if it were just about the economy,

406
00:22:04,520 --> 00:22:06,879
Speaker 1: then I think I might sympathize with that view. But

407
00:22:07,359 --> 00:22:11,159
Speaker 1: my suspicion is that actually we would go back to

408
00:22:11,240 --> 00:22:14,880
Speaker 1: their being outflows from mutual funds and ETFs and people

409
00:22:14,920 --> 00:22:17,440
Speaker 1: going back into catch long before that point, just as

410
00:22:17,520 --> 00:22:21,040
Speaker 1: was the case in eighteen And I think maybe the

411
00:22:21,119 --> 00:22:24,120
Speaker 1: underlying reason why it takes a lower and lower level

412
00:22:24,119 --> 00:22:26,040
Speaker 1: of reals to prop everything up is because there's more

413
00:22:26,080 --> 00:22:28,200
Speaker 1: and more debt in the system. And now, of course

414
00:22:28,240 --> 00:22:30,919
Speaker 1: there's more debt still, and so again my suspicion is

415
00:22:30,960 --> 00:22:33,280
Speaker 1: that that that we would reach that point earlier, and

416
00:22:33,320 --> 00:22:39,119
Speaker 1: if markets were wobbling then actually which again Larry perfectly acknowledges,

417
00:22:39,359 --> 00:22:41,680
Speaker 1: but then I think the risk of it filtering through

418
00:22:41,680 --> 00:22:44,760
Speaker 1: into the economy more than might have been the case historically,

419
00:22:45,280 --> 00:22:48,480
Speaker 1: that's actually quite elevated. And and and I think that's

420
00:22:48,520 --> 00:22:51,080
Speaker 1: this thing that investors everywhere struggling with it. The bond

421
00:22:51,119 --> 00:22:54,000
Speaker 1: market is, you know, the bond market flattening is telling

422
00:22:54,040 --> 00:22:56,080
Speaker 1: you if you go down that route, it will be

423
00:22:56,119 --> 00:22:58,440
Speaker 1: a mistake. It won't last very long, and the underlying

424
00:22:58,440 --> 00:23:01,320
Speaker 1: disinflationary pressures from the overhand of are still there, and

425
00:23:01,400 --> 00:23:04,800
Speaker 1: we're going to be stuck back in secularistagnation even more

426
00:23:04,800 --> 00:23:07,920
Speaker 1: strongly than previously. And ultimately I think that's right. But

427
00:23:08,560 --> 00:23:10,920
Speaker 1: the thing that's likely to make it right is a

428
00:23:10,920 --> 00:23:14,080
Speaker 1: correction in equities and credit and housing, and so far

429
00:23:14,119 --> 00:23:17,000
Speaker 1: there's no sign of that whatsoever. So I have a

430
00:23:17,040 --> 00:23:20,760
Speaker 1: slightly strange question based on that. But what would happen

431
00:23:20,840 --> 00:23:24,359
Speaker 1: if if central banks just did nothing? You know, if

432
00:23:24,440 --> 00:23:27,879
Speaker 1: if they actually stuck to the transitory inflation argument and

433
00:23:27,880 --> 00:23:30,200
Speaker 1: said they're just going to look through what the bond

434
00:23:30,240 --> 00:23:32,840
Speaker 1: market is doing at the moment. Would that be like

435
00:23:32,920 --> 00:23:38,000
Speaker 1: a big crisis of central banks um credibility, or maybe

436
00:23:38,200 --> 00:23:41,480
Speaker 1: it wouldn't matter so much given that people are basically

437
00:23:41,520 --> 00:23:45,240
Speaker 1: pricing in a policy error if they do start to tighten.

438
00:23:47,359 --> 00:23:50,160
Speaker 1: I like to think in terms of what I call

439
00:23:50,240 --> 00:23:55,359
Speaker 1: a credibility gap between inflation expectations on the one hand

440
00:23:55,400 --> 00:23:59,480
Speaker 1: and real yields on the other. And when I look

441
00:23:59,520 --> 00:24:04,040
Speaker 1: at that, basically we've already got the biggest gap between

442
00:24:04,240 --> 00:24:06,880
Speaker 1: real yields and inflation that you've had since the nineteen seventies.

443
00:24:07,640 --> 00:24:11,840
Speaker 1: And while I don't fully know, as I look at

444
00:24:12,000 --> 00:24:17,560
Speaker 1: some of this aggressive behavior in bond markets in Australia

445
00:24:17,600 --> 00:24:20,840
Speaker 1: and Canada and places that did almost seem dormant previously,

446
00:24:21,680 --> 00:24:24,639
Speaker 1: and as I look at the still terribly low levels

447
00:24:24,680 --> 00:24:28,080
Speaker 1: of term premium which exists across the board, I think

448
00:24:28,160 --> 00:24:30,240
Speaker 1: you're quite close to the point where the central banks

449
00:24:30,280 --> 00:24:31,720
Speaker 1: a damned if they do, and damned if they don't.

450
00:24:31,760 --> 00:24:37,119
Speaker 1: If they don't respond at all, then I think quite

451
00:24:37,200 --> 00:24:40,800
Speaker 1: rapidly you could see the bond market being destabilized at

452
00:24:40,800 --> 00:24:43,040
Speaker 1: a minimum, let's say, in the five year portion, the

453
00:24:43,080 --> 00:24:47,239
Speaker 1: longer and may may yet flatten more still, and and

454
00:24:47,280 --> 00:24:49,480
Speaker 1: I think that's just that's just tough for the central

455
00:24:49,520 --> 00:24:52,640
Speaker 1: banks to escape from. Frankly, now, now maybe I'm wrong,

456
00:24:52,720 --> 00:24:55,639
Speaker 1: and that point is further away, but it's almost as

457
00:24:55,640 --> 00:24:57,919
Speaker 1: though they packed themselves into a corner, because to begin with,

458
00:24:58,000 --> 00:24:59,920
Speaker 1: they said, well, we don't need to worry about it

459
00:25:00,000 --> 00:25:02,879
Speaker 1: inflation unless it turns into rises in inflation break evens

460
00:25:03,119 --> 00:25:05,840
Speaker 1: and low and but sorry, in inflation expectations and low

461
00:25:05,880 --> 00:25:08,560
Speaker 1: and behold, you've gotlonger dated inflation expectations in the US

462
00:25:08,640 --> 00:25:10,719
Speaker 1: north of four percent on the new York fled survey,

463
00:25:11,040 --> 00:25:13,080
Speaker 1: and likewise, they said, well, we won't need to worry

464
00:25:13,119 --> 00:25:15,639
Speaker 1: about it unless it turns into you know, unless it

465
00:25:15,680 --> 00:25:18,080
Speaker 1: moves away from just a few commodity prices and it

466
00:25:18,080 --> 00:25:20,680
Speaker 1: turns into writers in wages and lo and behold, you've

467
00:25:20,720 --> 00:25:23,600
Speaker 1: got average really earnings north of five And so again

468
00:25:23,640 --> 00:25:26,000
Speaker 1: they've almost backed themselves into a corner. I'm not actually

469
00:25:26,040 --> 00:25:28,840
Speaker 1: convinced that inflation expectations are quite as pivotal as the

470
00:25:28,840 --> 00:25:31,680
Speaker 1: central banks think they are, but the markets are now

471
00:25:31,800 --> 00:25:34,000
Speaker 1: liable to respond to that, and I think that's what's

472
00:25:34,040 --> 00:25:37,160
Speaker 1: creating this environment that we're just starting to see where

473
00:25:37,160 --> 00:25:39,399
Speaker 1: the market says, look, either you do the tightening and

474
00:25:39,440 --> 00:25:41,320
Speaker 1: you have the abrupt turn around as the Bank of

475
00:25:41,359 --> 00:25:45,000
Speaker 1: England is doing, or else I'm almost going to force

476
00:25:45,040 --> 00:25:46,800
Speaker 1: you into it. Maybe not over the next two years,

477
00:25:46,800 --> 00:25:49,280
Speaker 1: but definitely over the next five years. So you know,

478
00:25:49,359 --> 00:25:53,320
Speaker 1: I'm thinking about this in the context of how we

479
00:25:53,400 --> 00:25:56,879
Speaker 1: started the discussion, which is the economy as the incredibly

480
00:25:56,920 --> 00:26:00,520
Speaker 1: complex system that we've given a huge too. And I

481
00:26:00,560 --> 00:26:02,720
Speaker 1: think people could debate what the lack was. It was

482
00:26:02,760 --> 00:26:07,040
Speaker 1: obviously the pandemic itself, and then the fiscal policy response

483
00:26:07,280 --> 00:26:10,600
Speaker 1: and the public health policy response, which involved lockdowns in

484
00:26:10,640 --> 00:26:16,480
Speaker 1: many places, numerous numerous jolts out of equilibrium. Do rate

485
00:26:16,560 --> 00:26:19,160
Speaker 1: hikes like work? I mean, it's in in this sort

486
00:26:19,160 --> 00:26:22,160
Speaker 1: of environment in other words, like okay, like maybe there's

487
00:26:22,200 --> 00:26:25,840
Speaker 1: some sort of like traditional economic conception of overheating were

488
00:26:25,920 --> 00:26:27,800
Speaker 1: demand is picking up a little bit, and then the

489
00:26:27,960 --> 00:26:31,040
Speaker 1: high grades and then calls off loan growth nekels demand

490
00:26:31,080 --> 00:26:34,840
Speaker 1: and everything gets back to normal. But do rate hikes

491
00:26:35,640 --> 00:26:39,639
Speaker 1: do anything or accomplish anything in an environment in which

492
00:26:39,960 --> 00:26:43,639
Speaker 1: we're not seeing normal, in which we're seeing as pendulum

493
00:26:43,720 --> 00:26:47,240
Speaker 1: swing around like crazy. Even after the event, people will

494
00:26:47,320 --> 00:26:50,680
Speaker 1: argue about it. Yeah, of course I think and and

495
00:26:51,040 --> 00:26:53,600
Speaker 1: I think that for me, the paradox is it is

496
00:26:53,600 --> 00:26:55,760
Speaker 1: a bit like bringing up children or something. You almost

497
00:26:55,760 --> 00:26:58,639
Speaker 1: need to be stricter today in order to create longer

498
00:26:58,760 --> 00:27:02,399
Speaker 1: term stability. And versely, if you are laxed today, then

499
00:27:02,440 --> 00:27:05,439
Speaker 1: the bad behavior will carry on. And maybe that was

500
00:27:05,680 --> 00:27:07,879
Speaker 1: I used in my presentation, this example of the double

501
00:27:07,920 --> 00:27:10,720
Speaker 1: pendulum where once it starts, it's going a bit banan

502
00:27:10,880 --> 00:27:13,520
Speaker 1: is it doesn't settle down by itself as the oscillations

503
00:27:13,520 --> 00:27:17,520
Speaker 1: get smaller. It remains very erratic until you really crimp

504
00:27:17,560 --> 00:27:20,560
Speaker 1: down demand until you really almost stopped the system through

505
00:27:20,560 --> 00:27:23,680
Speaker 1: a recession or through rape rises, and only then can

506
00:27:23,760 --> 00:27:27,600
Speaker 1: you does the thing start but start behaving. So on

507
00:27:27,640 --> 00:27:31,159
Speaker 1: the one hand, yes, there is exactly a perfectly valid

508
00:27:31,200 --> 00:27:34,560
Speaker 1: criticism that, look, if I raise interest rates, it's not gonna,

509
00:27:34,800 --> 00:27:38,679
Speaker 1: you know, improve the availability of truck drivers necessarily, and

510
00:27:38,720 --> 00:27:41,800
Speaker 1: so it seems a terrible shame to crimp down demand

511
00:27:42,000 --> 00:27:44,000
Speaker 1: as a means of bringing the two back into into

512
00:27:44,080 --> 00:27:46,440
Speaker 1: line with one another. But equally Irving King put it

513
00:27:46,520 --> 00:27:48,280
Speaker 1: nicely on another city cool. He said, the role of

514
00:27:48,280 --> 00:27:50,440
Speaker 1: a central bank is to is to keep supply and

515
00:27:50,520 --> 00:27:53,160
Speaker 1: demand in line with one another. When the virus first hit,

516
00:27:53,200 --> 00:27:54,840
Speaker 1: it became clear we were going to have a massive

517
00:27:54,840 --> 00:27:57,199
Speaker 1: shot to demand, and so you needed all the support in.

518
00:27:58,480 --> 00:28:01,600
Speaker 1: But then equally came rapidly clear that there's also been

519
00:28:01,600 --> 00:28:05,120
Speaker 1: a shock to supply. Now, if anything, you just don't

520
00:28:05,240 --> 00:28:08,400
Speaker 1: have that need for super easy monetary policy, and if

521
00:28:08,440 --> 00:28:10,520
Speaker 1: you carry on with it, it's quite likely that you

522
00:28:10,560 --> 00:28:14,639
Speaker 1: do get overheating and the erratic behavior continues. And so

523
00:28:14,400 --> 00:28:16,960
Speaker 1: so for me, maybe it maybe maybe I mean that

524
00:28:17,119 --> 00:28:20,159
Speaker 1: the at a minimum, even if they were right and

525
00:28:20,280 --> 00:28:24,679
Speaker 1: some of the immediate inflationary pressures have slowed down. For me,

526
00:28:24,720 --> 00:28:27,640
Speaker 1: there's a funny parallel with with with almost with climate change. Here,

527
00:28:28,359 --> 00:28:30,879
Speaker 1: what's the paradigm we've been in for an extended period.

528
00:28:30,880 --> 00:28:33,440
Speaker 1: It's one where even if there hasn't been CPI inflation,

529
00:28:33,480 --> 00:28:35,960
Speaker 1: there's been asset price inflation, and there's been these boom

530
00:28:35,960 --> 00:28:39,160
Speaker 1: bust cycles in asset prices, and central banks have looked

531
00:28:39,200 --> 00:28:41,560
Speaker 1: back and said, but we fell short on the CPI target.

532
00:28:41,840 --> 00:28:44,360
Speaker 1: We should have had easier monetary policy, and now they're

533
00:28:44,360 --> 00:28:47,000
Speaker 1: trying the easier monetary policy. I and many people in

534
00:28:47,040 --> 00:28:49,400
Speaker 1: the markets look back at the boom bust cycles, at

535
00:28:49,440 --> 00:28:51,560
Speaker 1: the asset price bubbles, at more and more debt in

536
00:28:51,560 --> 00:28:54,120
Speaker 1: the system, and say, with hindsight, you should have had

537
00:28:54,200 --> 00:28:57,480
Speaker 1: tighter policy at a minium when the bubbles were forming.

538
00:28:57,760 --> 00:29:00,120
Speaker 1: And I think the trip and likewise you were to

539
00:29:00,160 --> 00:29:03,200
Speaker 1: reason twenty, but you should have tapered way earlier. And

540
00:29:03,240 --> 00:29:05,959
Speaker 1: the trick to doing it is to make it conditional,

541
00:29:06,240 --> 00:29:09,200
Speaker 1: to take the holistic view that includes asset prices a

542
00:29:09,200 --> 00:29:12,040
Speaker 1: little bit more, or looks at broader credit dynamics and

543
00:29:12,040 --> 00:29:14,040
Speaker 1: says here, I will tighten rate today, but if it

544
00:29:14,080 --> 00:29:15,960
Speaker 1: starts going horribly wrong because there's a big bust in

545
00:29:16,000 --> 00:29:18,120
Speaker 1: that in the housing market and equity markets, then I

546
00:29:18,160 --> 00:29:20,200
Speaker 1: will be and then I will be easier in future.

547
00:29:20,480 --> 00:29:22,280
Speaker 1: And on the one hand, a number of central banks

548
00:29:22,280 --> 00:29:24,320
Speaker 1: are moving in that direction, the e c B whe

549
00:29:24,400 --> 00:29:27,280
Speaker 1: it's we're going to maintain favorable financing conditions, or the

550
00:29:27,280 --> 00:29:28,920
Speaker 1: b o J with your curve control, or the r

551
00:29:28,960 --> 00:29:32,040
Speaker 1: b Z with having to include house prices alongside their

552
00:29:32,040 --> 00:29:34,280
Speaker 1: CPI target. But on the other hand, for the for

553
00:29:34,320 --> 00:29:39,240
Speaker 1: the big one, for the FED, that's still is almost anathema,

554
00:29:39,320 --> 00:29:41,720
Speaker 1: and they're inclined to function differently and say, no, we

555
00:29:41,760 --> 00:29:43,800
Speaker 1: need to pre commit to a certain course of action.

556
00:29:44,120 --> 00:29:46,440
Speaker 1: And for me, that's the paradox. You may need to

557
00:29:46,520 --> 00:29:51,000
Speaker 1: almost commit to being more volatile with your policies in

558
00:29:51,080 --> 00:29:54,160
Speaker 1: order to get market stability, and conversely, by committing to

559
00:29:54,600 --> 00:29:57,000
Speaker 1: easy money for longer, you've pushed the system into an

560
00:29:57,080 --> 00:30:17,080
Speaker 1: unstable state. You touched on this earlier, but I would

561
00:30:17,120 --> 00:30:19,680
Speaker 1: just love to drill down a little bit more. But

562
00:30:20,080 --> 00:30:22,320
Speaker 1: you know, when it comes to the inflationary pressures that

563
00:30:22,360 --> 00:30:25,440
Speaker 1: we're seeing, now, what's your sense of the breakdown between

564
00:30:26,000 --> 00:30:29,440
Speaker 1: demand versus supply issues? So you know, we've all been

565
00:30:29,440 --> 00:30:33,400
Speaker 1: talking about the supply chain shortages, transportation gridlock. But on

566
00:30:33,440 --> 00:30:36,520
Speaker 1: the other hand, we have had massive fiscal stimulus that's

567
00:30:36,560 --> 00:30:40,760
Speaker 1: injected trillions of dollars into the economy, put money into

568
00:30:40,800 --> 00:30:43,440
Speaker 1: people's pockets. And I was just looking at a chart today,

569
00:30:43,480 --> 00:30:45,440
Speaker 1: I think it was from Barclays, but it basically showed

570
00:30:45,480 --> 00:30:48,840
Speaker 1: that incomes in the US, even if you strip out

571
00:30:48,960 --> 00:30:53,040
Speaker 1: government transfers, so you know, unemployment stimulus payments and things

572
00:30:53,080 --> 00:30:56,080
Speaker 1: like that, even if you strip those out, they've still

573
00:30:56,200 --> 00:31:00,880
Speaker 1: been going up quite a lot. So people are wealthier

574
00:31:00,920 --> 00:31:04,720
Speaker 1: than they were before. So I don't know, it just

575
00:31:04,760 --> 00:31:07,520
Speaker 1: feels like it's sort of it's difficult to get a

576
00:31:07,640 --> 00:31:12,320
Speaker 1: good handle on what's demand versus supply at the moment.

577
00:31:14,080 --> 00:31:17,040
Speaker 1: That may be true for the US in particular. The

578
00:31:17,160 --> 00:31:19,960
Speaker 1: US is the only place where people's incomes really went

579
00:31:20,080 --> 00:31:23,120
Speaker 1: up massively. And yet of course we have the inflation

580
00:31:23,160 --> 00:31:26,680
Speaker 1: pressures showing up elsewhere as well, And so I think

581
00:31:26,720 --> 00:31:29,520
Speaker 1: in the immediate analysis you have to say, well, it's

582
00:31:29,520 --> 00:31:34,040
Speaker 1: about supply shortages, about bottlenecks, it's about you know, the

583
00:31:34,120 --> 00:31:37,200
Speaker 1: lack of wind in Europe and gas prices. And yet

584
00:31:38,160 --> 00:31:43,120
Speaker 1: the conclusion that people therefore draw is it would make

585
00:31:43,200 --> 00:31:47,000
Speaker 1: no sense to to tighten policy in order to deal

586
00:31:47,040 --> 00:31:49,600
Speaker 1: with it. And again it's sort of this presumption it

587
00:31:49,640 --> 00:31:53,200
Speaker 1: will settle down by itself. And I'm no expert on

588
00:31:53,280 --> 00:31:56,160
Speaker 1: the on the nineteen seventies, but again it seems to

589
00:31:56,200 --> 00:31:58,920
Speaker 1: me ironic that there too, you start from what was

590
00:31:59,320 --> 00:32:03,680
Speaker 1: largely about supply constraints, supply shortages and segments like oil.

591
00:32:03,960 --> 00:32:08,120
Speaker 1: But again you saw that actually that became much more entrenched,

592
00:32:08,160 --> 00:32:10,320
Speaker 1: the inflation that results became much more entrenched than you

593
00:32:10,320 --> 00:32:14,000
Speaker 1: would have thought, and almost the only way ultimately to

594
00:32:14,000 --> 00:32:16,640
Speaker 1: bring the system back into line was through the aggressive

595
00:32:16,720 --> 00:32:19,880
Speaker 1: rate rises to make everything settled down. And so I

596
00:32:19,880 --> 00:32:22,160
Speaker 1: think that that, for me, again is the paradox. Even

597
00:32:22,200 --> 00:32:25,200
Speaker 1: if the problem is the supply side, it may be

598
00:32:25,360 --> 00:32:28,040
Speaker 1: that you need to tighten policy and reduce demand in

599
00:32:28,160 --> 00:32:30,400
Speaker 1: order to get the good behavior just in time behavior

600
00:32:30,400 --> 00:32:32,920
Speaker 1: to the smooth behavior that we got used to revert

601
00:32:32,960 --> 00:32:35,200
Speaker 1: to it. And that's the puzzle. Everyone is busy scratching

602
00:32:35,240 --> 00:32:38,240
Speaker 1: their head looking at these micro supply chain shocks, saying

603
00:32:38,480 --> 00:32:40,280
Speaker 1: I don't understand, why can't it just go back to

604
00:32:40,280 --> 00:32:42,520
Speaker 1: how it was previously? And I think the system is

605
00:32:42,560 --> 00:32:45,760
Speaker 1: a bit more complex than that. So just to be clear, though,

606
00:32:45,800 --> 00:32:49,240
Speaker 1: you think it might take inducing a recession or some

607
00:32:49,360 --> 00:32:54,040
Speaker 1: sort of like meaningful slamming the brakes of demand to

608
00:32:54,080 --> 00:32:57,040
Speaker 1: get back to some sort of what we might call

609
00:32:57,160 --> 00:33:01,360
Speaker 1: equilibrium or balance or normal behavior. Yeah, and either that

610
00:33:01,480 --> 00:33:04,440
Speaker 1: happens by itself because the market valuations are overly elevated,

611
00:33:04,440 --> 00:33:07,600
Speaker 1: it happens earlier than you would have thought, or if

612
00:33:07,640 --> 00:33:09,920
Speaker 1: it's not happening, and the equity market is making new

613
00:33:09,960 --> 00:33:12,360
Speaker 1: highs and the housing market is becoming even more ridiculously

614
00:33:12,360 --> 00:33:15,360
Speaker 1: expensive than it is at the moment. Again, I suspect

615
00:33:16,560 --> 00:33:19,120
Speaker 1: you may need to move in that in that direction.

616
00:33:20,120 --> 00:33:22,680
Speaker 1: So I'm conscious that we haven't you know, we're having

617
00:33:22,680 --> 00:33:25,320
Speaker 1: this big global macro discussion and we haven't actually talked

618
00:33:25,320 --> 00:33:28,760
Speaker 1: about China just yet. And you know, I'm based over

619
00:33:28,800 --> 00:33:31,720
Speaker 1: in Hong Kong and we're watching UM the Chinese p

620
00:33:31,880 --> 00:33:34,200
Speaker 1: M I numbers come in over the weekend, which showed,

621
00:33:34,480 --> 00:33:37,800
Speaker 1: you know, a pretty stark slow down. And again, like

622
00:33:37,960 --> 00:33:40,840
Speaker 1: you start to think back to parallels of UM I

623
00:33:40,840 --> 00:33:44,800
Speaker 1: guess early when we sort of had weakness in China

624
00:33:44,880 --> 00:33:48,000
Speaker 1: spread to global markets. How are you thinking about that

625
00:33:48,120 --> 00:33:50,600
Speaker 1: at the moment? Is there a likelihood that the slowdown

626
00:33:50,600 --> 00:33:54,160
Speaker 1: in China, China's refusal to actually um stimulate or easy

627
00:33:54,200 --> 00:33:57,200
Speaker 1: the economy at this point in time, that starts feeding

628
00:33:57,320 --> 00:34:01,719
Speaker 1: into global markets and the economy. The funny thing is

629
00:34:01,800 --> 00:34:05,960
Speaker 1: that the China slow down, while I think it's hugely significant,

630
00:34:06,480 --> 00:34:09,880
Speaker 1: and e M investors seem to think it's hugely significant. Again,

631
00:34:10,000 --> 00:34:12,640
Speaker 1: DM investors have mostly shrugged it off. And as you

632
00:34:12,719 --> 00:34:16,080
Speaker 1: even the numbers over the weekend are a perfect illustration

633
00:34:16,120 --> 00:34:18,760
Speaker 1: of this. The market just hasn't seemed to care today,

634
00:34:19,160 --> 00:34:21,360
Speaker 1: and so that the slowdown needs to become much more entrenched.

635
00:34:21,400 --> 00:34:22,920
Speaker 1: And yes, want to speak to investors, and number of

636
00:34:22,920 --> 00:34:24,520
Speaker 1: them do seem to think that there's going to be

637
00:34:24,560 --> 00:34:27,920
Speaker 1: a more aggressive easing earlier than than we do. And

638
00:34:27,920 --> 00:34:30,560
Speaker 1: and we look instead at China's willingness to tolerate slow

639
00:34:30,600 --> 00:34:33,920
Speaker 1: down and draw parish conclusions. But again, it's it's puzzling

640
00:34:33,920 --> 00:34:37,040
Speaker 1: how the market hasn't responded. And maybe this comes into

641
00:34:37,040 --> 00:34:40,160
Speaker 1: a whole sort of broader set of questions around around

642
00:34:40,480 --> 00:34:43,280
Speaker 1: how markets have really been behaving and what the underlying

643
00:34:43,360 --> 00:34:47,239
Speaker 1: drivers have been. So a convention analysis would be, oh,

644
00:34:47,320 --> 00:34:50,120
Speaker 1: the China slowdown might be significant for some commodities or

645
00:34:50,160 --> 00:34:54,319
Speaker 1: might be significant for Germany exporting two in Switzerland ex

646
00:34:54,320 --> 00:34:56,399
Speaker 1: support supporting to China, but it's not a big deal

647
00:34:56,480 --> 00:34:59,920
Speaker 1: for the US with its more insular economy, and may

648
00:35:00,000 --> 00:35:02,360
Speaker 1: we can have the same conversation around rate hikes and

649
00:35:02,400 --> 00:35:05,319
Speaker 1: tightening of policy. A conventional approach would be to say,

650
00:35:05,400 --> 00:35:08,359
Speaker 1: but oh, normally markets do well during during the first

651
00:35:08,440 --> 00:35:10,440
Speaker 1: few rate hikes in the cycle. Surely there's nothing to

652
00:35:10,480 --> 00:35:14,560
Speaker 1: worry about. And for me instead, there's a whole broader

653
00:35:14,680 --> 00:35:18,239
Speaker 1: story which has become ever more intense over the last decade,

654
00:35:18,360 --> 00:35:23,440
Speaker 1: almost where all my favorite fundamental relationships are broken down

655
00:35:23,920 --> 00:35:25,960
Speaker 1: as companies have leveled up and spreads of tightened in

656
00:35:26,000 --> 00:35:28,440
Speaker 1: and there's been lots of uncertainty, but there's been no volatility,

657
00:35:28,600 --> 00:35:32,799
Speaker 1: and where the underlying drivers of everything, as far as

658
00:35:32,880 --> 00:35:35,759
Speaker 1: I can see in market terms, have revolved around the

659
00:35:35,800 --> 00:35:40,680
Speaker 1: wall of money, the reach f yield, the global liquidity patterns.

660
00:35:40,680 --> 00:35:42,360
Speaker 1: There are a number of terms for it, but it

661
00:35:42,400 --> 00:35:45,480
Speaker 1: really boils down to for me, there's quite literal process

662
00:35:45,560 --> 00:35:49,520
Speaker 1: of money creation, and it's in this context where China

663
00:35:49,960 --> 00:35:53,120
Speaker 1: has historically, over the last decadels have been terribly important,

664
00:35:53,160 --> 00:35:56,440
Speaker 1: not only in the immediate commodity markets and some real

665
00:35:56,520 --> 00:35:59,600
Speaker 1: estate markets where you might have imagined, but even more

666
00:35:59,680 --> 00:36:03,360
Speaker 1: broad oddly than that, I remember people were struggling with

667
00:36:03,400 --> 00:36:05,320
Speaker 1: the same thing, and they said, how come the the

668
00:36:05,400 --> 00:36:08,520
Speaker 1: China slowdown and the depreciation of a remimbi is suddenly

669
00:36:08,520 --> 00:36:11,279
Speaker 1: causing yoursel off in the SMP when the US doesn't

670
00:36:11,320 --> 00:36:13,080
Speaker 1: export that much to China. And one of the responses

671
00:36:13,120 --> 00:36:15,480
Speaker 1: I gave at the time is China maybe the stock

672
00:36:15,480 --> 00:36:18,400
Speaker 1: of dobal global debt, but it's six of the flow

673
00:36:18,440 --> 00:36:21,960
Speaker 1: of private borrowing, and often it's been eight of the

674
00:36:22,560 --> 00:36:25,120
Speaker 1: of the impulse of the change in the flow. And

675
00:36:25,520 --> 00:36:27,920
Speaker 1: I think this this for me a lot of what's

676
00:36:27,960 --> 00:36:31,720
Speaker 1: happening to markets. More broadly. We all tend to assume

677
00:36:31,760 --> 00:36:34,840
Speaker 1: that markets have this nice balance and it's between the

678
00:36:34,840 --> 00:36:37,320
Speaker 1: buyers and the sellers, and everyone has their own independent

679
00:36:37,400 --> 00:36:39,840
Speaker 1: estimate affair value, and if a few buyers and sellers

680
00:36:39,920 --> 00:36:42,320
Speaker 1: drop out, it doesn't really matter. But for me, markets

681
00:36:42,360 --> 00:36:45,720
Speaker 1: in recent years have been driven much more by the

682
00:36:45,719 --> 00:36:51,000
Speaker 1: the massive off market price insensitive buying that has come

683
00:36:51,040 --> 00:36:54,640
Speaker 1: as a result of money creation, most obviously from que

684
00:36:54,760 --> 00:36:58,200
Speaker 1: through central banks, but also through China on a great

685
00:36:58,239 --> 00:37:01,400
Speaker 1: many occasions. And I think what are just beginning to

686
00:37:01,440 --> 00:37:04,000
Speaker 1: realize at the moment is that that que is not

687
00:37:04,040 --> 00:37:05,800
Speaker 1: going to be there. The goldilocks environment is going to

688
00:37:05,840 --> 00:37:08,520
Speaker 1: be there. The central plants can't provide support. And similarly,

689
00:37:08,560 --> 00:37:11,640
Speaker 1: the flow of credit from China rippling out and setting

690
00:37:11,640 --> 00:37:14,400
Speaker 1: prices in global commodities, if they're really committed to financial

691
00:37:14,440 --> 00:37:16,800
Speaker 1: stability as they now seem to and rebalancing the economy

692
00:37:16,840 --> 00:37:18,800
Speaker 1: away from the real estate market, that's not going to

693
00:37:18,880 --> 00:37:22,440
Speaker 1: be there. And what we've seen on previous occasions like

694
00:37:23,080 --> 00:37:25,640
Speaker 1: eighteen where we did this on a smaller scale, is

695
00:37:25,680 --> 00:37:28,520
Speaker 1: that you don't get an instant correction down in market prices,

696
00:37:28,800 --> 00:37:31,400
Speaker 1: but there's a sort of void beneath the market price

697
00:37:31,800 --> 00:37:35,240
Speaker 1: as you discover that the that the inflows aren't there anymore.

698
00:37:35,320 --> 00:37:38,480
Speaker 1: And once you suddenly have somebody who really needs to sell,

699
00:37:38,960 --> 00:37:41,280
Speaker 1: that's when you're prone to this sudden sort of gapping.

700
00:37:41,520 --> 00:37:44,879
Speaker 1: And so that is my interpretation here, But hey, maybe

701
00:37:44,920 --> 00:37:47,600
Speaker 1: I'm completely wrong, and there's just another more traditional view

702
00:37:47,920 --> 00:37:50,080
Speaker 1: that says, no, China doesn't matter anymore, there's too much

703
00:37:50,120 --> 00:37:54,080
Speaker 1: stimulus elsewhere, and so we don't need them. So this

704
00:37:54,160 --> 00:37:56,759
Speaker 1: is like a perfect and you mentioned, you know, the

705
00:37:56,840 --> 00:37:59,840
Speaker 1: big risk aurset reaction to the R and B. And

706
00:38:00,280 --> 00:38:02,759
Speaker 1: you know, this gets to the puzzle that we've sort

707
00:38:02,800 --> 00:38:05,440
Speaker 1: of been uh that we started with it, which is

708
00:38:05,760 --> 00:38:08,879
Speaker 1: why with all of these sort of things steering at

709
00:38:09,080 --> 00:38:12,000
Speaker 1: us in the face the supply chain issues that don't

710
00:38:12,000 --> 00:38:16,960
Speaker 1: seem to be smoothing out, the hawkish pivot from central

711
00:38:16,960 --> 00:38:20,480
Speaker 1: banks and the market expectations thereof which we see reflected

712
00:38:20,520 --> 00:38:24,160
Speaker 1: in short term rates elevated inflation, why you know why

713
00:38:24,200 --> 00:38:27,400
Speaker 1: it hasn't hit risk assets and your view seems to

714
00:38:27,400 --> 00:38:30,600
Speaker 1: be that it's coming that it's simple. You know, maybe

715
00:38:30,600 --> 00:38:32,960
Speaker 1: central banks will have to induce a recession, maybe the

716
00:38:33,000 --> 00:38:35,680
Speaker 1: market is going to do it for it, and so forth. So,

717
00:38:36,200 --> 00:38:39,360
Speaker 1: setting aside what happens over the next like week or

718
00:38:39,400 --> 00:38:44,000
Speaker 1: the next month in markets, what is and what is

719
00:38:44,040 --> 00:38:46,960
Speaker 1: an investor to do? Like does how? Does the how

720
00:38:46,960 --> 00:38:49,640
Speaker 1: should the If the Goldilocks era of like the post

721
00:38:49,719 --> 00:38:53,000
Speaker 1: GFC or the Great Moderation which was arguably longer, is

722
00:38:53,040 --> 00:38:56,000
Speaker 1: officially coming to an end, then in theory I would

723
00:38:56,040 --> 00:39:00,319
Speaker 1: imagine portfolio strategy should change too. So what is they're

724
00:39:00,360 --> 00:39:05,439
Speaker 1: translate to in terms of like rethinking portfolios? So if

725
00:39:05,520 --> 00:39:09,400
Speaker 1: you really think that Goldilocks is over, that the inflation

726
00:39:09,480 --> 00:39:11,360
Speaker 1: is permanent and that the central banks will allow it

727
00:39:11,440 --> 00:39:15,480
Speaker 1: to run. And then obviously you start digging out your

728
00:39:15,600 --> 00:39:18,480
Speaker 1: very long term historical returns and you look back to

729
00:39:18,520 --> 00:39:20,120
Speaker 1: the nineteen seventies and so on, and you look at

730
00:39:20,160 --> 00:39:23,600
Speaker 1: what would be an inflation hedge, and people sometimes say

731
00:39:23,640 --> 00:39:27,440
Speaker 1: equities on the numbers, I look at that's not very persuasive.

732
00:39:27,840 --> 00:39:31,080
Speaker 1: You really come back to commodities, especially obviously, and to

733
00:39:31,719 --> 00:39:35,600
Speaker 1: real estate as being your inflation hedges. If though you

734
00:39:35,760 --> 00:39:41,000
Speaker 1: think that you're in this almost temporary environment where the

735
00:39:41,000 --> 00:39:45,600
Speaker 1: inflation pressures are there, but actually markets everywhere have been

736
00:39:45,640 --> 00:39:49,960
Speaker 1: made fundamentally expensive by all of the stimulus in a way,

737
00:39:50,000 --> 00:39:52,239
Speaker 1: that means that you could be close to some form

738
00:39:52,280 --> 00:39:55,520
Speaker 1: of tipping point, especially if real yields start going up.

739
00:39:56,239 --> 00:39:58,760
Speaker 1: Then in a sense, it's more complicated. Maybe it's more temporary,

740
00:39:58,800 --> 00:40:01,759
Speaker 1: but it's more complicated. And that's the framework that I've

741
00:40:01,800 --> 00:40:04,040
Speaker 1: tended to use. I like to talk in terms of

742
00:40:04,080 --> 00:40:06,560
Speaker 1: the real yield cycle, where when central branks come to

743
00:40:06,560 --> 00:40:08,840
Speaker 1: the rescue and real yields go down, she's supposed to

744
00:40:08,840 --> 00:40:11,520
Speaker 1: pilee and even though the fundamentals look bad, and then

745
00:40:11,560 --> 00:40:13,920
Speaker 1: there's a second phase where growth begins to return and

746
00:40:14,000 --> 00:40:17,200
Speaker 1: investor in inflation break evens move up, and the market

747
00:40:17,280 --> 00:40:19,360
Speaker 1: rally shifts away from investment grade to high yield and

748
00:40:19,360 --> 00:40:22,920
Speaker 1: away from growth equities and towards more cyclical equities. But

749
00:40:23,000 --> 00:40:25,560
Speaker 1: if you if we're now getting back to this point

750
00:40:25,640 --> 00:40:29,200
Speaker 1: where fundamentals are supposed to be taking over, but really

751
00:40:29,239 --> 00:40:33,200
Speaker 1: you'll start moving up. Multiple times we've seen in that environment.

752
00:40:33,239 --> 00:40:36,160
Speaker 1: Maybe temporarily bank equities do a bit better, but basically

753
00:40:36,160 --> 00:40:40,120
Speaker 1: it's really difficult. And you know, even things like gold

754
00:40:40,760 --> 00:40:42,840
Speaker 1: might ultimately be a defense, but they tend to do

755
00:40:42,880 --> 00:40:44,960
Speaker 1: poorly if real yields are are going up in the

756
00:40:45,000 --> 00:40:48,000
Speaker 1: near term, And almost what you end up doing is

757
00:40:48,440 --> 00:40:51,200
Speaker 1: going back into cash in a great many cases and

758
00:40:51,480 --> 00:40:55,800
Speaker 1: awaiting a re entry point, either to government wants because

759
00:40:55,920 --> 00:40:59,239
Speaker 1: and and investment grade credit because inflation is under control

760
00:40:59,280 --> 00:41:02,239
Speaker 1: and the auchi flating his character carrying on. Or conversely,

761
00:41:02,320 --> 00:41:04,520
Speaker 1: if when the central branks are going back to easing,

762
00:41:05,040 --> 00:41:07,480
Speaker 1: then you compile into into risk assets all over again.

763
00:41:07,640 --> 00:41:10,560
Speaker 1: And I wanted at a client event recently, we did

764
00:41:10,560 --> 00:41:12,719
Speaker 1: an interesting survey where we asked, if there is a

765
00:41:12,719 --> 00:41:14,640
Speaker 1: correction in markets, will you be buying the whole way

766
00:41:14,640 --> 00:41:16,560
Speaker 1: through because you've been preparing for this. Will you be

767
00:41:16,640 --> 00:41:19,320
Speaker 1: buying only when we get back towards fair value you

768
00:41:19,640 --> 00:41:21,520
Speaker 1: call it five or ten percent, maybe ten ten or

769
00:41:21,520 --> 00:41:24,440
Speaker 1: more percent down in the in the equity market, or

770
00:41:24,480 --> 00:41:27,080
Speaker 1: will you only go back to buying once the central

771
00:41:27,080 --> 00:41:30,200
Speaker 1: banks are back to easing again. And the rather dismaying

772
00:41:30,280 --> 00:41:34,759
Speaker 1: response from a majority was a little bit like, we're

773
00:41:34,800 --> 00:41:36,800
Speaker 1: going to wait until the central banks go back to easing.

774
00:41:37,120 --> 00:41:39,239
Speaker 1: And if that's the case, the trouble is again with

775
00:41:39,320 --> 00:41:42,279
Speaker 1: the inflation pressures in the system. We're miles away from

776
00:41:42,320 --> 00:41:44,480
Speaker 1: that point where they where the Fed put kicks back

777
00:41:44,480 --> 00:41:49,160
Speaker 1: in again. And so just temporarily, basically, I end up

778
00:41:49,200 --> 00:41:51,080
Speaker 1: holding much more cash than you would do otherwise. And

779
00:41:51,160 --> 00:41:54,719
Speaker 1: maybe you can combine it with put spreads or bar bells,

780
00:41:54,800 --> 00:41:57,759
Speaker 1: with some commodities or some risk assets, or even some

781
00:41:57,840 --> 00:42:00,280
Speaker 1: of my strateg just the same things like Asian high yield,

782
00:42:00,400 --> 00:42:03,760
Speaker 1: where at least you escape the systemic pressure where everything

783
00:42:03,840 --> 00:42:06,320
Speaker 1: has become correlated with real reals, everything has become correlated

784
00:42:06,360 --> 00:42:09,080
Speaker 1: with central bank policy. At least I get something idiosyncratic

785
00:42:09,120 --> 00:42:12,879
Speaker 1: in my portfolio. Again, that's the idea, but basically when

786
00:42:12,920 --> 00:42:15,960
Speaker 1: we've created this environment where everything depends on monetary policy

787
00:42:16,160 --> 00:42:19,360
Speaker 1: more than it depends on fundamentals, Those periods where monetary

788
00:42:19,360 --> 00:42:22,800
Speaker 1: policy at least temporarily is withdrawn take it really really difficult.

789
00:42:23,880 --> 00:42:26,760
Speaker 1: M So this is one of the things that stands

790
00:42:26,800 --> 00:42:29,879
Speaker 1: out in this conversation and also from your work. It's

791
00:42:29,920 --> 00:42:33,719
Speaker 1: the sort of like being trapped in a endless cycle

792
00:42:33,760 --> 00:42:37,600
Speaker 1: idea where we have this feedback loop of easy monetary

793
00:42:37,680 --> 00:42:41,200
Speaker 1: policy that inflates risk assets, that then leads to some

794
00:42:41,239 --> 00:42:43,719
Speaker 1: sort of like destabilization in the market, and then the

795
00:42:43,760 --> 00:42:45,719
Speaker 1: central banks come back in and ease further and we

796
00:42:45,760 --> 00:42:49,360
Speaker 1: start the cycle all over again. Is there any and

797
00:42:49,680 --> 00:42:51,319
Speaker 1: I'm conscious that you've been writing about this for a

798
00:42:51,360 --> 00:42:55,239
Speaker 1: long time, but is there any off ramp that that

799
00:42:55,280 --> 00:42:57,960
Speaker 1: you see? You know, are we ever going to get

800
00:42:58,000 --> 00:43:04,279
Speaker 1: away from this psyche gore of financialization? I certainly hope so,

801
00:43:04,400 --> 00:43:06,560
Speaker 1: And in a sense we touched on it already. For

802
00:43:06,560 --> 00:43:09,680
Speaker 1: for me, what this boils down to is basically a

803
00:43:09,719 --> 00:43:11,560
Speaker 1: series of cycles in which you buy the bubble and

804
00:43:11,600 --> 00:43:13,400
Speaker 1: you sell the bath. Also, when the central mats come

805
00:43:13,440 --> 00:43:15,120
Speaker 1: to the rescue and we punt the system full of debt,

806
00:43:15,560 --> 00:43:18,040
Speaker 1: it may look terrible from a long term sustainability perspective,

807
00:43:18,040 --> 00:43:20,239
Speaker 1: but you close your eyes and buy it. And conversely,

808
00:43:20,280 --> 00:43:22,200
Speaker 1: whenever they try and do the right thing again, it's

809
00:43:22,200 --> 00:43:24,799
Speaker 1: almost like dealing with climate change that would make things

810
00:43:24,800 --> 00:43:27,239
Speaker 1: more stable in the long term. Actually, in the new

811
00:43:27,360 --> 00:43:30,040
Speaker 1: term you get nervous about a correction in markets, and

812
00:43:30,080 --> 00:43:32,680
Speaker 1: so for me, these long term questions boiled down to

813
00:43:33,600 --> 00:43:36,880
Speaker 1: can we achieve some form of long smooth deleveraging, And

814
00:43:36,880 --> 00:43:39,800
Speaker 1: clearly the hope is, oh, now with fiscal stimulus, productivity

815
00:43:39,800 --> 00:43:42,080
Speaker 1: will go up and everything will be fine. Personally, I

816
00:43:42,080 --> 00:43:45,839
Speaker 1: don't believe that at all. For me, actually, the right

817
00:43:45,920 --> 00:43:48,359
Speaker 1: thing to do is to almost aim for some form

818
00:43:48,360 --> 00:43:51,879
Speaker 1: of long smooth deleveraging, some form of that for years.

819
00:43:51,920 --> 00:43:56,279
Speaker 1: The best I can imagine is a benign Japanification but

820
00:43:56,360 --> 00:43:59,439
Speaker 1: coupled with deleveraging and ironic, and people say, oh, that's

821
00:43:59,440 --> 00:44:01,960
Speaker 1: just a story to that that that never works. I

822
00:44:02,000 --> 00:44:04,880
Speaker 1: think actually the Eurozone periphery has done way better than

823
00:44:04,920 --> 00:44:07,279
Speaker 1: people give it credit for. They haven't needed more and

824
00:44:07,320 --> 00:44:10,840
Speaker 1: more and more austerity. You just adopt a less credit

825
00:44:10,840 --> 00:44:13,040
Speaker 1: intensive growth model, which is very difficult at the beginning

826
00:44:13,080 --> 00:44:15,000
Speaker 1: and gives you a negative impulse at the beginning, but

827
00:44:15,080 --> 00:44:18,760
Speaker 1: then you can achieve a steady deleveraging. And I hope

828
00:44:18,800 --> 00:44:21,040
Speaker 1: that we may yet get to this. For me, the

829
00:44:21,080 --> 00:44:23,239
Speaker 1: policies that would create it are the ones where the

830
00:44:23,280 --> 00:44:25,880
Speaker 1: central banks actors are backstop when things are going wrong,

831
00:44:26,640 --> 00:44:28,560
Speaker 1: but then are much more circumspect than they have been

832
00:44:28,600 --> 00:44:31,120
Speaker 1: about about inflating bubbles. And that that, for me, is

833
00:44:31,160 --> 00:44:34,040
Speaker 1: that the sort of key judgment here. It's it's how

834
00:44:34,080 --> 00:44:36,440
Speaker 1: if there is another correction of markets, how do they respond?

835
00:44:36,520 --> 00:44:40,160
Speaker 1: Is it providing much more temporary sort of support or conversely,

836
00:44:40,160 --> 00:44:41,879
Speaker 1: do they say no, we just need more stimulus, still

837
00:44:41,880 --> 00:44:45,400
Speaker 1: back by even larger amounts of QUEI, even as we

838
00:44:45,440 --> 00:44:47,920
Speaker 1: see this spilling over into things like inflation. And so

839
00:44:48,440 --> 00:44:50,520
Speaker 1: that that's been the trade off for a long time,

840
00:44:50,680 --> 00:44:54,040
Speaker 1: the unfortunately selling to the general public the idea of

841
00:44:54,440 --> 00:44:56,759
Speaker 1: the long smooth deleveraging. It's sort of like vote for me.

842
00:44:56,800 --> 00:44:58,520
Speaker 1: I'll give you ten years of stagnation, but it will

843
00:44:58,560 --> 00:45:01,960
Speaker 1: be better for your children. And then that's a difficult cell.

844
00:45:02,440 --> 00:45:06,680
Speaker 1: And yet the easiest solutions are steadily increasing the likelihood

845
00:45:06,680 --> 00:45:10,240
Speaker 1: of runaway inflation, increasing the likelihood of kind of military

846
00:45:10,280 --> 00:45:13,000
Speaker 1: debasement in a sense we've had that debasement already, not

847
00:45:13,080 --> 00:45:15,760
Speaker 1: with respect to goods prices up till now, but relative

848
00:45:15,800 --> 00:45:18,520
Speaker 1: to asset prices and people's ability to afford a pension

849
00:45:18,600 --> 00:45:21,239
Speaker 1: or afford a house. And the more debt you put in,

850
00:45:21,280 --> 00:45:24,000
Speaker 1: the more polarized systems become, the more unequal everything becomes.

851
00:45:24,120 --> 00:45:27,120
Speaker 1: The greater is the likelihood of those really negative tale scenarios.

852
00:45:28,560 --> 00:45:30,840
Speaker 1: You must hear this debate a lot, and we have

853
00:45:30,920 --> 00:45:33,440
Speaker 1: a lot of guests, part because of my own personal

854
00:45:33,480 --> 00:45:36,600
Speaker 1: predilections and interests that come at this from the MMT

855
00:45:36,880 --> 00:45:40,840
Speaker 1: perspective that as government debt is fundamentally different than private

856
00:45:40,840 --> 00:45:43,680
Speaker 1: sector debt, and that if you look at say right

857
00:45:43,680 --> 00:45:47,040
Speaker 1: now in the US, for example, household balance sheets are

858
00:45:47,080 --> 00:45:49,719
Speaker 1: in extremely good shape, and part of that is due

859
00:45:49,719 --> 00:45:52,840
Speaker 1: to asset prices, part of it is due to generally speaking,

860
00:45:53,640 --> 00:45:55,719
Speaker 1: households not having taken on a lot of debt in

861
00:45:55,760 --> 00:45:58,440
Speaker 1: the post GFC period, and that we did have this

862
00:45:58,600 --> 00:46:03,840
Speaker 1: big private sector deleveraging. And well, it's true that government

863
00:46:03,880 --> 00:46:06,879
Speaker 1: debt treasury issuance has shot through the moon. The debts

864
00:46:06,880 --> 00:46:10,759
Speaker 1: fundamentally different, that governments don't have credit risk in the

865
00:46:10,760 --> 00:46:13,680
Speaker 1: same way that households and firms do, and that therefore

866
00:46:14,400 --> 00:46:19,000
Speaker 1: the US is already currently in a implicitly or explicitly

867
00:46:19,520 --> 00:46:23,920
Speaker 1: much less leveraged position. The economy does not bear the

868
00:46:23,960 --> 00:46:27,560
Speaker 1: same level of private sector debt risk than it may have.

869
00:46:27,800 --> 00:46:29,879
Speaker 1: You know, prior to the Great Financial Crisis or several

870
00:46:30,000 --> 00:46:34,359
Speaker 1: years ago. I don't buy any of it, or rather

871
00:46:34,480 --> 00:46:39,480
Speaker 1: I've b very very little figured. It is certainly true

872
00:46:39,560 --> 00:46:44,520
Speaker 1: that governments are able to pull more levers and cope

873
00:46:44,560 --> 00:46:49,000
Speaker 1: with debt in ways that corporates or households cannot. However,

874
00:46:50,000 --> 00:46:55,680
Speaker 1: debt is this almost magical thing which, on the one hand,

875
00:46:55,800 --> 00:46:58,400
Speaker 1: is just money that the system os to itself, and

876
00:46:58,440 --> 00:47:01,239
Speaker 1: the process of adding more of these obligations to the

877
00:47:01,239 --> 00:47:03,719
Speaker 1: system is almost always positive for growth or positive for

878
00:47:03,800 --> 00:47:10,520
Speaker 1: asset prices, provided that it remains credible, provided that people

879
00:47:10,719 --> 00:47:13,440
Speaker 1: believe that they're going to get paid back. It's sort

880
00:47:13,480 --> 00:47:16,960
Speaker 1: of like having a pension. When you think that the

881
00:47:17,040 --> 00:47:19,080
Speaker 1: government is going to pay you a pension in future,

882
00:47:19,160 --> 00:47:21,680
Speaker 1: you go out and you spend more money today. The

883
00:47:21,840 --> 00:47:23,719
Speaker 1: moment that you get to the point where you start

884
00:47:23,760 --> 00:47:25,360
Speaker 1: to call into question whether or not the government is

885
00:47:25,360 --> 00:47:27,799
Speaker 1: actually going to be able to afford the healthcare that

886
00:47:27,840 --> 00:47:32,240
Speaker 1: it's promised you then you're you're spending today gets called

887
00:47:32,239 --> 00:47:35,920
Speaker 1: into question. And while the limits around this for governments

888
00:47:35,960 --> 00:47:39,919
Speaker 1: are greater than they are for private sector actors, when

889
00:47:40,000 --> 00:47:43,239
Speaker 1: you do the long term historical analysis, Ray Dalio has

890
00:47:43,239 --> 00:47:45,080
Speaker 1: done some some wonderful work on this, and you look

891
00:47:45,120 --> 00:47:50,000
Speaker 1: back across centuries, unfortunately, all the signs that the system

892
00:47:50,040 --> 00:47:53,040
Speaker 1: could be close to a tipping point. Maybe it's a

893
00:47:53,040 --> 00:47:55,680
Speaker 1: bit better now because interest rates are lower, but basically

894
00:47:55,880 --> 00:47:58,279
Speaker 1: we've passed them already in terms of aggregate debt levels

895
00:47:58,320 --> 00:48:00,719
Speaker 1: across the public and private sector together, in terms of

896
00:48:00,719 --> 00:48:05,000
Speaker 1: political polarization, in terms of inequality, and frankly, all of

897
00:48:05,040 --> 00:48:08,279
Speaker 1: that is extremely alarming. So so to me, yes, it's

898
00:48:08,320 --> 00:48:12,120
Speaker 1: all just an accounting construct, but actually it's such a

899
00:48:12,239 --> 00:48:17,560
Speaker 1: powerful accounting construct that even that that the governments and

900
00:48:17,600 --> 00:48:21,680
Speaker 1: central banks are not actually as fundamentally different as we imagine.

901
00:48:22,440 --> 00:48:24,240
Speaker 1: The clue is in the titling our debt or credit

902
00:48:24,360 --> 00:48:27,799
Speaker 1: is about credibility. It's about whether those promises will get repaid.

903
00:48:28,320 --> 00:48:31,759
Speaker 1: And as you make more and more promises, so at

904
00:48:31,800 --> 00:48:35,120
Speaker 1: some point those get called into question, and and and

905
00:48:35,480 --> 00:48:38,959
Speaker 1: maybe on on this what's further alarming is even though

906
00:48:39,000 --> 00:48:41,640
Speaker 1: in general we don't seem particularly close to that point,

907
00:48:41,719 --> 00:48:44,200
Speaker 1: and even emerging markets that are stretching things. In many

908
00:48:44,200 --> 00:48:47,120
Speaker 1: cases today we've had currency weakness, we haven't had runs

909
00:48:47,120 --> 00:48:50,000
Speaker 1: on currencies today. I also think, unfortunately, it's a bit

910
00:48:50,040 --> 00:48:52,440
Speaker 1: like bank runs in the nineteen thirties or in the

911
00:48:52,600 --> 00:48:55,160
Speaker 1: nineteenth century. The thing that causes a run on my

912
00:48:55,239 --> 00:48:58,920
Speaker 1: bank or my government or my currency isn't necessarily anything

913
00:48:58,960 --> 00:49:01,520
Speaker 1: I've done today. It's the fact that there was a

914
00:49:01,600 --> 00:49:03,560
Speaker 1: run on the currency down the road, of run on

915
00:49:03,560 --> 00:49:06,120
Speaker 1: the bank down the road, and suddenly investors get nervous.

916
00:49:06,440 --> 00:49:08,920
Speaker 1: And so if we started to see this in emerging

917
00:49:08,960 --> 00:49:11,560
Speaker 1: markets or in some of the smaller economies, then actually

918
00:49:11,600 --> 00:49:14,440
Speaker 1: it could quite rapidly spread through to the to the

919
00:49:14,480 --> 00:49:16,960
Speaker 1: stronger economies. And that, as I look at the price

920
00:49:16,960 --> 00:49:19,640
Speaker 1: action in some of the front end of rates markets today,

921
00:49:20,760 --> 00:49:24,319
Speaker 1: could be a very very early precursor. But you you

922
00:49:24,400 --> 00:49:29,680
Speaker 1: begin to see that potential contagion effect coming through. All right, Well, Matt,

923
00:49:29,680 --> 00:49:32,960
Speaker 1: it was lovely having you on. As always really appreciate

924
00:49:33,120 --> 00:49:37,080
Speaker 1: you coming on the show. My pleasure. That was fantastic, Matt,

925
00:49:52,200 --> 00:49:55,440
Speaker 1: So Joe, I always loved talking to Matt and I

926
00:49:55,480 --> 00:49:57,400
Speaker 1: do think he's a really good foil for some of

927
00:49:57,440 --> 00:50:00,440
Speaker 1: the other guests that we've had on the show recently.

928
00:50:00,920 --> 00:50:04,320
Speaker 1: And I have to say, like, unfortunately our listeners couldn't

929
00:50:04,360 --> 00:50:06,920
Speaker 1: see this, but as we were talking Matt, we were

930
00:50:06,920 --> 00:50:09,520
Speaker 1: doing this over zoom and Matt was bringing up like

931
00:50:09,640 --> 00:50:12,480
Speaker 1: he basically had a presentation for every single one of

932
00:50:12,520 --> 00:50:15,399
Speaker 1: his points and would pull up stuff from like three

933
00:50:15,480 --> 00:50:18,560
Speaker 1: years ago and flip through it as he was speaking.

934
00:50:18,719 --> 00:50:21,400
Speaker 1: And this times like this, I kind of wish we

935
00:50:21,400 --> 00:50:24,520
Speaker 1: were doing this as a like a digital video show

936
00:50:24,600 --> 00:50:26,919
Speaker 1: or TV or something like that. But that was really good.

937
00:50:28,000 --> 00:50:30,080
Speaker 1: That was great, And he had like a chart for

938
00:50:30,160 --> 00:50:33,680
Speaker 1: like every question and he immediately knew where it was.

939
00:50:33,760 --> 00:50:35,560
Speaker 1: It was like, why isn't blah blah blah, and you

940
00:50:35,680 --> 00:50:38,120
Speaker 1: immediately it's like being here's a chart that I put

941
00:50:38,160 --> 00:50:41,400
Speaker 1: into report. No. I agreed, it was good, And you know,

942
00:50:41,480 --> 00:50:45,480
Speaker 1: I do think that, like, there are many issues that

943
00:50:45,640 --> 00:50:51,320
Speaker 1: he identified from my perspective that are clearly of concern.

944
00:50:51,520 --> 00:50:53,680
Speaker 1: And I would say one is just this sort of

945
00:50:53,800 --> 00:50:57,560
Speaker 1: general assumption that we will come out of this sort

946
00:50:57,600 --> 00:51:01,160
Speaker 1: of like goldilocks. Yeah, OK, we're gonna get We're gonna

947
00:51:01,239 --> 00:51:04,440
Speaker 1: hike we're gonna have a couple of hikes in two,

948
00:51:04,920 --> 00:51:08,120
Speaker 1: maybe we get a hike in three, then we get

949
00:51:08,160 --> 00:51:12,040
Speaker 1: the rate cut cycle, and then risk guess let's go up.

950
00:51:12,080 --> 00:51:15,080
Speaker 1: So let's just fast forward to the end of the videotape.

951
00:51:15,080 --> 00:51:17,040
Speaker 1: But we know it's going to be fine because we've

952
00:51:17,080 --> 00:51:20,440
Speaker 1: done seen this a million times therefore whatever, you know,

953
00:51:20,480 --> 00:51:24,120
Speaker 1: it's all fine. It does kind of feel like investors

954
00:51:24,120 --> 00:51:26,040
Speaker 1: are in the mode. Always saw this movie before we

955
00:51:26,080 --> 00:51:27,920
Speaker 1: saw the tape, re tangent, but ended up not being

956
00:51:27,920 --> 00:51:30,080
Speaker 1: a big deal. So why selling stocks? And I do

957
00:51:30,160 --> 00:51:32,520
Speaker 1: think like we don't really know. I mean, like, maybe

958
00:51:32,520 --> 00:51:36,120
Speaker 1: it won't be that smooth this time right. I was

959
00:51:36,160 --> 00:51:38,440
Speaker 1: also thinking about that, like that is the key difference

960
00:51:38,719 --> 00:51:41,560
Speaker 1: this time around is we've had, you know, over a

961
00:51:41,600 --> 00:51:45,839
Speaker 1: decade now of deflation or very low inflation, and so

962
00:51:45,920 --> 00:51:49,320
Speaker 1: investors got used to that cycle because the FED could

963
00:51:49,360 --> 00:51:53,719
Speaker 1: just continuously drop interest rates and nothing really happened to prices.

964
00:51:54,239 --> 00:51:58,880
Speaker 1: But the big difference in one seems to be that

965
00:51:58,960 --> 00:52:02,759
Speaker 1: we do actually have a of inflation, and so the

966
00:52:02,800 --> 00:52:05,719
Speaker 1: idea that they're just going to immediately like revert back

967
00:52:05,760 --> 00:52:09,359
Speaker 1: into easing after a big market blow up, I don't

968
00:52:09,360 --> 00:52:12,040
Speaker 1: think that's necessarily a given, and I don't think investors

969
00:52:12,080 --> 00:52:15,600
Speaker 1: are really thinking about that at the moment. No, And

970
00:52:15,640 --> 00:52:19,719
Speaker 1: I definitely like don't think investors are thinking about like, look,

971
00:52:19,760 --> 00:52:22,040
Speaker 1: it's pretty stark, as he laid it out, and it's

972
00:52:22,080 --> 00:52:25,439
Speaker 1: kind of vulcar ish that maybe there's so much sort

973
00:52:25,480 --> 00:52:31,240
Speaker 1: of chaos, pendulums to hinge, pendulum swinging in unpredictable ways,

974
00:52:31,600 --> 00:52:35,120
Speaker 1: that the only way to to slow that down, or

975
00:52:35,160 --> 00:52:38,040
Speaker 1: that central banks decide, Okay, we have to induce a

976
00:52:38,080 --> 00:52:41,879
Speaker 1: recession because right now things are too unstable. I don't

977
00:52:41,960 --> 00:52:45,239
Speaker 1: think is on many people's radars. I think, yeah, the

978
00:52:45,760 --> 00:52:48,319
Speaker 1: expectation is we're going to get rate hikes next year,

979
00:52:48,760 --> 00:52:51,920
Speaker 1: but as he pointed out, it's not even clear that

980
00:52:52,000 --> 00:52:55,720
Speaker 1: the market believes rate hikes will be uh monetary tightening,

981
00:52:55,760 --> 00:52:58,960
Speaker 1: because if inflation is expected to outpace the rate hikes still,

982
00:52:59,360 --> 00:53:01,359
Speaker 1: then you can have will uh you know, real yield

983
00:53:01,400 --> 00:53:04,359
Speaker 1: to go up, and you're not actually um, you're just

984
00:53:04,400 --> 00:53:07,719
Speaker 1: sort of like, you know, keeping things neutral. Yeah, it's

985
00:53:07,719 --> 00:53:10,200
Speaker 1: always a bit scary when people start talking about you know,

986
00:53:10,280 --> 00:53:15,080
Speaker 1: basically like resetting the financial system or the economy. No,

987
00:53:15,320 --> 00:53:17,600
Speaker 1: you know, just just to play push back on one

988
00:53:17,640 --> 00:53:21,680
Speaker 1: thought I had though, is like after crises, there is

989
00:53:21,719 --> 00:53:24,680
Speaker 1: that temptations like everything is different this time now, And

990
00:53:24,880 --> 00:53:28,759
Speaker 1: we certainly had that in twenty not, but that one

991
00:53:28,840 --> 00:53:30,360
Speaker 1: was kind of different. It's like, oh, we need to

992
00:53:30,480 --> 00:53:33,520
Speaker 1: retrain everyone because they're just aren't the jobs that there

993
00:53:33,560 --> 00:53:35,640
Speaker 1: used to be, and everyone needs to become a coder

994
00:53:35,760 --> 00:53:38,000
Speaker 1: in order to get back to full employment. It turns

995
00:53:38,000 --> 00:53:41,160
Speaker 1: out we just needed to have more robust growth and

996
00:53:41,480 --> 00:53:45,000
Speaker 1: nothing had fundamentally changed from the pre grade financial crisis

997
00:53:45,000 --> 00:53:47,880
Speaker 1: to the post grade financial crisis economy. So like, I

998
00:53:47,920 --> 00:53:52,239
Speaker 1: also think that people should just remember that every time

999
00:53:52,280 --> 00:53:54,480
Speaker 1: there's a big event, there is that temptation to say

1000
00:53:54,480 --> 00:53:57,640
Speaker 1: something big has changed and not. It's not always a

1001
00:53:57,680 --> 00:54:00,960
Speaker 1: case it's different this time. You might be the same

1002
00:54:01,040 --> 00:54:05,320
Speaker 1: this time. But yeah, I just it's just just my pushback.

1003
00:54:06,160 --> 00:54:09,840
Speaker 1: All right, shall we leave it there? Let's leave it there. Okay.

1004
00:54:10,080 --> 00:54:12,840
Speaker 1: This has been another episode of the All Thoughts Podcast.

1005
00:54:12,920 --> 00:54:15,480
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at

1006
00:54:15,480 --> 00:54:18,920
Speaker 1: Tracy Alloway and I'm Joe Why Isn't All? You can

1007
00:54:19,000 --> 00:54:22,440
Speaker 1: follow me on Twitter at the Stalwart. Follow our producer

1008
00:54:22,520 --> 00:54:26,680
Speaker 1: Laura Carlson. She's at Laura M. Carlson followed the Bloomberg

1009
00:54:26,680 --> 00:54:30,759
Speaker 1: head of podcast francesco Leedy at Francesca Today and check

1010
00:54:30,800 --> 00:54:33,600
Speaker 1: out all of our podcasts on Twitter under the handle

1011
00:54:34,000 --> 00:55:05,680
Speaker 1: at podcasts. Thanks for listening.