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Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.

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Speaker 1: I'm Tracy Alloway and I'm Joe. Isn't so Joe. We

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Speaker 1: just had a FED meeting where basically the Central Bank

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Speaker 1: decided to not change anything, and the market reaction was,

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Speaker 1: let's see, stocks went up, But probably the most interesting

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Speaker 1: move that we saw was in the three year break even,

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Speaker 1: and that actually went up I think eight basis points

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Speaker 1: to the highest since two thousand eight. So you saw

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Speaker 1: this immediate assumption in the market that we would get

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Speaker 1: a bunch of inflation because the Feds on hold for longer,

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Speaker 1: and meanwhile we have fiscal stimulus and the economy is

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Speaker 1: recovering really strongly. Exactly right, I mean that is you know,

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Speaker 1: it's sort of interesting. I was watching the press conference

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Speaker 1: and there were so many questions about inflation, so many

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Speaker 1: questions about when the FED is going to perhaps pull

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Speaker 1: back one day on its asset purchases, the so called taper,

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Speaker 1: and the answers were really the same. Like Sherman, Powell

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Speaker 1: was incredibly consistent. By the way, I should mention recording

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Speaker 1: this April. The meeting was yesterday, but the answers were

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Speaker 1: incredibly consistent. He's like, look, I'm not gonna do anything

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Speaker 1: until we get there, until we see the inflation, until

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Speaker 1: we get the full employment everything, and so he's kind

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Speaker 1: of like stop asking. But this dynamic in which everyone

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Speaker 1: sees these pressures are building in the economy for an

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Speaker 1: unknown length of time and a FED that's willing to

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Speaker 1: not do anything until they actually like emerge in a

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Speaker 1: sustained way, and so you get these expectations of greater

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Speaker 1: reflationary forces at the minimum to come. Yeah. I find

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Speaker 1: this a really interesting moment in markets, because, as you mentioned,

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Speaker 1: the FED is pretty emphatic that it sees inflationary pressures

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Speaker 1: as transitory. You know, these are things like commodities prices

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Speaker 1: going up because of supply bottlenecks from COVID, and the

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Speaker 1: central Bank expects that they're not gonna last that long.

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Speaker 1: But meanwhile, the market seems to be positioning for something

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Speaker 1: very different. At least, you know, if you look at

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Speaker 1: the three year break even that I just mentioned, that's

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Speaker 1: three years out, and certainly that's pricing in higher levels

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Speaker 1: of inflations at the same time. It's really interesting that

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Speaker 1: the market seems to be taking that stance, because of

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Speaker 1: course we've had ten years of no inflation or deflation. Uh.

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Speaker 1: You know, despite lots of monetary easing from the Central

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Speaker 1: Bank and a relatively strong economy, we haven't seen price

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Speaker 1: increases like you would have expected from some economic models

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Speaker 1: like NEHRU or the Phillips curve. So really interesting moment

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Speaker 1: in time, and today we're gonna be talking all about

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Speaker 1: inflation with one of our favorite odd lots. Yes, we're

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Speaker 1: going to bring back Victor Schwetz. He's a strategist over

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Speaker 1: at McQuary. Victor, thanks for coming on again. Thank you

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Speaker 1: very much, Tracy. So do you want to lay the

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Speaker 1: scene for us When you look at the world right now,

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Speaker 1: what inflationary pressures, if any do you see? Well, there

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Speaker 1: is no question that if you goes through the next

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Speaker 1: six and nine twelve months, whether you look at the

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Speaker 1: United States or whether you look at other countries as well,

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Speaker 1: inflation will pick up for exactly the same reason as

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Speaker 1: what you've just outlined, base effect, recovering demand and supply

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Speaker 1: side bottom lights. Whether you have a war or a pandemic,

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Speaker 1: usually it has a demand and supply shock in some form.

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Speaker 1: Supply disappears, companies become zombies, incapable of providing sub services.

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Speaker 1: Some of the capacities just withdrawn investment goes down, and

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Speaker 1: so when you start recording bring supplies never quite know

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Speaker 1: how much capacity should they provide. I will demand go

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Speaker 1: up ten percent, and so the result is it usually

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Speaker 1: takes four or five or six quarters to what I

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Speaker 1: would call normalized demand and supply. And I think what

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Speaker 1: fair Reserve is saying is that this is a transitory

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Speaker 1: period that we are not confident that inflation actually will

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Speaker 1: be sustainable. And as we go back and go sort

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Speaker 1: of forward to the end of twenty two or into

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Speaker 1: twenty three, we're not that confident that there will be

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Speaker 1: such a strong inflationary pulse um. And I find myself

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Speaker 1: an unusual position, because I usually quite disagree with many

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Speaker 1: things that FED does. I find myself an unusual position

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Speaker 1: to actually agree that it is probably easy case that

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Speaker 1: the precious transitory. And if you think of inflationary break

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Speaker 1: even rate, the interesting thing is that five by five,

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Speaker 1: for example, are lower than five. So clearly even the

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Speaker 1: market itself assumes that there will be more inflation to

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Speaker 1: begin with and then it comes off later on. So

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Speaker 1: when you say the five by five, what what you

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Speaker 1: mean is the market has expectations for where inflation will

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Speaker 1: be over the next five years, but there's also expectations

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Speaker 1: essentially over what five years out will look like five

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Speaker 1: years out from now, kind of ten years out, I guess,

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Speaker 1: And there's sort of view of this initial hump the

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Speaker 1: inflationary pressure is now, but then the market is expecting something, um,

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Speaker 1: a sort of a return to normalcy after that. Yeah,

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Speaker 1: the market is not anticipating deflation. The market is not

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Speaker 1: anticipating dec inflation, but it doesn't anticipate a runaway inflation

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Speaker 1: where you're consistently getting three four or five. Because remember,

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Speaker 1: if you just think of G five economies and if

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Speaker 1: commodity complex doesn't move terribly far from where it is

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Speaker 1: today but sort of going forward, then it's all mathematically

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Speaker 1: correct that inflation will go to around three four, maybe

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Speaker 1: even touch five. That compares to G five inflation Sat.

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Speaker 1: February was only point seven. In March it was only

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Speaker 1: like one and a half. So there's no question inflation

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Speaker 1: will go up. What the market is saying is that

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Speaker 1: they think, and I agree with that, that it will

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Speaker 1: pull back. In fact, I will go beyond that and

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Speaker 1: say that decent inflation is far more likely longer term

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Speaker 1: than you know, two point two or to inflation. There

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Speaker 1: are people out there, um, and Larry Summer's sort of

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Speaker 1: springs to mind here, but there are people out there

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Speaker 1: who are describing, you know, fiscal stimulus combined with easy

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Speaker 1: monetary policy as uh, irresponsible, I think is the way

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Speaker 1: Summers put it, but something that will ignite big price

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Speaker 1: rises that the Fed doesn't appreciate. Obviously you don't agree

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Speaker 1: with that argument. But what do you think it is

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Speaker 1: that they're getting wrong here? I see lots of people,

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Speaker 1: for instance, reaching to the analogy of the nineteen seventies

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Speaker 1: or the nineteen sixties as an era of high inflation. Yeah,

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Speaker 1: they do, uh, And there's a lot of investors and

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Speaker 1: commentators who seem to feel that we probably somewhere around

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Speaker 1: late sixties, and yes, it will take a bit of time,

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Speaker 1: but ultimately we are going to an anchor, so to speak,

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Speaker 1: inflationary expectations, and inflation will be much much stronger than

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Speaker 1: most people expect right now. I completely disagree with that,

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Speaker 1: and primarily I disagree with that that whether it's a

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Speaker 1: Congressional Budget Office or whether it's Larry Summers, they're all

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Speaker 1: using very much an industrial age framework. In other words,

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Speaker 1: the era where capital was capital, fixed assets where fixed assets,

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Speaker 1: labor was labor. None of those things aren't true anymore.

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Speaker 1: So if you think of for example, US private sector,

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Speaker 1: US private sector GDP is now six intangible assets. If

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Speaker 1: you look at Europe, depending on the country choose, it's

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Speaker 1: twenty five to intangibles. Even in China it's anywhere from fift.

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Speaker 1: Why is it important, Well, intangibles don't have the same

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Speaker 1: capacity constraints, the incredibly fluid and they spill over from

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Speaker 1: one industry to another good synergistic benefits. So it's the

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Speaker 1: first point to remember. If we're not actually building roads,

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Speaker 1: machinery factories you know, are railways and the rest of it,

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Speaker 1: it's a very different investment we're making. And if you

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Speaker 1: think of Biden's package infrastructure package, Republicans are right to

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Speaker 1: say that only about is real infrastructure. But that's the

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Speaker 1: whole point that we should not be investing in real infrastructure.

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Speaker 1: We should be investing in the future. So that's the

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Speaker 1: first area, which is capital and where do we invest

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Speaker 1: and how it behaves. The other area is labor. Remember

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Speaker 1: everybody is still relying on Bureau of Labor statistics sort

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Speaker 1: of classifications. Are your plumber, electrician? Are you are your

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Speaker 1: business professional? Are your full time? Are your part time?

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Speaker 1: With In reality, labor is really stretched in many areas,

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Speaker 1: like for example, you're recording now this conversation. In the past,

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Speaker 1: somebody else would have been recording, So you're stretched. You're

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Speaker 1: doing many jobs in the service oriented industry, employees are

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Speaker 1: now either non conventional or gig economy, and so labor

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Speaker 1: doesn't function the same way as it has done in

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Speaker 1: industrial age. And so the way basically describe it is

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Speaker 1: capacity constraints incredibly hard to compute even in the good days.

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Speaker 1: Today it's almost impossible. In fact, I would argue capacity

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Speaker 1: constraints just melt away in front of you every day.

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Speaker 1: They're just going away high and higher. And to me,

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Speaker 1: that explains why Philip's curve did not work and hasn't

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Speaker 1: worked for several decades. And by the way, it even

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Speaker 1: predates China, it didn't even work in the eighties forgetting

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Speaker 1: the last twenty years. It also explains why commodity prices

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Speaker 1: could go up but battery prices, for example, go down.

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Speaker 1: It ex planes how we can ignite shell Guest revolution.

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Speaker 1: Remember Show Guest was invented or for the first TIME'M

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Speaker 1: tried in nineteen but in three we couldn't respond with

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Speaker 1: shell guests, but today we can. So to me, it's technology, financialization,

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Speaker 1: changes in the functioning of capital fixed us, it's intangible

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Speaker 1: as it's labor. All of that implies to me that

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Speaker 1: I don't think we're really facing capacity constraints at all.

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Speaker 1: You make a very compelling argument that various structural factors

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Speaker 1: in the economy were unlikely to see her repeat of

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Speaker 1: the nineteen seventies, that these sort of general conditions that

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Speaker 1: we experienced, or at least the general inflation conditions that

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Speaker 1: we experienced pre crisis, will probably be more the norm

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Speaker 1: after the short term bottlenecks. However, and you know, you

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Speaker 1: mentioned Biden again last night, hearing the big sort of

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Speaker 1: Biden speech laying out its infrastructure plan. And yet, however,

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Speaker 1: we do seem to be having this big political shift,

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Speaker 1: and the big political shift that we keep talking about

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Speaker 1: on the podcast there. It's multifaceted, but the big thing

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Speaker 1: for us is the shift from reliance primarily on monetary

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Speaker 1: policy as the main driver of macro stabilization to fiscal policy.

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Speaker 1: And that feels like a pretty big deal. So setting

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Speaker 1: aside our current commodity constraints and bottlenecks, this new thinking

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Speaker 1: and this sort of like new willingness of democratic small

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Speaker 1: d democratic leaders to spend more, at least in the US,

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Speaker 1: perhaps in Europe and elsewhere. That feels new. How does

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Speaker 1: that play into the mix and thinking about what the

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Speaker 1: post crisis economy is going to look like? For you, absolutely, Joe,

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Speaker 1: you you, You're totally right. It is a shift. And

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Speaker 1: coronavirus accelerated that shift. By the way, that shift was

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Speaker 1: going on even before coronavirus, almost nobody was exercising much

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Speaker 1: restraint on fiscal spending even prior to coronavirus. But COVID

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Speaker 1: accelerated this process quite quite dramatically, and people accepted and

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Speaker 1: people in fact increasingly demand the spending. And so from

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Speaker 1: a political perspective, it gets easier and easier to ignore

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Speaker 1: sort of the guidelines or constraints of fiscal spending or

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Speaker 1: financing or anything else. And so that is a major issue.

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Speaker 1: Instead of just relying on the monetary policy, you're now

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Speaker 1: relying on the fiscal policy. Was monetary policy in more

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Speaker 1: supporting rule? However, a couple of things to highlight Number one,

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Speaker 1: where do we invest money? Now, If you think of

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Speaker 1: COVID nineteen shacks, for example, according to Federal Reserve, only

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Speaker 1: of the money was spent. The other seventy or percent

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Speaker 1: went essentially either into financial speculation you know, bitcoins, equities,

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Speaker 1: real estate alternatively went into state of the bankruptcy is

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Speaker 1: to repay the debt and so and so what you

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Speaker 1: have seen is a relatively low for called multiplier. Now,

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Speaker 1: infrastructure theoretically has a much higher, larger multiplier. But again

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Speaker 1: I've just said a second ago. Only of what Widen

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Speaker 1: wants to do is real infrastructure. If you invest in

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Speaker 1: green energy, alternative energy and transportation platforms, if you invest

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Speaker 1: in R and D fundamental research, this is all very

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Speaker 1: very good stuff and actually longer term raises your capacity

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Speaker 1: are capabilities, But it does not have the same fiscal

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Speaker 1: multiplier as building a road or building a dam. If

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Speaker 1: you think of human resources are spending, that's even lower

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Speaker 1: multiplier and much lower really time, even though it's totally

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Speaker 1: appropriate and it's absolutely the right thing to do. So.

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Speaker 1: So the first thing to highlight is that everything we're

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Speaker 1: doing today on the fiscal side is either exceptional circumstances.

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Speaker 1: We justified because it's like a war. You know, we're

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Speaker 1: fighting a war. That's why we're doing it. Alternatively, we're

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Speaker 1: doing something for very distant future, which in turn is disinflationary.

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Speaker 1: If you invest in oil, that's inflationary. If you invest

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Speaker 1: in lithium, that's disinflationary. And so the way I look

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Speaker 1: at it is we are not investing enough in the

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Speaker 1: areas that actually would generate a longer term inflationary outcomes.

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Speaker 1: In fact, what we're doing with strengthening the case with

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Speaker 1: disinflation on a longer term basis the other thing very

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Speaker 1: quickly to highlight where all the report not that long

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Speaker 1: ago and sort of known a zeguist or the spirit

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Speaker 1: of the age, and basically what we argue is a

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Speaker 1: fiscal policies are very, very very hard, and the reason

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Speaker 1: they're hard is that people have a schizophrenic approach to

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Speaker 1: monitory versus fiscal policies. Monetary policy is supposed to be technocratic.

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Speaker 1: Over the last eight or nine years, have become completely free.

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Speaker 1: There is virtually no adult supervision at all. Central banks

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Speaker 1: can spend trillions of dollars and almost nobody cares. And

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Speaker 1: the reason for that there is a perception that monetary

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Speaker 1: policies atmocratic and it doesn't generate debt. Now that is

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Speaker 1: not true, but that's what people believe. Fiscal policy, on

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Speaker 1: the other hand, people look at it very very differently.

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Speaker 1: They basically view a fiscal policy as inefficient, unfair, and

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Speaker 1: generating debt that needs to be repaid. So, once again,

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Speaker 1: none of it is true, but that's what people believe.

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Speaker 1: And so the result is in almost every country. China

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Speaker 1: clearly is an exception, but in almost every country, in

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Speaker 1: order to engage in physical spending, you have to have

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Speaker 1: community support, You have to go to legislature, whether it's

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Speaker 1: a parliament or congress, to get it approved. You need

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Speaker 1: to itemize it. People need to know exactly where you

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Speaker 1: spend every dime. Nobody else Jeremy Pal every time he spends.

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Speaker 1: But on the fiscal side, you need to explain where

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Speaker 1: you're going to spend the money, and it usually is

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Speaker 1: time limited. It's sunsets, whereas monetary policy these days have

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Speaker 1: a completely open ended there is no sunset. And so

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Speaker 1: the problem we struck shuring fiscal policy predominantly as an

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Speaker 1: exceptional circumstance is that as soon as the economy is recovered,

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Speaker 1: and I see the United States will be recovering very

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Speaker 1: strongly in the first, second third, and into the fourth quarter.

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Speaker 1: Even as economy is recovered almost inevitably within three to

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Speaker 1: six months. That will be debate. We must put our

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Speaker 1: house in order. Radical left is destroying America. There will

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Speaker 1: be discussion. We are bequesting to our grandchildren trillions of

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Speaker 1: dollars of debt. How are we going to finance it?

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Speaker 1: And and that's sort of a discussion. Would imply that

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Speaker 1: the line of least resistance right now, the least resistance

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Speaker 1: is for politicians to sunset fiscal policy. Economies are recovering,

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Speaker 1: everything is doing is doing fine. Let sunset it now.

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Speaker 1: Nobody is going to do another grief. Nobody is going

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Speaker 1: to try to do austerity. But we're not talking about austerity.

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Speaker 1: We are talking about the level of fiscal pulse that

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Speaker 1: we can actually maintain. And I think it's actually going

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Speaker 1: to go down before it goes up again, and then

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Speaker 1: it will go down again before it goes up. It

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Speaker 1: will be stopping, go, stop and go. And the reason

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Speaker 1: why that is important permanent policies have a very different

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Speaker 1: impact to temporary ones. There are people out there who

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Speaker 1: say that the experience of the pandemic has changed everything.

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Speaker 1: I think Joe and I have had quite a few

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Speaker 1: episodes by now about how the pandemic has changed everything,

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Speaker 1: but that there's more acceptance of fiscal stimulus. MMT has

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Speaker 1: been making some in roads among policymakers, so people aren't

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Speaker 1: as worked up around the deficit as they once were.

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Speaker 1: And one of the arguments that I've seen about why

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Speaker 1: to actually be concerned about inflation is that even though

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Speaker 1: the current fiscal stimulus that's been announced might not be

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Speaker 1: enough to generate substantial price increases, it's sort of opened

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Speaker 1: this Pandora's box. Well Pandora's box isn't a good term

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Speaker 1: for it, but you know, it's led to the shift

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Speaker 1: around physical stimulus where we don't know how popular it's

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Speaker 1: going to be further on, and it could become very

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Speaker 1: politically popular. People like to have stimulus checks mailed to them,

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Speaker 1: people like better infrastructure things like that, so you could

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Speaker 1: get repeated fiscal stimulus over and over. Um, you clearly

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Speaker 1: don't agree with that, but I'd love to know more

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Speaker 1: of your thinking around this. Well, I I actually do

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Speaker 1: agree that there will be a regular stimulus list That's

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Speaker 1: why I've argued that nobody will be running primary surplus assailable.

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Speaker 1: Nobody is going to do austerity, nobody is going to

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Speaker 1: try to do another degree sup Portugal or something like that.

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Speaker 1: That's all gone forever. All we arguing is, and we

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Speaker 1: create a consistent long term physical strategy that doesn't rely

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Speaker 1: on revisitation of COVID, doesn't rely on revisitational wars on

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Speaker 1: major financial dislocation, can we reach the stage that we

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Speaker 1: also will be managing our investment without reliance on the

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Speaker 1: bond market um and directly funded out of central banks

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Speaker 1: as we go forward. And so my argument was that

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Speaker 1: that will be the ultimate destination, but it's probably at

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Speaker 1: least five teen years out. And the reason for why

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Speaker 1: it is five teen years out because clearly in every

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Speaker 1: country you could think of, there is a degree of polarization,

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Speaker 1: so in other words, not a degree, there is a

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Speaker 1: very high level of polarization. There is no consensus agreement.

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Speaker 1: Anybody who is younger than about thirty five basically agrees

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Speaker 1: with a strategy. Anybody is sort of all much older

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Speaker 1: than that does not agree. And you can mathematically calculate

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Speaker 1: at what stage somebody like AOC is bound to become

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Speaker 1: a president of the United States. If you think of

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Speaker 1: the younger generation, they were roughly about twenty of the

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Speaker 1: Boks cast in the latest elections. If you project forward

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Speaker 1: somewhere between kind of two, that younger cohort is going

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Speaker 1: to be the dominant force. And so what we need

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Speaker 1: to do is have a lot of a lot of problems,

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Speaker 1: a lot of dislocations over the next five to ten years.

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Speaker 1: Gradually demographics will call us around it, and then you

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Speaker 1: have a different set of policies. Think of the monetary policy.

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Speaker 1: When Japan introduced in earlier two thousand's, people were questioning

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Speaker 1: whether that's disaster, complete disaster. Then there were you introduced

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Speaker 1: globally around two thousand and eight. Between two thousand and

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Speaker 1: eight and two thousand and twelve, the first question every

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Speaker 1: fun manager would ask you, when do we normalize monetary policy?

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Speaker 1: When I used to tell them we will never normalize

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Speaker 1: monetary policy, people didn't expect that. He didn't ex apped.

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Speaker 1: It took people ten years until they finally recognize that

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Speaker 1: monetary policy can never be normalized. Irrespected what Jaron Powell

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Speaker 1: thinks or what he might or might not do. If

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Speaker 1: you think of fiscal policy today. I view it in

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Speaker 1: a very similar light to two thousand eight to thousand

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Speaker 1: twelve monetary policy. One of the first questions people ask, yes, fective,

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Speaker 1: we understand that we will be spending more money, but

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Speaker 1: how are we going to pay for it? What is

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Speaker 1: the endgame of what we are what we're trying to do. Now,

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Speaker 1: when you tell them we'll never pay any of that back,

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Speaker 1: it doesn't really matter. People don't accept it, and so

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Speaker 1: what you need, you need time. People don't move in

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Speaker 1: revolutionary steps. So what we have today is acceptance at

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Speaker 1: fiscal policy play a much more important role. What we

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Speaker 1: don't have is an acceptance that that sort of expansionary

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Speaker 1: state policy is permanent and it's never going to change,

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Speaker 1: and that that expansionary policy will be funded through central bands.

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Speaker 1: So the way to look at mixing fiscal and monetary

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Speaker 1: policy together. By doing more fiscal we're reducing the speed

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Speaker 1: of disinflation rather than creating a great deal of sort

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Speaker 1: of sustainable inflation. So what does it mean for you know, investors?

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Speaker 1: Like I was, there are so many charts that if

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Speaker 1: you look at I mean, there are so many charts

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Speaker 1: that are shooting straight up obviously at least as of

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Speaker 1: as of now. But not only that, there's so many

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Speaker 1: church that are shooting straight up that are clearly reversed

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Speaker 1: a trend that had been in place pre crisis. So

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Speaker 1: the most obvious example is like you know, e M stocks,

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Speaker 1: they had generally been and I think like about a

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Speaker 1: two year under performance run at least since early going

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Speaker 1: into the crisis. Now a straight lineup, look at like

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Speaker 1: a commodity some of the commodity and disseries very uh

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Speaker 1: downward trend. Now straight up, is there a new this

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Speaker 1: new regime that we're talking about, the new monetary policy,

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Speaker 1: fiscal mix and so forth. Does it change how mark

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Speaker 1: to behave on a sustainable way or do we just

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Speaker 1: sort of go back to this like sixty forty goldilocks

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Speaker 1: world in a year two where you buy some text

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Speaker 1: docs and you buy some bonds and there's a disinflation

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Speaker 1: and uh yeah, you have a really easy now, Joe,

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Speaker 1: you you, you're absolutely right. There is a regime change

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Speaker 1: that is occurred. If you think of a lot sort

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Speaker 1: of sixties and seventies, there was a significant regime change

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Speaker 1: into late seventies early eighties. There was another regime change

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Speaker 1: occurring in late nineties, and so they around those periods

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Speaker 1: where there is a regime change. And so going forward,

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Speaker 1: because we're mixing fiscal and monetary policy together, we are

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Speaker 1: not going to have such a consistent trend over the

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Speaker 1: last fifteen years. If you did not realize that we

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Speaker 1: live in a disinflationary world, if you didn't realize that

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Speaker 1: boast labor and capital is losing pricing power, you probably

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Speaker 1: no longer managing money. You're probably no longer with us.

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Speaker 1: And so as we go forward, our say over the

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Speaker 1: next ten to twenty years, this is going to be

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Speaker 1: a much more complex world. Now. Part of the reason

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Speaker 1: is complex. As I said earlier, we're mixing fiscal and

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Speaker 1: monetary policy rather than just relying on trickle down economics

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Speaker 1: asset prices and in effectively creating stro monetary policy disinflation.

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Speaker 1: This time around, it's going to be some inflationary spikes,

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Speaker 1: there is going to be some disinflation respikes, there will

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Speaker 1: be sector rotations depending on what government wants to do

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Speaker 1: and where the government wants to invest. So it's going

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Speaker 1: to be, in my view, more complex world because of

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Speaker 1: the policies. But there is another thing that is going on,

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Speaker 1: and that is there is a technological change that is

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Speaker 1: going on. Between mid nineties and two thousand, technologies were

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Speaker 1: dominated by PCs, by corporations, by business applications, government applications.

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Speaker 1: Around two thousands it started to change. Remember Amazon was

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Speaker 1: a tiny company back into thousand and so between two

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Speaker 1: sus then call it twenty eight twenty, it was a

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Speaker 1: world dominated. But what I describe as a digit manipulators,

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Speaker 1: they're basically company manipulating digits of information, whether it's a

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Speaker 1: short social media or downloading videos or trading stock exchange

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Speaker 1: of getting information or whatever that might be. Now those

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Speaker 1: companies become incredibly powerful. Now what we're going to do

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Speaker 1: for the next twenty years is starting to much more

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Speaker 1: manipulate atoms and physical matter. So, in other words, this

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Speaker 1: is the age of manufacturing logistics, different alternative energy platforms,

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Speaker 1: transportation platforms, green energy. This is the period of robotics, automation,

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Speaker 1: This is a period of infotech and by tech. Now

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Speaker 1: this new era will be much more capital intensive than

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Speaker 1: the previous twenty years. But as I said early on

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Speaker 1: about Biden, where you spend the money is different. So

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Speaker 1: there is no long term cycle for oil. There is

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Speaker 1: no long term cycle for coal or iron, or or

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Speaker 1: or steel, because we won't be building a lot of

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Speaker 1: factories or a lot of roads, a lot of machinery,

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Speaker 1: but there will be a massive continuing upscaling of some commodities. So,

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Speaker 1: for example, if you treat semiconductors as a commodity, which

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Speaker 1: I do, I think they're going to have a long run. Similarly,

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Speaker 1: if you think of copper, nickel, cobbalt, lithium, silver, so

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Speaker 1: there will be part of the commodity cycle which will

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Speaker 1: be in the bull run. The other single happen is

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Speaker 1: that you know, the likes of Amazon on Facebook are

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Speaker 1: not very good at physical stuff, and so if you

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Speaker 1: want physicality, a lot of capital goods companies actually what

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Speaker 1: comes through the woodwork and instead of being value could

429
00:26:38,720 --> 00:26:43,240
Speaker 1: actually become semantics. You know your mid subitio electrics, your Honeywells,

430
00:26:43,359 --> 00:26:48,119
Speaker 1: your Rockwells, your potentially your geo, your semans, those sorts

431
00:26:48,119 --> 00:26:51,919
Speaker 1: of companies potentially could become more critical. There's also a

432
00:26:51,960 --> 00:26:55,760
Speaker 1: new third generation tech companies coming up. You know your tesla's,

433
00:26:55,840 --> 00:27:00,080
Speaker 1: your needs, your capitals, your Panukias covers and where there

434
00:27:00,160 --> 00:27:03,560
Speaker 1: is robotics, automation, new energy. There's a lot of startups.

435
00:27:03,800 --> 00:27:07,080
Speaker 1: So one of the interesting things that is occurring not

436
00:27:07,119 --> 00:27:11,080
Speaker 1: only the policy mix is changing, but the winners among

437
00:27:11,200 --> 00:27:15,479
Speaker 1: thematics are also starting to change. The digit manipulators are

438
00:27:15,520 --> 00:27:19,000
Speaker 1: still highly profitable, and they will continue to be highly profitable,

439
00:27:19,480 --> 00:27:23,120
Speaker 1: but very few companies ever make a transition from one

440
00:27:23,160 --> 00:27:26,040
Speaker 1: world into the next. Some will, but a lot of

441
00:27:26,040 --> 00:27:28,840
Speaker 1: them will not. So the question is what will happen

442
00:27:28,880 --> 00:27:33,359
Speaker 1: to those digit manipulators. Are they becoming a highly competitive utility,

443
00:27:33,480 --> 00:27:37,680
Speaker 1: regulated platforms and eventually with law returns, so they would

444
00:27:37,680 --> 00:27:40,440
Speaker 1: need to do things like share buy back, self liquidations,

445
00:27:40,480 --> 00:27:43,560
Speaker 1: dividends and the rest of it in order to also

446
00:27:43,720 --> 00:27:46,159
Speaker 1: to drive value. So we have two things happening in

447
00:27:46,240 --> 00:27:49,119
Speaker 1: my view. Number one, a mix of fiscal and monitor

448
00:27:49,200 --> 00:27:52,480
Speaker 1: policy is different, creating cross currents. And number two, what

449
00:27:52,720 --> 00:27:56,800
Speaker 1: you have is a technological backdrop is also shifting quite

450
00:27:56,840 --> 00:28:00,280
Speaker 1: considerably contenuous time. The winners are not going be the

451
00:28:00,320 --> 00:28:04,080
Speaker 1: same companies as what they were over the last twenty years.

452
00:28:04,440 --> 00:28:07,959
Speaker 1: So what it basically means, instead of saying, well, okay,

453
00:28:08,080 --> 00:28:11,439
Speaker 1: it's more capital intensive world, government spends more, I should

454
00:28:11,440 --> 00:28:17,000
Speaker 1: buy commodity, materials, infrastructure, companies, banks, and financials to me

455
00:28:17,119 --> 00:28:20,399
Speaker 1: that's wrong. Banks have no future. I don't see along

456
00:28:20,440 --> 00:28:23,360
Speaker 1: cycle for oil or coal or many other basic commodities.

457
00:28:39,080 --> 00:28:41,520
Speaker 1: I want to go back to something that you alluded

458
00:28:41,560 --> 00:28:44,200
Speaker 1: to earlier, or you said, which is that you don't

459
00:28:44,240 --> 00:28:47,640
Speaker 1: normally agree with the FED, but on this one idea

460
00:28:47,800 --> 00:28:52,720
Speaker 1: around transitory inflation, you think they have it right. Why

461
00:28:52,880 --> 00:28:55,760
Speaker 1: is that? Because you know, for years we've heard the

462
00:28:55,760 --> 00:28:58,880
Speaker 1: FED talk about the natural rate of unemployment and things

463
00:28:58,920 --> 00:29:02,360
Speaker 1: like the Phillips curve. It seems odd to have the

464
00:29:02,440 --> 00:29:09,280
Speaker 1: FED suddenly grasped like a big transition in economic ideas.

465
00:29:09,280 --> 00:29:13,040
Speaker 1: So why do you think that's happened in recent years. Well,

466
00:29:13,280 --> 00:29:15,600
Speaker 1: it sort of reminds me when I was a fund manager.

467
00:29:15,760 --> 00:29:19,840
Speaker 1: If you keep losing money consistently, eventually it changes your mind.

468
00:29:20,400 --> 00:29:23,760
Speaker 1: But you have to remember, for economics as a profession,

469
00:29:24,200 --> 00:29:27,520
Speaker 1: any science progresses only one funeral at a time, and

470
00:29:27,560 --> 00:29:31,239
Speaker 1: so for economics as a science or or or art

471
00:29:31,320 --> 00:29:36,800
Speaker 1: or whatever that is, to change requires considerable considerable change

472
00:29:36,800 --> 00:29:41,240
Speaker 1: of basic tenants, basic fundamentals. Now, that will happen, but

473
00:29:41,280 --> 00:29:44,840
Speaker 1: that's probably at least a decade away. So economics as

474
00:29:44,880 --> 00:29:49,080
Speaker 1: a profession is still largely functioning in an industrial age.

475
00:29:49,160 --> 00:29:52,600
Speaker 1: That has no relevance almost to what we have today.

476
00:29:52,680 --> 00:29:56,160
Speaker 1: But the practitioners, people who actually at the cold face

477
00:29:56,640 --> 00:29:58,760
Speaker 1: and they need to face their own losses or their

478
00:29:58,760 --> 00:30:01,600
Speaker 1: own bad decisions, they do change their mind. And I

479
00:30:01,640 --> 00:30:05,160
Speaker 1: do think that what Federal Reserve has basically done over

480
00:30:05,200 --> 00:30:08,320
Speaker 1: the last twelve months or so, they said, you know

481
00:30:08,400 --> 00:30:12,400
Speaker 1: what flat philips basically means, there is no relationship. Basically

482
00:30:12,440 --> 00:30:15,920
Speaker 1: there is no such thing as an inflationary neutral level

483
00:30:15,960 --> 00:30:19,200
Speaker 1: of unemployment or interest rates. Now, they never actually spelled

484
00:30:19,240 --> 00:30:22,560
Speaker 1: it out as openly as what I have said right now,

485
00:30:22,720 --> 00:30:26,320
Speaker 1: but that's basically the implication. And to me, that's a

486
00:30:26,560 --> 00:30:30,120
Speaker 1: right approach. They're moving in the right direction. But remember

487
00:30:30,240 --> 00:30:32,920
Speaker 1: they will come under pressure in the next three four

488
00:30:32,960 --> 00:30:37,200
Speaker 1: months as inflation rates go up. Investors will test them

489
00:30:37,600 --> 00:30:40,680
Speaker 1: and they screen. The things they're looking at is still

490
00:30:40,920 --> 00:30:44,000
Speaker 1: very conventional. So for example, that screen has no Bitcoin,

491
00:30:44,120 --> 00:30:48,440
Speaker 1: has not dodge Point, has no non fundable tokens, has

492
00:30:48,440 --> 00:30:52,000
Speaker 1: no specs, has no paritage rates, has no private act.

493
00:30:52,120 --> 00:30:54,520
Speaker 1: It doesn't have any of that stuff. It has like

494
00:30:54,760 --> 00:30:58,520
Speaker 1: general financial conditions of a night spread that spread to

495
00:30:58,520 --> 00:31:02,040
Speaker 1: your bank and commercial risk, your volatility rate, your spreads,

496
00:31:02,120 --> 00:31:05,000
Speaker 1: and the high your market things like that, when it's

497
00:31:05,040 --> 00:31:08,080
Speaker 1: almost guaranteed that the next crisis will have nothing to

498
00:31:08,120 --> 00:31:11,200
Speaker 1: do with mortgages, will have nothing to do with banks,

499
00:31:11,520 --> 00:31:15,080
Speaker 1: and we'll have nothing to do with nazdak. But essentially

500
00:31:15,280 --> 00:31:18,320
Speaker 1: they're still looking at it as if we're facing an

501
00:31:18,320 --> 00:31:21,320
Speaker 1: ASTEC debacle or a housing or mortgage debacle. And so

502
00:31:21,400 --> 00:31:24,760
Speaker 1: the interesting saying is that they've accepted the premise. I

503
00:31:24,920 --> 00:31:27,800
Speaker 1: think that the economies have changed and the past rules

504
00:31:27,880 --> 00:31:31,280
Speaker 1: no longer apply, but their screen, in my view, has

505
00:31:31,360 --> 00:31:33,720
Speaker 1: not yet changed. And so one of the things I

506
00:31:33,800 --> 00:31:37,280
Speaker 1: keep asking people, is it more dangerous if those digital

507
00:31:37,360 --> 00:31:41,239
Speaker 1: assets go up another hundred hundred percent? Or is it

508
00:31:41,320 --> 00:31:45,320
Speaker 1: more dangerous if we go down from from the current levels?

509
00:31:45,560 --> 00:31:50,320
Speaker 1: And clearly going up another will be far more dangerous,

510
00:31:50,360 --> 00:31:53,960
Speaker 1: because what is happening right now in that world is

511
00:31:54,000 --> 00:31:59,320
Speaker 1: becoming incredibly interconnected and increasingly leveraged. It's a little bit

512
00:31:59,360 --> 00:32:02,720
Speaker 1: like mortgage marketing or seven. There was nothing horribly wrong

513
00:32:02,760 --> 00:32:06,080
Speaker 1: with individual mortgages. It's how you packaged it and collacterized

514
00:32:06,120 --> 00:32:09,240
Speaker 1: and leveraged it that created the GFC. And what you

515
00:32:09,280 --> 00:32:12,840
Speaker 1: see today is exactly that people who buying bitcoin also

516
00:32:12,880 --> 00:32:17,440
Speaker 1: buying Tesla Tesla buying bitcoin. People who buy Dodge Dodge

517
00:32:17,440 --> 00:32:20,200
Speaker 1: coin will buy n f T. Some of the exchanges

518
00:32:20,280 --> 00:32:22,680
Speaker 1: now allow you three fine up to a hundred times

519
00:32:22,760 --> 00:32:26,600
Speaker 1: leverage on some of those transactions. The whole universe is

520
00:32:26,640 --> 00:32:30,080
Speaker 1: now at least three or four trillion dollars and is growing.

521
00:32:30,280 --> 00:32:32,600
Speaker 1: And so the way basically describe it, you know, if

522
00:32:32,640 --> 00:32:35,400
Speaker 1: you lose a couple of billion dollars, it's like a

523
00:32:35,440 --> 00:32:37,680
Speaker 1: bad day in the office, But if you lose a trillion,

524
00:32:37,960 --> 00:32:40,440
Speaker 1: that's systemic. And so the way I look at central

525
00:32:40,480 --> 00:32:43,520
Speaker 1: banks and fat I think they've got over the hump

526
00:32:43,800 --> 00:32:47,360
Speaker 1: of trying to separate themselves from a basic concept like

527
00:32:47,400 --> 00:32:50,560
Speaker 1: Philip's curve or non inflation rate, but they have not

528
00:32:50,760 --> 00:32:55,400
Speaker 1: yet transited into altering their screen to look for where

529
00:32:55,520 --> 00:32:59,720
Speaker 1: the trouble actually will lie. So where is it gonna be? What? Wait,

530
00:32:59,800 --> 00:33:02,360
Speaker 1: what your vision of the next crisis? Well, that's what

531
00:33:02,360 --> 00:33:04,920
Speaker 1: I said. Those digital assets will be will be the

532
00:33:05,040 --> 00:33:08,240
Speaker 1: next crisis. And the interesting thing to me, of course,

533
00:33:08,600 --> 00:33:10,600
Speaker 1: is all of those people buying n f T s,

534
00:33:10,640 --> 00:33:15,080
Speaker 1: are buying bitcoin or anything else, all those specs that

535
00:33:15,120 --> 00:33:19,520
Speaker 1: are going down the down the triple C death umbrella.

536
00:33:19,920 --> 00:33:22,320
Speaker 1: Throw them, throw it down in quality. All of those

537
00:33:22,360 --> 00:33:25,520
Speaker 1: people are declaring independence from the state in some form,

538
00:33:25,720 --> 00:33:27,320
Speaker 1: but it will be the state that will need to

539
00:33:27,320 --> 00:33:29,640
Speaker 1: bail them out. And that will be the r N

540
00:33:30,600 --> 00:33:33,560
Speaker 1: of trying to become independent from the state when you

541
00:33:33,600 --> 00:33:36,520
Speaker 1: actually will be relying on the state to help you,

542
00:33:37,120 --> 00:33:40,840
Speaker 1: to bail you out and to avoid systemic outcomes. Why

543
00:33:40,920 --> 00:33:43,480
Speaker 1: will it be the state? Like what is the linkage

544
00:33:43,520 --> 00:33:48,400
Speaker 1: between um something like bitcoin or n f t s

545
00:33:48,680 --> 00:33:54,120
Speaker 1: and you know, a regulated bank and the traditional financial system. Well,

546
00:33:54,160 --> 00:33:57,320
Speaker 1: it is a butterfly impact because we are in other words,

547
00:33:57,360 --> 00:34:00,360
Speaker 1: that the butterfly, you know, flapping the wings suddenly creates

548
00:34:00,360 --> 00:34:03,320
Speaker 1: a problem. That's what it is. We're highly interconnected, We're

549
00:34:03,400 --> 00:34:06,920
Speaker 1: highly leverage. I mean, the whole global economy, if you're

550
00:34:06,920 --> 00:34:10,520
Speaker 1: single financialization is a police leverage five times. One could

551
00:34:10,640 --> 00:34:12,920
Speaker 1: argue to look at the growth basis maybe eight times,

552
00:34:12,920 --> 00:34:17,240
Speaker 1: eight to ten times. So we incredibly leverage, were incredibly financialized.

553
00:34:17,480 --> 00:34:21,600
Speaker 1: We increasingly instious. In other words, one group of assets

554
00:34:21,600 --> 00:34:24,799
Speaker 1: buyas into other group of assets. And that's the inevitable

555
00:34:24,840 --> 00:34:27,960
Speaker 1: outcome of the monetary policies that we've pursued for the

556
00:34:28,040 --> 00:34:31,680
Speaker 1: last thirty or forty years. It basically forces people to

557
00:34:31,800 --> 00:34:34,600
Speaker 1: go down and down the line, and and so and so.

558
00:34:34,640 --> 00:34:39,520
Speaker 1: What happens is that eventually central banks can't tolerate any

559
00:34:39,560 --> 00:34:44,200
Speaker 1: molatility at ALLLL. They can't tolerate any price discovery because

560
00:34:44,239 --> 00:34:47,360
Speaker 1: you never know, you know, some disaster in a digital

561
00:34:47,440 --> 00:34:50,719
Speaker 1: universe might bring down mortgages into Jikistan, which in turn

562
00:34:50,800 --> 00:34:53,600
Speaker 1: will impact mortgages in Los Angeles or something like that.

563
00:34:53,800 --> 00:34:56,080
Speaker 1: You just don't know. You have to remember that if

564
00:34:56,120 --> 00:34:58,640
Speaker 1: you sing of triple cy debt right now, which is

565
00:34:58,680 --> 00:35:02,200
Speaker 1: basically bankrupt company is they're trading at almost the lowest

566
00:35:02,200 --> 00:35:05,600
Speaker 1: spreads ever. If you think of average HIGHER'L spreads, it's

567
00:35:05,640 --> 00:35:09,319
Speaker 1: only three again, one of the lowest ever. Think what

568
00:35:09,480 --> 00:35:12,120
Speaker 1: happened a couple of months ago when the movie Index,

569
00:35:12,120 --> 00:35:14,839
Speaker 1: the Bold market Index pretty much in two days, went

570
00:35:14,880 --> 00:35:18,000
Speaker 1: from forty seven to seventy three. In the same couple

571
00:35:18,000 --> 00:35:21,239
Speaker 1: of days, VIX went from fifteen to thirty. So you

572
00:35:21,280 --> 00:35:25,800
Speaker 1: can see how significant dislocation in assets, which are becoming

573
00:35:25,880 --> 00:35:32,360
Speaker 1: increasingly integrate into various sesset classes. A dislocation there could

574
00:35:32,400 --> 00:35:35,560
Speaker 1: just drive suddenly the high yield spreads, and then you

575
00:35:35,640 --> 00:35:39,480
Speaker 1: find a lot of companies relying on the triple see that,

576
00:35:39,640 --> 00:35:42,600
Speaker 1: for example, will be unable to service or we'll have

577
00:35:42,640 --> 00:35:46,120
Speaker 1: to go bankrupt. So that's what it is. It's interconnectedness.

578
00:35:46,120 --> 00:35:49,480
Speaker 1: So long as those digital assets are the periphery, So

579
00:35:49,640 --> 00:35:53,240
Speaker 1: long as just a couple of people who are really

580
00:35:53,280 --> 00:35:57,560
Speaker 1: interested in that doing it, everybody else is completely segmented

581
00:35:57,600 --> 00:36:00,839
Speaker 1: and separated, then that's not a problem. But that is

582
00:36:00,880 --> 00:36:03,600
Speaker 1: not the way to each the lasses behave. Look at

583
00:36:03,600 --> 00:36:05,799
Speaker 1: even n f T. Look how much have gone up

584
00:36:06,000 --> 00:36:09,239
Speaker 1: just in a space of bull months. What I'm saying is,

585
00:36:09,560 --> 00:36:11,920
Speaker 1: if you do the same thing for the next twelve

586
00:36:11,920 --> 00:36:16,000
Speaker 1: months and another twel months, eventually reached the state that

587
00:36:16,120 --> 00:36:22,359
Speaker 1: it will become systemic. Victor, fantastic having you on as always. Uh,

588
00:36:22,400 --> 00:36:24,680
Speaker 1: And we'll have to get you on in maybe in

589
00:36:24,719 --> 00:36:28,040
Speaker 1: another year to see uh whether or not crypto has

590
00:36:28,080 --> 00:36:32,560
Speaker 1: become further embedded with the global economy and financial system. Okay,

591
00:36:32,600 --> 00:36:37,319
Speaker 1: we would loved it. Okay, Victor Schwetz from McCary take

592
00:36:37,320 --> 00:36:52,120
Speaker 1: care of Victor, Thank you so much. Okay, cheers, So Joe.

593
00:36:52,160 --> 00:36:54,240
Speaker 1: One of the things I love about talking to Victor

594
00:36:54,440 --> 00:36:58,799
Speaker 1: is you you start out talking about inflation and commodity

595
00:36:58,800 --> 00:37:01,600
Speaker 1: prices and market expect stations and then somehow you get

596
00:37:01,600 --> 00:37:05,560
Speaker 1: to Bitcoin is going to lead to a state sponsored

597
00:37:05,560 --> 00:37:10,040
Speaker 1: bailout at the end, and doge coin and coin. Yeah.

598
00:37:10,080 --> 00:37:12,120
Speaker 1: I don't disagree with him, by the way, but like,

599
00:37:12,640 --> 00:37:15,839
Speaker 1: I just love the transition. It feels like the great

600
00:37:15,880 --> 00:37:20,040
Speaker 1: doge coin crisis of is just like something that has

601
00:37:20,080 --> 00:37:21,839
Speaker 1: to happen one day, right, Like if you just think

602
00:37:21,880 --> 00:37:24,960
Speaker 1: about the arc of history, it just feels like that

603
00:37:24,960 --> 00:37:29,239
Speaker 1: that has to happen. Yeah, Victor, I do really like

604
00:37:29,760 --> 00:37:32,239
Speaker 1: the way he thinks at this point about sort of

605
00:37:32,239 --> 00:37:35,320
Speaker 1: fighting the last war. I also think it's just interesting

606
00:37:35,360 --> 00:37:40,120
Speaker 1: because I do think that it is extremely tempting to think, like, Okay,

607
00:37:40,160 --> 00:37:43,120
Speaker 1: this is the new era post grade financial crisis, this

608
00:37:43,200 --> 00:37:48,040
Speaker 1: is the new era of inflation pressures or labor market

609
00:37:48,080 --> 00:37:51,960
Speaker 1: tightening tightening, or the change in direction on rates or whatever,

610
00:37:52,400 --> 00:37:55,440
Speaker 1: and there is some stuff happening. But I think he

611
00:37:55,560 --> 00:37:58,720
Speaker 1: provides some very like sort of um, a good temper

612
00:37:59,239 --> 00:38:02,239
Speaker 1: to all that, the enthusiasm that you know, still the

613
00:38:02,320 --> 00:38:06,960
Speaker 1: most likely outcome is the burst now, but then a

614
00:38:06,960 --> 00:38:10,279
Speaker 1: a reversion to a sort of like an economy that

615
00:38:10,360 --> 00:38:12,560
Speaker 1: has a lot of the same characteristics as the pre

616
00:38:12,680 --> 00:38:18,279
Speaker 1: crisis economy. Did, Yeah, exactly. Shall we leave it there? Yeah,

617
00:38:18,360 --> 00:38:22,160
Speaker 1: let's just leave it there. Okay, all right, This has

618
00:38:22,200 --> 00:38:25,720
Speaker 1: been another episode of the All Thoughts Podcast. I'm Tracy Alloway.

619
00:38:25,800 --> 00:38:28,839
Speaker 1: You can follow me on Twitter at Tracy Alloway and

620
00:38:28,880 --> 00:38:31,400
Speaker 1: I'm Joe wisn't thought you could follow me on Twitter

621
00:38:31,600 --> 00:38:35,480
Speaker 1: at the Stalwart. Follow our producer on Twitter, Laura Carlson.

622
00:38:35,600 --> 00:38:39,320
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,

623
00:38:39,400 --> 00:38:43,279
Speaker 1: Francesca Levie at Francesco Today, and check out all of

624
00:38:43,280 --> 00:38:47,680
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks

625
00:38:47,719 --> 00:39:03,520
Speaker 1: for listening to