WEBVTT - Viktor Shvets on Inflation and How Crypto Could Cause the Next Financial Crisis 0:00:10.960 --> 0:00:14.520 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.640 --> 0:00:18.680 I'm Tracy Alloway and I'm Joe. Isn't so Joe. We 0:00:18.840 --> 0:00:23.640 just had a FED meeting where basically the Central Bank 0:00:23.680 --> 0:00:29.080 decided to not change anything, and the market reaction was, 0:00:29.360 --> 0:00:32.920 let's see, stocks went up, But probably the most interesting 0:00:33.000 --> 0:00:37.520 move that we saw was in the three year break even, 0:00:37.720 --> 0:00:41.199 and that actually went up I think eight basis points 0:00:41.400 --> 0:00:45.480 to the highest since two thousand eight. So you saw 0:00:45.479 --> 0:00:48.840 this immediate assumption in the market that we would get 0:00:48.880 --> 0:00:51.800 a bunch of inflation because the Feds on hold for longer, 0:00:51.840 --> 0:00:54.680 and meanwhile we have fiscal stimulus and the economy is 0:00:54.840 --> 0:00:58.800 recovering really strongly. Exactly right, I mean that is you know, 0:00:58.840 --> 0:01:01.880 it's sort of interesting. I was watching the press conference 0:01:02.040 --> 0:01:06.160 and there were so many questions about inflation, so many 0:01:06.240 --> 0:01:09.320 questions about when the FED is going to perhaps pull 0:01:09.360 --> 0:01:13.200 back one day on its asset purchases, the so called taper, 0:01:13.480 --> 0:01:17.520 and the answers were really the same. Like Sherman, Powell 0:01:17.600 --> 0:01:21.560 was incredibly consistent. By the way, I should mention recording 0:01:21.560 --> 0:01:26.360 this April. The meeting was yesterday, but the answers were 0:01:26.360 --> 0:01:29.000 incredibly consistent. He's like, look, I'm not gonna do anything 0:01:29.400 --> 0:01:31.920 until we get there, until we see the inflation, until 0:01:31.959 --> 0:01:34.520 we get the full employment everything, and so he's kind 0:01:34.520 --> 0:01:38.520 of like stop asking. But this dynamic in which everyone 0:01:38.600 --> 0:01:42.680 sees these pressures are building in the economy for an 0:01:42.760 --> 0:01:46.240 unknown length of time and a FED that's willing to 0:01:46.319 --> 0:01:49.280 not do anything until they actually like emerge in a 0:01:49.360 --> 0:01:54.080 sustained way, and so you get these expectations of greater 0:01:54.960 --> 0:01:59.000 reflationary forces at the minimum to come. Yeah. I find 0:01:59.040 --> 0:02:01.919 this a really interesting moment in markets, because, as you mentioned, 0:02:02.000 --> 0:02:06.480 the FED is pretty emphatic that it sees inflationary pressures 0:02:06.520 --> 0:02:09.960 as transitory. You know, these are things like commodities prices 0:02:10.000 --> 0:02:13.880 going up because of supply bottlenecks from COVID, and the 0:02:13.919 --> 0:02:16.120 central Bank expects that they're not gonna last that long. 0:02:16.440 --> 0:02:20.239 But meanwhile, the market seems to be positioning for something 0:02:20.320 --> 0:02:22.600 very different. At least, you know, if you look at 0:02:22.600 --> 0:02:24.760 the three year break even that I just mentioned, that's 0:02:24.919 --> 0:02:28.359 three years out, and certainly that's pricing in higher levels 0:02:28.360 --> 0:02:31.280 of inflations at the same time. It's really interesting that 0:02:31.320 --> 0:02:33.600 the market seems to be taking that stance, because of 0:02:33.639 --> 0:02:39.040 course we've had ten years of no inflation or deflation. Uh. 0:02:39.120 --> 0:02:41.760 You know, despite lots of monetary easing from the Central 0:02:41.760 --> 0:02:45.359 Bank and a relatively strong economy, we haven't seen price 0:02:45.480 --> 0:02:48.880 increases like you would have expected from some economic models 0:02:48.960 --> 0:02:53.920 like NEHRU or the Phillips curve. So really interesting moment 0:02:53.919 --> 0:02:56.919 in time, and today we're gonna be talking all about 0:02:57.000 --> 0:03:00.600 inflation with one of our favorite odd lots. Yes, we're 0:03:00.600 --> 0:03:03.799 going to bring back Victor Schwetz. He's a strategist over 0:03:03.840 --> 0:03:07.480 at McQuary. Victor, thanks for coming on again. Thank you 0:03:07.560 --> 0:03:11.120 very much, Tracy. So do you want to lay the 0:03:11.160 --> 0:03:14.120 scene for us When you look at the world right now, 0:03:14.760 --> 0:03:20.720 what inflationary pressures, if any do you see? Well, there 0:03:20.800 --> 0:03:23.880 is no question that if you goes through the next 0:03:24.000 --> 0:03:27.200 six and nine twelve months, whether you look at the 0:03:27.280 --> 0:03:30.240 United States or whether you look at other countries as well, 0:03:30.600 --> 0:03:34.320 inflation will pick up for exactly the same reason as 0:03:34.360 --> 0:03:39.360 what you've just outlined, base effect, recovering demand and supply 0:03:39.480 --> 0:03:43.280 side bottom lights. Whether you have a war or a pandemic, 0:03:43.760 --> 0:03:47.240 usually it has a demand and supply shock in some form. 0:03:47.880 --> 0:03:53.880 Supply disappears, companies become zombies, incapable of providing sub services. 0:03:54.080 --> 0:03:58.840 Some of the capacities just withdrawn investment goes down, and 0:03:58.880 --> 0:04:01.920 so when you start recording bring supplies never quite know 0:04:02.320 --> 0:04:05.480 how much capacity should they provide. I will demand go 0:04:05.600 --> 0:04:09.720 up ten percent, and so the result is it usually 0:04:09.800 --> 0:04:12.600 takes four or five or six quarters to what I 0:04:12.600 --> 0:04:16.479 would call normalized demand and supply. And I think what 0:04:16.520 --> 0:04:19.640 fair Reserve is saying is that this is a transitory 0:04:19.760 --> 0:04:23.880 period that we are not confident that inflation actually will 0:04:23.920 --> 0:04:26.640 be sustainable. And as we go back and go sort 0:04:26.640 --> 0:04:29.160 of forward to the end of twenty two or into 0:04:29.200 --> 0:04:32.200 twenty three, we're not that confident that there will be 0:04:32.839 --> 0:04:37.000 such a strong inflationary pulse um. And I find myself 0:04:37.040 --> 0:04:40.440 an unusual position, because I usually quite disagree with many 0:04:40.520 --> 0:04:44.040 things that FED does. I find myself an unusual position 0:04:44.640 --> 0:04:48.440 to actually agree that it is probably easy case that 0:04:48.520 --> 0:04:52.200 the precious transitory. And if you think of inflationary break 0:04:52.240 --> 0:04:55.559 even rate, the interesting thing is that five by five, 0:04:55.800 --> 0:04:59.039 for example, are lower than five. So clearly even the 0:04:59.080 --> 0:05:02.640 market itself assumes that there will be more inflation to 0:05:02.720 --> 0:05:06.000 begin with and then it comes off later on. So 0:05:06.040 --> 0:05:07.919 when you say the five by five, what what you 0:05:07.920 --> 0:05:11.760 mean is the market has expectations for where inflation will 0:05:11.800 --> 0:05:14.839 be over the next five years, but there's also expectations 0:05:14.960 --> 0:05:18.120 essentially over what five years out will look like five 0:05:18.200 --> 0:05:21.200 years out from now, kind of ten years out, I guess, 0:05:21.279 --> 0:05:23.520 And there's sort of view of this initial hump the 0:05:23.600 --> 0:05:27.640 inflationary pressure is now, but then the market is expecting something, um, 0:05:28.360 --> 0:05:32.320 a sort of a return to normalcy after that. Yeah, 0:05:32.360 --> 0:05:35.880 the market is not anticipating deflation. The market is not 0:05:36.000 --> 0:05:40.400 anticipating dec inflation, but it doesn't anticipate a runaway inflation 0:05:40.440 --> 0:05:44.400 where you're consistently getting three four or five. Because remember, 0:05:44.520 --> 0:05:46.800 if you just think of G five economies and if 0:05:46.839 --> 0:05:50.920 commodity complex doesn't move terribly far from where it is 0:05:51.000 --> 0:05:54.919 today but sort of going forward, then it's all mathematically 0:05:55.080 --> 0:05:59.320 correct that inflation will go to around three four, maybe 0:05:59.320 --> 0:06:04.479 even touch five. That compares to G five inflation Sat. 0:06:04.520 --> 0:06:08.320 February was only point seven. In March it was only 0:06:08.400 --> 0:06:11.400 like one and a half. So there's no question inflation 0:06:11.440 --> 0:06:13.840 will go up. What the market is saying is that 0:06:14.320 --> 0:06:16.479 they think, and I agree with that, that it will 0:06:16.520 --> 0:06:19.440 pull back. In fact, I will go beyond that and 0:06:19.680 --> 0:06:24.040 say that decent inflation is far more likely longer term 0:06:24.240 --> 0:06:27.920 than you know, two point two or to inflation. There 0:06:27.960 --> 0:06:31.080 are people out there, um, and Larry Summer's sort of 0:06:31.120 --> 0:06:33.240 springs to mind here, but there are people out there 0:06:33.240 --> 0:06:37.200 who are describing, you know, fiscal stimulus combined with easy 0:06:37.279 --> 0:06:41.640 monetary policy as uh, irresponsible, I think is the way 0:06:41.680 --> 0:06:45.400 Summers put it, but something that will ignite big price 0:06:45.520 --> 0:06:50.200 rises that the Fed doesn't appreciate. Obviously you don't agree 0:06:50.240 --> 0:06:52.719 with that argument. But what do you think it is 0:06:52.760 --> 0:06:55.359 that they're getting wrong here? I see lots of people, 0:06:55.400 --> 0:06:58.480 for instance, reaching to the analogy of the nineteen seventies 0:06:58.560 --> 0:07:03.640 or the nineteen sixties as an era of high inflation. Yeah, 0:07:04.000 --> 0:07:07.279 they do, uh, And there's a lot of investors and 0:07:07.360 --> 0:07:11.119 commentators who seem to feel that we probably somewhere around 0:07:11.240 --> 0:07:13.960 late sixties, and yes, it will take a bit of time, 0:07:14.000 --> 0:07:17.320 but ultimately we are going to an anchor, so to speak, 0:07:17.360 --> 0:07:21.280 inflationary expectations, and inflation will be much much stronger than 0:07:22.000 --> 0:07:25.320 most people expect right now. I completely disagree with that, 0:07:25.840 --> 0:07:28.920 and primarily I disagree with that that whether it's a 0:07:28.920 --> 0:07:32.440 Congressional Budget Office or whether it's Larry Summers, they're all 0:07:32.600 --> 0:07:36.600 using very much an industrial age framework. In other words, 0:07:36.960 --> 0:07:41.400 the era where capital was capital, fixed assets where fixed assets, 0:07:41.720 --> 0:07:45.640 labor was labor. None of those things aren't true anymore. 0:07:45.960 --> 0:07:49.520 So if you think of for example, US private sector, 0:07:49.880 --> 0:07:54.440 US private sector GDP is now six intangible assets. If 0:07:54.440 --> 0:07:57.440 you look at Europe, depending on the country choose, it's 0:07:57.480 --> 0:08:02.720 twenty five to intangibles. Even in China it's anywhere from fift. 0:08:04.000 --> 0:08:07.120 Why is it important, Well, intangibles don't have the same 0:08:07.160 --> 0:08:12.360 capacity constraints, the incredibly fluid and they spill over from 0:08:12.400 --> 0:08:15.880 one industry to another good synergistic benefits. So it's the 0:08:15.920 --> 0:08:18.800 first point to remember. If we're not actually building roads, 0:08:18.880 --> 0:08:23.200 machinery factories you know, are railways and the rest of it, 0:08:23.200 --> 0:08:26.000 it's a very different investment we're making. And if you 0:08:26.080 --> 0:08:30.760 think of Biden's package infrastructure package, Republicans are right to 0:08:30.760 --> 0:08:34.360 say that only about is real infrastructure. But that's the 0:08:34.400 --> 0:08:38.040 whole point that we should not be investing in real infrastructure. 0:08:38.080 --> 0:08:41.240 We should be investing in the future. So that's the 0:08:41.320 --> 0:08:44.640 first area, which is capital and where do we invest 0:08:44.720 --> 0:08:48.320 and how it behaves. The other area is labor. Remember 0:08:48.400 --> 0:08:51.560 everybody is still relying on Bureau of Labor statistics sort 0:08:51.559 --> 0:08:55.280 of classifications. Are your plumber, electrician? Are you are your 0:08:55.400 --> 0:08:57.920 business professional? Are your full time? Are your part time? 0:08:58.240 --> 0:09:02.840 With In reality, labor is really stretched in many areas, 0:09:02.960 --> 0:09:06.920 like for example, you're recording now this conversation. In the past, 0:09:06.920 --> 0:09:09.480 somebody else would have been recording, So you're stretched. You're 0:09:09.480 --> 0:09:14.959 doing many jobs in the service oriented industry, employees are 0:09:14.960 --> 0:09:18.560 now either non conventional or gig economy, and so labor 0:09:18.600 --> 0:09:21.320 doesn't function the same way as it has done in 0:09:21.320 --> 0:09:24.720 industrial age. And so the way basically describe it is 0:09:24.760 --> 0:09:29.240 capacity constraints incredibly hard to compute even in the good days. 0:09:29.559 --> 0:09:33.040 Today it's almost impossible. In fact, I would argue capacity 0:09:33.080 --> 0:09:37.360 constraints just melt away in front of you every day. 0:09:37.480 --> 0:09:40.280 They're just going away high and higher. And to me, 0:09:40.960 --> 0:09:44.360 that explains why Philip's curve did not work and hasn't 0:09:44.400 --> 0:09:47.040 worked for several decades. And by the way, it even 0:09:47.080 --> 0:09:50.960 predates China, it didn't even work in the eighties forgetting 0:09:51.080 --> 0:09:55.240 the last twenty years. It also explains why commodity prices 0:09:55.240 --> 0:09:59.240 could go up but battery prices, for example, go down. 0:09:59.559 --> 0:10:03.480 It ex planes how we can ignite shell Guest revolution. 0:10:03.720 --> 0:10:06.520 Remember Show Guest was invented or for the first TIME'M 0:10:06.559 --> 0:10:10.680 tried in nineteen but in three we couldn't respond with 0:10:10.800 --> 0:10:15.959 shell guests, but today we can. So to me, it's technology, financialization, 0:10:16.200 --> 0:10:19.920 changes in the functioning of capital fixed us, it's intangible 0:10:19.960 --> 0:10:23.160 as it's labor. All of that implies to me that 0:10:23.360 --> 0:10:27.560 I don't think we're really facing capacity constraints at all. 0:10:28.120 --> 0:10:32.840 You make a very compelling argument that various structural factors 0:10:33.559 --> 0:10:36.360 in the economy were unlikely to see her repeat of 0:10:36.400 --> 0:10:40.520 the nineteen seventies, that these sort of general conditions that 0:10:40.640 --> 0:10:44.760 we experienced, or at least the general inflation conditions that 0:10:44.840 --> 0:10:48.319 we experienced pre crisis, will probably be more the norm 0:10:48.400 --> 0:10:52.800 after the short term bottlenecks. However, and you know, you 0:10:52.840 --> 0:10:57.440 mentioned Biden again last night, hearing the big sort of 0:10:57.640 --> 0:11:01.600 Biden speech laying out its infrastructure plan. And yet, however, 0:11:01.840 --> 0:11:04.680 we do seem to be having this big political shift, 0:11:04.760 --> 0:11:07.079 and the big political shift that we keep talking about 0:11:07.080 --> 0:11:10.319 on the podcast there. It's multifaceted, but the big thing 0:11:10.400 --> 0:11:15.720 for us is the shift from reliance primarily on monetary 0:11:15.840 --> 0:11:20.880 policy as the main driver of macro stabilization to fiscal policy. 0:11:20.960 --> 0:11:24.120 And that feels like a pretty big deal. So setting 0:11:24.120 --> 0:11:28.520 aside our current commodity constraints and bottlenecks, this new thinking 0:11:28.720 --> 0:11:32.360 and this sort of like new willingness of democratic small 0:11:32.480 --> 0:11:35.319 d democratic leaders to spend more, at least in the US, 0:11:35.480 --> 0:11:39.080 perhaps in Europe and elsewhere. That feels new. How does 0:11:39.160 --> 0:11:42.320 that play into the mix and thinking about what the 0:11:42.400 --> 0:11:46.000 post crisis economy is going to look like? For you, absolutely, Joe, 0:11:46.040 --> 0:11:48.800 you you, You're totally right. It is a shift. And 0:11:48.880 --> 0:11:52.360 coronavirus accelerated that shift. By the way, that shift was 0:11:52.400 --> 0:11:57.080 going on even before coronavirus, almost nobody was exercising much 0:11:57.320 --> 0:12:02.200 restraint on fiscal spending even prior to coronavirus. But COVID 0:12:02.440 --> 0:12:07.400 accelerated this process quite quite dramatically, and people accepted and 0:12:07.480 --> 0:12:11.079 people in fact increasingly demand the spending. And so from 0:12:11.080 --> 0:12:14.840 a political perspective, it gets easier and easier to ignore 0:12:15.200 --> 0:12:18.440 sort of the guidelines or constraints of fiscal spending or 0:12:18.440 --> 0:12:21.920 financing or anything else. And so that is a major issue. 0:12:22.160 --> 0:12:25.160 Instead of just relying on the monetary policy, you're now 0:12:25.200 --> 0:12:28.680 relying on the fiscal policy. Was monetary policy in more 0:12:28.960 --> 0:12:33.920 supporting rule? However, a couple of things to highlight Number one, 0:12:34.320 --> 0:12:37.520 where do we invest money? Now, If you think of 0:12:37.640 --> 0:12:41.199 COVID nineteen shacks, for example, according to Federal Reserve, only 0:12:42.280 --> 0:12:45.400 of the money was spent. The other seventy or percent 0:12:45.960 --> 0:12:50.640 went essentially either into financial speculation you know, bitcoins, equities, 0:12:50.760 --> 0:12:55.000 real estate alternatively went into state of the bankruptcy is 0:12:55.120 --> 0:12:57.680 to repay the debt and so and so what you 0:12:57.720 --> 0:13:01.360 have seen is a relatively low for called multiplier. Now, 0:13:01.400 --> 0:13:06.560 infrastructure theoretically has a much higher, larger multiplier. But again 0:13:06.600 --> 0:13:09.800 I've just said a second ago. Only of what Widen 0:13:09.880 --> 0:13:13.160 wants to do is real infrastructure. If you invest in 0:13:13.320 --> 0:13:17.800 green energy, alternative energy and transportation platforms, if you invest 0:13:17.920 --> 0:13:21.360 in R and D fundamental research, this is all very 0:13:21.480 --> 0:13:25.280 very good stuff and actually longer term raises your capacity 0:13:25.600 --> 0:13:29.720 are capabilities, But it does not have the same fiscal 0:13:29.840 --> 0:13:33.560 multiplier as building a road or building a dam. If 0:13:33.600 --> 0:13:37.600 you think of human resources are spending, that's even lower 0:13:37.679 --> 0:13:41.360 multiplier and much lower really time, even though it's totally 0:13:41.400 --> 0:13:44.920 appropriate and it's absolutely the right thing to do. So. 0:13:44.920 --> 0:13:47.800 So the first thing to highlight is that everything we're 0:13:47.840 --> 0:13:52.640 doing today on the fiscal side is either exceptional circumstances. 0:13:52.840 --> 0:13:55.240 We justified because it's like a war. You know, we're 0:13:55.280 --> 0:13:58.840 fighting a war. That's why we're doing it. Alternatively, we're 0:13:58.880 --> 0:14:03.800 doing something for very distant future, which in turn is disinflationary. 0:14:04.200 --> 0:14:07.040 If you invest in oil, that's inflationary. If you invest 0:14:07.080 --> 0:14:10.040 in lithium, that's disinflationary. And so the way I look 0:14:10.080 --> 0:14:13.600 at it is we are not investing enough in the 0:14:13.720 --> 0:14:19.480 areas that actually would generate a longer term inflationary outcomes. 0:14:19.640 --> 0:14:22.200 In fact, what we're doing with strengthening the case with 0:14:22.360 --> 0:14:26.000 disinflation on a longer term basis the other thing very 0:14:26.040 --> 0:14:28.480 quickly to highlight where all the report not that long 0:14:28.520 --> 0:14:30.720 ago and sort of known a zeguist or the spirit 0:14:30.760 --> 0:14:33.400 of the age, and basically what we argue is a 0:14:33.480 --> 0:14:37.040 fiscal policies are very, very very hard, and the reason 0:14:37.080 --> 0:14:40.680 they're hard is that people have a schizophrenic approach to 0:14:40.760 --> 0:14:45.320 monitory versus fiscal policies. Monetary policy is supposed to be technocratic. 0:14:45.600 --> 0:14:49.040 Over the last eight or nine years, have become completely free. 0:14:49.240 --> 0:14:53.040 There is virtually no adult supervision at all. Central banks 0:14:53.080 --> 0:14:56.480 can spend trillions of dollars and almost nobody cares. And 0:14:56.520 --> 0:14:59.280 the reason for that there is a perception that monetary 0:14:59.360 --> 0:15:03.880 policies atmocratic and it doesn't generate debt. Now that is 0:15:03.880 --> 0:15:07.320 not true, but that's what people believe. Fiscal policy, on 0:15:07.360 --> 0:15:09.880 the other hand, people look at it very very differently. 0:15:10.280 --> 0:15:14.920 They basically view a fiscal policy as inefficient, unfair, and 0:15:15.160 --> 0:15:18.640 generating debt that needs to be repaid. So, once again, 0:15:19.040 --> 0:15:21.640 none of it is true, but that's what people believe. 0:15:21.920 --> 0:15:24.920 And so the result is in almost every country. China 0:15:25.040 --> 0:15:28.400 clearly is an exception, but in almost every country, in 0:15:28.520 --> 0:15:31.440 order to engage in physical spending, you have to have 0:15:31.640 --> 0:15:34.960 community support, You have to go to legislature, whether it's 0:15:34.960 --> 0:15:37.840 a parliament or congress, to get it approved. You need 0:15:37.880 --> 0:15:40.800 to itemize it. People need to know exactly where you 0:15:40.880 --> 0:15:44.800 spend every dime. Nobody else Jeremy Pal every time he spends. 0:15:44.840 --> 0:15:47.440 But on the fiscal side, you need to explain where 0:15:47.440 --> 0:15:49.960 you're going to spend the money, and it usually is 0:15:50.040 --> 0:15:54.400 time limited. It's sunsets, whereas monetary policy these days have 0:15:54.560 --> 0:15:58.360 a completely open ended there is no sunset. And so 0:15:58.400 --> 0:16:02.560 the problem we struck shuring fiscal policy predominantly as an 0:16:02.560 --> 0:16:06.640 exceptional circumstance is that as soon as the economy is recovered, 0:16:07.160 --> 0:16:09.760 and I see the United States will be recovering very 0:16:09.800 --> 0:16:13.000 strongly in the first, second third, and into the fourth quarter. 0:16:13.080 --> 0:16:18.720 Even as economy is recovered almost inevitably within three to 0:16:18.800 --> 0:16:22.040 six months. That will be debate. We must put our 0:16:22.080 --> 0:16:26.840 house in order. Radical left is destroying America. There will 0:16:26.840 --> 0:16:30.720 be discussion. We are bequesting to our grandchildren trillions of 0:16:30.800 --> 0:16:33.120 dollars of debt. How are we going to finance it? 0:16:33.440 --> 0:16:36.240 And and that's sort of a discussion. Would imply that 0:16:36.320 --> 0:16:40.160 the line of least resistance right now, the least resistance 0:16:40.320 --> 0:16:44.440 is for politicians to sunset fiscal policy. Economies are recovering, 0:16:44.720 --> 0:16:48.440 everything is doing is doing fine. Let sunset it now. 0:16:48.480 --> 0:16:51.200 Nobody is going to do another grief. Nobody is going 0:16:51.240 --> 0:16:54.480 to try to do austerity. But we're not talking about austerity. 0:16:54.680 --> 0:16:58.080 We are talking about the level of fiscal pulse that 0:16:58.160 --> 0:17:01.240 we can actually maintain. And I think it's actually going 0:17:01.280 --> 0:17:03.920 to go down before it goes up again, and then 0:17:03.920 --> 0:17:06.000 it will go down again before it goes up. It 0:17:06.040 --> 0:17:08.840 will be stopping, go, stop and go. And the reason 0:17:08.880 --> 0:17:12.560 why that is important permanent policies have a very different 0:17:12.640 --> 0:17:31.600 impact to temporary ones. There are people out there who 0:17:31.760 --> 0:17:37.920 say that the experience of the pandemic has changed everything. 0:17:37.960 --> 0:17:39.920 I think Joe and I have had quite a few 0:17:39.920 --> 0:17:43.520 episodes by now about how the pandemic has changed everything, 0:17:43.560 --> 0:17:48.000 but that there's more acceptance of fiscal stimulus. MMT has 0:17:48.040 --> 0:17:51.760 been making some in roads among policymakers, so people aren't 0:17:51.760 --> 0:17:54.680 as worked up around the deficit as they once were. 0:17:55.400 --> 0:17:57.840 And one of the arguments that I've seen about why 0:17:58.000 --> 0:18:01.560 to actually be concerned about inflation is that even though 0:18:02.160 --> 0:18:05.960 the current fiscal stimulus that's been announced might not be 0:18:06.080 --> 0:18:10.040 enough to generate substantial price increases, it's sort of opened 0:18:10.160 --> 0:18:13.680 this Pandora's box. Well Pandora's box isn't a good term 0:18:13.680 --> 0:18:15.639 for it, but you know, it's led to the shift 0:18:15.680 --> 0:18:19.560 around physical stimulus where we don't know how popular it's 0:18:19.600 --> 0:18:22.760 going to be further on, and it could become very 0:18:22.800 --> 0:18:27.160 politically popular. People like to have stimulus checks mailed to them, 0:18:27.400 --> 0:18:30.640 people like better infrastructure things like that, so you could 0:18:30.640 --> 0:18:33.919 get repeated fiscal stimulus over and over. Um, you clearly 0:18:33.960 --> 0:18:36.520 don't agree with that, but I'd love to know more 0:18:36.760 --> 0:18:42.280 of your thinking around this. Well, I I actually do 0:18:42.359 --> 0:18:45.320 agree that there will be a regular stimulus list That's 0:18:45.359 --> 0:18:49.320 why I've argued that nobody will be running primary surplus assailable. 0:18:49.720 --> 0:18:52.560 Nobody is going to do austerity, nobody is going to 0:18:52.600 --> 0:18:56.000 try to do another degree sup Portugal or something like that. 0:18:56.000 --> 0:19:00.280 That's all gone forever. All we arguing is, and we 0:19:00.400 --> 0:19:05.119 create a consistent long term physical strategy that doesn't rely 0:19:05.480 --> 0:19:10.760 on revisitation of COVID, doesn't rely on revisitational wars on 0:19:11.000 --> 0:19:15.280 major financial dislocation, can we reach the stage that we 0:19:15.440 --> 0:19:19.439 also will be managing our investment without reliance on the 0:19:19.440 --> 0:19:23.440 bond market um and directly funded out of central banks 0:19:23.840 --> 0:19:26.720 as we go forward. And so my argument was that 0:19:26.720 --> 0:19:29.880 that will be the ultimate destination, but it's probably at 0:19:29.960 --> 0:19:33.400 least five teen years out. And the reason for why 0:19:33.480 --> 0:19:36.840 it is five teen years out because clearly in every 0:19:36.880 --> 0:19:40.439 country you could think of, there is a degree of polarization, 0:19:40.760 --> 0:19:42.520 so in other words, not a degree, there is a 0:19:42.600 --> 0:19:46.840 very high level of polarization. There is no consensus agreement. 0:19:47.200 --> 0:19:51.080 Anybody who is younger than about thirty five basically agrees 0:19:51.320 --> 0:19:54.080 with a strategy. Anybody is sort of all much older 0:19:54.119 --> 0:19:58.040 than that does not agree. And you can mathematically calculate 0:19:58.359 --> 0:20:01.879 at what stage somebody like AOC is bound to become 0:20:01.880 --> 0:20:04.320 a president of the United States. If you think of 0:20:04.359 --> 0:20:07.320 the younger generation, they were roughly about twenty of the 0:20:07.359 --> 0:20:10.960 Boks cast in the latest elections. If you project forward 0:20:11.400 --> 0:20:17.440 somewhere between kind of two, that younger cohort is going 0:20:17.520 --> 0:20:20.480 to be the dominant force. And so what we need 0:20:20.520 --> 0:20:23.959 to do is have a lot of a lot of problems, 0:20:24.080 --> 0:20:28.520 a lot of dislocations over the next five to ten years. 0:20:28.880 --> 0:20:32.720 Gradually demographics will call us around it, and then you 0:20:32.880 --> 0:20:36.280 have a different set of policies. Think of the monetary policy. 0:20:36.440 --> 0:20:40.680 When Japan introduced in earlier two thousand's, people were questioning 0:20:40.720 --> 0:20:44.200 whether that's disaster, complete disaster. Then there were you introduced 0:20:44.200 --> 0:20:47.359 globally around two thousand and eight. Between two thousand and 0:20:47.359 --> 0:20:50.520 eight and two thousand and twelve, the first question every 0:20:50.800 --> 0:20:54.800 fun manager would ask you, when do we normalize monetary policy? 0:20:55.080 --> 0:20:57.359 When I used to tell them we will never normalize 0:20:57.400 --> 0:21:00.520 monetary policy, people didn't expect that. He didn't ex apped. 0:21:00.960 --> 0:21:04.600 It took people ten years until they finally recognize that 0:21:04.680 --> 0:21:08.760 monetary policy can never be normalized. Irrespected what Jaron Powell 0:21:08.880 --> 0:21:11.960 thinks or what he might or might not do. If 0:21:12.000 --> 0:21:14.919 you think of fiscal policy today. I view it in 0:21:14.960 --> 0:21:17.960 a very similar light to two thousand eight to thousand 0:21:18.000 --> 0:21:21.720 twelve monetary policy. One of the first questions people ask, yes, fective, 0:21:21.760 --> 0:21:24.000 we understand that we will be spending more money, but 0:21:24.080 --> 0:21:26.080 how are we going to pay for it? What is 0:21:26.119 --> 0:21:30.400 the endgame of what we are what we're trying to do. Now, 0:21:30.400 --> 0:21:32.800 when you tell them we'll never pay any of that back, 0:21:32.880 --> 0:21:37.359 it doesn't really matter. People don't accept it, and so 0:21:37.560 --> 0:21:40.679 what you need, you need time. People don't move in 0:21:40.800 --> 0:21:44.679 revolutionary steps. So what we have today is acceptance at 0:21:44.720 --> 0:21:48.080 fiscal policy play a much more important role. What we 0:21:48.160 --> 0:21:51.680 don't have is an acceptance that that sort of expansionary 0:21:51.800 --> 0:21:55.560 state policy is permanent and it's never going to change, 0:21:55.800 --> 0:22:00.000 and that that expansionary policy will be funded through central bands. 0:22:00.080 --> 0:22:02.880 So the way to look at mixing fiscal and monetary 0:22:02.880 --> 0:22:07.159 policy together. By doing more fiscal we're reducing the speed 0:22:07.200 --> 0:22:11.240 of disinflation rather than creating a great deal of sort 0:22:11.240 --> 0:22:15.679 of sustainable inflation. So what does it mean for you know, investors? 0:22:15.720 --> 0:22:18.160 Like I was, there are so many charts that if 0:22:18.160 --> 0:22:19.680 you look at I mean, there are so many charts 0:22:19.720 --> 0:22:22.399 that are shooting straight up obviously at least as of 0:22:22.480 --> 0:22:25.480 as of now. But not only that, there's so many 0:22:25.560 --> 0:22:28.560 church that are shooting straight up that are clearly reversed 0:22:29.080 --> 0:22:32.159 a trend that had been in place pre crisis. So 0:22:32.200 --> 0:22:35.240 the most obvious example is like you know, e M stocks, 0:22:35.280 --> 0:22:37.040 they had generally been and I think like about a 0:22:37.080 --> 0:22:41.800 two year under performance run at least since early going 0:22:41.840 --> 0:22:44.159 into the crisis. Now a straight lineup, look at like 0:22:44.200 --> 0:22:47.280 a commodity some of the commodity and disseries very uh 0:22:47.560 --> 0:22:51.840 downward trend. Now straight up, is there a new this 0:22:51.960 --> 0:22:56.080 new regime that we're talking about, the new monetary policy, 0:22:56.600 --> 0:22:59.920 fiscal mix and so forth. Does it change how mark 0:23:00.040 --> 0:23:03.560 to behave on a sustainable way or do we just 0:23:03.560 --> 0:23:06.920 sort of go back to this like sixty forty goldilocks 0:23:07.000 --> 0:23:10.960 world in a year two where you buy some text 0:23:11.040 --> 0:23:13.800 docs and you buy some bonds and there's a disinflation 0:23:14.000 --> 0:23:17.320 and uh yeah, you have a really easy now, Joe, 0:23:17.359 --> 0:23:20.560 you you, you're absolutely right. There is a regime change 0:23:21.200 --> 0:23:24.120 that is occurred. If you think of a lot sort 0:23:24.119 --> 0:23:27.480 of sixties and seventies, there was a significant regime change 0:23:28.040 --> 0:23:31.240 into late seventies early eighties. There was another regime change 0:23:31.240 --> 0:23:35.160 occurring in late nineties, and so they around those periods 0:23:35.200 --> 0:23:38.760 where there is a regime change. And so going forward, 0:23:38.840 --> 0:23:43.360 because we're mixing fiscal and monetary policy together, we are 0:23:43.400 --> 0:23:46.600 not going to have such a consistent trend over the 0:23:46.680 --> 0:23:49.439 last fifteen years. If you did not realize that we 0:23:49.520 --> 0:23:53.159 live in a disinflationary world, if you didn't realize that 0:23:53.280 --> 0:23:57.560 boast labor and capital is losing pricing power, you probably 0:23:57.560 --> 0:24:00.520 no longer managing money. You're probably no longer with us. 0:24:00.600 --> 0:24:03.520 And so as we go forward, our say over the 0:24:03.560 --> 0:24:06.320 next ten to twenty years, this is going to be 0:24:06.359 --> 0:24:09.320 a much more complex world. Now. Part of the reason 0:24:09.480 --> 0:24:12.199 is complex. As I said earlier, we're mixing fiscal and 0:24:12.240 --> 0:24:16.560 monetary policy rather than just relying on trickle down economics 0:24:16.600 --> 0:24:21.000 asset prices and in effectively creating stro monetary policy disinflation. 0:24:21.320 --> 0:24:24.600 This time around, it's going to be some inflationary spikes, 0:24:24.720 --> 0:24:27.720 there is going to be some disinflation respikes, there will 0:24:27.760 --> 0:24:30.960 be sector rotations depending on what government wants to do 0:24:31.200 --> 0:24:34.000 and where the government wants to invest. So it's going 0:24:34.040 --> 0:24:36.520 to be, in my view, more complex world because of 0:24:36.560 --> 0:24:39.320 the policies. But there is another thing that is going on, 0:24:39.520 --> 0:24:42.399 and that is there is a technological change that is 0:24:42.440 --> 0:24:46.640 going on. Between mid nineties and two thousand, technologies were 0:24:46.640 --> 0:24:53.040 dominated by PCs, by corporations, by business applications, government applications. 0:24:53.080 --> 0:24:56.639 Around two thousands it started to change. Remember Amazon was 0:24:56.680 --> 0:24:59.520 a tiny company back into thousand and so between two 0:24:59.560 --> 0:25:03.200