Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Isn't so Joe. We
Speaker 1: just had a FED meeting where basically the Central Bank
Speaker 1: decided to not change anything, and the market reaction was,
Speaker 1: let's see, stocks went up, But probably the most interesting
Speaker 1: move that we saw was in the three year break even,
Speaker 1: and that actually went up I think eight basis points
Speaker 1: to the highest since two thousand eight. So you saw
Speaker 1: this immediate assumption in the market that we would get
Speaker 1: a bunch of inflation because the Feds on hold for longer,
Speaker 1: and meanwhile we have fiscal stimulus and the economy is
Speaker 1: recovering really strongly. Exactly right, I mean that is you know,
Speaker 1: it's sort of interesting. I was watching the press conference
Speaker 1: and there were so many questions about inflation, so many
Speaker 1: questions about when the FED is going to perhaps pull
Speaker 1: back one day on its asset purchases, the so called taper,
Speaker 1: and the answers were really the same. Like Sherman, Powell
Speaker 1: was incredibly consistent. By the way, I should mention recording
Speaker 1: this April. The meeting was yesterday, but the answers were
Speaker 1: incredibly consistent. He's like, look, I'm not gonna do anything
Speaker 1: until we get there, until we see the inflation, until
Speaker 1: we get the full employment everything, and so he's kind
Speaker 1: of like stop asking. But this dynamic in which everyone
Speaker 1: sees these pressures are building in the economy for an
Speaker 1: unknown length of time and a FED that's willing to
Speaker 1: not do anything until they actually like emerge in a
Speaker 1: sustained way, and so you get these expectations of greater
Speaker 1: reflationary forces at the minimum to come. Yeah. I find
Speaker 1: this a really interesting moment in markets, because, as you mentioned,
Speaker 1: the FED is pretty emphatic that it sees inflationary pressures
Speaker 1: as transitory. You know, these are things like commodities prices
Speaker 1: going up because of supply bottlenecks from COVID, and the
Speaker 1: central Bank expects that they're not gonna last that long.
Speaker 1: But meanwhile, the market seems to be positioning for something
Speaker 1: very different. At least, you know, if you look at
Speaker 1: the three year break even that I just mentioned, that's
Speaker 1: three years out, and certainly that's pricing in higher levels
Speaker 1: of inflations at the same time. It's really interesting that
Speaker 1: the market seems to be taking that stance, because of
Speaker 1: course we've had ten years of no inflation or deflation. Uh.
Speaker 1: You know, despite lots of monetary easing from the Central
Speaker 1: Bank and a relatively strong economy, we haven't seen price
Speaker 1: increases like you would have expected from some economic models
Speaker 1: like NEHRU or the Phillips curve. So really interesting moment
Speaker 1: in time, and today we're gonna be talking all about
Speaker 1: inflation with one of our favorite odd lots. Yes, we're
Speaker 1: going to bring back Victor Schwetz. He's a strategist over
Speaker 1: at McQuary. Victor, thanks for coming on again. Thank you
Speaker 1: very much, Tracy. So do you want to lay the
Speaker 1: scene for us When you look at the world right now,
Speaker 1: what inflationary pressures, if any do you see? Well, there
Speaker 1: is no question that if you goes through the next
Speaker 1: six and nine twelve months, whether you look at the
Speaker 1: United States or whether you look at other countries as well,
Speaker 1: inflation will pick up for exactly the same reason as
Speaker 1: what you've just outlined, base effect, recovering demand and supply
Speaker 1: side bottom lights. Whether you have a war or a pandemic,
Speaker 1: usually it has a demand and supply shock in some form.
Speaker 1: Supply disappears, companies become zombies, incapable of providing sub services.
Speaker 1: Some of the capacities just withdrawn investment goes down, and
Speaker 1: so when you start recording bring supplies never quite know
Speaker 1: how much capacity should they provide. I will demand go
Speaker 1: up ten percent, and so the result is it usually
Speaker 1: takes four or five or six quarters to what I
Speaker 1: would call normalized demand and supply. And I think what
Speaker 1: fair Reserve is saying is that this is a transitory
Speaker 1: period that we are not confident that inflation actually will
Speaker 1: be sustainable. And as we go back and go sort
Speaker 1: of forward to the end of twenty two or into
Speaker 1: twenty three, we're not that confident that there will be
Speaker 1: such a strong inflationary pulse um. And I find myself
Speaker 1: an unusual position, because I usually quite disagree with many
Speaker 1: things that FED does. I find myself an unusual position
Speaker 1: to actually agree that it is probably easy case that
Speaker 1: the precious transitory. And if you think of inflationary break
Speaker 1: even rate, the interesting thing is that five by five,
Speaker 1: for example, are lower than five. So clearly even the
Speaker 1: market itself assumes that there will be more inflation to
Speaker 1: begin with and then it comes off later on. So
Speaker 1: when you say the five by five, what what you
Speaker 1: mean is the market has expectations for where inflation will
Speaker 1: be over the next five years, but there's also expectations
Speaker 1: essentially over what five years out will look like five
Speaker 1: years out from now, kind of ten years out, I guess,
Speaker 1: And there's sort of view of this initial hump the
Speaker 1: inflationary pressure is now, but then the market is expecting something, um,
Speaker 1: a sort of a return to normalcy after that. Yeah,
Speaker 1: the market is not anticipating deflation. The market is not
Speaker 1: anticipating dec inflation, but it doesn't anticipate a runaway inflation
Speaker 1: where you're consistently getting three four or five. Because remember,
Speaker 1: if you just think of G five economies and if
Speaker 1: commodity complex doesn't move terribly far from where it is
Speaker 1: today but sort of going forward, then it's all mathematically
Speaker 1: correct that inflation will go to around three four, maybe
Speaker 1: even touch five. That compares to G five inflation Sat.
Speaker 1: February was only point seven. In March it was only
Speaker 1: like one and a half. So there's no question inflation
Speaker 1: will go up. What the market is saying is that
Speaker 1: they think, and I agree with that, that it will
Speaker 1: pull back. In fact, I will go beyond that and
Speaker 1: say that decent inflation is far more likely longer term
Speaker 1: than you know, two point two or to inflation. There
Speaker 1: are people out there, um, and Larry Summer's sort of
Speaker 1: springs to mind here, but there are people out there
Speaker 1: who are describing, you know, fiscal stimulus combined with easy
Speaker 1: monetary policy as uh, irresponsible, I think is the way
Speaker 1: Summers put it, but something that will ignite big price
Speaker 1: rises that the Fed doesn't appreciate. Obviously you don't agree
Speaker 1: with that argument. But what do you think it is
Speaker 1: that they're getting wrong here? I see lots of people,
Speaker 1: for instance, reaching to the analogy of the nineteen seventies
Speaker 1: or the nineteen sixties as an era of high inflation. Yeah,
Speaker 1: they do, uh, And there's a lot of investors and
Speaker 1: commentators who seem to feel that we probably somewhere around
Speaker 1: late sixties, and yes, it will take a bit of time,
Speaker 1: but ultimately we are going to an anchor, so to speak,
Speaker 1: inflationary expectations, and inflation will be much much stronger than
Speaker 1: most people expect right now. I completely disagree with that,
Speaker 1: and primarily I disagree with that that whether it's a
Speaker 1: Congressional Budget Office or whether it's Larry Summers, they're all
Speaker 1: using very much an industrial age framework. In other words,
Speaker 1: the era where capital was capital, fixed assets where fixed assets,
Speaker 1: labor was labor. None of those things aren't true anymore.
Speaker 1: So if you think of for example, US private sector,
Speaker 1: US private sector GDP is now six intangible assets. If
Speaker 1: you look at Europe, depending on the country choose, it's
Speaker 1: twenty five to intangibles. Even in China it's anywhere from fift.
Speaker 1: Why is it important, Well, intangibles don't have the same
Speaker 1: capacity constraints, the incredibly fluid and they spill over from
Speaker 1: one industry to another good synergistic benefits. So it's the
Speaker 1: first point to remember. If we're not actually building roads,
Speaker 1: machinery factories you know, are railways and the rest of it,
Speaker 1: it's a very different investment we're making. And if you
Speaker 1: think of Biden's package infrastructure package, Republicans are right to
Speaker 1: say that only about is real infrastructure. But that's the
Speaker 1: whole point that we should not be investing in real infrastructure.
Speaker 1: We should be investing in the future. So that's the
Speaker 1: first area, which is capital and where do we invest
Speaker 1: and how it behaves. The other area is labor. Remember
Speaker 1: everybody is still relying on Bureau of Labor statistics sort
Speaker 1: of classifications. Are your plumber, electrician? Are you are your
Speaker 1: business professional? Are your full time? Are your part time?
Speaker 1: With In reality, labor is really stretched in many areas,
Speaker 1: like for example, you're recording now this conversation. In the past,
Speaker 1: somebody else would have been recording, So you're stretched. You're
Speaker 1: doing many jobs in the service oriented industry, employees are
Speaker 1: now either non conventional or gig economy, and so labor
Speaker 1: doesn't function the same way as it has done in
Speaker 1: industrial age. And so the way basically describe it is
Speaker 1: capacity constraints incredibly hard to compute even in the good days.
Speaker 1: Today it's almost impossible. In fact, I would argue capacity
Speaker 1: constraints just melt away in front of you every day.
Speaker 1: They're just going away high and higher. And to me,
Speaker 1: that explains why Philip's curve did not work and hasn't
Speaker 1: worked for several decades. And by the way, it even
Speaker 1: predates China, it didn't even work in the eighties forgetting
Speaker 1: the last twenty years. It also explains why commodity prices
Speaker 1: could go up but battery prices, for example, go down.
Speaker 1: It ex planes how we can ignite shell Guest revolution.
Speaker 1: Remember Show Guest was invented or for the first TIME'M
Speaker 1: tried in nineteen but in three we couldn't respond with
Speaker 1: shell guests, but today we can. So to me, it's technology, financialization,
Speaker 1: changes in the functioning of capital fixed us, it's intangible
Speaker 1: as it's labor. All of that implies to me that
Speaker 1: I don't think we're really facing capacity constraints at all.
Speaker 1: You make a very compelling argument that various structural factors
Speaker 1: in the economy were unlikely to see her repeat of
Speaker 1: the nineteen seventies, that these sort of general conditions that
Speaker 1: we experienced, or at least the general inflation conditions that
Speaker 1: we experienced pre crisis, will probably be more the norm
Speaker 1: after the short term bottlenecks. However, and you know, you
Speaker 1: mentioned Biden again last night, hearing the big sort of
Speaker 1: Biden speech laying out its infrastructure plan. And yet, however,
Speaker 1: we do seem to be having this big political shift,
Speaker 1: and the big political shift that we keep talking about
Speaker 1: on the podcast there. It's multifaceted, but the big thing
Speaker 1: for us is the shift from reliance primarily on monetary
Speaker 1: policy as the main driver of macro stabilization to fiscal policy.
Speaker 1: And that feels like a pretty big deal. So setting
Speaker 1: aside our current commodity constraints and bottlenecks, this new thinking
Speaker 1: and this sort of like new willingness of democratic small
Speaker 1: d democratic leaders to spend more, at least in the US,
Speaker 1: perhaps in Europe and elsewhere. That feels new. How does
Speaker 1: that play into the mix and thinking about what the
Speaker 1: post crisis economy is going to look like? For you, absolutely, Joe,
Speaker 1: you you, You're totally right. It is a shift. And
Speaker 1: coronavirus accelerated that shift. By the way, that shift was
Speaker 1: going on even before coronavirus, almost nobody was exercising much
Speaker 1: restraint on fiscal spending even prior to coronavirus. But COVID
Speaker 1: accelerated this process quite quite dramatically, and people accepted and
Speaker 1: people in fact increasingly demand the spending. And so from
Speaker 1: a political perspective, it gets easier and easier to ignore
Speaker 1: sort of the guidelines or constraints of fiscal spending or
Speaker 1: financing or anything else. And so that is a major issue.
Speaker 1: Instead of just relying on the monetary policy, you're now
Speaker 1: relying on the fiscal policy. Was monetary policy in more
Speaker 1: supporting rule? However, a couple of things to highlight Number one,
Speaker 1: where do we invest money? Now, If you think of
Speaker 1: COVID nineteen shacks, for example, according to Federal Reserve, only
Speaker 1: of the money was spent. The other seventy or percent
Speaker 1: went essentially either into financial speculation you know, bitcoins, equities,
Speaker 1: real estate alternatively went into state of the bankruptcy is
Speaker 1: to repay the debt and so and so what you
Speaker 1: have seen is a relatively low for called multiplier. Now,
Speaker 1: infrastructure theoretically has a much higher, larger multiplier. But again
Speaker 1: I've just said a second ago. Only of what Widen
Speaker 1: wants to do is real infrastructure. If you invest in
Speaker 1: green energy, alternative energy and transportation platforms, if you invest
Speaker 1: in R and D fundamental research, this is all very
Speaker 1: very good stuff and actually longer term raises your capacity
Speaker 1: are capabilities, But it does not have the same fiscal
Speaker 1: multiplier as building a road or building a dam. If
Speaker 1: you think of human resources are spending, that's even lower
Speaker 1: multiplier and much lower really time, even though it's totally
Speaker 1: appropriate and it's absolutely the right thing to do. So.
Speaker 1: So the first thing to highlight is that everything we're
Speaker 1: doing today on the fiscal side is either exceptional circumstances.
Speaker 1: We justified because it's like a war. You know, we're
Speaker 1: fighting a war. That's why we're doing it. Alternatively, we're
Speaker 1: doing something for very distant future, which in turn is disinflationary.
Speaker 1: If you invest in oil, that's inflationary. If you invest
Speaker 1: in lithium, that's disinflationary. And so the way I look
Speaker 1: at it is we are not investing enough in the
Speaker 1: areas that actually would generate a longer term inflationary outcomes.
Speaker 1: In fact, what we're doing with strengthening the case with
Speaker 1: disinflation on a longer term basis the other thing very
Speaker 1: quickly to highlight where all the report not that long
Speaker 1: ago and sort of known a zeguist or the spirit
Speaker 1: of the age, and basically what we argue is a
Speaker 1: fiscal policies are very, very very hard, and the reason
Speaker 1: they're hard is that people have a schizophrenic approach to
Speaker 1: monitory versus fiscal policies. Monetary policy is supposed to be technocratic.
Speaker 1: Over the last eight or nine years, have become completely free.
Speaker 1: There is virtually no adult supervision at all. Central banks
Speaker 1: can spend trillions of dollars and almost nobody cares. And
Speaker 1: the reason for that there is a perception that monetary
Speaker 1: policies atmocratic and it doesn't generate debt. Now that is
Speaker 1: not true, but that's what people believe. Fiscal policy, on
Speaker 1: the other hand, people look at it very very differently.
Speaker 1: They basically view a fiscal policy as inefficient, unfair, and
Speaker 1: generating debt that needs to be repaid. So, once again,
Speaker 1: none of it is true, but that's what people believe.
Speaker 1: And so the result is in almost every country. China
Speaker 1: clearly is an exception, but in almost every country, in
Speaker 1: order to engage in physical spending, you have to have
Speaker 1: community support, You have to go to legislature, whether it's
Speaker 1: a parliament or congress, to get it approved. You need
Speaker 1: to itemize it. People need to know exactly where you
Speaker 1: spend every dime. Nobody else Jeremy Pal every time he spends.
Speaker 1: But on the fiscal side, you need to explain where
Speaker 1: you're going to spend the money, and it usually is
Speaker 1: time limited. It's sunsets, whereas monetary policy these days have
Speaker 1: a completely open ended there is no sunset. And so
Speaker 1: the problem we struck shuring fiscal policy predominantly as an
Speaker 1: exceptional circumstance is that as soon as the economy is recovered,
Speaker 1: and I see the United States will be recovering very
Speaker 1: strongly in the first, second third, and into the fourth quarter.
Speaker 1: Even as economy is recovered almost inevitably within three to
Speaker 1: six months. That will be debate. We must put our
Speaker 1: house in order. Radical left is destroying America. There will
Speaker 1: be discussion. We are bequesting to our grandchildren trillions of
Speaker 1: dollars of debt. How are we going to finance it?
Speaker 1: And and that's sort of a discussion. Would imply that
Speaker 1: the line of least resistance right now, the least resistance
Speaker 1: is for politicians to sunset fiscal policy. Economies are recovering,
Speaker 1: everything is doing is doing fine. Let sunset it now.
Speaker 1: Nobody is going to do another grief. Nobody is going
Speaker 1: to try to do austerity. But we're not talking about austerity.
Speaker 1: We are talking about the level of fiscal pulse that
Speaker 1: we can actually maintain. And I think it's actually going
Speaker 1: to go down before it goes up again, and then
Speaker 1: it will go down again before it goes up. It
Speaker 1: will be stopping, go, stop and go. And the reason
Speaker 1: why that is important permanent policies have a very different
Speaker 1: impact to temporary ones. There are people out there who
Speaker 1: say that the experience of the pandemic has changed everything.
Speaker 1: I think Joe and I have had quite a few
Speaker 1: episodes by now about how the pandemic has changed everything,
Speaker 1: but that there's more acceptance of fiscal stimulus. MMT has
Speaker 1: been making some in roads among policymakers, so people aren't
Speaker 1: as worked up around the deficit as they once were.
Speaker 1: And one of the arguments that I've seen about why
Speaker 1: to actually be concerned about inflation is that even though
Speaker 1: the current fiscal stimulus that's been announced might not be
Speaker 1: enough to generate substantial price increases, it's sort of opened
Speaker 1: this Pandora's box. Well Pandora's box isn't a good term
Speaker 1: for it, but you know, it's led to the shift
Speaker 1: around physical stimulus where we don't know how popular it's
Speaker 1: going to be further on, and it could become very
Speaker 1: politically popular. People like to have stimulus checks mailed to them,
Speaker 1: people like better infrastructure things like that, so you could
Speaker 1: get repeated fiscal stimulus over and over. Um, you clearly
Speaker 1: don't agree with that, but I'd love to know more
Speaker 1: of your thinking around this. Well, I I actually do
Speaker 1: agree that there will be a regular stimulus list That's
Speaker 1: why I've argued that nobody will be running primary surplus assailable.
Speaker 1: Nobody is going to do austerity, nobody is going to
Speaker 1: try to do another degree sup Portugal or something like that.
Speaker 1: That's all gone forever. All we arguing is, and we
Speaker 1: create a consistent long term physical strategy that doesn't rely
Speaker 1: on revisitation of COVID, doesn't rely on revisitational wars on
Speaker 1: major financial dislocation, can we reach the stage that we
Speaker 1: also will be managing our investment without reliance on the
Speaker 1: bond market um and directly funded out of central banks
Speaker 1: as we go forward. And so my argument was that
Speaker 1: that will be the ultimate destination, but it's probably at
Speaker 1: least five teen years out. And the reason for why
Speaker 1: it is five teen years out because clearly in every
Speaker 1: country you could think of, there is a degree of polarization,
Speaker 1: so in other words, not a degree, there is a
Speaker 1: very high level of polarization. There is no consensus agreement.
Speaker 1: Anybody who is younger than about thirty five basically agrees
Speaker 1: with a strategy. Anybody is sort of all much older
Speaker 1: than that does not agree. And you can mathematically calculate
Speaker 1: at what stage somebody like AOC is bound to become
Speaker 1: a president of the United States. If you think of
Speaker 1: the younger generation, they were roughly about twenty of the
Speaker 1: Boks cast in the latest elections. If you project forward
Speaker 1: somewhere between kind of two, that younger cohort is going
Speaker 1: to be the dominant force. And so what we need
Speaker 1: to do is have a lot of a lot of problems,
Speaker 1: a lot of dislocations over the next five to ten years.
Speaker 1: Gradually demographics will call us around it, and then you
Speaker 1: have a different set of policies. Think of the monetary policy.
Speaker 1: When Japan introduced in earlier two thousand's, people were questioning
Speaker 1: whether that's disaster, complete disaster. Then there were you introduced
Speaker 1: globally around two thousand and eight. Between two thousand and
Speaker 1: eight and two thousand and twelve, the first question every
Speaker 1: fun manager would ask you, when do we normalize monetary policy?
Speaker 1: When I used to tell them we will never normalize
Speaker 1: monetary policy, people didn't expect that. He didn't ex apped.
Speaker 1: It took people ten years until they finally recognize that
Speaker 1: monetary policy can never be normalized. Irrespected what Jaron Powell
Speaker 1: thinks or what he might or might not do. If
Speaker 1: you think of fiscal policy today. I view it in
Speaker 1: a very similar light to two thousand eight to thousand
Speaker 1: twelve monetary policy. One of the first questions people ask, yes, fective,
Speaker 1: we understand that we will be spending more money, but
Speaker 1: how are we going to pay for it? What is
Speaker 1: the endgame of what we are what we're trying to do. Now,
Speaker 1: when you tell them we'll never pay any of that back,
Speaker 1: it doesn't really matter. People don't accept it, and so
Speaker 1: what you need, you need time. People don't move in
Speaker 1: revolutionary steps. So what we have today is acceptance at
Speaker 1: fiscal policy play a much more important role. What we
Speaker 1: don't have is an acceptance that that sort of expansionary
Speaker 1: state policy is permanent and it's never going to change,
Speaker 1: and that that expansionary policy will be funded through central bands.
Speaker 1: So the way to look at mixing fiscal and monetary
Speaker 1: policy together. By doing more fiscal we're reducing the speed
Speaker 1: of disinflation rather than creating a great deal of sort
Speaker 1: of sustainable inflation. So what does it mean for you know, investors?
Speaker 1: Like I was, there are so many charts that if
Speaker 1: you look at I mean, there are so many charts
Speaker 1: that are shooting straight up obviously at least as of
Speaker 1: as of now. But not only that, there's so many
Speaker 1: church that are shooting straight up that are clearly reversed
Speaker 1: a trend that had been in place pre crisis. So
Speaker 1: the most obvious example is like you know, e M stocks,
Speaker 1: they had generally been and I think like about a
Speaker 1: two year under performance run at least since early going
Speaker 1: into the crisis. Now a straight lineup, look at like
Speaker 1: a commodity some of the commodity and disseries very uh
Speaker 1: downward trend. Now straight up, is there a new this
Speaker 1: new regime that we're talking about, the new monetary policy,
Speaker 1: fiscal mix and so forth. Does it change how mark
Speaker 1: to behave on a sustainable way or do we just
Speaker 1: sort of go back to this like sixty forty goldilocks
Speaker 1: world in a year two where you buy some text
Speaker 1: docs and you buy some bonds and there's a disinflation
Speaker 1: and uh yeah, you have a really easy now, Joe,
Speaker 1: you you, you're absolutely right. There is a regime change
Speaker 1: that is occurred. If you think of a lot sort
Speaker 1: of sixties and seventies, there was a significant regime change
Speaker 1: into late seventies early eighties. There was another regime change
Speaker 1: occurring in late nineties, and so they around those periods
Speaker 1: where there is a regime change. And so going forward,
Speaker 1: because we're mixing fiscal and monetary policy together, we are
Speaker 1: not going to have such a consistent trend over the
Speaker 1: last fifteen years. If you did not realize that we
Speaker 1: live in a disinflationary world, if you didn't realize that
Speaker 1: boast labor and capital is losing pricing power, you probably
Speaker 1: no longer managing money. You're probably no longer with us.
Speaker 1: And so as we go forward, our say over the
Speaker 1: next ten to twenty years, this is going to be
Speaker 1: a much more complex world. Now. Part of the reason
Speaker 1: is complex. As I said earlier, we're mixing fiscal and
Speaker 1: monetary policy rather than just relying on trickle down economics
Speaker 1: asset prices and in effectively creating stro monetary policy disinflation.
Speaker 1: This time around, it's going to be some inflationary spikes,
Speaker 1: there is going to be some disinflation respikes, there will
Speaker 1: be sector rotations depending on what government wants to do
Speaker 1: and where the government wants to invest. So it's going
Speaker 1: to be, in my view, more complex world because of
Speaker 1: the policies. But there is another thing that is going on,
Speaker 1: and that is there is a technological change that is
Speaker 1: going on. Between mid nineties and two thousand, technologies were
Speaker 1: dominated by PCs, by corporations, by business applications, government applications.
Speaker 1: Around two thousands it started to change. Remember Amazon was
Speaker 1: a tiny company back into thousand and so between two
Speaker 1: sus then call it twenty eight twenty, it was a
Speaker 1: world dominated. But what I describe as a digit manipulators,
Speaker 1: they're basically company manipulating digits of information, whether it's a
Speaker 1: short social media or downloading videos or trading stock exchange
Speaker 1: of getting information or whatever that might be. Now those
Speaker 1: companies become incredibly powerful. Now what we're going to do
Speaker 1: for the next twenty years is starting to much more
Speaker 1: manipulate atoms and physical matter. So, in other words, this
Speaker 1: is the age of manufacturing logistics, different alternative energy platforms,
Speaker 1: transportation platforms, green energy. This is the period of robotics, automation,
Speaker 1: This is a period of infotech and by tech. Now
Speaker 1: this new era will be much more capital intensive than
Speaker 1: the previous twenty years. But as I said early on
Speaker 1: about Biden, where you spend the money is different. So
Speaker 1: there is no long term cycle for oil. There is
Speaker 1: no long term cycle for coal or iron, or or
Speaker 1: or steel, because we won't be building a lot of
Speaker 1: factories or a lot of roads, a lot of machinery,
Speaker 1: but there will be a massive continuing upscaling of some commodities. So,
Speaker 1: for example, if you treat semiconductors as a commodity, which
Speaker 1: I do, I think they're going to have a long run. Similarly,
Speaker 1: if you think of copper, nickel, cobbalt, lithium, silver, so
Speaker 1: there will be part of the commodity cycle which will
Speaker 1: be in the bull run. The other single happen is
Speaker 1: that you know, the likes of Amazon on Facebook are
Speaker 1: not very good at physical stuff, and so if you
Speaker 1: want physicality, a lot of capital goods companies actually what
Speaker 1: comes through the woodwork and instead of being value could
Speaker 1: actually become semantics. You know your mid subitio electrics, your Honeywells,
Speaker 1: your Rockwells, your potentially your geo, your semans, those sorts
Speaker 1: of companies potentially could become more critical. There's also a
Speaker 1: new third generation tech companies coming up. You know your tesla's,
Speaker 1: your needs, your capitals, your Panukias covers and where there
Speaker 1: is robotics, automation, new energy. There's a lot of startups.
Speaker 1: So one of the interesting things that is occurring not
Speaker 1: only the policy mix is changing, but the winners among
Speaker 1: thematics are also starting to change. The digit manipulators are
Speaker 1: still highly profitable, and they will continue to be highly profitable,
Speaker 1: but very few companies ever make a transition from one
Speaker 1: world into the next. Some will, but a lot of
Speaker 1: them will not. So the question is what will happen
Speaker 1: to those digit manipulators. Are they becoming a highly competitive utility,
Speaker 1: regulated platforms and eventually with law returns, so they would
Speaker 1: need to do things like share buy back, self liquidations,
Speaker 1: dividends and the rest of it in order to also
Speaker 1: to drive value. So we have two things happening in
Speaker 1: my view. Number one, a mix of fiscal and monitor
Speaker 1: policy is different, creating cross currents. And number two, what
Speaker 1: you have is a technological backdrop is also shifting quite
Speaker 1: considerably contenuous time. The winners are not going be the
Speaker 1: same companies as what they were over the last twenty years.
Speaker 1: So what it basically means, instead of saying, well, okay,
Speaker 1: it's more capital intensive world, government spends more, I should
Speaker 1: buy commodity, materials, infrastructure, companies, banks, and financials to me
Speaker 1: that's wrong. Banks have no future. I don't see along
Speaker 1: cycle for oil or coal or many other basic commodities.
Speaker 1: I want to go back to something that you alluded
Speaker 1: to earlier, or you said, which is that you don't
Speaker 1: normally agree with the FED, but on this one idea
Speaker 1: around transitory inflation, you think they have it right. Why
Speaker 1: is that? Because you know, for years we've heard the
Speaker 1: FED talk about the natural rate of unemployment and things
Speaker 1: like the Phillips curve. It seems odd to have the
Speaker 1: FED suddenly grasped like a big transition in economic ideas.
Speaker 1: So why do you think that's happened in recent years. Well,
Speaker 1: it sort of reminds me when I was a fund manager.
Speaker 1: If you keep losing money consistently, eventually it changes your mind.
Speaker 1: But you have to remember, for economics as a profession,
Speaker 1: any science progresses only one funeral at a time, and
Speaker 1: so for economics as a science or or or art
Speaker 1: or whatever that is, to change requires considerable considerable change
Speaker 1: of basic tenants, basic fundamentals. Now, that will happen, but
Speaker 1: that's probably at least a decade away. So economics as
Speaker 1: a profession is still largely functioning in an industrial age.
Speaker 1: That has no relevance almost to what we have today.
Speaker 1: But the practitioners, people who actually at the cold face
Speaker 1: and they need to face their own losses or their
Speaker 1: own bad decisions, they do change their mind. And I
Speaker 1: do think that what Federal Reserve has basically done over
Speaker 1: the last twelve months or so, they said, you know
Speaker 1: what flat philips basically means, there is no relationship. Basically
Speaker 1: there is no such thing as an inflationary neutral level
Speaker 1: of unemployment or interest rates. Now, they never actually spelled
Speaker 1: it out as openly as what I have said right now,
Speaker 1: but that's basically the implication. And to me, that's a
Speaker 1: right approach. They're moving in the right direction. But remember
Speaker 1: they will come under pressure in the next three four
Speaker 1: months as inflation rates go up. Investors will test them
Speaker 1: and they screen. The things they're looking at is still
Speaker 1: very conventional. So for example, that screen has no Bitcoin,
Speaker 1: has not dodge Point, has no non fundable tokens, has
Speaker 1: no specs, has no paritage rates, has no private act.
Speaker 1: It doesn't have any of that stuff. It has like
Speaker 1: general financial conditions of a night spread that spread to
Speaker 1: your bank and commercial risk, your volatility rate, your spreads,
Speaker 1: and the high your market things like that, when it's
Speaker 1: almost guaranteed that the next crisis will have nothing to
Speaker 1: do with mortgages, will have nothing to do with banks,
Speaker 1: and we'll have nothing to do with nazdak. But essentially
Speaker 1: they're still looking at it as if we're facing an
Speaker 1: ASTEC debacle or a housing or mortgage debacle. And so
Speaker 1: the interesting saying is that they've accepted the premise. I
Speaker 1: think that the economies have changed and the past rules
Speaker 1: no longer apply, but their screen, in my view, has
Speaker 1: not yet changed. And so one of the things I
Speaker 1: keep asking people, is it more dangerous if those digital
Speaker 1: assets go up another hundred hundred percent? Or is it
Speaker 1: more dangerous if we go down from from the current levels?
Speaker 1: And clearly going up another will be far more dangerous,
Speaker 1: because what is happening right now in that world is
Speaker 1: becoming incredibly interconnected and increasingly leveraged. It's a little bit
Speaker 1: like mortgage marketing or seven. There was nothing horribly wrong
Speaker 1: with individual mortgages. It's how you packaged it and collacterized
Speaker 1: and leveraged it that created the GFC. And what you
Speaker 1: see today is exactly that people who buying bitcoin also
Speaker 1: buying Tesla Tesla buying bitcoin. People who buy Dodge Dodge
Speaker 1: coin will buy n f T. Some of the exchanges
Speaker 1: now allow you three fine up to a hundred times
Speaker 1: leverage on some of those transactions. The whole universe is
Speaker 1: now at least three or four trillion dollars and is growing.
Speaker 1: And so the way basically describe it, you know, if
Speaker 1: you lose a couple of billion dollars, it's like a
Speaker 1: bad day in the office, But if you lose a trillion,
Speaker 1: that's systemic. And so the way I look at central
Speaker 1: banks and fat I think they've got over the hump
Speaker 1: of trying to separate themselves from a basic concept like
Speaker 1: Philip's curve or non inflation rate, but they have not
Speaker 1: yet transited into altering their screen to look for where
Speaker 1: the trouble actually will lie. So where is it gonna be? What? Wait,
Speaker 1: what your vision of the next crisis? Well, that's what
Speaker 1: I said. Those digital assets will be will be the
Speaker 1: next crisis. And the interesting thing to me, of course,
Speaker 1: is all of those people buying n f T s,
Speaker 1: are buying bitcoin or anything else, all those specs that
Speaker 1: are going down the down the triple C death umbrella.
Speaker 1: Throw them, throw it down in quality. All of those
Speaker 1: people are declaring independence from the state in some form,
Speaker 1: but it will be the state that will need to
Speaker 1: bail them out. And that will be the r N
Speaker 1: of trying to become independent from the state when you
Speaker 1: actually will be relying on the state to help you,
Speaker 1: to bail you out and to avoid systemic outcomes. Why
Speaker 1: will it be the state? Like what is the linkage
Speaker 1: between um something like bitcoin or n f t s
Speaker 1: and you know, a regulated bank and the traditional financial system. Well,
Speaker 1: it is a butterfly impact because we are in other words,
Speaker 1: that the butterfly, you know, flapping the wings suddenly creates
Speaker 1: a problem. That's what it is. We're highly interconnected, We're
Speaker 1: highly leverage. I mean, the whole global economy, if you're
Speaker 1: single financialization is a police leverage five times. One could
Speaker 1: argue to look at the growth basis maybe eight times,
Speaker 1: eight to ten times. So we incredibly leverage, were incredibly financialized.
Speaker 1: We increasingly instious. In other words, one group of assets
Speaker 1: buyas into other group of assets. And that's the inevitable
Speaker 1: outcome of the monetary policies that we've pursued for the
Speaker 1: last thirty or forty years. It basically forces people to
Speaker 1: go down and down the line, and and so and so.
Speaker 1: What happens is that eventually central banks can't tolerate any
Speaker 1: molatility at ALLLL. They can't tolerate any price discovery because
Speaker 1: you never know, you know, some disaster in a digital
Speaker 1: universe might bring down mortgages into Jikistan, which in turn
Speaker 1: will impact mortgages in Los Angeles or something like that.
Speaker 1: You just don't know. You have to remember that if
Speaker 1: you sing of triple cy debt right now, which is
Speaker 1: basically bankrupt company is they're trading at almost the lowest
Speaker 1: spreads ever. If you think of average HIGHER'L spreads, it's
Speaker 1: only three again, one of the lowest ever. Think what
Speaker 1: happened a couple of months ago when the movie Index,
Speaker 1: the Bold market Index pretty much in two days, went
Speaker 1: from forty seven to seventy three. In the same couple
Speaker 1: of days, VIX went from fifteen to thirty. So you
Speaker 1: can see how significant dislocation in assets, which are becoming
Speaker 1: increasingly integrate into various sesset classes. A dislocation there could
Speaker 1: just drive suddenly the high yield spreads, and then you
Speaker 1: find a lot of companies relying on the triple see that,
Speaker 1: for example, will be unable to service or we'll have
Speaker 1: to go bankrupt. So that's what it is. It's interconnectedness.
Speaker 1: So long as those digital assets are the periphery, So
Speaker 1: long as just a couple of people who are really
Speaker 1: interested in that doing it, everybody else is completely segmented
Speaker 1: and separated, then that's not a problem. But that is
Speaker 1: not the way to each the lasses behave. Look at
Speaker 1: even n f T. Look how much have gone up
Speaker 1: just in a space of bull months. What I'm saying is,
Speaker 1: if you do the same thing for the next twelve
Speaker 1: months and another twel months, eventually reached the state that
Speaker 1: it will become systemic. Victor, fantastic having you on as always. Uh,
Speaker 1: And we'll have to get you on in maybe in
Speaker 1: another year to see uh whether or not crypto has
Speaker 1: become further embedded with the global economy and financial system. Okay,
Speaker 1: we would loved it. Okay, Victor Schwetz from McCary take
Speaker 1: care of Victor, Thank you so much. Okay, cheers, So Joe.
Speaker 1: One of the things I love about talking to Victor
Speaker 1: is you you start out talking about inflation and commodity
Speaker 1: prices and market expect stations and then somehow you get
Speaker 1: to Bitcoin is going to lead to a state sponsored
Speaker 1: bailout at the end, and doge coin and coin. Yeah.
Speaker 1: I don't disagree with him, by the way, but like,
Speaker 1: I just love the transition. It feels like the great
Speaker 1: doge coin crisis of is just like something that has
Speaker 1: to happen one day, right, Like if you just think
Speaker 1: about the arc of history, it just feels like that
Speaker 1: that has to happen. Yeah, Victor, I do really like
Speaker 1: the way he thinks at this point about sort of
Speaker 1: fighting the last war. I also think it's just interesting
Speaker 1: because I do think that it is extremely tempting to think, like, Okay,
Speaker 1: this is the new era post grade financial crisis, this
Speaker 1: is the new era of inflation pressures or labor market
Speaker 1: tightening tightening, or the change in direction on rates or whatever,
Speaker 1: and there is some stuff happening. But I think he
Speaker 1: provides some very like sort of um, a good temper
Speaker 1: to all that, the enthusiasm that you know, still the
Speaker 1: most likely outcome is the burst now, but then a
Speaker 1: a reversion to a sort of like an economy that
Speaker 1: has a lot of the same characteristics as the pre
Speaker 1: crisis economy. Did, Yeah, exactly. Shall we leave it there? Yeah,
Speaker 1: let's just leave it there. Okay, all right, This has
Speaker 1: been another episode of the All Thoughts Podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe wisn't thought you could follow me on Twitter
Speaker 1: at the Stalwart. Follow our producer on Twitter, Laura Carlson.
Speaker 1: She's at Laura M. Carlson. Follow the Bloomberg head of podcast,
Speaker 1: Francesca Levie at Francesco Today, and check out all of
Speaker 1: our podcasts at Bloomberg under the handle at podcasts. Thanks
Speaker 1: for listening to