Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe. Joe. I'm thinking back
Speaker 1: to the spring of the depths, of the COVID nineteen
Speaker 1: pandemic and the big market sell off. I don't like
Speaker 1: thinking that. I mean, it was a terrible time. It
Speaker 1: was about why why are you? Why are you reminding
Speaker 1: us of that? Well, I remember we spoke to one
Speaker 1: particular guest in I think it was May of and
Speaker 1: he came on and basically said that we're going to
Speaker 1: see a bad economic recovery and we're going to see
Speaker 1: inflation as a result of what was happening. And I
Speaker 1: think at the time both you and I were a
Speaker 1: little a little skeptical. You know, at that particular moment,
Speaker 1: everyone was talking about deflation and the possibility of a
Speaker 1: prolonged depression. Really, yeah, you're totally right. And then also
Speaker 1: by like sort of late or even like summer, optimism
Speaker 1: started to grow. Oh yeah, we're gonna have this. We're
Speaker 1: gonna come out of this with the boom that we
Speaker 1: got the policy just right, that we're going to have all.
Speaker 1: You know, we avoided the mistakes of two thousand that's right,
Speaker 1: that's right, and the stock market was surging, and I
Speaker 1: think there was just a lot of optimism even outside
Speaker 1: the stock market that like, we're going to be on
Speaker 1: this new superior trajectory post pandemic. Yeah. And of course,
Speaker 1: now fast forward about two years and uh, we're talking
Speaker 1: about the pain of higher interest rates as the Federal
Speaker 1: Reserve tries to tamp down on inflation that is that
Speaker 1: it's highest. And I think four decades people are talking
Speaker 1: about stress in the financial market, the potential for something
Speaker 1: to break as these rate increases go through, and we're
Speaker 1: already seeing some stuff internationally start to break. So I
Speaker 1: think it's a perfect time to catch up with that
Speaker 1: original guest who did get a lot right in May
Speaker 1: when you know there was a lot of uncertainty. Yeah,
Speaker 1: you know something you mentioned the fears of that something
Speaker 1: is going to break, and I'm thinking, you know, our
Speaker 1: regular guest John Turk has We's written about this and others,
Speaker 1: this idea that what if, you know, the real economy,
Speaker 1: employment is holding up okay, but the financial system starts
Speaker 1: to creak and that something breaks in the financial system,
Speaker 1: creating this real tension for central banks that still want
Speaker 1: to fight inflation. It's a pretty confusing time, it is,
Speaker 1: So why don't we bring in Neurial Rubini. Of course
Speaker 1: we're gonna let him do a victory lap on the show,
Speaker 1: but we also want to talk to him about the
Speaker 1: risks that he's seeing now because he has a new
Speaker 1: book out. It's uh, it's coming out on October eighteenth.
Speaker 1: It's called Mega Threats tend dangerous trends that imperil our
Speaker 1: future and how to survive them. So hopefully the perfect
Speaker 1: person to be speaking to right now, Uh, Neurio Rubini,
Speaker 1: thank you so much for joining us. Great thing with you.
Speaker 1: That's a pleasure to do it again. So we should
Speaker 1: we let you have that victory lap. So, you know,
Speaker 1: how did what did you see in early that you
Speaker 1: think other people, notably perhaps certain policymakers might have missed?
Speaker 1: Well at that time, the entire talk was about the
Speaker 1: risk of not just an economic contraction but also of
Speaker 1: deflation because it was a shock to aggregate demand and
Speaker 1: a credit crunch. The thing what I saw that other
Speaker 1: people saw as well. You know, early on people like
Speaker 1: Larry Summers, Mohammed Lay and others talk that the amount
Speaker 1: of the stimulus monitor and fiscal will be excessive. Of
Speaker 1: course we didn't do enough on the physical side in
Speaker 1: two thousand and eight, but between the Trump and Biden
Speaker 1: with about five three do dollars of physical stimuls that
Speaker 1: is something like about d DP that was excessive. And
Speaker 1: of course the fact that went back to zero credit easing,
Speaker 1: quantity of easing back stopping money market, commercial paper, hill,
Speaker 1: high grade banks, don't banks, corporate households, you name it,
Speaker 1: everybody under the sun. I think the difference between me
Speaker 1: and people like Larry was that they were stressing that
Speaker 1: will be inflation because of a aggregate amendment shock, too
Speaker 1: much stimulus, and I agreed on that that half of
Speaker 1: the problem was bad policies to lose monetary, physical and
Speaker 1: credit ezing. But from early on I also realized that
Speaker 1: this will be a negative aggregate supply shock, the disruption
Speaker 1: that came to global supply chains. They shutdown of economic
Speaker 1: activity from services to initially manufacturing, the reduction in the
Speaker 1: labor supply, and then we ended up with a great
Speaker 1: resignation and those initial negative supply shock was amplified of
Speaker 1: course this year by the Russian invasion of Ukraine. This
Speaker 1: brutal invasion is led to a spike in oil and
Speaker 1: natural gas prices, food fertilizer, industrial methods. That's another negative
Speaker 1: supply shock. And the third one is the continue sation
Speaker 1: of the zero tolerance policy of China towards COVID. That's
Speaker 1: creating further bottlenecks. So most people were saying we're gonna
Speaker 1: get inflation because of excessive overeating, because of the bad
Speaker 1: policy and excessive stimulus. I think my contribution to that
Speaker 1: discussion was to emphasize that the aggregate supply shops and
Speaker 1: old enough in a grayer and I remember the two
Speaker 1: all shocks of seventy three and seventy nine that led
Speaker 1: not only to inflation but also to star inflation. So
Speaker 1: most people were worried about inflation and overeating and excessive growth.
Speaker 1: I started to worry about instead not only inflation but
Speaker 1: also recession because of the negative supply shops. So that
Speaker 1: was maybe the new twist that I gave to that debate.
Speaker 1: So looking at the situation today in October two thousand
Speaker 1: and twenty two, we still have obviously extremely elevated inflation,
Speaker 1: really no signs that it's turning the corner yet at all.
Speaker 1: Maybe a little bit if you look at headline of
Speaker 1: the elevated inflation and today, how much would you at
Speaker 1: this point attribute it to the persistence of these supply
Speaker 1: shocks that you identify, including the ongoing war, versus still
Speaker 1: paying the price in some way for what you characterize
Speaker 1: as excessive fiscal and monetary policy, because I think it
Speaker 1: matters when thinking about how much the FED is going
Speaker 1: to have to tighten to get the inflation back to
Speaker 1: its target. Well, it depends on the countries. I would
Speaker 1: say the solharmonic answer is half and half. But of
Speaker 1: course in Europe, given the exposure to ration energy, is
Speaker 1: more that shock. In the U S where in ters
Speaker 1: a monitor, fiscal and credit is in even worse than Europe,
Speaker 1: and Europe did a lot. In the UK. In addition
Speaker 1: to that, there was another negative supply sharks, self inflicted
Speaker 1: those the Brexit decision that was staculation ary reduced the
Speaker 1: growth and increased that cost of production. Same thing in China.
Speaker 1: Some of it is self inflicted. So I would say
Speaker 1: it depends on the country, but I would say is
Speaker 1: combination of of both of them. You had serious negative
Speaker 1: supply shops and you had really a policy steamus that
Speaker 1: was by any standard massively excessive across the world in
Speaker 1: all advanced economies. Now, in my book, what I point
Speaker 1: out is that while in the short term that at
Speaker 1: least three negative aggregate supply shops that are COVID initially Russia,
Speaker 1: Ukraine and now the China policy, I identify in the
Speaker 1: book wherever chapter about the great Coming Staculation, that there
Speaker 1: are eleven medium term aggregate supply shops that are negative.
Speaker 1: They're going to reduce potential growth and they're gonna increase
Speaker 1: cost of production. And if then you have a loose
Speaker 1: monitor and physical policy because I expected central banks gonna
Speaker 1: blink for a reason I can discuss, then went up
Speaker 1: like the seventies with inflation and stacculation and with a
Speaker 1: dead crisis as well. So it's gonna be worse than
Speaker 1: the seventies. So this is not just the short term phenomenon.
Speaker 1: People say they global supply bottom next my end, after November,
Speaker 1: when is gonna care about growth? I think there are
Speaker 1: many other forces. Is a protectionism and the globalization, French
Speaker 1: shoring and restoring of manufacturing from China to I causset
Speaker 1: Europe in US, aging of population, restriction of migration, decoupling
Speaker 1: between US and China. Geopolitical risk and depression that's gonna
Speaker 1: fragment the couple valcanized and the globalize, the global economy,
Speaker 1: the impact of global climate change, the impact of cyber warfare,
Speaker 1: the impact of the current pandemics, the backlash against income
Speaker 1: and wealth inequalities leading to policies pro labor your workers
Speaker 1: and so on, and of course digularization of the dollar,
Speaker 1: when eventually people are gonna get out of dollar assets
Speaker 1: because of the financial sanction and so on. Those are
Speaker 1: elevened forces that are medium termed have nothing to do
Speaker 1: with COVID in Russia, Ukraine. They're gonna be reducing growth,
Speaker 1: increased cost of production, and I think central banks will
Speaker 1: have to blink like the first exact police what happened
Speaker 1: in the the UK. If you're gonna have an economic crash,
Speaker 1: you're gonna have a financial crash. As you increase interest rates,
Speaker 1: you're gonna wimp out. Guaranteed. The Fed didd into thousand nineteen,
Speaker 1: the BO he has done it. Now the e c
Speaker 1: B is gonna have to do it. The Fed is
Speaker 1: gonna do it. It's gonna happen for sure, and therefore
Speaker 1: we're gonna have an engine of inflation expectation. I don't
Speaker 1: believe sent to a bank what they say, we're gonna
Speaker 1: do fight inflation at any cost, even if there is
Speaker 1: a recession, even if there's a hard landing. First of all,
Speaker 1: it's not going to be a short and shallow recession.
Speaker 1: It's going to be ugly, and then you have financial
Speaker 1: stresses and a financial debt crisis. At that point they're
Speaker 1: gonna wimp out and went out actually worse than the
Speaker 1: seventies because in the seventies where two straight treasury shocks
Speaker 1: and with inflational recession, but that ratio where a hundred
Speaker 1: percent of GDP for private and public. Second advanced economies
Speaker 1: after the GFC where the dead crisis mortgage housing bank
Speaker 1: that but we have deflation because it was a negative aggregate,
Speaker 1: the man shop and a credit crunch, so we could
Speaker 1: ease monitor and fiscal policies like we wanted. Today, we
Speaker 1: have levels of debt to GDP of three hundred and
Speaker 1: fifty pc of GDP globally, four d and twenty in
Speaker 1: advanced economies private in public, and we have these massive
Speaker 1: negative supply shops. So we're not gonna have only inflation.
Speaker 1: We're not gonna have only stagflation. We'll have a stagflationary
Speaker 1: debt prices the worst of the seventies and the worst
Speaker 1: of the positive superior sterio. I gotta say, you're not
Speaker 1: helping with my anxiety levels right now, I'm gonna go
Speaker 1: to I'm moving my portfolio to cash. One second pasitive
Speaker 1: positive podcast. She's gonna be wiped up by inflation. Pats
Speaker 1: and I can discuss they can hidge your insinflation. All right, So, um,
Speaker 1: this idea of a stag fla a great coming stagflation,
Speaker 1: I mean, stagflation already seems like the nightmare scenario for
Speaker 1: central banks if you have high prices and lower growth.
Speaker 1: But if you tack onto that a debt crisis plus
Speaker 1: stagflation just seems like incredibly difficult for any central pin
Speaker 1: to navigate. What is the appropriate policy response, especially if
Speaker 1: inflation is being driven by supply side bottlenecks as you
Speaker 1: described well. Some people say, if inflation is driven by
Speaker 1: negative supply shops, we shouldn't tighten too much because central
Speaker 1: bank can affect aggregate the man, not aggregate supply. But
Speaker 1: the reality is that like in the seventies, if you
Speaker 1: don't fight inflation, you have a the anchoring of inflation expectation,
Speaker 1: you have a wage price parallel, and then you end
Speaker 1: up in a nightmare. So unfortunately, even if the negative
Speaker 1: supply shop as opposed to aggreg the man you have
Speaker 1: to tighten monetary policy to make sure that you don't
Speaker 1: have an injine of inflation expectation. Otherwise you make the
Speaker 1: same mistake it was done in the seventies. They reply
Speaker 1: to these two negative supply shops with loose monetary policy
Speaker 1: and loose fist health policy. You went up instaculation. So
Speaker 1: the right response would be to fight it. But in
Speaker 1: the seventies we had the nasty recession sev seventy five
Speaker 1: and a double deepercession in eighteen eighty two when Walker
Speaker 1: came to power, and it caused the double dee precession
Speaker 1: to finally break the back of inflation expectations. And we're
Speaker 1: at the beginning of the American carnage because a lot
Speaker 1: of the industry went bass for good. But in the
Speaker 1: seventies we did not have a dead crisis in US
Speaker 1: or advanced The column is where the dead crisis of
Speaker 1: course in Latin America because they borrowed like crazy in
Speaker 1: the seventies, and when the FED were to twenty percent
Speaker 1: interest rates, of course Brazil, Argentina, Mexico, they all the
Speaker 1: faults and went bankrupt. So we had the stacturation, but
Speaker 1: not a dead crisis. Today, the problem we're facing is
Speaker 1: that if you fight inflation, not only you're gonna have recession.
Speaker 1: And the idea they're gonna have a short and shallow
Speaker 1: recession train vanilla garden variety is totally delusional. I mean
Speaker 1: it's totally delusional because we have amounts of death like
Speaker 1: we've never seen before. In previous rest actial like COVID GFC,
Speaker 1: we could do monitoring physcal easy because you have deflation.
Speaker 1: Now we're to tighten monitor and physical policy into a recession.
Speaker 1: Inflation is global and everybody is tightening, and therefore, as
Speaker 1: I pointed out, we get the worst of the seventies
Speaker 1: and the worst of the GFC. It's gonna be long,
Speaker 1: ugly protracted with financial stresses, financial stability, and that crisis.
Speaker 1: That's what we're facing right now. So what would be
Speaker 1: the optimal response? Try to avoid an injuring of inflation expectation.
Speaker 1: But you have two problems. If you do the right thing,
Speaker 1: One you have a recession to get nasty. Second, you
Speaker 1: have a financial and that crisis like you're not seeing before,
Speaker 1: and that's gonna lead central banks to wimp out. Because
Speaker 1: between causing an economic crash is severe and a financial crash,
Speaker 1: or blinking and whimping out and monetizing those deficits and
Speaker 1: wiping out the real value of nominal long term fits UH,
Speaker 1: nominal debt and blown duration, the part of list resistance
Speaker 1: politically is gonna be to monetize it and therefore to
Speaker 1: cause inflation and stat racial like the seventies. And the
Speaker 1: first example is exactly the b O E face with
Speaker 1: a financial shock. What they do They totally wimped out
Speaker 1: and they go back to M M T. So that's
Speaker 1: gonna happen across the board. So I don't believe central
Speaker 1: banks when they say we're gonna fight in fresh at
Speaker 1: any cost, because their delusion of either soft landing or
Speaker 1: a hard landing it is short and shallow. Two courts
Speaker 1: as a negative growth and then you return to growth
Speaker 1: and easy, that's not gonna happen. It's gonna get ugly
Speaker 1: the recession and you'll have a financial crisis. So how
Speaker 1: can they do it they're not gonna do it. Talk
Speaker 1: a little bit more about hiking rates and fighting inflation
Speaker 1: in a period of high levels of private sector debt.
Speaker 1: And I could see it going both ways, because on
Speaker 1: the other one hand, I could imagine that in a
Speaker 1: heavily indebted economy UH interest rate increases have a quick
Speaker 1: transmission mechanism and that that significantly impedes private sector activity
Speaker 1: and helps you fight inflation sooner. Or I could see
Speaker 1: it the other way that high levels of private sector
Speaker 1: debt created over sensitivity. Maybe the debt crisis scenario that
Speaker 1: you're talking about walk through a specifically, how it unfolds
Speaker 1: the intersection in the US of higher rates and high
Speaker 1: levels of indebtedness UM. In short, that it becomes very ugly,
Speaker 1: and it becomes very ugly because the indebtedness of the
Speaker 1: private sector in the US was very high and rising
Speaker 1: even after the GFC, because we had zero rates, quee
Speaker 1: credit easing, and so on, and then we doubled down
Speaker 1: on it UH during the COVID crisis. And of course
Speaker 1: during the GFC was household debt and banks, but then
Speaker 1: they build up in the next decade was of corporate
Speaker 1: debt and of shadow banks, leverage loans, ce laws, high yield,
Speaker 1: high grade, fallen aims of the new name it. And
Speaker 1: while the death of the household sector is now reduced,
Speaker 1: there are significant pockets of the household sector those who
Speaker 1: have low income and low wealth and the borrowing. They're
Speaker 1: gonna be under stress, especially as they get unemployed. So
Speaker 1: the biggest stress is going to be corporates and shadow banks.
Speaker 1: But eventually the official banks are linked to the shadow banks,
Speaker 1: and the household sector is going to also get in trouble.
Speaker 1: Those who have low income, they don't have much wealthy,
Speaker 1: have a lot of debt, and their income is fragile
Speaker 1: to a recession, so we'll have a dead crisis. So
Speaker 1: what's happening in this situation is that if you don't
Speaker 1: fight inflation. If you fight inflation, first of all, you
Speaker 1: have to jack up interest rates to the point in
Speaker 1: which there is a debt crisis, a recession, and and
Speaker 1: interests are so high that the zombie housle, corporate banks,
Speaker 1: shadow banks, government countries that are insolvent are gonna go bankrupt.
Speaker 1: And they were built out twice during the GFC. During
Speaker 1: COVID wed high that ratios, but we had low that
Speaker 1: servicing racial because of zero rates on the short end,
Speaker 1: on the long end, and all the other policy of easy.
Speaker 1: Now he said into a session, where to raise rates
Speaker 1: because there is inflation. So those who were swimming naked
Speaker 1: as the tiger cid, you'll see where they were. Those
Speaker 1: who had the emperor without clothes, you'll see where they are.
Speaker 1: And the zombies are gonna recognize. The zombies are gonna default.
Speaker 1: We're not gonna be able to build them out this
Speaker 1: time around. We'll have to raise rates, and they're gonna
Speaker 1: go bankrupt. Across the board. And I'm not saying everything
Speaker 1: and everybody in every country, but the amounts of debt
Speaker 1: private public across advanced economy and emerging market implies the
Speaker 1: severe debt crisis. Now, interest rates for the public sector
Speaker 1: are gonna rise. And in the UK with stupid fiscal policy,
Speaker 1: those spreads widened in significant terms. But then the private
Speaker 1: sector has spread over a riskless rates. Right, you have
Speaker 1: spread over treasury mortgages. Hi held a great consumer loanlans on.
Speaker 1: So if you are an insolvent agent, uh, it's not
Speaker 1: gonna be just increasing long term interested on treasury. It's
Speaker 1: gonna increase your cost of servicing your debt, but they spread.
Speaker 1: Widening on your own private debt is going to cause
Speaker 1: another's reason for the fault. And already highiled right now
Speaker 1: is gone from three hundred to over six hundred. The
Speaker 1: entire clo and leverage, your low market right now is
Speaker 1: shut down, literally shut down. And this is only the
Speaker 1: beginning of it of that stress on the private sector.
Speaker 1: So we're gonna see significant financial distress in the corporate sector,
Speaker 1: in the shadow banks, in parts of the household sector.
Speaker 1: So I mean, you just laid out basically the stuff
Speaker 1: that you think could break first as interest rates rise.
Speaker 1: Where do you see other pockets of weakness? And I'm
Speaker 1: thinking specifically about some of the international developments, the impact
Speaker 1: of the stronger dollar. We've seen that way already on
Speaker 1: a number of emerging markets. You have taken out dollar
Speaker 1: denominated debt that's getting a lot more expensive as rates
Speaker 1: go up and the dollar strengthened. At the same time,
Speaker 1: talk to us about the sort of international repercussions here. Well,
Speaker 1: the internationally percussions for emerging market is that many, not
Speaker 1: all of them, of these emerging markets are in deep,
Speaker 1: deep trouble. I don't want to lamp them together that
Speaker 1: are better credits, worse credits, better solving work. Sovereigns to
Speaker 1: you about forty countries, but I would say good two
Speaker 1: thirds of them are in trouble and then travel for
Speaker 1: several reasons. One, interests arising US in advanced economies, so
Speaker 1: their interest rates and their spreads arising even more to
Speaker 1: their currencies are weakening as the dollar is strengthening. And
Speaker 1: unless you are a commodity exporter, mostly the guys in
Speaker 1: the Gulf were making a fortune everybody else among emerging markets.
Speaker 1: And to be, with your exception a commodity importer, especially
Speaker 1: in Asia, but also in other parts of the world,
Speaker 1: and therefore you have also in terms of trade shop,
Speaker 1: so it's a it's a quadruple way. You have first
Speaker 1: of all, the rays of interstates in advanced economy pushing
Speaker 1: your interests higher. You have the weakending of your currency
Speaker 1: and you have a lot of dollar that and the
Speaker 1: real value goes higher. You have a negative terms of
Speaker 1: trade shock and the slowdown of growth and the recession
Speaker 1: US in Europe, in UK, in China. Effectively the be
Speaker 1: a recession weekends your export markets in your own economic growth.
Speaker 1: So it's the perfect storm for the weakest emerging markets,
Speaker 1: and I would say a good two thirds of this
Speaker 1: emerging market right now have these types of economic and
Speaker 1: financial fragility. Now, if we're gonna have a recession in
Speaker 1: the US, it's gonna be even worse in Europe in
Speaker 1: my view, for several reasons. Reason number one, Europe is
Speaker 1: more exposed to the Russian energy shock, and it's gonna
Speaker 1: get worse this world and they'll be a total cutoff
Speaker 1: and natural gas. Secondly, the dollar is strong and that
Speaker 1: reduces inflation. The eurous week that increases inflation. Inflation is
Speaker 1: already double gig in the Eurozone, let alone in the UK. Three,
Speaker 1: Europe is exposed to export to China and China is
Speaker 1: slowing down very, very, very sharply. And for within the Eurozone,
Speaker 1: you have this fragmentation risks of the risk of a
Speaker 1: widening of spreads of the periphery that this new tool
Speaker 1: t p I. But if the new Italian government follows
Speaker 1: policies that are on a collision course with Europe, they're
Speaker 1: not gonna qualify for the bailout that the CP is
Speaker 1: gonna make for those that have unwarranted widening of their spreads.
Speaker 1: As as opposed to those that are warranted by poor
Speaker 1: economic and physical policy. So things are going to be
Speaker 1: even worse in Europe that they are in the US.
Speaker 1: And the asket case, of course is the UK right
Speaker 1: now that is pricing like literally like an emerging market.
Speaker 1: Usually the fiscal stimulus in US, the dollar gets stronger,
Speaker 1: interested rise only little in the UK that the pound
Speaker 1: is collapsing and the interest rates are the roof, even
Speaker 1: with the support of the b o E. So it's
Speaker 1: really becoming an emerging market, is there? You know? The
Speaker 1: way you describe things so much as already baked, in
Speaker 1: particular with these trends that are in place with g
Speaker 1: globalization and these shocks that we've seen, the all supply
Speaker 1: chains and then the accumulated debts that we've seen in
Speaker 1: public and private. At this point, are there better policy
Speaker 1: paths than what you expect, UH leader policymakers to take?
Speaker 1: I mean, could there is there? What? What what is
Speaker 1: the wiggle rumor what is the what would what would
Speaker 1: you do? What would you advise policymakers and say the
Speaker 1: US and Europe to do well? You know, there's always
Speaker 1: a difference between normatives statements about how the world should
Speaker 1: be as opposed to positive statesmen about what is the
Speaker 1: world that's gonna be and likely to. So I'm making
Speaker 1: for now positive statesmen about the fact that we're gonna
Speaker 1: have a nasty recession, nasty extractlation, and another severe financial crisis.
Speaker 1: I think that's the baseline, and I think that the
Speaker 1: policy trade off like during the GFC, is too late
Speaker 1: right now, because if you fight inflation, you'll have a
Speaker 1: recession and financial crisis. And if you don't fight inflation,
Speaker 1: you're gonna have the answer inflation and you get inflation
Speaker 1: extaclation and still a financial crisis. Because you can wipe
Speaker 1: out with unexpected inflation the real value of nominal long
Speaker 1: duration that e fix interest rates. But you can fool
Speaker 1: all of the people some of the time, you can
Speaker 1: fool some of the people all of the time. You
Speaker 1: cannot fool all of the people all of the time.
Speaker 1: And if we use the inflation tax to wipe out
Speaker 1: private in public that is nominal long duration, it fixed
Speaker 1: interest rates. That's gonna come to maturity, and then it's
Speaker 1: gonna reprice either at very high interest rates if you
Speaker 1: borrow a long term or if you borrow short term,
Speaker 1: it's gonna price in the inflation. So you can for
Speaker 1: a couple of years resolve at that problem private and
Speaker 1: public with unexpected inflation, But then you're gonna cause a
Speaker 1: bigger that crisis because once prices replies for inflation, and
Speaker 1: the spreads real spreads a nominal spread, and the inflation
Speaker 1: volative leads you to higher nominal interest rates, then you
Speaker 1: have a bigger that problem down the line. So I
Speaker 1: fear that right now we have three problems, a problem
Speaker 1: of inflation, a problem of growth, and a problem of
Speaker 1: financial stability with too much debt and collapsing asset bubbles,
Speaker 1: and you cannot resolve them. I could tell you what
Speaker 1: I would do in principle, but whatever you do is
Speaker 1: not gonna avoid a crisis. At this point, the margin
Speaker 1: for action is very, very lim. I would tell you
Speaker 1: if I were you, I would avoid the seventies avoid
Speaker 1: inflation by going real hard on fighting inflation and avoiding
Speaker 1: at the anchoring of inflation expectation. But that's gonna lead
Speaker 1: to a nasty recession and a financial crisis like we
Speaker 1: didn't have in the seventies because we didn't have that problem,
Speaker 1: and the recession in that seventies was a decade longer stagnation.
Speaker 1: This time's gonna be worse because of the financial and
Speaker 1: the dead problem. So unfortunately, at this point them if
Speaker 1: you do them, if you don't, there is no easy
Speaker 1: way out of this. So let me um, let me
Speaker 1: ask you basically the same question, but from a different perspective.
Speaker 1: What should investors do here? And this is something you know,
Speaker 1: this is something I've been thinking about recently, And one
Speaker 1: of our recent guests, Toby Ningle, came on the show.
Speaker 1: He was talking about the moves and the guilt market,
Speaker 1: basically saying you can't unburned toast. So once you have
Speaker 1: this extreme volatility, once interest rates start to reset higher,
Speaker 1: you can't kind of undo that and all of that
Speaker 1: historic volatility, that anxiety for investors, it all weighs on
Speaker 1: them for years to come, and you potentially get a
Speaker 1: repricing of risk. In general, capital becomes more expensive, Asset
Speaker 1: prices start to deteriorate, as you just mentioned. So what
Speaker 1: can investors do here? Well, Usually investors have some variant
Speaker 1: of a sixty formal for the portfolio sixty equity forty,
Speaker 1: fixed income, long duration treasuries or seven thirty or even
Speaker 1: rispirity labridge, water is a variant of the same, but
Speaker 1: usually the price of bonds that prices of equities are
Speaker 1: negatively correlated. In normal times, risk on equity the well
Speaker 1: bond on the well, risk of bond, the well equited
Speaker 1: on the well growth equity, the well bonds go up,
Speaker 1: price falls, recession bonds fall, price goes up. Price of
Speaker 1: equity faults. So you're not only hedged. And a sixty
Speaker 1: four or seventy thirty portfolio has given you for the
Speaker 1: last few decades positive returns, normally more so in good times,
Speaker 1: less so in bad times, and always this here for
Speaker 1: the first time in thirty years, you have lost money
Speaker 1: on your equity side and on your fixed income because
Speaker 1: sixty fourth is based on low inflation. But when inflation
Speaker 1: is rising, two things happen. Long term interests go higher.
Speaker 1: That hurts equity because the discounter factor for equity becomes higher,
Speaker 1: and we're seeing the correction of equity and growth stocks
Speaker 1: and text stops that are long duration hurt even more
Speaker 1: because their long duration assets and more sensitive to interest rates.
Speaker 1: But you lost on the MP, but this year you
Speaker 1: have lost twenty or you on your own racial treasuries
Speaker 1: because tand your treasuries have gone up from one and
Speaker 1: a half to three and a half four, and that
Speaker 1: increasing interest rates is the twenty five fall enter price.
Speaker 1: So you lost money on equity, and you lost money
Speaker 1: even on the safe asset. There was nowhere to hide.
Speaker 1: And if you went into cash, you lost because of inflation.
Speaker 1: So that's the problem when you have rising inflation. That
Speaker 1: sixty four doesn't work. What's the solution is not cash
Speaker 1: that's been given you zero nominal return wiped out by
Speaker 1: ten percent inflation. You have to go into assets that
Speaker 1: are hedged against inflation. One of them is tips the
Speaker 1: reprice when inflation is higher. The second one is very
Speaker 1: short duration treasuries because as interests go higher, the price
Speaker 1: of them falls much less than the one of a
Speaker 1: ten year or thirty year treasury. As interests are higher,
Speaker 1: you get higher return even is expected inflation. That's one. Secondly,
Speaker 1: you might want to go into gold. Gold has not
Speaker 1: done very well in the last year. But once inflational
Speaker 1: expectations become an injin when the central banks are gonna blink,
Speaker 1: and until now central banks have played tough. That's why
Speaker 1: gold has done poorly. Because the real rates were going higher,
Speaker 1: then gold is gonna outperform like other precious metals, like
Speaker 1: probably many commodities, but the commodities are gonna be hurt
Speaker 1: by the recession, so gold is actually less cyclical. Three.
Speaker 1: In the seventies, both equities and real estate did poorly,
Speaker 1: but equity did much worse than real estate. The peer
Speaker 1: ratio for SMP was down to eight. Because real estate
Speaker 1: is in fixed supply, you can often replace the rent,
Speaker 1: and it's a good hedge against inflation as long as
Speaker 1: monetary policy is not very tight. Of course, ris deser
Speaker 1: have done poorly because the Fed was hiking, but again,
Speaker 1: when the Feds are gonna wimp out, I think that
Speaker 1: real estate is gonna outperform equities because of the nature
Speaker 1: of being a fixed supply kind of asset, at least
Speaker 1: in the short run. The only caveat is that a
Speaker 1: lot of real estate is going to be stranded because
Speaker 1: of global climate change. Literally, there are maps that show
Speaker 1: that half of the US in the next twenty years
Speaker 1: is gonna be either underwater on the coastlines or too
Speaker 1: hot or droughts or wildfires to be living in it.
Speaker 1: And people have stupidly moved from New York to Miami
Speaker 1: and from San Francisco to Austin. But Florida is gonna
Speaker 1: be flooded and Texas gonna be too hard to survive there,
Speaker 1: so there left to be a massive migration from south
Speaker 1: and the coastline towards. The only part of the US
Speaker 1: is going to survive climate change is the Midwest into
Speaker 1: essentially Canada. So there big trillions of dollars of real
Speaker 1: esti assets are gonna be damaged by essentially global climate change.
Speaker 1: So if you have to worry about that, you have
Speaker 1: to find the types of investment in the right parts
Speaker 1: of the United States. So I would say combination short
Speaker 1: term treasuries of tips and other inflation index bonds, gold,
Speaker 1: and the right type of real estate is going to
Speaker 1: be the future. And I'm actually working on a financial
Speaker 1: product that is exactly creating first and index and then
Speaker 1: anytf along the lines of edging the risk of inflation
Speaker 1: in the basement of youth currency by having a combination
Speaker 1: dynamically optimize of disassets. That's something I'm going to be
Speaker 1: launching in the next month or so. Yeah, I remember
Speaker 1: talking to you about it earlier in the year. This
Speaker 1: idea of a sort of tokenized dollar that's more tied
Speaker 1: to hard assets. Is that you know, this is also
Speaker 1: something we've discussed many times on the podcast at this point,
Speaker 1: the idea of the dollar losing its reserve currency status.
Speaker 1: And one of the things about that is, you know,
Speaker 1: people have been talking about it for a long time
Speaker 1: and it hasn't yet happened. What, in your opinion makes
Speaker 1: this time different several things. Of course, it's not gonna
Speaker 1: happen overnight. The shine of reserve currency status takes text
Speaker 1: many years. But there are at least two factors. One
Speaker 1: is that the US is very large current account of
Speaker 1: physical deficits. The physical deficits and other advanced economies, but
Speaker 1: they tend to run current account surpluses or a balance
Speaker 1: while we have a twin deficits, and historically every time
Speaker 1: they had twin deficits and the dollar was too strong,
Speaker 1: you have a cycle of dollar going up and then
Speaker 1: has to go down in order to restore the excellal competiveness.
Speaker 1: And the fall of the dollar can be thirty on
Speaker 1: a weight at the basis. So that's gonna be something
Speaker 1: that is going to happen, especially as the fat is
Speaker 1: gonna wimp out, while other central banks will have to
Speaker 1: start to tighten. Secondly, I think that the big revolution
Speaker 1: right now is that a change regime change is that
Speaker 1: we've weaponized the US dollar for national security and foreign
Speaker 1: policy purposes, and they might be the right thing to do.
Speaker 1: We have to punish our enemies, whether as Russia or Korea,
Speaker 1: you run, or even China with trade and financial sanction
Speaker 1: because there is a geopolitical rivalry is gonna get worse.
Speaker 1: But they know right now, even the Chinese, that the
Speaker 1: dollar can be seized like they were seised in color Korea,
Speaker 1: in Iran and now in Russia. And not just the dollar,
Speaker 1: also the yen, the europe, the pound, the Swiss frank.
Speaker 1: So if you need another reserve currency, there is a
Speaker 1: reserve currency or assets. There's no dollar, euro, yen, pound
Speaker 1: and so on, or frank which one is the only
Speaker 1: one out there that it's gonna be an alternative. They
Speaker 1: cannot be seized by the US or Europe or Japan.
Speaker 1: Is gold, but gold not in the volt in New York,
Speaker 1: New York, fred or London, by gold in your own
Speaker 1: vault or caves in Russia or China, wherever you have it.
Speaker 1: I think that that's gonna be what's gonna lead to
Speaker 1: a sharp fall of the budge of the dollar. The
Speaker 1: strategic rival US have a plan to completely phase out
Speaker 1: their exposure to dollar assets, and that's gonna be a
Speaker 1: regime change for the long run as opposed to being
Speaker 1: a short term factor. It's gonna happen. I really saw.
Speaker 1: We might hear Urial make the case for bitcoin there,
Speaker 1: but I have basically just one last question. And you
Speaker 1: know bitcoin is another ship coin. No will break that
Speaker 1: out of a separate story. But it's gonna be gold.
Speaker 1: There's gonna be tips, It's not gonna be a bit
Speaker 1: cocked frandly uh, last question for me. You know, investors
Speaker 1: are very big on this idea of like when is
Speaker 1: the FED gonna pivot? And the way you see it
Speaker 1: is not pivot per se, but essentially tri uncle whimp out.
Speaker 1: See what is that point? What would the will the
Speaker 1: FED see either in real economic activity or financial market
Speaker 1: conditions that you see would be the catalyst for the
Speaker 1: Fed and maybe other central bankers to whimp out, in
Speaker 1: your words, what will it take? Well, the Bank of
Speaker 1: England already wimped out, and if you remember what happened
Speaker 1: in eighteen nine, in December of eighteen, the FED went
Speaker 1: from to twenty five to fifty. Then they said we're
Speaker 1: gonna go to three percent, We're gonna continue qt What
Speaker 1: happened during that quarter stock market collapsed by how you'll spread,
Speaker 1: go from three hundred nine hundred, and the entire see
Speaker 1: a low levels land market shuts down. Two weeks later,
Speaker 1: January two or two thousand nineteen, J. Powell comes up
Speaker 1: and says, I was kidding when we said we're gonna
Speaker 1: go to three percent. I was kidding when I said
Speaker 1: we're gonna continue qute. We're gonna stop raising grades, We're
Speaker 1: gonna stop duty. And two months later, because there was
Speaker 1: a slowdown of growth given the tension within US and
Speaker 1: China on trade, and because there were some ripple problem
Speaker 1: in the ripple market, what do they do? The caut
Speaker 1: rates from two and a half to one seventy five
Speaker 1: and they resumed two. It through the back door, through
Speaker 1: the reserve rep operation. This was for a mile mile
Speaker 1: financial shop and a group slow down. That's what they
Speaker 1: totally wimped out. They totally blinked, even the FED, let
Speaker 1: alone the BOE. So when they're gonna do it again,
Speaker 1: when the recession is gonna start, and it's gonna get ugly,
Speaker 1: and it's part of the recession. Inflation is not gonna
Speaker 1: fall fast enough because we have the negative supply shop.
Speaker 1: Remember when you have negating supply shop to get a
Speaker 1: recession in high inflation. Therefore, we're not going to get
Speaker 1: a fault in inflation. This rapid enough to go to
Speaker 1: two percent. And we're already in financial stress right now.
Speaker 1: Stock market down simp NASA more than MIMI. Stock collapse,
Speaker 1: Stark collapse, crypto collapse, private equity collapse, Housing is collapsing.
Speaker 1: See a lot markets shutdown, leverage, lot market shutdown. How
Speaker 1: you spreads are already six hundred plus. Even high grade
Speaker 1: is an interesting like you're nervousing in years and this
Speaker 1: is just the beginning of that pain. Wait until it's
Speaker 1: a real pain. And then you have even a major
Speaker 1: financial institution. They may crack globally, not in the US
Speaker 1: maybe now, but certain internationally there are a couple of
Speaker 1: firms are huge and systemic. They can go under. You
Speaker 1: have to have another limit effect. Then the FED will
Speaker 1: have to wimp out. You'll have a severe recession and
Speaker 1: you'll have a financial market shock. They're gonna wimp out
Speaker 1: for sure. So, just to add to my anxiety levels,
Speaker 1: which are already through the roof, I want to I
Speaker 1: want to talk about the social consequences of this, because
Speaker 1: it seems like an environment where inflation is high, growth
Speaker 1: is slowing. You know, the FED is explicitly trying to
Speaker 1: boost unemployment. It seems like that is probably the worst
Speaker 1: environment for you know, your average person on the street.
Speaker 1: And it almost seems like the FEDS, like the FEDS
Speaker 1: goals here, they're almost anti American at this point, or
Speaker 1: like anti the American dream right, like housing more expressive,
Speaker 1: crushing demand, crushing labor force, Like what are going to
Speaker 1: be the social consequences of central banks, you know, having
Speaker 1: to do this in order to put a cap on
Speaker 1: price increases, Um, they're going to be severe. You know,
Speaker 1: we're already seeing, of course, the backlash against the free market,
Speaker 1: backlash against trade and globalization, even a backlash against technology,
Speaker 1: and backfish against you knows, fair policies. Because that it's
Speaker 1: doing a massive, massive increase in income and wealth and equality.
Speaker 1: There's leading to populism of the extreme right and or
Speaker 1: of extreme left in many countries across the world, and
Speaker 1: authoritarian regions becoming more popular across the board is a
Speaker 1: repeat of the thirties. Literally, scary what's happening. And then
Speaker 1: if on the top of it to fight inflation, now
Speaker 1: you're gonna have very severe session and unemployment going to
Speaker 1: six seven, eight percent or more. And then your assets
Speaker 1: are collapsing, the value of your home, the value of
Speaker 1: your stocks, and your debt service invasion going to go
Speaker 1: to the roof. There will be a revolution. That's why
Speaker 1: the fact cannot but monetize it because we're already having
Speaker 1: a huge amount of social tension. There's already massive political polarization.
Speaker 1: There already so many people are angry. Whether they're voting
Speaker 1: for the right or the left, it doesn't matter. That
Speaker 1: are those who are left behind, those who have been
Speaker 1: screwed by globalization and the current sets of policies, those
Speaker 1: who don't have jobs and skills and income and wealth.
Speaker 1: You have, you know, one hundred thousand deaths of despair
Speaker 1: every year in the US from opioids and other drug
Speaker 1: over those you have two billion people that are addicted
Speaker 1: to opioids. This is a massacre, literally a massacre. People
Speaker 1: are helpless, hopeless, jobless, skill less, worthless, and they're desperate.
Speaker 1: That's leading to that resentment and people either voting for
Speaker 1: on one side, Trump or right wing conspiracy types, or
Speaker 1: for very extreme left. These policies depending on whether you
Speaker 1: are socially and religiously conservative as opposed to liberal, but
Speaker 1: the economic policy are the same nativist nationalists against trade,
Speaker 1: against migration, against free market, and so on. So it's
Speaker 1: gonna get more ugly. It's gonna get more ugly because
Speaker 1: we are ready at the breaking point. We could have
Speaker 1: literally in the US, as we know, the entire books
Speaker 1: written recently about the risk of civil war, violence, insurrection, secession.
Speaker 1: This is what is the reason that US is facing,
Speaker 1: let alone other countries, not maybe in the selection, but
Speaker 1: two thousand and twenty four. So we're already in a
Speaker 1: re of time bomb in terms of social and political pressures,
Speaker 1: and in economic crisis, and a financial crisis and a
Speaker 1: geo political crisis is going to make these things much worse,
Speaker 1: much worse, alright, noriel Um, I think that's I can't
Speaker 1: say it's a good place to leave it, but it
Speaker 1: is definitely a place to leave it. We really appreciate
Speaker 1: you coming back on all thoughts. Um As I mentioned before,
Speaker 1: your insights, you know, broadly proved to turn out correct.
Speaker 1: Um the last time we had you on the show.
Speaker 1: The book Mega Threats Tend Dangerous Trends that imperil Our
Speaker 1: Future and How to Survive Them is out on October eight.
Speaker 1: Thanks so much, no real, thanks for great Thanks again,
Speaker 1: Thank you, buddy. So Joe, I think I need therapy
Speaker 1: after that conversation. And you know, last time we spoke
Speaker 1: to Neurial, we had a lot of commentators who were
Speaker 1: like shocked that we were so shocked by what he
Speaker 1: was saying. But I gotta I'm trying to use humor
Speaker 1: to diffuse the situation. Yeah, he sounds bearish, Yeah, you
Speaker 1: think just a little. He said that it doesn't make
Speaker 1: me want to buy the dip. No, but I do think, like,
Speaker 1: you know, this is what we've been talking about for
Speaker 1: a long time. The economic mix this time does seem different.
Speaker 1: Like at a minimum, inflation is a constraint on the
Speaker 1: central bank, and it's going to be much more difficult
Speaker 1: for them to come in and stabilize financial markets, um
Speaker 1: stimulate the economy if they need to, if they're having
Speaker 1: to deal with that price constraint. You know something, I
Speaker 1: keep thinking about how much this environment is sort of
Speaker 1: the mirror image of the Great Financial Crisis. You know,
Speaker 1: coming out of the the GFC, we had terrible growth. There's
Speaker 1: big collapsed and deflation. Everyone was worried about we can't
Speaker 1: hit the two percent target. And then years of sort
Speaker 1: of basically a decade of moderate growth in the economy,
Speaker 1: and this time we had the crisis conicide with a
Speaker 1: stock market surge and a growth surge. So maybe it
Speaker 1: is maybe the maybe the mirror image is the long,
Speaker 1: ugly slog for current crisis. I don't know something to
Speaker 1: look forward to, something to look for, so many episodes
Speaker 1: to come. All right, shall we leave it there? Let's
Speaker 1: leave it there? Okay, this has been another episode of
Speaker 1: the All Thoughts podcast. I'm Tracy Alloway. You can follow
Speaker 1: me on Twitter at Tracy Alloway and I'm Joe Why
Speaker 1: Isn't All? You can follow me on Twitter at the Stalwart.
Speaker 1: Follow our guest on Twitter, Neuriel Rubini. He's at Neuriel.
Speaker 1: Follow our producer Carmen Rodriguez at Carmen armand, and check
Speaker 1: out all of our podcasts Bloomberg under the handle at podcasts.
Speaker 1: Thanks for listening to