Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to
Speaker 1: another episode of The Bots podcast.
Speaker 2: I'm Tracy Allaway.
Speaker 3: And I'm Joe Wisenthal.
Speaker 2: Joe, do you remember, I think it was in twenty
Speaker 2: twenty two everyone was talking about stagflation.
Speaker 3: Yes, of course, because we had it right, because we
Speaker 3: had markets were low, so people were talking about recession.
Speaker 3: The FED was hiking interest rates aggressively, and inflation in
Speaker 3: twenty twenty two was peaking. So it certainly seemed like
Speaker 3: we could have had the combo right then for essentially
Speaker 3: elevated inflation and some kind of recession.
Speaker 2: Yes, And in fact, before we recorded this episode, I
Speaker 2: went back and I looked at a Google trends chart
Speaker 2: for the word stagflation, and like, the peak in twenty
Speaker 2: twenty two is just amazing. And then it sort of
Speaker 2: fell off because we definitely had inflation, we didn't necessarily
Speaker 2: have lower economic growth. But I think now at the
Speaker 2: tail end of twenty twenty four, some of that stagflation
Speaker 2: talk is beginning to creep back into I guess the
Speaker 2: economic discourse.
Speaker 3: Yeah, a little bit. I mean what I would say
Speaker 3: is I would agree with you. There seems to be
Speaker 3: a couple things going on that are very confusing, to
Speaker 3: say the least. But one is the sort of I
Speaker 3: don't know if it's acceptance or reality that like inflation
Speaker 3: has come down quite a bit, but maybe it's going
Speaker 3: to keep bumping up against the ceiling, or maybe it's
Speaker 3: going to keep like bouncing off the floor, so to speak.
Speaker 2: Yeah, that last mile is going to be difficult still.
Speaker 3: And then on some measures, the economy still seems good,
Speaker 3: but you look at some of the pmiyes, issms, other
Speaker 3: industrial measures, labor market measures, some seem to be slowing down.
Speaker 3: So like, I still think this idea of like I
Speaker 3: don't know if it's called stagflation, but this sort of
Speaker 3: unpleasant combination of not great growth, not great real real growth,
Speaker 3: and inflation that's still like at the higher end of
Speaker 3: what people are comfortable with, feels like something that could
Speaker 3: very plausibly be the case for a while.
Speaker 2: It's definitely in the air. So we need to dig
Speaker 2: into this particular argument. And who better to speak to
Speaker 2: than Neuriel Rubini. He is, of course, the chief economist
Speaker 2: and portfolio manager of the Atlas America Fund, which is
Speaker 2: a new ETF that has just launched and He is
Speaker 2: also the chairman and CEO of Rubini Macro Associates. Really
Speaker 2: the perfect guest to do this type of macro with us. So, Nuriel,
Speaker 2: welcome back to the show.
Speaker 4: Good being with you today, see and Zoe.
Speaker 2: Do you get the same sense that the the risk
Speaker 2: of stagflation is starting to pick up again?
Speaker 4: Certainly is one of the risks that have to consider.
Speaker 4: And I think that the question and everybody is man
Speaker 4: of course, is what would be the economic policies of
Speaker 4: Trump and the impact on growth and inflation. If I
Speaker 4: have to look ahead, I would say that some of
Speaker 4: his policies actually could increase growth and reduce inflation, being
Speaker 4: pro business in general, making those tax cut permanent, having
Speaker 4: government efficiency, deregulating the economy, maybe even increasing the production
Speaker 4: of fossil fuel, reducing the price of energy. Those go
Speaker 4: in the direction of policies actually increase growth and reduce inflation.
Speaker 4: But on the other side, there's a long list of
Speaker 4: other policy that could be implemented. First of them, of course,
Speaker 4: tariff protectionism, an economic war with China. Secondly draconia, restriction
Speaker 4: to migration, if not mass deportation. Three unfunded tax cuts
Speaker 4: and run away fiscal deficits for potentially in attempt to
Speaker 4: weekend the dollar in a disorderly way. Five maybe trying
Speaker 4: to interfere with the independence of the FAD. Now, if
Speaker 4: the second set of policy were to be implemented, their
Speaker 4: impact will be higher inflation over the time and lower
Speaker 4: economic growth. So those sets of policy will be definitely
Speaker 4: in the stockflationary direction.
Speaker 3: There was an amazing summary by the way of the
Speaker 3: two ways of thinking about paths, And I guess what's
Speaker 3: striking listening to you sort of list off the two
Speaker 3: columns is within trump Ism or within the Trump administration.
Speaker 3: It feels like there are several competing camps so to speak,
Speaker 3: and we don't really know how it's going to resolve.
Speaker 3: But there are a lot of internal contradictions, whether on
Speaker 3: personnel or ideology, and to some extent you just laid
Speaker 3: out are sort of I don't know, maybe the fork
Speaker 3: in the road, so to speak, of how things could go.
Speaker 4: Yeah, you're absolutely right. There is a spectrum of positions
Speaker 4: on the variety of economic issues. Some are truly protectionist,
Speaker 4: Others like Scott bass And says we want to escalate
Speaker 4: as a way of de escalating, and we're not going
Speaker 4: to know until after, of course, inauguration, in which direction
Speaker 4: the economic policy will go. I would say, however, the
Speaker 4: following observation. I think that the potentially more stackflationary policy
Speaker 4: will be constrained by several factors. One, of course, is
Speaker 4: the choice of some of the economic advisors like Scot
Speaker 4: Bass and understand markets and in as that if you
Speaker 4: do things that are radically stackflationary, it will be bad
Speaker 4: for the economy and bad for the market, so you're
Speaker 4: going to try to push down against those. Secondly, I
Speaker 4: think there'll be also significant impact of market discipline. If
Speaker 4: you have run away budget deficits, migration restrictions, and tire
Speaker 4: if that increase inflation, then the bond market digilant is
Speaker 4: going to wake up expect that inflation will be higher,
Speaker 4: rates will be higher, and then rising in bond deal
Speaker 4: could lead to a correctional stock market. And if there's
Speaker 4: one thing that Trump cares about is one the stock market.
Speaker 4: We also cares about the bond market because high bond
Speaker 4: deals imply high cost of borrowing and that's going to
Speaker 4: be hurting the economy. I think the other constraint is
Speaker 4: going to be, of course, the fact that the Fed
Speaker 4: is still independent. If some of these policies were to
Speaker 4: be pursued, the FED will likely cut next week in December,
Speaker 4: may not cut again, or may cut much less than
Speaker 4: the market are expecting next year. In an extreme scenario
Speaker 4: in which inflation goes much higher, they could even increase
Speaker 4: interest rates. And that's going to be So there is
Speaker 4: both a market discipline and there's also FED discipline that
Speaker 4: my constraint to some extent those stock preationary.
Speaker 2: Policies, setting aside the Trump administration and what they might do,
Speaker 2: and I realized that that's a big thing to set
Speaker 2: aside right now. But the path of inflation, it has
Speaker 2: come down from the peaks that we saw in twenty
Speaker 2: twenty two. As Joe was talking about why did that happen?
Speaker 2: In your opinion, because one of the you were one
Speaker 2: of the few voices I remember in early twenty twenty
Speaker 2: when the pandemic was just unfolding, that predicted inflation, and
Speaker 2: you know it happened. But since then it has petered
Speaker 2: out a little bit.
Speaker 4: Yes, I mean, the reason why we had this burst
Speaker 4: of inflation during and after COVID were both bad policies.
Speaker 4: The amount of monetary, fiscal and credit zing exposts that
Speaker 4: turned out to be way excessive given the size of
Speaker 4: the economic shock, that was relatively temporary. But second there
Speaker 4: was so bad luck. There were three negative aggregate supply
Speaker 4: shocks that essentially reduced growth and increased inflation. One was
Speaker 4: the impact of course of COVID on the supply of
Speaker 4: labor and production of goods and on global supply chains.
Speaker 4: The second was the impact of the brutal rush invasion
Speaker 4: of Ukraine on commodity prices entry the kind of a
Speaker 4: zero COVID policy of China that further restricted global supply chain.
Speaker 4: So why inflation fell in part was, of course central
Speaker 4: bank gave up on quantity easy normalized policy rates. But
Speaker 4: if that was the case, we should have seen inflation
Speaker 4: falling dramatically, but probably a much stronger slow down of
Speaker 4: economic growth, maybe a recession the way most economist thought
Speaker 4: about it. And instead we got the reduction inflation. But growth,
Speaker 4: say in US as remain robust above potential twenty a
Speaker 4: half percent in the last couple of years. So I
Speaker 4: think in part we also got lucky, and lack was
Speaker 4: the distree negative aggregate suppli show got reversed. First, we
Speaker 4: had the end of COVID, so supply of libor increased,
Speaker 4: we started producing goods and services. Supply chains got at
Speaker 4: lays say, unstuck. The impact on commodity prices of the
Speaker 4: invasion of Ukraine became ready US because there were new
Speaker 4: sources of energy coming from Middle least US and so
Speaker 4: on that went to Europe. And finally China gave up
Speaker 4: on a zero COVID policy, so we got luck. And
Speaker 4: on top of it, there was another set of actors
Speaker 4: at least for the US that maintained growth strong. One
Speaker 4: was that we had significant amount of migration documented or
Speaker 4: otherwise people estimated maybe up to ten million people entered
Speaker 4: in the United States in the last four years. That
Speaker 4: increased the label supply, increase growth, and reduce some pressures
Speaker 4: on wage inflation. Definitely right now. Politically, of course, migration
Speaker 4: is a hot topic, but from economic point of view,
Speaker 4: it increased growth and reduced inflation. And we had also
Speaker 4: other physical stimulus that helped the growth from the Infrastructure Act,
Speaker 4: the IRA and the Chips Act, and then we had
Speaker 4: got Also of course AI revolution has led to significant
Speaker 4: increasing capecs. So least for the United States, that think
Speaker 4: was a combination of active factors that implied that inflation
Speaker 4: file and growth remained robust, not so in other parts
Speaker 4: of the world.
Speaker 3: I want to talk a little bit more about the dollar,
Speaker 3: and there are so many different ways that you can
Speaker 3: begin a conversation or about thinking about the role of
Speaker 3: the US dollar. You can think about the effects that
Speaker 3: tariffs will have on inflation or the strength of the
Speaker 3: US dollar relative to other currencies. You can think about
Speaker 3: the central role that the government that the US dollar
Speaker 3: plays in global trade and finance, and whether there are
Speaker 3: possible rivals that are emerging. One of the things that
Speaker 3: we saw recently from President Trump was a threat that
Speaker 3: he put on his Truth Social Account against any of terror,
Speaker 3: against any country that would attempt to form a rival
Speaker 3: currency block, and the specifically mentioned the Bricks. I don't
Speaker 3: know if the Bricks is a real thing or not.
Speaker 3: It sometimes seems like a meme to me, but there
Speaker 3: is an organization called the Bricks, and sometimes you see
Speaker 3: headlines about dollar alternatives in the short to medium term.
Speaker 3: Is there a real prospect of some other currency, the
Speaker 3: Chinese un perhaps taking sizeable market share and global trade
Speaker 3: from the US dollar.
Speaker 4: Well, I would say for now, not yet. But the
Speaker 4: dollarization process that could occur over time, and what could
Speaker 4: trigger it was, of course, that we have rightly or
Speaker 4: wrongly weaponized the dollar in the last few years for
Speaker 4: national and security and foreign policy purposes, imposing a variety
Speaker 4: of sanctions against a variety of strategic rivals of the
Speaker 4: United States and the West. This isue about finding an alternative.
Speaker 4: The dollar is complicated because you cannot essentially replace something
Speaker 4: with nothing, and the question is what's the alternative to
Speaker 4: US dollar for US actor treasure there Summers once jokingly said,
Speaker 4: people don't like the dollar, but you know, Europe is
Speaker 4: a museum, China as a prison, Japan is a nursing home,
Speaker 4: and bitcoin so for now is an experiment. So there
Speaker 4: is something of an happiness with the US dollar. But
Speaker 4: for the time being, I would say the US dollar
Speaker 4: is still dominant. And by the way, I would probably
Speaker 4: argue that the Trump police is regarding the dollar a
Speaker 4: little bit confused, because on one side, there is this
Speaker 4: concern that a strong dollar has led to the industrialization,
Speaker 4: loss of competitiveness, large trade, current account deficits people free
Speaker 4: riding on the US So there is a sense I
Speaker 4: would like a weaker dollar. But if you think about
Speaker 4: policy and economic fundamentalals, tariffs will strengthen the dollar, and
Speaker 4: threads of tariffs have led since selection to the dollar
Speaker 4: becoming stronger. Trump says, I don't want other country to
Speaker 4: unquote the dollar rise, and I'm going to impose tarif
Speaker 4: on them if they do so. He wants to maintain
Speaker 4: the role of the dollars a major global reserve currency.
Speaker 4: If that's the case, demand for dollar ass remain high,
Speaker 4: the dollar remains strong in terms of relative growth. The
Speaker 4: US is doing stronger than Europe and other advanced economies
Speaker 4: that just strengthen the dollar in terms of relative monetary
Speaker 4: Police is probably given these differentials in growth and inflation,
Speaker 4: the US or the FED is going to cut rate
Speaker 4: less than other countries. Well, in Europe, the colomies we
Speaker 4: can there'll be more cuts. And overall, given the productive
Speaker 4: growth of the US, the boom of new technologies, AI,
Speaker 4: you name it, capital flows are going into the United States.
Speaker 4: So I think there is this dilemma that fundamentals and
Speaker 4: police would suggest that the dollar is going to become stronger,
Speaker 4: but than that objective of trying to reduce the trade
Speaker 4: imbalance of the US to a weaker dollar unless you
Speaker 4: have a big agreement on currency, is hard to fathom
Speaker 4: how you're going to do it. There are some ideas
Speaker 4: along those lines. Is going to be, to say, challenging.
Speaker 2: This is something I completely agree with, and I think
Speaker 2: I've said on the podcast before that it feels like
Speaker 2: Trump doesn't know what type of dollar he wants because instinctively,
Speaker 2: I think there's a sense that he wants to say
Speaker 2: the dollar is strong. It sounds good when you can
Speaker 2: say those types of things, and generally it means that
Speaker 2: the US economy is doing well relative to others. But
Speaker 2: if he's serious about boosting manufacturing and exports, then he
Speaker 2: needs the weaker dollar. There's also that tension between decoupling
Speaker 2: the US economy from the rest of the world, maybe
Speaker 2: becoming more self reliant, and also wanting the dollar to
Speaker 2: be at the center of a globalized financial se Are
Speaker 2: there ways that the Trump administration could like kind of
Speaker 2: thread the needle between those two different objectives.
Speaker 4: No, it's not going to be easy because either you want,
Speaker 4: you know, a weeker dollar to try to improve competitiveness,
Speaker 4: reduce the trade balances and so on, but then the
Speaker 4: dollar will left weaken. Or instead, if you want to
Speaker 4: maintain the globals or currency roll of the dollar, then
Speaker 4: the dollar is going to remain strong. And by the way,
Speaker 4: the risk of doing an agreement to try to weaken
Speaker 4: the dollar is that that could occur in a disorderly
Speaker 4: way because if you do another people talking now about
Speaker 4: a Mara lagoa agreement, because in the past agreements to
Speaker 4: moved currencies were always in resorts like Breton Woods, Plaza,
Speaker 4: over Come, David, you name it. So people think about
Speaker 4: maybe getting together all major economies in mar Lago and
Speaker 4: finding an agreement where europe Asian allies and others let
Speaker 4: their currency appreciate the dollar weekend. But you know, if
Speaker 4: people expect that from happening, then capital is going to
Speaker 4: suddenly move out of the US because you're going to
Speaker 4: have a massive capital loss time fifteen to twenty percent
Speaker 4: on your dollar assets, and then you could have a
Speaker 4: spike in long rates or you could have a correction
Speaker 4: in US ecuity. So how do you engineer an orderly
Speaker 4: weakening of the dollar without causing significant tightening of financial
Speaker 4: condition that's also problematic. It's not going to be very
Speaker 4: easy to be done. The other trade off that I
Speaker 4: think it's complicated it's not just a weak or strong
Speaker 4: dollars a currency role, but also your tariff policies, because
Speaker 4: on one side, if you impose the tariffs, the dollar
Speaker 4: is going to strengthen. And on the other side, also
Speaker 4: if you're going to raise tariffs, you need revenues. But
Speaker 4: raising tariffs, if it's very significant, it's going to be
Speaker 4: highly inflationary. Now, some people within the Trump come say, well,
Speaker 4: in twenty eighteen nineteen, when we increase the tariffs on China,
Speaker 4: there was not significant increase in inflation because the RMB
Speaker 4: depreciated and therefore import prices did not increase very much.
Speaker 4: But suppose that you impose the tariffs and the currencies
Speaker 4: of all your trading partners weekend, then you might not
Speaker 4: get the inflationary burst of the tariff. That's correct, but
Speaker 4: then you're not going to have an improvement of the
Speaker 4: competitiveness of the United States, and therefore inflation is not
Speaker 4: going to rise, but your trade deficit is going to
Speaker 4: remain very large. Vice versa. If tarif are imposed and
Speaker 4: the dollar does not strength another currency weekend, you might
Speaker 4: get actually some improvement of your trade balance, but then
Speaker 4: you'll have some inflational impact of this, so in all
Speaker 4: these cases, there is not really a free lunch.
Speaker 1: Yeah.
Speaker 3: I want to actually dive further into this because a
Speaker 3: lot of times when tariffs come up, one thing people
Speaker 3: say is that, Okay, well it's a one off.
Speaker 5: It's a one right.
Speaker 3: The prices may go up at some point, but that
Speaker 3: doesn't necessarily represent a new inflationary trend that say, the
Speaker 3: FED would have to worry about. And perhaps that's true,
Speaker 3: But it also occurs to me that if part of
Speaker 3: the impulse here is to be less reliant on global
Speaker 3: trading partners for say, various manufactured goods, and to have
Speaker 3: more domestic building, et cetera of various things, this is
Speaker 3: happening at a time of still high resource utilization already,
Speaker 3: So the unemployment rate is at four point one percent,
Speaker 3: There are already a lot there are shortages of industrial parts.
Speaker 3: Yesterday we're recording this December third, by the way, yesterday
Speaker 3: we got the ISM Manufacturing and it showed that electrical
Speaker 3: components have now been in shortage for fifty straight months,
Speaker 3: so over four years. So it seems to me that
Speaker 3: regardless of you know, if you have this impulse to
Speaker 3: build more here, et cetera, you're coming at it at
Speaker 3: a time in which resources remain quite constrained.
Speaker 4: I think your point is very correct and valid in
Speaker 4: some sense. Actually, the US economy right now it's not
Speaker 4: in a soft landing, maybe in a no landing zone
Speaker 4: because growth has remained above potential and inflation has fallen.
Speaker 4: But you know, core PC this year probably going to
Speaker 4: be two point eightyve and two point nine percent, and
Speaker 4: next year may still remain elevated, especially next year if
Speaker 4: you impost tariff, if you do significant draconia restriction to migration,
Speaker 4: if you have run away physical deficits, that's stimulate further demand.
Speaker 4: And if you have, you know, a policy of trying
Speaker 4: to weekend the dollar. So yeah, we live in an
Speaker 4: economy is already no landing where resource constraints are significant.
Speaker 4: Libor market is significantly tight, Goods market are also tight.
Speaker 4: Imports can help you, But then if you're gonna restrict
Speaker 4: the libor supply to migration restriction, you're gonna weaken the dollars.
Speaker 4: You're going to impose tariff, You're gonna make those inflationtionary
Speaker 4: pressure going higher, and then make trigger the fad than
Speaker 4: having to act and stop cutting rates or maybe even
Speaker 4: increase them over time.
Speaker 2: I mean, the counter argument to the no landing idea
Speaker 2: is that we have seen some signs as Joe mentioned
Speaker 2: in the intro of the labor market softening, and even yesterday,
Speaker 2: you know we already mentioned the ism, but we had
Speaker 2: PMIS as well that also looked kind of sluggish. Is
Speaker 2: there a possibility that the economy weaken significantly into twenty
Speaker 2: twenty five?
Speaker 4: Well, I would say that the risk of economy weakening
Speaker 4: significant twenty twenty five will be one in which those
Speaker 4: sets of staculationary policy are followed. If you really impose
Speaker 4: massive tariffs, if you deport millions of people, if you
Speaker 4: try the weekend the dollar, if you have a massive
Speaker 4: physical deficit then lead to bond hills rising, crowding out
Speaker 4: economic growth. You could be in a situation which growth
Speaker 4: significantly slow downs and inflation goes higher. I think that's
Speaker 4: definitely a risk. As I pointed out at the beginning, However,
Speaker 4: there are sets of policies of trumpet are actually positive
Speaker 4: for economic growth, and some of those policies will be implemented.
Speaker 5: So if you had to.
Speaker 2: Choose from like column A or column B, what would
Speaker 2: be like the higher probability.
Speaker 4: As of now, I would say that the impact on
Speaker 4: growth for next year is going to be a wash
Speaker 4: because on one side, definitely is pro business is going
Speaker 4: to deregulate, There'll be some increase in capital spending, stock
Speaker 4: market is strong, financial conditioner easy, So those are positive
Speaker 4: for increasing growth. But then some of the other polices,
Speaker 4: especially on labor market and tariff and protection is when
Speaker 4: some increase in long rate are going to weaken economic growth.
Speaker 4: So I think that the impact for growth next year
Speaker 4: is that if this year we're growing, say two point
Speaker 4: eight percent, next year we're going to still grow about
Speaker 4: potential but less maybe two point four. But I don't
Speaker 4: think there's going to be a massive slowdown unless it
Speaker 4: goes really radical with the stackpreationary policies. However, on net
Speaker 4: in an economy is already in a sight resource constraint
Speaker 4: labor goods market otherwise that is more in a low
Speaker 4: landing zone, where even before Trump was elected, the FED
Speaker 4: was started to say, wait a moment, should we really
Speaker 4: cut right as much as we promise? Given that growth
Speaker 4: it seems to remain robust, that inflation remains more sticky
Speaker 4: that in that world. In my view, inflation is going
Speaker 4: to be on net staying high rather than going towards
Speaker 4: the two percent targets. So I would say the net
Speaker 4: impact on growth for the time being is a wash,
Speaker 4: but the impact on inflation will probably be the inflation
Speaker 4: is somehow higher, and that's going to impose something of
Speaker 4: a dilemma for the FAT. Of course, there is a
Speaker 4: tail risk that it goes fully stackflationary. But as I point,
Speaker 4: are two major constraint. One is really market discipline. The
Speaker 4: market would punish those policies and will have to reverse.
Speaker 4: I mean, take an example in the UK, because there
Speaker 4: was a physical STEAMUS was excessive. Then suddenly the pound collapse,
Speaker 4: bond deals when higher, the pension crisis, and least trusts
Speaker 4: Prime minister lost power in forty four days. Now that's
Speaker 4: not going to happen in the United States. But I
Speaker 4: think that people should not underestimate how market discipline can
Speaker 4: really punish even a country like the United States. So
Speaker 4: between the constrain of the FED being still independent and
Speaker 4: the market discipline probably excessively stack, treasury policy would be
Speaker 4: constrained next year.
Speaker 3: So a mirror all of the extraordinary uncertainty you recently
Speaker 3: at the end of November announced you have a new ETF,
Speaker 3: the Atlas America Fund, and it looks very interesting. You know,
Speaker 3: I think, like I want to get into what it is.
Speaker 3: But I think, you know, when people think about, say
Speaker 3: like a well diversified or all weather portfolio, and it
Speaker 3: sounds like we all want all weather portfolio because there's
Speaker 3: just so much uncertainty right now, as you've been talking
Speaker 3: about for the last several minutes, something that would thrive
Speaker 3: and be stable amid all this uncertainty. You know, for
Speaker 3: years people talked about the sixty forty portfolio, and it
Speaker 3: had a certain I guess I would say intellectual elegance
Speaker 3: to it, because the two legs of it generally produced
Speaker 3: positive real returns, but also they had a sort of
Speaker 3: natural hedging component against each other, and so usually if
Speaker 3: stocks were going up at bonds were doing a little worse,
Speaker 3: and then when your stocks would go down and the
Speaker 3: boons were going up, work very beautifully for several years,
Speaker 3: basically until twenty twenty one. And now I'm not sure
Speaker 3: if people feel confident at all to go back into that,
Speaker 3: and people come up with reasons why it's very there's
Speaker 3: a lot of distrust about using bonds or a heavy
Speaker 3: allocation of bonds as a good ballast for a portfolio.
Speaker 3: What is the sort of before we get into the
Speaker 3: specifics per se, what do you talk about sort of
Speaker 3: like the intellectual or conceptual framework, but behind your approach,
Speaker 3: which is to come up with a new sort of
Speaker 3: diversification strategy that can work across cycles.
Speaker 4: Yeah, the logic is as follows. I wrote the whole
Speaker 4: book title Mega Threads where I argue that the air
Speaker 4: of the Great Moderation where we had low growth and
Speaker 4: low inflation, is over. Even the air of the cyclist
Speaker 4: technotion that followed the past GFC period, where again growth
Speaker 4: was law and there were these inflationary forces, is over.
Speaker 4: And there are a variety of forces are going to
Speaker 4: lead to stack inflationary pressures in the global economy, both
Speaker 4: on the supply side and a demand on the supply side.
Speaker 4: That I consider ten factors from geopolitical fragmentation to the globalization, protectionism,
Speaker 4: French shoring, reshoring to agingle population restriction to migration, global
Speaker 4: climate change, pandemics, cyber warfare, backlash against liberal democracy and
Speaker 4: proliber fiscal policies, and potential gradual dedollarization. Now, all these
Speaker 4: factors gradually over time reduce growth and increase inflation. And
Speaker 4: on the demand side, we live in a world of
Speaker 4: very larger private and public debts are going to become larger.
Speaker 4: We're going to spend more on defence all over the world.
Speaker 4: We're going to spend more on dealing with climate change.
Speaker 4: We're going to spend more to deal with pandemics. We're
Speaker 4: going to spend more because there's going to be a
Speaker 4: disruption coming from AI robotic automation. We're going to spend
Speaker 4: more because there are many people left behind. We need
Speaker 4: the bigger social safety nets, so we spend more. We
Speaker 4: have limits so much we can raise avenues, so structural
Speaker 4: budget death is going to rise, and therefore they're being
Speaker 4: incentive to wipe out the real value of nominal long
Speaker 4: duration that through unexpected inflation. Now I'm not talking about
Speaker 4: hyper inflation or even high inflation, not even double digits.
Speaker 4: Let's assume for a moment that this supply and these
Speaker 4: the main forces imply that over this decade inflation is
Speaker 4: not a tool. Let's say five six percent, it is
Speaker 4: very reasonable. We were at nine just two years ago.
Speaker 4: And I think these forces over time are going to
Speaker 4: essentially materialize, and the policies of Trump, some of them
Speaker 4: exactly go along the same tackflationary direction of lower growth
Speaker 4: and higher inflation that we described. So in that world,
Speaker 4: think of it this way. Bond yial is ten years
Speaker 4: right now aband four percent, but if inflation was six,
Speaker 4: bond yills have to be at least eight six percent
Speaker 4: for expected inflation and two for the real because in
Speaker 4: the world of high debt and that it's the equlibrium
Speaker 4: relong rate is not zero anymore, it's closer to two.
Speaker 4: Suppose the bond yills go gradually from four to eight percent,
Speaker 4: then a tenured treasury is going to lose thirty forty
Speaker 4: percent of its value over time. And we saw what
Speaker 4: happened in twenty twenty two. In twenty twenty two, sixty
Speaker 4: forty did not work. It did not work because sixty
Speaker 4: forty assumes that there is a negative correlation between the
Speaker 4: price of stocks and the price of bonds. Risk one
Speaker 4: and growth equity to well. Bond bills are higher, the
Speaker 4: price is lower, so you make money on equities, you
Speaker 4: lose money on bonds. Risk of recession. Equities go down,
Speaker 4: bond bills fall, the price goes up, you make money
Speaker 4: on the bond part of your portfolio. You lose on equity.
Speaker 4: But that negative correlation assumes that inflation is low and stable.
Speaker 4: When inflation is not low and stable is rising, then
Speaker 4: what happens. Bond bills are higher and you lose money
Speaker 4: on the bond component. And like to happening in twenty two,
Speaker 4: and happened again even last year. When bond yials are
Speaker 4: significantly higher, stock prices correct, and therefore you get a
Speaker 4: positive correlation between bond prices and equity prices. Paradoxically, actually,
Speaker 4: in twenty twenty two, a sm PIFA boundred fell by
Speaker 4: fifteen percent, but the price of tenure treasury fell more
Speaker 4: fell by twenty percent as tenure treasure yield went from
Speaker 4: one to three and a half. So in a world
Speaker 4: in which bond yields gradually could go from four to eight,
Speaker 4: the traditional defensive asset in a sixty to forty portfolio,
Speaker 4: this long duration treasury doesn't work anymore, and therefore this
Speaker 4: is not an old weather portfolio. ATTF is something of
Speaker 4: an alternative to the traditional defensive assets, and alternity to
Speaker 4: the forty percent of the sixty forty is not the
Speaker 4: sixty part.
Speaker 3: So we're just working the four here, we're.
Speaker 4: Working mostly on the forty. And the point is that
Speaker 4: if you do believe the story, or even if you
Speaker 4: assign a meaningful probability that inflation is going to be
Speaker 4: gradually higher and nominal long bondials is got to be higher,
Speaker 4: you have essentially twenty three million dollars of long duration
Speaker 4: fixed income, mostly treasury, but also high grade high yield
Speaker 4: or em THATTA is dominated dollars, and its significant gradual
Speaker 4: rights in those bond yields is going to imply that
Speaker 4: your defensive asset actually loses as much, if not more
Speaker 4: than equities. So then you have to think in a
Speaker 4: world of gradually higher inflation, which are the other alternative
Speaker 4: asset that provide a hedge against inflation, against the basement
Speaker 4: of your currency, against disuization, against the geopolitical risk, against
Speaker 4: financial crisis, and against climate change. And the range of
Speaker 4: assets that we have chosen for this ETF is one
Speaker 4: that provides you a better hedge against those still risks
Speaker 4: than traditional defensive masses like tenure treasury, and that's the
Speaker 4: idea behind this new ETF.
Speaker 2: Yeah, I find this ETF fascinating because it touches on
Speaker 2: so many different themes. You know, obviously there's the macro
Speaker 2: and the risk of inflation. There's portfolio construction in the
Speaker 2: form of sixty forty, which you just discussed. But there's
Speaker 2: also this idea of maybe creating a sort of like
Speaker 2: dollar or US treasury alternative that is backed by real assets.
Speaker 2: So you mentioned, you know, the stuff that could do
Speaker 2: well in an inflationary environment and withstand some of those
Speaker 2: big risks, stuff like gold, US property that is somewhat
Speaker 2: climate resilient. So I guess in the northeast and short
Speaker 2: term US treasuries where the rates will more or less
Speaker 2: follow inflation. And one of the other interesting things about
Speaker 2: this whole project is Atlas itself is based out of Dubai,
Speaker 2: where there are you know, it's very close to some
Speaker 2: very large pools of capital that have been investing in treasuries.
Speaker 2: Talk to us more about that angle, this idea that
Speaker 2: you could pitch it as a sort of treasury alternative
Speaker 2: for some big investors.
Speaker 4: Well, as I pointed out, any investor starting from institutional
Speaker 4: investor large sobein well fund, private and public pension funds,
Speaker 4: endowment foundations, let alone retail investors hold a sum allocation
Speaker 4: of their portfolio in long term treasuries, and that's because
Speaker 4: has been traditionally the safe defensive asset. Speaking about literally
Speaker 4: twenty threellion dollar plus of debt and in the world
Speaker 4: that I describe right now, the losses that occurred in
Speaker 4: twenty twenty two or summer of last year when again
Speaker 4: there was a spike in bond hills to five percent,
Speaker 4: there was a correction equity will occur, So you're going
Speaker 4: to lose money on the equity and on the bond
Speaker 4: side of portfolio. That's why, by the way, even fancy
Speaker 4: models like risparity, there are glorified versions of sixty forty
Speaker 4: seventy thirty have not done very well. And therefore I
Speaker 4: think there is a nervousness around the world. The large
Speaker 4: pools of money that I have. The allocation to long
Speaker 4: duration treasury is their concern about a variety of the
Speaker 4: risks that I described, and they're thinking about alternative and
Speaker 4: as you pointed out, the combination of the assets is
Speaker 4: one exactly that does reasonably well actually in normal times
Speaker 4: and is a convexity. So if some of these tailies
Speaker 4: were to materialize, of course the return is going to
Speaker 4: be much higher. So for example, you want to stay
Speaker 4: completely away from long duration treasuries and instead you want
Speaker 4: to be in short duration treasury whisually goes higher and
Speaker 4: under the same price correction. If bond deals are going
Speaker 4: to be higher, you want to be into tips that
Speaker 4: of course are going to do well if there are
Speaker 4: increases in an expected inflation. The allocation to gold is
Speaker 4: a hedge bought against inflation and the basement of yet currency,
Speaker 4: but there's also a hedge against potential di dollarization. If
Speaker 4: you think about the only liquid foreign reserve acid that
Speaker 4: cannot be seized. The last few years in Russia, in Iran,
Speaker 4: North Korea, we've had massive sanctional financial and seize their
Speaker 4: foreign assets. The only liquid acid that cannot be seized
Speaker 4: not euros, not dollars. It's not the end. All of
Speaker 4: those have been seased. There's going to be gold bullion.
Speaker 4: If you old gold bullion, you're going to go and
Speaker 4: be safe. And that's why for example, significant central banks,
Speaker 4: not only of the strategic ralvas of the US, but
Speaker 4: even of the fer enemies of the US. I've gone
Speaker 4: into gold this year. The surge over forty percent in
Speaker 4: gold prices is significantly driven by that geopolitical risk of
Speaker 4: didollarization and diversification. You want to be in some allocation
Speaker 4: for commodities, especially a commodity is because in the world
Speaker 4: of climate change, the demand is going to be there,
Speaker 4: but there'll be supply disruption. We have seen spikes in
Speaker 4: commodity prices driven by climate change. And real estate traditionally
Speaker 4: is a good hedge against moderate increases in inflation because
Speaker 4: rents and other things can go higher, and in the
Speaker 4: short run, real estate is a fixed supply. But because
Speaker 4: of climate change, of course, lots of parts of North
Speaker 4: America are going to have significant problems and asset dials
Speaker 4: are going to be reduced. I mean many parts of Florida, Louisiana,
Speaker 4: California not even a more insurable in terms of home insurance.
Speaker 4: People have to move, and as they move, prices are
Speaker 4: going to fall in the region where you have climate change,
Speaker 4: and they're going to increase where you are having better climate.
Speaker 4: And therefore some location is in real estate. But we
Speaker 4: have data at the zip level for every zip level
Speaker 4: county of the United States, and we look at each
Speaker 4: one of the riads in North America. We see what's
Speaker 4: our allocation two different region with a whole global climate
Speaker 4: change map based on big data that allows us to
Speaker 4: go into the reads that are going to be benefiting
Speaker 4: from climate change as opposed to those who are going
Speaker 4: to be hurt by climate change. So the combination of
Speaker 4: assets that provides you know, solid returns with very low volatility,
Speaker 4: and it's an alternative to the traditional defensive act.
Speaker 3: Yeah, just looking through the holding of gold and short
Speaker 3: term treasuries and tips and a short twenty year were
Speaker 3: betting against the twenty year treasury and equinics and American Tower.
Speaker 3: Interesting mix, right, I have one last question. Yeah, I'm
Speaker 3: not going to ask you the obvious question. And one
Speaker 3: thing I noticed in here there's no bitcoin ETF. But
Speaker 3: I don't want to religate a bitcoin conversation because it's
Speaker 3: the end and I don't want to have that. But
Speaker 3: I do want to ask an adjacent question today, which
Speaker 3: is that when you talk to overseas investors and talk
Speaker 3: to people with high amounts of ultra high networth people
Speaker 3: today in twenty twenty four, when you talk to them,
Speaker 3: how seriously do they view setting aside your own views?
Speaker 3: How seriously do they view bitcoin or crypto? Is some
Speaker 3: component of the portfolio that they want to have.
Speaker 4: You know, some people are opening up to the idea
Speaker 4: of all the crypto acids, but those investors that are
Speaker 4: looking safe for a safe aset that does well given
Speaker 4: this tail risk, are not going to look at the
Speaker 4: crypto acids. When the paradox of crypto acids is that
Speaker 4: they were doing actually quite poorly when inflation was rising
Speaker 4: and the fat was tightening, and they're doing better when
Speaker 4: inflation is falling and the fat is easy. They're not
Speaker 4: negatively correlated with equities actually that are kind of like
Speaker 4: exactly exactly. So if you want if you want something
Speaker 4: a substitute for the forty component, I would say the
Speaker 4: combination of assets that we have considered and willok them
Speaker 4: carefully gives you stable returns and reasonably high turns. If
Speaker 4: you add any crypto asset, you add a huge amount
Speaker 4: of volatility, and there's a wide range of investors that
Speaker 4: don't want that type of volatility.
Speaker 2: When we were first talking about the ETF, there was
Speaker 2: some early discussion of maybe tokenizing it in some way.
Speaker 2: Is that still a possibility.
Speaker 5: Yes, it is.
Speaker 4: The idea is that I do believe that actually tokeonization
Speaker 4: of real and financial asset as some validity as opposed
Speaker 4: to crypto assets are back by nothing vaporware, and I
Speaker 4: think that the process of some degree of tachonization is
Speaker 4: going to occur, and the benefit of tokenization will be
Speaker 4: that these types of liquid acid ETF is not widely
Speaker 4: available in aver of jurisdiction, especially in parts of the
Speaker 4: world like the Global South where there is significant inflation.
Speaker 4: The basement of FIAD currency, you could have something that
Speaker 4: would actually have a stable store of value, still dollar rinked,
Speaker 4: but gives you positive return, and it's going to be
Speaker 4: a good hedg against some of those theories that are
Speaker 4: facing So it'll be a way of eventually making it
Speaker 4: available to many investors all over the world. But that'd
Speaker 4: be stage two organization, not for the time makes the ATF.
Speaker 2: Yes, So I have just one more question. And every
Speaker 2: once in a while I get the urge to start
Speaker 2: an ETF of some sort, maybe the odd thoughts ETF
Speaker 2: that is full of like thematic related assets to the
Speaker 2: stuff that we talk about on the podcast, and then
Speaker 2: I never do it for obvious reasons. But what has
Speaker 2: been the most challenging or unexpected part of launching this ETF.
Speaker 4: You know, it takes a lot of work. You know,
Speaker 4: you have to build a team, collaboration with Goldman Sacks.
Speaker 2: Oh yeah, because this one's actively managed as well.
Speaker 4: Yeah yeah, So you know, one thing is to write
Speaker 4: about money, another thing is to manage it. You have
Speaker 4: ideally P and L. But for me, it's a new
Speaker 4: and interesting challenge. I've been an advisor to many financial
Speaker 4: decisions over time. There's a big picture of view here
Speaker 4: is that Seculuss technician is over Secluss technilious, inflation is rising.
Speaker 4: So it's not just a little twist on a new idea,
Speaker 4: but says there is a big asset class. It's the
Speaker 4: defensive one. There's not going to be this safe acet
Speaker 4: anymore in a world in which will be a variety
Speaker 4: of new tail risks. We have to find a hedge
Speaker 4: against it. So I think that is is going to
Speaker 4: take time. It's not something's going to happen overnight. Is
Speaker 4: a medium, long term story. But I do believe that
Speaker 4: investors are getting nervous about the whole speries of things,
Speaker 4: and I have to think about an alternative to traditional
Speaker 4: But you know, making the idea design and get implementing
Speaker 4: convincing people that that's the right thing to do takes
Speaker 4: a lot of time and effort. Is hard work, all right.
Speaker 2: Neurial Rubini truly the perfect guest to talk about stagflation
Speaker 2: and some of the other big risks out there.
Speaker 5: Thank you so much the great having me. Thanks so much, Joe.
Speaker 2: It's always fun to catch up with Nuriel and see
Speaker 2: how his thinking is kind of evolving and also how
Speaker 2: he's putting some of the big picture like theories into
Speaker 2: practice with the new et.
Speaker 5: I love that chet.
Speaker 3: I thought there was a fantastic chat with Muriel, and
Speaker 3: I thought, a he does a really good job of
Speaker 3: laying out what is very clearly the sort of for
Speaker 3: better worse. Look, all presidents come in and have different factions, right,
Speaker 3: that's not weird. Coalitions are coalitions and what they are,
Speaker 3: and there's always tensions. But there do seem to be
Speaker 3: some very interesting sharp divides within the broader tent of
Speaker 3: trump Ism. There's this sort of traditional Wall Street quote
Speaker 3: pro business unquote view, and then there is the sort
Speaker 3: of much more nationalistic, anti immigration, anti free trade, stagflationary view,
Speaker 3: and it's very unclear who what mix will win out.
Speaker 2: You know, the other thing I like about Muriel is
Speaker 2: he kind of like self catalogs. Yeah, wellness speaks like
Speaker 2: number one, number two, number three, number four. The other
Speaker 2: thing I was thinking, Okay, this has been emerging as
Speaker 2: like a big talking point in a variety of our
Speaker 2: conversations on the podcast now, and also you've written about it.
Speaker 2: I've written about it to some extent, but the idea
Speaker 2: of the market as a limiting factor on what's possible,
Speaker 2: and part of me is a little bit nervous about
Speaker 2: that one because it seems like maybe a big ask
Speaker 2: for the market to police the new administration. But the
Speaker 2: other thing I was thinking about was the importance.
Speaker 5: Of growth in all of this.
Speaker 2: Yeah, and like what becomes possible if the economy continues
Speaker 2: to grow, Maybe that enables like some of the more
Speaker 2: I don't want to say radical, but like creative ideas
Speaker 2: from the administration.
Speaker 3: Yeah, adventurism and heterodox and sort of yeah, for sure,
Speaker 3: you know. I think also I really enjoyed hearing his
Speaker 3: theory of a new safe haven because you do see
Speaker 3: this like a lot of people's big holdings to bonds
Speaker 3: got blown up over the last few years, and you think, okay, well, now,
Speaker 3: they're yielding like I don't know, a few percent. Maybe
Speaker 3: they it's a good time to step back in.
Speaker 2: But the short end is already has made like a
Speaker 2: little bit of a comeback recently.
Speaker 3: A little bit. But like you know, there's a lot
Speaker 3: of people who saying, why am I buying the twenty
Speaker 3: year when the short end is yielding more or is
Speaker 3: yielding about the same with much less duration. And so
Speaker 3: that and then gold has obviously done phenomenally well the
Speaker 3: last couple of years thinking about what makes real estate
Speaker 3: a safe haven in the specific properties of like climate,
Speaker 3: et cetera. Just some very interesting ideas. There are many
Speaker 3: ETFs get that get launched all the time. Most of
Speaker 3: them just sort of disappear. This will be one I
Speaker 3: at least pay attention to.
Speaker 2: Yeah, and the ticker I just realized is USAF, which
Speaker 2: is kind of funny.
Speaker 5: Yeah.
Speaker 2: Anyway, shall we leave it there.
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Authlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 3: I'm Joe Wisenthal. You could follow me at the Stalwart.
Speaker 3: Follow Nurial Rubini at Nuriel. Follow our producers Carmen Rodriguez
Speaker 3: at Carman armand dash Ol Bennett at Dashbot and cal
Speaker 3: Brooks at cal Brooks. Thank you to our producer Moses Onam.
Speaker 3: From our odd Lags content, go to Bloomberg dot com
Speaker 3: slash odd Lots, where we have transcripts, a blog and
Speaker 3: a newsletter and you can chat about all of these
Speaker 3: topics twenty four to seven in our discord with fellow
Speaker 3: listeners Discord dot gg slash.
Speaker 2: Out Lots and if you enjoy odd Lots, if you
Speaker 2: like it when we catch up with Nurial Rubini, then
Speaker 2: please leave us a positive review on your favorite podcast platform.
Speaker 2: And remember, if you are a Bloomberg subscriber, in addition
Speaker 2: to getting our new daily newsletter, you can also listen
Speaker 2: to all of our episodes absolutely add free. All you
Speaker 2: need to do is connect your Bloomberg account with Apple Podcasts.
Speaker 2: To do that, just find the Bloomberg channel on Apple
Speaker 2: Podcasts and follow the instructions there.
Speaker 5: Thanks for listening