Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Joe, it feels like
Speaker 1: there's a lot of uncertainty at the moment. I think,
Speaker 1: why why? What's uncertain kind of everything at the moment.
Speaker 1: So obviously you have what's going on with geopolitics and
Speaker 1: Russia's invasion of Ukraine, and that's obviously a big thing
Speaker 1: for markets. But even without that, you were sort of
Speaker 1: at this inflection point where central banks were just beginning
Speaker 1: to respond to inflation risks, and there's this question of
Speaker 1: how much of an impact that's actually going to have
Speaker 1: on risk assets. Yeah, that's exactly right, and I think
Speaker 1: it's kind of been a confusing couple of leaks in
Speaker 1: terms of understanding both the plan from central banks and
Speaker 1: of course primarily we're talking about the FED and the
Speaker 1: market response to them. Because we did have, uh, the
Speaker 1: start of a eight hiking cycle basis point, many more
Speaker 1: hikes expected, We've you know, the immediate market reaction which
Speaker 1: this rally, and so there's questions which was not necessarily expected,
Speaker 1: And the question as well, is this the market doesn't
Speaker 1: think the Fed is going to go that hard? I
Speaker 1: didn't think the FED isn't gonna need to go that
Speaker 1: hard or is a market going to be surprised that
Speaker 1: the FED really is going to do what it says
Speaker 1: and maybe we're gonna get multiple fifty basic point hikes,
Speaker 1: lots of confusion the start of the raid high cycle.
Speaker 1: Isn't that really created any certainty about what's next? No,
Speaker 1: And we actually had to have Jerome Pale, the FED chair,
Speaker 1: come back on and just emphasized that they were actually
Speaker 1: going to hike UM at a potentially significant rate, and
Speaker 1: then we saw the market reaction. But I mean, even
Speaker 1: beyond the US, there's been a lot of uncertainty and
Speaker 1: just looking at China at the moment, we've had, you know,
Speaker 1: a big sell off in China tech stocks. Yet again
Speaker 1: at the same time that there was this expectation that
Speaker 1: they were going to be easing even more, and then
Speaker 1: we saw them crack down further on the tech space
Speaker 1: and then they seem to walk part of it back UM.
Speaker 1: So this is another open question mark over what exactly
Speaker 1: China's Central Bank is doing here. They seem to be
Speaker 1: you know, taking two steps forward and then one step
Speaker 1: back and trying to calibrate everything and it's I feel
Speaker 1: like it's just confusing the market at the moment. Everything
Speaker 1: the real estate in China of core is a huge,
Speaker 1: huge deal energy so much. Yeah, Okay, Well, on that note,
Speaker 1: on the note of uncertainty, we are going to be
Speaker 1: bringing on one of our favorite guests. We're going to
Speaker 1: be speaking with Victor Schwetz about well everything really, what
Speaker 1: central banks are doing, the situation in Russia, what's going
Speaker 1: on in China. He's going to try to bring it
Speaker 1: all together. Victor Schutz is, of course, the head of
Speaker 1: Global and Asia Pacific Strategy at McQuary Capital. So Victor,
Speaker 1: thank you so much for coming back on the show.
Speaker 1: Thank you for having me. I feel like one of
Speaker 1: the things that happens when we are in times of
Speaker 1: uncertainty is everyone starts reaching for a historic parallel and
Speaker 1: then they try to fit that on what's happening now.
Speaker 1: And there's never a perfect one, but it does feel
Speaker 1: like the one that's emerged as consensus most recently is
Speaker 1: the idea of going back to the nineteen seventies era
Speaker 1: of high inflation, some sort of commodities shock that then
Speaker 1: feeds into the broader economy. Is that the right way
Speaker 1: of framing things. As you correctly said, no historical parallel
Speaker 1: is perfect. If you think of nineteen seventies, we today
Speaker 1: live in a very different world. Labor market in the
Speaker 1: structure of labor market is massively different than what it
Speaker 1: used to be. Our financial leverage, addiction to a surprises
Speaker 1: is radically different to what it used to be. If
Speaker 1: you sink up technological innovation, we really live in the
Speaker 1: world where technologies everything. When people say tech, I basically
Speaker 1: say what do you mean by tech? Everything is tax
Speaker 1: these days, whereas ninety in seventies and sixties, we are
Speaker 1: much more about inventiveness rather than innovation. We have a
Speaker 1: very different demographics, We have very different income and wealth.
Speaker 1: Inequalities were closer to nineteen ten nineteen twenties Gilded Age
Speaker 1: than we are to nineteen seventies. So there is no
Speaker 1: perfect parallels, UH that we preferred to look at. It
Speaker 1: is to say there were three big shocks to the system.
Speaker 1: One was in early nineteen twenties, the other one was
Speaker 1: between nineteen forty five eight UH, and the third one
Speaker 1: is is that was clearly nineteen seventies, and what we're
Speaker 1: going through just another one of those cycles. Each one
Speaker 1: of those episodes have something to teach us, and so
Speaker 1: to me just looking at nineteen seventies sort of ignoring
Speaker 1: the lessons of some of the prior periods. For example,
Speaker 1: clearly there was a massive spike of inflation around nineteen
Speaker 1: nineteen nineteen twenty one. That was the end of the
Speaker 1: Spanish flu or process of Spanish flu as well as
Speaker 1: the end of the Great War Great War, which is
Speaker 1: World War One. What you had then is a significant
Speaker 1: tightening of monitor and fiscal policy occurred, and one that
Speaker 1: occurred in nineteen twenty two. There was a massive deflation
Speaker 1: repost cp I was negative more than twenty before it
Speaker 1: finally stabilized in nineteen twenty three. If you think of
Speaker 1: nineteen forties again, that was the back end of World
Speaker 1: War two. We had a significant inflationary spiked early on,
Speaker 1: but monetary policy remained incredibly loose that they didn't really
Speaker 1: tighten at all. Uh And what was happening through the
Speaker 1: back end of nineteen forties, inflation just worked this way
Speaker 1: out of the system and the only time it picked
Speaker 1: up again was the nineteen fifty one in the lead
Speaker 1: up to the Korean War. But then it stabilized for
Speaker 1: almost two decades after that point. So the question is
Speaker 1: when you look at all of those periods, what they're
Speaker 1: telling us is that, you know, premature tightening is not
Speaker 1: necessarily a good, saying are waiting too long is not
Speaker 1: necessarily good, saying just using fiscal policy might or might
Speaker 1: not be the right thing. That every one of those
Speaker 1: episodes is different. And I think what you need to
Speaker 1: look at today and say and ask why are central
Speaker 1: banks tightening? Well, because there is inflation, Okay, why do
Speaker 1: we have inflation? Why we did not have inflation in
Speaker 1: December two thousand nineteen before COVID, Why we were not
Speaker 1: running out of people in December two thousand nineteen, and
Speaker 1: why we're running out of people today? Well, the answer
Speaker 1: is it's not the month. The month globally is only
Speaker 1: slightly higher than it was prior to one set of COVID.
Speaker 1: I mean, there are some exceptions, uss further advanced on
Speaker 1: the countries and less, but globally it's not that much higher.
Speaker 1: So it's not so much demand. What clearly happened is
Speaker 1: a demand shifted aestimily two goods against services. What we
Speaker 1: had is a massive disruption of supply chains. What we
Speaker 1: had as massive shocks to the system. But theoretically all
Speaker 1: of that prior to Russia's invasion of Ukraine started to normalize.
Speaker 1: If you think of most supply indicators and the value
Speaker 1: chain indicators that they really distressed. Maximum stress was about
Speaker 1: September October one. After that it was all easy back. Um.
Speaker 1: And so if you think of why titan today, why
Speaker 1: do we have a problem today, Well, because we're disrupted.
Speaker 1: We disrupted labor market with disrupted supply chains, we disruptive products,
Speaker 1: We disrupted everything. And so the result is there as
Speaker 1: massive shortages suddenly emerging that do you just leave it
Speaker 1: to work? It? So it's ways through the system. Because
Speaker 1: what we're seeing today already is that fiscal pulses massively
Speaker 1: negative global We're taking out amongst G five economies about
Speaker 1: three trillion dollars. Monetary pulse is becoming negative to we're
Speaker 1: taking out more and we will take an even more
Speaker 1: as we go forward. Uh. The result is that leading
Speaker 1: indicators are already weakening, reflation and cyclicality weakening. The system
Speaker 1: is already adjusted, and as it continues to adjust. Why
Speaker 1: why do you want to necessarily quote twenty two time
Speaker 1: deflationary bust by tightening interface of already declining pressures. Now
Speaker 1: you could argue, of course, you could argue, of course,
Speaker 1: lets look Russia Ukraine upended all of this and we
Speaker 1: suddenly have another shot. Absolutely, but monetary policy is not
Speaker 1: the best tool to use when you have a supply
Speaker 1: chain problems or or a geopolitical problem. So it's interesting.
Speaker 1: So I mean, god, I have like a million questions
Speaker 1: after that, and that was like a sort of fantastic overview,
Speaker 1: But I just wanna hone in on something very specific.
Speaker 1: I'm surprised is there for all of the talk about
Speaker 1: inflation in the wake or really with an ongoing pandemic,
Speaker 1: that I hadn't heard more about the inflation in the
Speaker 1: wake of the Spanish flu, because you think, well, if
Speaker 1: we're looking for historical analogies of pandemic and subsequent inflation,
Speaker 1: would be a pretty good place to start. And yet
Speaker 1: you don't really hear many people go there. Can you
Speaker 1: just talk to us a little bit more about that
Speaker 1: inflationary boom? Then? But what was the catalyst for that
Speaker 1: inflation and how long did it last? And then of
Speaker 1: course you mentioned the tightening and turn into a bus,
Speaker 1: but give a little bit more color on what happened then, Yeah, sure,
Speaker 1: essentially that the think to remember in nineteen thirteen nineteen fourteen,
Speaker 1: the world was incredibly globalized UM. And in fact, globalization
Speaker 1: of nineteen fourteen was thought again replicated until nineteen nine. Uh.
Speaker 1: And so there was a lot of books written back
Speaker 1: in nineteen of five, nineteen nine, nineteen basically saying there's
Speaker 1: a lot of job political pressures, but the war is
Speaker 1: inconceivable because we're so interconnected on a global basis. Plus
Speaker 1: our weaponryes are so dangerous and so deadly that you
Speaker 1: just can't have a war. And of course you did.
Speaker 1: And so one of the things that happened in the
Speaker 1: wake of global war of World War one is that
Speaker 1: all the supply and value chains were disrupted, all the
Speaker 1: things we're seeing today. Through the war, there was a
Speaker 1: lot of distruction of physical capacity occurring, uh and so
Speaker 1: and so there were shortages in ability to supply goods
Speaker 1: UH was very pronounced towards the back end of World
Speaker 1: War One. The other thing you had, you had a
Speaker 1: disruption of the labor market. Not as extensive. I mean,
Speaker 1: Spanish flu was much more deadly, uh, primarily because our
Speaker 1: medicine and science just progressed so much over the last
Speaker 1: you know, seventy eighty years. It was much more deadly,
Speaker 1: but in some ways it was a little bit less
Speaker 1: disruptive to the labor force because people just moved on
Speaker 1: with it. Uh uh And but nevertheless, there was a
Speaker 1: disruption of Spanish flu occurring at the same time, and
Speaker 1: so there was a very significant spike in inflation rates
Speaker 1: because of a global disruption, because of destruction of capacity
Speaker 1: on the global basis, because of the Spanish flu uh.
Speaker 1: And So what happened is that the Federal Reserve of
Speaker 1: New York massively raised the discount rates um. And as
Speaker 1: they raised discount rates and a fiscal policy were brought
Speaker 1: back into under control, in other deficits were reduced, you
Speaker 1: ended up with a significant past. Now, this episode was
Speaker 1: described by Milton Friedman and many others, and the view
Speaker 1: was that if perhaps Federal Reserve of New York acted
Speaker 1: earlier rather than waiting for inflation to persist, maybe they
Speaker 1: wouldn't have had to tighten as much. So there was
Speaker 1: there is a debate clearly going on what you should
Speaker 1: have done. But the net outcome was more than twenty
Speaker 1: deflation uh in twenty two. But nineteen twenties three, it's stabilized,
Speaker 1: and in fact the climate was slightly inflationary and or
Speaker 1: slightly decent inflationary all the way to the crash of
Speaker 1: nineteen um and so and so that's an example. This
Speaker 1: is the example of the government or the public instrumentalities
Speaker 1: either waiting too long to add and or acting too
Speaker 1: much and causing significant economic and a surprise destruction. Now
Speaker 1: in nineteen forties, on the other hands, remember the interest
Speaker 1: rates were fixed by then, and so there was no
Speaker 1: change in real interest rates, no change in the discount rate. Uh,
Speaker 1: fiscal deficits have come down, but only gradually. The government
Speaker 1: was prepared to spend money to either construction or restructuring
Speaker 1: of the industries from wartime to peace time, and so
Speaker 1: the result was a very strong inflationary spike in night
Speaker 1: was basically out of the system by the time you
Speaker 1: get to around nineteen nine, and only spiked again at
Speaker 1: the onset of Korean law. But then after it basically stabilized.
Speaker 1: So that's a result basically telling you that we've made
Speaker 1: a decision back then that we're going to have inflationary
Speaker 1: spike and we're going to work its way out of
Speaker 1: the system rather than fight it. Whereas in nineteen twenties
Speaker 1: decision was made that fiscal policy needs to be brought
Speaker 1: under control and monitory policy was significantly tightened. Now, if
Speaker 1: you think of today's experience, what we actually have decided
Speaker 1: in twenty is that we are we would like to
Speaker 1: have inflationary spike rather than deflationary bust. Remember when the
Speaker 1: onset of COVID started, banks were making huge provisions. And
Speaker 1: the reason that we're making provisions that we're expecting a
Speaker 1: deflationary bust. But it did not happen. And the reason,
Speaker 1: of course we know it didn't happen is because fiscal
Speaker 1: authorities and monitor resource is all step up and propped
Speaker 1: up demand. That's a cause for all the problems we're
Speaker 1: experiencing today. So in other words, we propped up the demand,
Speaker 1: demop shifted the goods against services. Suddenly we have shortages,
Speaker 1: Suddenly we have inflationary spikes. And so the question now
Speaker 1: is it's all working its way out of the systems.
Speaker 1: Logistics is getting better. Certainly prior to Rush it was
Speaker 1: getting better. Supply times we're getting better. Should we just
Speaker 1: let it through because we already have economic activities slowing down.
Speaker 1: Most leading indicators are slowing down. Global money supply is
Speaker 1: now only growing at three. Global credit is improving somewhat,
Speaker 1: but on the momentum it was negative for at least
Speaker 1: the last eight or nine months. And the global credit
Speaker 1: is only growing at about three. We're already taking out
Speaker 1: a lot of fiscal stimuli out of the system as well.
Speaker 1: Should we just let it run off and do very
Speaker 1: little to sort of to aggravate that situation? Russia Ukraine
Speaker 1: of course made a massive difference now. Uh and so.
Speaker 1: But but as I said earlier on um sins like
Speaker 1: geopolitics or healthcare crisis, is uh, they are their fat tales.
Speaker 1: They can never be estimated, they can never be predicted. Uh.
Speaker 1: And and the monetary policy has said is not necessarily
Speaker 1: the best. Not necessarily it's not the best, though it's
Speaker 1: not it shouldn't be the tool that actually addresses either
Speaker 1: of those things. When you look at the yield curve
Speaker 1: right now, it's clearly pricing in recession. But there is
Speaker 1: this big debate going on about how much informational value
Speaker 1: is actually embedded in the yield curve, given you know
Speaker 1: how much of the treasury market is locked up by
Speaker 1: the FED or in bank balance sheets and things like
Speaker 1: that nowadays. But clearly, just looking at the yield curve,
Speaker 1: you would think that the market sees some sort of
Speaker 1: policy error on the horizon. You know, rates rise too much, uh,
Speaker 1: and eventually we end up hitting economic growth in order
Speaker 1: to bring down inflation. Yes, that's exactly what the yields
Speaker 1: coasts are telling you. And when people say, look, let's
Speaker 1: look at the short end or the long end, that's
Speaker 1: that's that's incorrect. You should always look at the long
Speaker 1: end because that's where businesses the banks are expressing their
Speaker 1: views as to the trajectory of growth, as the trajectory
Speaker 1: of inflation rates, what the equity permeerates they should have
Speaker 1: in order to finance the balance sheds in order to
Speaker 1: carry on with their business. And what Clearly, whether you
Speaker 1: look at two by ten, whether you look at five
Speaker 1: by five, well, whatever you look at, there is this
Speaker 1: incredible flattening occurring. In most cases, you only have twenty
Speaker 1: bibbs left. In some parts of the curve you already inverted.
Speaker 1: And so it's federal reserve and no central banks can
Speaker 1: leave you'l curve inverted for any length of time because basically,
Speaker 1: as you correctly said, what it basically the message it
Speaker 1: can baste to the marketplace is that credit conditions are
Speaker 1: going to be too tight. Uh. And therefore interest rates
Speaker 1: ultimately will have to be at a much lower level,
Speaker 1: and that impedes economic activity as you as you go forward.
Speaker 1: So they can't just left it live it unattended, so
Speaker 1: to speak. And so the market is basically saying policy
Speaker 1: error is in the making. It will bring down massively
Speaker 1: economic growth rates. We might end up with recession, we
Speaker 1: might end up with a sequence of heart attacks potentially,
Speaker 1: but ultimately the inflation will get out of the system
Speaker 1: through our substantially reducing the demank. That's what the market
Speaker 1: is saying. But on the other hand, as you correctly said,
Speaker 1: informational value of youl curve has significantly eroded. The webb
Speaker 1: seply compared is to say, you know, private sector, the
Speaker 1: musician in the in the orchestra pit, uh, and the
Speaker 1: central banks are conductors in the past that we're happy
Speaker 1: just to conduct, but now they could often jump in
Speaker 1: the pit and start playing instruments as well as conducting,
Speaker 1: and so they do votes. Uh. And so whenever you
Speaker 1: have central banks starting to land to the main street,
Speaker 1: or buying collateral that they should never be buying, or
Speaker 1: breaching rules on state state financing, or having emergency reap
Speaker 1: A lines just because reaper market is the functioning properly,
Speaker 1: will just have a massive line out there to make
Speaker 1: it work properly the way we think it should be working. Uh.
Speaker 1: And so whenever you have that, now the question is
Speaker 1: how much informational value do you have when the market
Speaker 1: is so distorted. And that's part of the reason why
Speaker 1: I think term premium just disappeared. Even today it's negative,
Speaker 1: you knows, which normally it should be more like a
Speaker 1: hundred and fifty hundred and sixty bits. So as a
Speaker 1: result of term premium being so low, it's easy to invert,
Speaker 1: but it conveys less information to the marketplace as to
Speaker 1: what the real economy rather than financial economy, is doing.
Speaker 1: And the other thing I think it's important to highlight
Speaker 1: whenever you read I don't know all the all the
Speaker 1: all the important people, or you know Blanchard or Muhammadalarian
Speaker 1: or or Summers, they're all focusing on a real economy.
Speaker 1: It's all about labor markets, it's all about capacity constraints.
Speaker 1: Very little is discussed about financial economy. It is regarded
Speaker 1: as somewhat the redistribution mechanism, it is not really a
Speaker 1: creative of anything. But we know that is not true.
Speaker 1: And a financial economy is at least five six times
Speaker 1: larger than the real economy and it has can really
Speaker 1: crush real economy if it comes to it. So one
Speaker 1: thing with it is missing, And the discussion is asset
Speaker 1: prices and the impact of volatility of surprises will have
Speaker 1: on underlying economic activities. Said, we all talk about wages,
Speaker 1: we'll talk about wages per hour, we all talk about
Speaker 1: the capacity constraints ships trended in Los Angeles Harbor, but
Speaker 1: we're not talking about asset prices. And if we cause
Speaker 1: significant volatility of a surprises, what does it do to
Speaker 1: gross what does it do inflation? And the answer it
Speaker 1: actually crushes acrosses both of them. So I wanna drill
Speaker 1: into this further. And I should note for listeners were
Speaker 1: recording this March twenty three, so who knows will happen
Speaker 1: in the next few days while people hear this, but
Speaker 1: before people hear this, But I doubt that this volatility
Speaker 1: will have gone down so much. The counter argument, I
Speaker 1: guess to what you're saying is that you know, there's
Speaker 1: so much real demand that's been put in the pocket
Speaker 1: of um. Uh sort of. I'm thinking back to, say,
Speaker 1: a conversation that we had with Jeff Curry about what's
Speaker 1: drives what drives commodity inflation, and the idea of purchasing
Speaker 1: power being put into lower income households is incredibly powerful.
Speaker 1: It results in more goods purchases, or results in more
Speaker 1: commodity intensive demand and so forth. And so the argument
Speaker 1: that everyone should focus on the real economy is in
Speaker 1: part driven by the sort of fact that lots of
Speaker 1: people have lots of real buying power and their buying
Speaker 1: stuff and that's what's causing the jam at the ports
Speaker 1: and so forth. And Uh. The counter argument is that, well, yes, uh,
Speaker 1: rich people control a lot of the world's financial wealth,
Speaker 1: but not you know, really from a demand perspective, it's
Speaker 1: not as significant. Talk us through a little bit more.
Speaker 1: Why you see in this environment, uh, financial asset volatility,
Speaker 1: which we've particularly seen in the bond market lately, how
Speaker 1: that feeds through to potential bust, potential recession, potential disinflation. Well,
Speaker 1: if you sink all and your specific we're thinking of
Speaker 1: the United States, because other other markets don't have quite
Speaker 1: the same dynamics. But if you think of the United States,
Speaker 1: the top ten percent of households control roughly of that assets.
Speaker 1: Bottom households control absolute and own absolutely nothing on the
Speaker 1: net basis. UH. And so the whole idea is that
Speaker 1: the assets side of the balance ship is as our
Speaker 1: top ten percent of the households they control assets. The
Speaker 1: liability side of the balance is a bottom fifty, right,
Speaker 1: and those bottom must be encouraged to consume and to
Speaker 1: borrow because if they don't, then the value of the
Speaker 1: top ten percent of the of the households will come down.
Speaker 1: In other asset values will come down. But what we
Speaker 1: have seen through the COVID and what we have seen
Speaker 1: through every one of the episodes over the last twenty
Speaker 1: or thirty years, UH that the well screenation of the
Speaker 1: top ten just keeps on accelerating and keeps on accelerating,
Speaker 1: and that means the top ten percent getting more and
Speaker 1: more wealthy. That's your wealth inequality argument. And it's like,
Speaker 1: it's not just top ten percent. You have to remember
Speaker 1: top one controls about that wealth. So it's even more
Speaker 1: than just top ten it's more like top one uh
Speaker 1: and and so as the result is that they're accumulating
Speaker 1: more and more and more assets. They're accumulating assets at
Speaker 1: a faster pace that they can consume or at a
Speaker 1: faster pace that they will get provide for the retirement,
Speaker 1: for example. And as it continue to create this extra
Speaker 1: access wells that needs to be deployed somewhere and wayas
Speaker 1: doesn't get deployed. Well either get deployed in the Ferrari cars,
Speaker 1: you know, Hampton mentions, you know, Picasso painting and the
Speaker 1: rest of it. Maybe super jots and things like that,
Speaker 1: but mostly it gets distributed back to the bottom. To
Speaker 1: contin you need to encourage them to consume. Now because
Speaker 1: you're generating more and more wells, interest rates have to
Speaker 1: be lower and lawer, right, because you're generating more wells
Speaker 1: than you need, and you need to transfer that well
Speaker 1: els to the bottom. And the bottom is already barely
Speaker 1: keeping up with commitments, which means the cost of money
Speaker 1: has to continue to fall if you were to encourage
Speaker 1: those bottom fift to continue to consume. And so the
Speaker 1: problem becomes if the bottom cannot consume, and or if
Speaker 1: you slow down the well's accumulation at the top of
Speaker 1: the pyramid, then the cost of money will go up
Speaker 1: right because you don't have as much access capital to
Speaker 1: relocate to the bottom. And as it goes up, consumption
Speaker 1: at the bottom goes down even more. Uh And So
Speaker 1: the way I look at it, the role and function
Speaker 1: of Federal Reserve is to be an intermediary between the
Speaker 1: top one and the bottom six, or call the top
Speaker 1: ten percent and the bottom six to it, they're the
Speaker 1: conductor of the orchestra which they have to make sure
Speaker 1: that the two sides of the balance, all of the
Speaker 1: assets belong to the top one of ten percent, all
Speaker 1: of the liabilities belong to the bottom fifty or six,
Speaker 1: that those two are in unison, that those two are
Speaker 1: in in in relative harmony. Uh And and that's not
Speaker 1: an easy task. Now, one way of getting rid of
Speaker 1: this system is to say, let's just get rid of
Speaker 1: monetary system as we know it. In other words, we
Speaker 1: live in the world which is highly financialized, highly leverage.
Speaker 1: We're all dependent on asset prices. Is a queue for
Speaker 1: our decisions whether to spend or the safe, whether to
Speaker 1: invest or to share buy backs, or what sort of
Speaker 1: see your compensation you're going to do whatever, let's break
Speaker 1: that system and let's create a different system. Well, it's
Speaker 1: fair enough, but how do you break it without causing
Speaker 1: massive latility and massive collapses of esset prices in the meantime?
Speaker 1: Goues What what people will find if you create too
Speaker 1: much volatility? You know, for one case, are not going
Speaker 1: to be worse what you think they are. Pensions are
Speaker 1: not going to be worse what they think you are.
Speaker 1: Real estate prices won't be the same as what they're today.
Speaker 1: So when people are discussing that we should junk this
Speaker 1: monetary system that we have built since nine eighties and
Speaker 1: replace it with another system, I I basically say, good luck.
Speaker 1: I agree we should. We should have done it twenty
Speaker 1: years ago, thirty years ago. Okay, good luck. How are
Speaker 1: you going to do it? How are you going to
Speaker 1: go from point eight to point B? Clearly the answer
Speaker 1: is fiscal policy. That's how you go from point eight
Speaker 1: to point B. But fiscal policy is much more inflationary,
Speaker 1: uh than a monetary policy. Monetary policy is basically disinflation,
Speaker 1: but fiscal policy is inflationary because it takes the money
Speaker 1: from the cloud of finance and puts it down to
Speaker 1: the ground where real people live. Uh, and so as
Speaker 1: you create inflation, um, you're destabilizing your monetary system before
Speaker 1: you actually building a new system. So how do you
Speaker 1: make this transition? And so nobody in my viewer knows
Speaker 1: how to do it. We all sort of understand that
Speaker 1: it has to change over time, but most of the thinking,
Speaker 1: most of the advice is still very very conventional, still
Speaker 1: treating financial markets as an afterthought, still treating as serprises
Speaker 1: as an afterthought. It's all redistribution. If one got well, said,
Speaker 1: the other one got poorer. How you have a transfer wells,
Speaker 1: it's it's not treated as part of the system itself
Speaker 1: and a critical part of the system, given that it
Speaker 1: is five six times larger then the underlying economies are.
Speaker 1: So that's that's that's the answer. In the short term,
Speaker 1: You're absolutely right, you put more people into into poorer
Speaker 1: people's hand. They consume it. That's why you have increased
Speaker 1: in demand. That's absolutely correct. But they forget the other
Speaker 1: side of the bell where belong those sets belong in
Speaker 1: the top one percent of the households. Um I wondered
Speaker 1: if we could shift focused slightly and maybe talk about
Speaker 1: what's been going on in China. Because there have been
Speaker 1: a lot of headlines coming out of that specific market,
Speaker 1: but they've also been overshadowed a little bit by events
Speaker 1: in Europe. So we've seen a big route in China equities,
Speaker 1: tech stocks, and real estate stocks, and then it seemed
Speaker 1: like the authorities came out and seemed to suggest, Okay,
Speaker 1: maybe we went a little bit too far, maybe we're
Speaker 1: going to start rolling back some of these various crackdowns
Speaker 1: that have really hit those two industries. I believe you
Speaker 1: were fairly bullish on Chinese equities. UM, certainly for and
Speaker 1: maybe going into two. But just talk to us about
Speaker 1: how you're thinking about that market at the moment and
Speaker 1: whether or not the Central Bank seems to be um
Speaker 1: correcting its path. Yeah, you're absolutely right going into twenty two. UM.
Speaker 1: I was bullish on Chinese equities for a couple of reasons.
Speaker 1: First of all, remember China is the only major economy
Speaker 1: on the other side of the title everybody is starting.
Speaker 1: China is the only one which is completely contracyclical. Uh,
Speaker 1: China already was contracyclical over the last eighteen months when
Speaker 1: everybody was flushing but was money. China actually was contracted
Speaker 1: and for the next twelve eighteen months. It looks like
Speaker 1: China again will be contracyclical and being on the other
Speaker 1: side of tightening trade has a great deal of value
Speaker 1: for investors. Not only gives you more inflation growth in China,
Speaker 1: but it also assumes at least that a reman be
Speaker 1: probably don't balance ought to be weaker as China liquefies
Speaker 1: and the rest of the world titans. Uh. The other
Speaker 1: argument that I had was all to do with political,
Speaker 1: geopolitical and regular repressures. That whether it's Olympic Games, whether
Speaker 1: it's a party events, all the way through November twenty two,
Speaker 1: that China will try to don't play some of those challenges,
Speaker 1: whether it's political or regulatory. In other words, it's not
Speaker 1: going to be of primary importance. Now, don't get me wrong,
Speaker 1: China will not change its political system, it's political views,
Speaker 1: or its regulatory views. One uh, there will be no change.
Speaker 1: It's irreversible trend. But at least for a period of
Speaker 1: six or twelve months, I felt that the degree of
Speaker 1: pressure that China will be under will diminish. And the
Speaker 1: third reason, of course was China was a horrible performer
Speaker 1: through one and earlier part of twenty two, and I
Speaker 1: was assuming that at least some of that can be
Speaker 1: can be reclaimed. So if you think of it right now,
Speaker 1: it's been a wrong call because China and the performed
Speaker 1: so far, Asia, Japan as well as as well as
Speaker 1: a bergeant market universe by an the eight or nine percent,
Speaker 1: that's say, they got to perform by last year. So
Speaker 1: clearly it was the wrong call. Uh. And there are
Speaker 1: a couple of reasons for that. Reasonable one is what
Speaker 1: you've alluded to. Uh. The Chinese policymakers are really calibrating
Speaker 1: this idea that they're going to do the same thing
Speaker 1: is what they've done the last three times is well
Speaker 1: and truly debt. They don't want to add another ten
Speaker 1: or fifteen trillion dollars of debt, although they don't mind
Speaker 1: a little bit more leveraging. They don't want infrastructure investment
Speaker 1: to be galloping again. They don't want another massive bubble
Speaker 1: in real estate, and so they are trying to calibrate,
Speaker 1: trying to give you enough stimulus in order to achieve
Speaker 1: reduced gross expectations without complicating longer term picture. And so
Speaker 1: the result is you actually have less differentiation. I guess
Speaker 1: between tightening and easing countries. And so this argument that
Speaker 1: you on the other side of the trade so far
Speaker 1: has been as strong as I thought it might be.
Speaker 1: The second area, of course, is politics, your politics, and
Speaker 1: and the and the regulatory drive. UM. To me, China
Speaker 1: has no choice but to support Russia, UH, and and
Speaker 1: and and and the reason for that is very simple.
Speaker 1: It's nothing to do with the economics, it's nothing to
Speaker 1: do with markets, and it's everything to do with the
Speaker 1: fact that Russia, China, some other places like Iran, Central Asia,
Speaker 1: they look at the world in a similar way. In
Speaker 1: other words, their view is the status dominant debut is
Speaker 1: its interests of society and community trump interests of individuals. UH.
Speaker 1: They have their own view what international rules should be,
Speaker 1: whether it's rules or for the trade, including how you
Speaker 1: treat state or enterprises. UM. Absolute sovereignty sort of harping
Speaker 1: back to eighteenth century and part of the nineteenth century
Speaker 1: where there was absolute sovereignty. Nation is entitled to do
Speaker 1: whatever they want within their own borders. So whether it's
Speaker 1: internet and valcanization of internet, whether it's a rule of
Speaker 1: the state, whether it's a rule of state, US as
Speaker 1: private sector a boss Russia China believe that private sector
Speaker 1: is subordinate to the state and should be largely doing
Speaker 1: what the states sink they should be doing. China clearly
Speaker 1: is not Russia. It gives a lot more freedom to
Speaker 1: private sector. It's much more universal. So it's not the same,
Speaker 1: but the basic concepts are the same. And so what
Speaker 1: we're seeing is this massive illiberal Eurasian bloc forming led
Speaker 1: by China, what I called Sinus sphere. But within that
Speaker 1: will be nassault smaller you know, Russian Empire ing the
Speaker 1: empire Central Asia and many other parts. And to me,
Speaker 1: the objective of redefining global rules ready mining global behavior
Speaker 1: to be much more in line with the way countries
Speaker 1: like China think about the world is far more important
Speaker 1: than any particularly given trade relationship or a slight diminution
Speaker 1: of our GDP numbers. So the Russian invasion of Ukraine
Speaker 1: UH did not come at the good time for for China,
Speaker 1: and I'm sure China would rather not have that. But
Speaker 1: at the end of the day, at the end of
Speaker 1: the day, China has to be on on on on.
Speaker 1: They can't be completely neutral in this because as I said,
Speaker 1: they do look at world very similar way. The way
Speaker 1: places like Russia around look look at the world, and
Speaker 1: the same applies to regulatory issues because it goes down
Speaker 1: to the concept of a separation of state enterprises and
Speaker 1: state itself versus private enterprises. What we have seen since
Speaker 1: two thousand and twelve is increasing fusion between the two.
Speaker 1: Prior to two thousand and twelve, you actually have separation,
Speaker 1: and in many ways state enterprises were encouraged to behave
Speaker 1: more like private enterprises. Since two thousand and twelve there
Speaker 1: was a very strong link towards a few fusion of
Speaker 1: the two. So the space separating state and non state
Speaker 1: private public has been diminishing for more than more than
Speaker 1: a decade. And so when people say, hey, we're finishing
Speaker 1: with a regulatory aspect, no we're not. Uh. You can
Speaker 1: ease back a little bit tactically, but the basic strategic
Speaker 1: thrust of lack of separation between the two is something
Speaker 1: that is going to stay with us. UM And I
Speaker 1: was surprised a little bit that actually continued as aggressively
Speaker 1: as it did over the last over the last six months, UM.
Speaker 1: And so so to me, when I look at China, UH,
Speaker 1: people want an investors want to have a bit of
Speaker 1: ray of sunshine and any any any idea or any
Speaker 1: concept that somehow rush in Ukraine might be winding down
Speaker 1: in some form, any view that perhaps regulatory precious will
Speaker 1: get a little bit less, perhaps you're going to get
Speaker 1: a little bit more stimulatory action. As we progressed through
Speaker 1: the balance of the year. Still should be enough which
Speaker 1: I need is equity still off performed EMOJIU marks. But
Speaker 1: as I said in an earlier part of the year,
Speaker 1: that coal was wrong because basic ingredients that I was
Speaker 1: hoping I'm going to play through that didn't quite get that.
Speaker 1: I wanna expand further on this idea as you put
Speaker 1: in a sort of Eurasian illiberal coalition or block. And
Speaker 1: one of the things that's been striking, of course with
Speaker 1: Russia is beyond just the formal sanctions, the degree to
Speaker 1: which US companies are inner European companies as well as
Speaker 1: will have just sort of abandoned Russia, abandoned operations, in
Speaker 1: many cases severed ties with the local unit of the business.
Speaker 1: And I'm curious that you know what is if these
Speaker 1: blocks harden, these relationships hardened, what does that mean for
Speaker 1: the US China economic relationship? And could there be a
Speaker 1: slower version of that same process in play by which
Speaker 1: you know, if there is this separation, if there is
Speaker 1: two internets, if there is this sort of dramatically different
Speaker 1: regulatory environment, there will we see this sort of some
Speaker 1: sort of break with the companies that have trade and
Speaker 1: links in both countries. Yes, you will. I I prefer
Speaker 1: to call it a slow moving train wreck. Uh So
Speaker 1: Russia was an immediate implosion, a very very fast implosion.
Speaker 1: China is not Russia. China is critical to every supply
Speaker 1: and value chain. China as wasn't temper cent of the
Speaker 1: global economy, it's not less a two percent of global economy.
Speaker 1: So the things that could be done to Russia can
Speaker 1: never be done to China because the blowback to the
Speaker 1: Western economies and the Western societies will be just enormous.
Speaker 1: But what you're going to get, I believe as we
Speaker 1: continue forward, as the blocks hottened, sort of the anglist here,
Speaker 1: the U twenty seven, the signus feel Liberal duration block.
Speaker 1: As it haddens, you will find more and more separation.
Speaker 1: It usually starts with the software areas and more high
Speaker 1: tech areas. So for example, transfer knowledge, transfer technology, educational
Speaker 1: institution ability to acquire skills, uh, it progresses onto some
Speaker 1: more humanitarian pockets um, and then it progresses onto sanctions
Speaker 1: against certain individuals, it progresses to inability to access capital
Speaker 1: um and so so to me, that's an inevitable progression.
Speaker 1: Access to capital will be a privilege, not a free
Speaker 1: market opportunity the way it has been over the last
Speaker 1: three to four decades, but then gradual level creeping up
Speaker 1: into other relationships as well as we progress foward. Again,
Speaker 1: I want to highlight that China is not Russia uh
Speaker 1: and and this disconnect or ability to quarantine the country
Speaker 1: of the size and important of China is just not
Speaker 1: on nobody will ever contemplated, but gradually, bit by bit
Speaker 1: over a long period of time, that's going to be
Speaker 1: the answer. And so the question that becomes from an
Speaker 1: asset perspective or investor perspective, is China investable? Is a
Speaker 1: portfolio manageable? Because if we continue on this pass, which
Speaker 1: looks likely we will, then from international investors opportunity to
Speaker 1: invest in China and Chinese equities will become more constrained. Now,
Speaker 1: that doesn't preclude private equity participating in various ventures. It
Speaker 1: doesn't preclude companies investing into some plants, for example. But
Speaker 1: whether your private equity, whether you are company, or whether
Speaker 1: your portfolio manager, you'll be second guessing yourself. You'll be saying,
Speaker 1: should I do this? Well, I wake up on Monday
Speaker 1: morning and finding financial times and done something I shouldn't
Speaker 1: have done. Uh. And and whenever people start the second
Speaker 1: guests themselves, so to speak, they are slower. Uh, they
Speaker 1: will be a little bit less committed. And I think
Speaker 1: that's what you're going to see. You're gonna see a
Speaker 1: little bit less commitment, slower responses, more desired to look
Speaker 1: again and double check yourself whether you, in fact are
Speaker 1: doing the right thing. And it does wouldn't just apply
Speaker 1: to portfolio managers. It will apply to their trustees. It
Speaker 1: will apply to management teams that are running uh those funds. Uh.
Speaker 1: And so I think you're absolutely right. That's that's what
Speaker 1: the final trajector would look like. Doesn't mean that there
Speaker 1: is no capital in China or China will be stopped
Speaker 1: of capital. That's not the case. China has no shortage
Speaker 1: of capital. China needs expertise, um and knowledge rather than capital.
Speaker 1: So it doesn't mean necessarily disaster for China or a
Speaker 1: uration block or sinus sphere block, whatever you call it,
Speaker 1: it doesn't mean that at all. It's just it will
Speaker 1: be functioning by different rules, it will have different systems,
Speaker 1: it will have different rule of the state and private sectors.
Speaker 1: It will just be different. But it doesn't mean necessarily
Speaker 1: a disaster. So, given all this uncertainty that you've laid out,
Speaker 1: what are you actually recommending people buy at the moment?
Speaker 1: Because I feel like we often have these macro conversations
Speaker 1: and you know, it's like, here's a risk, here's another risk.
Speaker 1: Bonds clearly aren't good bet if rates are going to
Speaker 1: go up significantly. But on the other hand, you probably
Speaker 1: don't want to own stocks if you think that rates
Speaker 1: are going to go up and then lead to some
Speaker 1: sort of recession. It feels very very hard to advise
Speaker 1: people on what exactly to buy in the current environment.
Speaker 1: It is it is, and that's one of the problems
Speaker 1: was not having a normal distribution of events people are functioning,
Speaker 1: and corporate finance and investment theory functioning on the normal distribution.
Speaker 1: In other words, you can anticipate, you can predict certain outcomes,
Speaker 1: you can estimate what the impact that those outcomes will be,
Speaker 1: and so it is no longer normal distribution. UH. Those
Speaker 1: events cannot be predicted. Those events cannot be estimated. UH,
Speaker 1: and enhance As a portfolio manager, You're lost. Whatever bet
Speaker 1: you're making, it's just a bet. It's a gamble. It's
Speaker 1: not really an investable proposition. Now you might take a
Speaker 1: view that commodities is a way to go forward, absolutely fine,
Speaker 1: but more likely than not that actually over the longer
Speaker 1: term might turn out to be wrong unless you're in
Speaker 1: the right commodities. People will say, should I go into
Speaker 1: high asset, low return invested capital type company as well? Yes, maybe,
Speaker 1: but it depends what's going to happen, depends what is
Speaker 1: the role of the state going to be, What is
Speaker 1: the roll of fiscal policies are going to be the
Speaker 1: same applies to the bond market. The same way as
Speaker 1: we're worried about inflation, the same inflation could collapse very
Speaker 1: quickly as we go into twenty twenties three. Remember inflation
Speaker 1: is a delta, uh and others. All the prices have
Speaker 1: to be higher in UH. You know March April twenties
Speaker 1: three compared to March April two to give you a
Speaker 1: positive read on inflation. UH. And it is quite possible
Speaker 1: that the markets are right that by twenty twenty four
Speaker 1: you're going to have at least three or four interest
Speaker 1: rate cuts occurring rather than tightening of monetary policy. It
Speaker 1: is also possible that fiscal policy will go back into
Speaker 1: becoming a player after contracting for eighteen months. So all
Speaker 1: of this could change very quickly, and therefore ten year
Speaker 1: bonds could end up back at one one and a
Speaker 1: half percent easily rather than just marching onto two and
Speaker 1: a half three percent. Uh So, to me, in all
Speaker 1: the sea of confusion, and we haven't even talked about
Speaker 1: whether it's a healthcare emergency, so whether it's pandemics, or
Speaker 1: whether it's your political events, we haven't even talked about that.
Speaker 1: So in that sort of sea of confusion, to me,
Speaker 1: just identifying what are the right circular drivers, What is changing,
Speaker 1: what isn't changing, Well, financialization is not changing. Remember, but
Speaker 1: the only reason US has an opportunity to raise money
Speaker 1: or race cost of capital is because the policy rates
Speaker 1: today in the US are below neutral rates. Neutral rates
Speaker 1: in US are roughly around zero in real terms that
Speaker 1: means about two percent and nominal terms. But if you
Speaker 1: think of Eurozone, in Japan, their policy rates are in line,
Speaker 1: if not even higher that their neutral rates, so they
Speaker 1: can't really tighten. Uh, And so US has an opportunity
Speaker 1: to tighten. But as they tighten and get closer to
Speaker 1: our start or a neutral rate, what's going to happen.
Speaker 1: Molatility of enterprise increase. So financialization is unstoppable because as
Speaker 1: soon as molatility of enterprises goes up, central banks have
Speaker 1: to back off. And this idea that we need to
Speaker 1: generate more money and more liquidity than underlying economy is
Speaker 1: required cannot be reversed. So that's a given. The other
Speaker 1: thing is given is technology will continue progressing. Right now,
Speaker 1: we have shortages here and there, but at the end
Speaker 1: of the day, technology will continu your reducing marginal pricing
Speaker 1: power of both capital marginal pricing power products corporates as
Speaker 1: well as as well as labor. That should be that
Speaker 1: should be given. And the third thing that should be
Speaker 1: given is that geopolitical, social and political pressures will continue
Speaker 1: boiling over. It might get much tougher actually as we
Speaker 1: go over the next over the next five to ten years.
Speaker 1: So none of that stuff is actually changing. So if
Speaker 1: it is not changing, what do you want to buy? Well,
Speaker 1: you want to buy commodities that are actually replacing today's
Speaker 1: world and building the new world. That's your copper, your nickel,
Speaker 1: your aluminum, you're lythium, your rearse, your semiconductors. What else
Speaker 1: do you want to do well? Capital goods companies that
Speaker 1: actually will be rebuilding where I was destroyed, plus building
Speaker 1: the new the new era. What else do you want
Speaker 1: to do well? The new startups that will be operating
Speaker 1: new world, whether it's alternative transportation platforms, energy platforms, whether
Speaker 1: it's a fusion of infat tact and by attack all
Speaker 1: of that staff. Plus in addition to that, some software
Speaker 1: and select digital companies. You want to have, not all
Speaker 1: of them, but you want to have some of that.
Speaker 1: You want to look at any company in any sector
Speaker 1: that has not just pricing power, but ability to do
Speaker 1: things differently, whether their products are marketing, the way they
Speaker 1: use technology and therefore their productivity growth rates are faster
Speaker 1: so to meet the in the in the sea of confusion,
Speaker 1: the only thing is certain is that go with a
Speaker 1: circular strengths and go with the productivity drivers. In other words,
Speaker 1: those guys who consistently deliver access our productivity, circular strength,
Speaker 1: productivity drivers. To me, that's an easiest way to sort
Speaker 1: of conceptualize it in the short term. However, Yeah, you're
Speaker 1: absolutely right energy. If you take out energy, global markets
Speaker 1: would not have performed. Uh. And if you were an
Speaker 1: energy you're up to against any index. If you have
Speaker 1: a mix of energy and financials, you would have been
Speaker 1: up at least ten. If you are somebody like Cassi
Speaker 1: would have ARC, which is completely on the opposite side,
Speaker 1: you would have been down twenty five gains the indexes.
Speaker 1: So somewhere in between those extreme outcomes to me is
Speaker 1: the sort of the essence of resilient portfolio. Do you
Speaker 1: really want to pluck more on energy at the current
Speaker 1: prices or do you really want to completely double down
Speaker 1: and triple up so to speak, on on on extreme
Speaker 1: startups or profitable tech companies. Uh. The answer to me,
Speaker 1: both of those answers are wrong because both of them
Speaker 1: will lead to very high crystallized flatility. And somewhere between
Speaker 1: those outcomes I think lies sort of resilient performance. I
Speaker 1: just want to go back real quickly just to this
Speaker 1: idea of as you put it, prior to the invasion
Speaker 1: of your craned are already indicators of normalization and it's
Speaker 1: really not clear how much aggressive easing is needed, especially
Speaker 1: in light of the massive amount of fiscal that's being
Speaker 1: taken out of the system. What is the worry? And
Speaker 1: you know we talked about the deflationary bust after the
Speaker 1: inflation of the Spanish flu. How do you see a
Speaker 1: potential policy mistake playing out right now? Well, the the
Speaker 1: only number sort of to look at Israeli financial conditions.
Speaker 1: Different countries call it different the names. Some call it
Speaker 1: stress conditions, some call it some other names, but essentially
Speaker 1: all of them are the same, all of them taken
Speaker 1: to count. Variety of spreads are like high yield spreads
Speaker 1: and a variety of volatilities in various markets in order
Speaker 1: to define how how easy or tight financial conditions on
Speaker 1: what you have seen so far in the last sort
Speaker 1: of six weeks seven weeks is a fairly dramatic tightening
Speaker 1: occurring in Eurozone as well as in Egic market. But
Speaker 1: in the U s. Typing star far has been less pronounced.
Speaker 1: And the reason for that is that, as I said,
Speaker 1: the our star in the US is above the policy rids.
Speaker 1: So you still stimilitary, you still have the capacity to
Speaker 1: come to come up. The question is half far can
Speaker 1: you come? How close can you come to our star?
Speaker 1: Can you go above our star and actually become contraction?
Speaker 1: To me, the answer is you can't go above that.
Speaker 1: But as you go closing closer, volatility of esset prices increases. Now,
Speaker 1: remember theoretically our star is zero in real, which is
Speaker 1: say two nominal, So there is a room for fifty BIPs,
Speaker 1: maybe another twenty five, maybe a little bit more. But
Speaker 1: as you go up and get closer and closer to
Speaker 1: our star, volatility of enterprises will six potentially significantly increased.
Speaker 1: When that happens, it flows straight through into financial conditions indexes.
Speaker 1: And that's a cute four central banks to pull back,
Speaker 1: they have no true is spot to pull back very quickly.
Speaker 1: Uh and and so I I, as you know, I
Speaker 1: I I tended to believe that twenty two will be
Speaker 1: the year of removal of fiscal and monetary supports. Twenty
Speaker 1: twenty four will be the years of putting it back off,
Speaker 1: uh and and so and so I still maintain that
Speaker 1: that's probably will be the right answer, and the que
Speaker 1: will be financial condition indexes. If you want to look
Speaker 1: at specific areas, of course, you can look at the
Speaker 1: high yiel spreads. You can look at the plumbing of
Speaker 1: the banking system. There are specific indicators you can look
Speaker 1: at it, but all of that is kind of conceptualized
Speaker 1: into financial condition indoors. Now you can also argue that
Speaker 1: we talked about the yield curve, the more it inverts,
Speaker 1: the more federal reserve. We need to consider operation twist,
Speaker 1: or in other words, some degree of yield curve control.
Speaker 1: That's something that might be part of the discussion and
Speaker 1: debate as we go towards the end of twenty two.
Speaker 1: All right, well, Victor, we're gonna have to leave it there,
Speaker 1: but thank you so much for coming back on the show.
Speaker 1: Thank you. I'd really appreciate it. So, Joe, it's always
Speaker 1: great hearing from Victor, and he has this uncanny knack
Speaker 1: of bringing everything together under one sort of giant macro umbrella.
Speaker 1: But I thought what he was saying about the parallel
Speaker 1: to the post Spanish flu era was really interesting. And
Speaker 1: also to get back to this idea of, you know,
Speaker 1: we can have an inflationary spike, but that can easily
Speaker 1: tip over into deflation. This idea of it's not necessarily
Speaker 1: that prices are just going up and up and up
Speaker 1: right now. It's actually that they're really volatile and it's
Speaker 1: hard to measure. And what that means is that it's
Speaker 1: really difficult to get a handle on real demand versus
Speaker 1: sort of fake stockpiling. To Matt, yes, absolutely, and you
Speaker 1: know something that he touched on, and I've been writing
Speaker 1: a little bit about this, and you know, even Powell
Speaker 1: talked about it in his two recent appearances. Whatever you
Speaker 1: say about the two word transitory, transitory, some of the
Speaker 1: current inflation is still likely the result of it, even
Speaker 1: though no one uses that word. And there's been major disruptions,
Speaker 1: and uh, there's the shift in consumption from services to
Speaker 1: goods and all these sort of unusual things, and the
Speaker 1: trillions of dollars that spent which is not going to
Speaker 1: be spent in two there is physical tightening and so
Speaker 1: I do you know, no one talks about the user
Speaker 1: of the word transitory, but that is still an element.
Speaker 1: And if it's significant, and if we were going to
Speaker 1: see some sort of normalization naturally, plus you add in
Speaker 1: an aggressive hiking cycle, then you get to the scenario
Speaker 1: Victor laid out where by three they're talking about eating
Speaker 1: again totally. I mean, this is the other thing that
Speaker 1: emerged from the pandemic. We didn't really get a proper
Speaker 1: recession after the pandemic because we had all the stimulus,
Speaker 1: and then we sort of got shunted into a recovery
Speaker 1: that was really supercharged again thanks to that physical stimulus.
Speaker 1: And now it feels like we're sort of getting the response.
Speaker 1: I know some people say it was too slow coming,
Speaker 1: but it actually feels like it could come very quickly,
Speaker 1: with pal talking about fifty basis point increases and so
Speaker 1: it feels like we could get a whole another cycle
Speaker 1: happening very very fast. Yeah, you know, it's interesting. I
Speaker 1: had this thought about like this sort of I guess
Speaker 1: it's like the the fun house mirror version of the
Speaker 1: downturn and how fast this I'm trying to turn it out?
Speaker 1: And you know what day I felt like that specifically
Speaker 1: is that day, remember like the price of nickel went
Speaker 1: completely to shut down the nickel trading, And the day
Speaker 1: it reminded me of, weirdly was the day that oil
Speaker 1: went negative. Even though it's the exact opposite move it
Speaker 1: one is this huge spike, but both are these days
Speaker 1: that sort of like broke the market, except in opposite directions,
Speaker 1: and so to some extent it did feel like I
Speaker 1: don't know, like, yes, I think what you're what you're
Speaker 1: saying is we'll put like we're just getting this really
Speaker 1: extremely torqued version of what we experienced throughout hopefully thanks
Speaker 1: you know that. Hence that, hence the dream of a
Speaker 1: soft landing or just te normal. Yeah, the torque does
Speaker 1: a good word. Isn't it all? Right? Um? Shall we
Speaker 1: leave it there? Let's leave it there? Okay. This has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe Why Isn't Thal? You can follow me on
Speaker 1: Twitter at the Stalwarts. Big thanks to our producers Magnus
Speaker 1: Henrickson and Colin Tipton. Followed the Bloomberg head of podcast
Speaker 1: Francesco Levy at Francesco Today and check out all of
Speaker 1: the podcasts at Bloomberg onto the handle add Podcasts. Thanks
Speaker 1: for listening.