WEBVTT - Viktor Shvets on Why We Might Be Heading for a Deflationary Bust 0:00:05.800 --> 0:00:09.120 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:09.160 --> 0:00:12.760 I'm Tracy Allaway and I'm Joe. Joe, it feels like 0:00:12.800 --> 0:00:15.880 there's a lot of uncertainty at the moment. I think, 0:00:16.840 --> 0:00:20.479 why why? What's uncertain kind of everything at the moment. 0:00:20.520 --> 0:00:24.319 So obviously you have what's going on with geopolitics and 0:00:24.400 --> 0:00:27.960 Russia's invasion of Ukraine, and that's obviously a big thing 0:00:28.040 --> 0:00:31.960 for markets. But even without that, you were sort of 0:00:32.040 --> 0:00:35.839 at this inflection point where central banks were just beginning 0:00:35.880 --> 0:00:40.120 to respond to inflation risks, and there's this question of 0:00:40.320 --> 0:00:42.239 how much of an impact that's actually going to have 0:00:42.280 --> 0:00:45.720 on risk assets. Yeah, that's exactly right, and I think 0:00:45.760 --> 0:00:48.839 it's kind of been a confusing couple of leaks in 0:00:48.960 --> 0:00:52.680 terms of understanding both the plan from central banks and 0:00:52.720 --> 0:00:55.160 of course primarily we're talking about the FED and the 0:00:55.200 --> 0:00:58.520 market response to them. Because we did have, uh, the 0:00:58.680 --> 0:01:02.319 start of a eight hiking cycle basis point, many more 0:01:02.360 --> 0:01:06.760 hikes expected, We've you know, the immediate market reaction which 0:01:06.840 --> 0:01:11.280 this rally, and so there's questions which was not necessarily expected, 0:01:11.319 --> 0:01:13.800 And the question as well, is this the market doesn't 0:01:13.800 --> 0:01:15.600 think the Fed is going to go that hard? I 0:01:15.680 --> 0:01:17.520 didn't think the FED isn't gonna need to go that 0:01:17.720 --> 0:01:20.800 hard or is a market going to be surprised that 0:01:20.880 --> 0:01:22.800 the FED really is going to do what it says 0:01:22.840 --> 0:01:25.480 and maybe we're gonna get multiple fifty basic point hikes, 0:01:25.600 --> 0:01:28.560 lots of confusion the start of the raid high cycle. 0:01:28.680 --> 0:01:31.920 Isn't that really created any certainty about what's next? No, 0:01:32.080 --> 0:01:35.320 And we actually had to have Jerome Pale, the FED chair, 0:01:35.480 --> 0:01:38.600 come back on and just emphasized that they were actually 0:01:38.640 --> 0:01:42.759 going to hike UM at a potentially significant rate, and 0:01:42.800 --> 0:01:47.360 then we saw the market reaction. But I mean, even 0:01:47.440 --> 0:01:51.120 beyond the US, there's been a lot of uncertainty and 0:01:51.160 --> 0:01:53.560 just looking at China at the moment, we've had, you know, 0:01:53.600 --> 0:01:56.600 a big sell off in China tech stocks. Yet again 0:01:57.120 --> 0:01:59.480 at the same time that there was this expectation that 0:01:59.520 --> 0:02:02.360 they were going to be easing even more, and then 0:02:02.400 --> 0:02:04.960 we saw them crack down further on the tech space 0:02:05.040 --> 0:02:07.680 and then they seem to walk part of it back UM. 0:02:07.800 --> 0:02:11.440 So this is another open question mark over what exactly 0:02:11.560 --> 0:02:13.919 China's Central Bank is doing here. They seem to be 0:02:13.960 --> 0:02:16.520 you know, taking two steps forward and then one step 0:02:16.520 --> 0:02:19.240 back and trying to calibrate everything and it's I feel 0:02:19.240 --> 0:02:22.399 like it's just confusing the market at the moment. Everything 0:02:22.480 --> 0:02:25.120 the real estate in China of core is a huge, 0:02:25.840 --> 0:02:30.680 huge deal energy so much. Yeah, Okay, Well, on that note, 0:02:30.840 --> 0:02:33.200 on the note of uncertainty, we are going to be 0:02:33.320 --> 0:02:35.600 bringing on one of our favorite guests. We're going to 0:02:35.639 --> 0:02:39.600 be speaking with Victor Schwetz about well everything really, what 0:02:39.720 --> 0:02:42.560 central banks are doing, the situation in Russia, what's going 0:02:42.639 --> 0:02:44.280 on in China. He's going to try to bring it 0:02:44.320 --> 0:02:47.360 all together. Victor Schutz is, of course, the head of 0:02:47.400 --> 0:02:51.400 Global and Asia Pacific Strategy at McQuary Capital. So Victor, 0:02:51.560 --> 0:02:53.240 thank you so much for coming back on the show. 0:02:53.840 --> 0:02:56.280 Thank you for having me. I feel like one of 0:02:56.320 --> 0:02:59.000 the things that happens when we are in times of 0:02:59.080 --> 0:03:03.720 uncertainty is everyone starts reaching for a historic parallel and 0:03:03.720 --> 0:03:06.600 then they try to fit that on what's happening now. 0:03:06.639 --> 0:03:09.320 And there's never a perfect one, but it does feel 0:03:09.440 --> 0:03:14.240 like the one that's emerged as consensus most recently is 0:03:14.280 --> 0:03:16.799 the idea of going back to the nineteen seventies era 0:03:16.919 --> 0:03:20.799 of high inflation, some sort of commodities shock that then 0:03:20.880 --> 0:03:24.240 feeds into the broader economy. Is that the right way 0:03:24.280 --> 0:03:29.000 of framing things. As you correctly said, no historical parallel 0:03:29.160 --> 0:03:33.320 is perfect. If you think of nineteen seventies, we today 0:03:33.400 --> 0:03:36.520 live in a very different world. Labor market in the 0:03:36.560 --> 0:03:40.040 structure of labor market is massively different than what it 0:03:40.200 --> 0:03:44.400 used to be. Our financial leverage, addiction to a surprises 0:03:44.680 --> 0:03:47.720 is radically different to what it used to be. If 0:03:47.760 --> 0:03:52.160 you sink up technological innovation, we really live in the 0:03:52.200 --> 0:03:56.080 world where technologies everything. When people say tech, I basically 0:03:56.080 --> 0:03:58.520 say what do you mean by tech? Everything is tax 0:03:58.600 --> 0:04:01.760 these days, whereas ninety in seventies and sixties, we are 0:04:01.840 --> 0:04:06.560 much more about inventiveness rather than innovation. We have a 0:04:06.640 --> 0:04:10.880 very different demographics, We have very different income and wealth. 0:04:10.920 --> 0:04:15.320 Inequalities were closer to nineteen ten nineteen twenties Gilded Age 0:04:15.840 --> 0:04:18.599 than we are to nineteen seventies. So there is no 0:04:18.760 --> 0:04:21.800 perfect parallels, UH that we preferred to look at. It 0:04:21.880 --> 0:04:26.039 is to say there were three big shocks to the system. 0:04:26.640 --> 0:04:30.640 One was in early nineteen twenties, the other one was 0:04:31.120 --> 0:04:35.440 between nineteen forty five eight UH, and the third one 0:04:36.320 --> 0:04:39.520 is is that was clearly nineteen seventies, and what we're 0:04:39.520 --> 0:04:43.080 going through just another one of those cycles. Each one 0:04:43.120 --> 0:04:46.760 of those episodes have something to teach us, and so 0:04:46.839 --> 0:04:50.720 to me just looking at nineteen seventies sort of ignoring 0:04:50.760 --> 0:04:53.920 the lessons of some of the prior periods. For example, 0:04:54.800 --> 0:04:59.400 clearly there was a massive spike of inflation around nineteen 0:04:59.520 --> 0:05:03.240 nineteen nineteen twenty one. That was the end of the 0:05:03.279 --> 0:05:06.720 Spanish flu or process of Spanish flu as well as 0:05:06.760 --> 0:05:09.240 the end of the Great War Great War, which is 0:05:09.240 --> 0:05:13.760 World War One. What you had then is a significant 0:05:13.800 --> 0:05:17.359 tightening of monitor and fiscal policy occurred, and one that 0:05:17.400 --> 0:05:21.400 occurred in nineteen twenty two. There was a massive deflation 0:05:21.480 --> 0:05:25.480 repost cp I was negative more than twenty before it 0:05:25.600 --> 0:05:29.000 finally stabilized in nineteen twenty three. If you think of 0:05:29.080 --> 0:05:32.240 nineteen forties again, that was the back end of World 0:05:32.279 --> 0:05:36.360 War two. We had a significant inflationary spiked early on, 0:05:37.240 --> 0:05:41.360 but monetary policy remained incredibly loose that they didn't really 0:05:41.400 --> 0:05:44.800 tighten at all. Uh And what was happening through the 0:05:44.839 --> 0:05:47.640 back end of nineteen forties, inflation just worked this way 0:05:47.680 --> 0:05:50.559 out of the system and the only time it picked 0:05:50.600 --> 0:05:53.080 up again was the nineteen fifty one in the lead 0:05:53.160 --> 0:05:57.720 up to the Korean War. But then it stabilized for 0:05:57.880 --> 0:06:01.360 almost two decades after that point. So the question is 0:06:01.440 --> 0:06:03.800 when you look at all of those periods, what they're 0:06:03.839 --> 0:06:07.680 telling us is that, you know, premature tightening is not 0:06:07.800 --> 0:06:10.720 necessarily a good, saying are waiting too long is not 0:06:10.800 --> 0:06:15.159 necessarily good, saying just using fiscal policy might or might 0:06:15.200 --> 0:06:17.480 not be the right thing. That every one of those 0:06:17.520 --> 0:06:20.520 episodes is different. And I think what you need to 0:06:20.560 --> 0:06:24.440 look at today and say and ask why are central 0:06:24.480 --> 0:06:28.279 banks tightening? Well, because there is inflation, Okay, why do 0:06:28.360 --> 0:06:31.440 we have inflation? Why we did not have inflation in 0:06:31.480 --> 0:06:35.359 December two thousand nineteen before COVID, Why we were not 0:06:35.480 --> 0:06:38.960 running out of people in December two thousand nineteen, and 0:06:39.000 --> 0:06:42.080 why we're running out of people today? Well, the answer 0:06:42.240 --> 0:06:44.720 is it's not the month. The month globally is only 0:06:44.760 --> 0:06:49.200 slightly higher than it was prior to one set of COVID. 0:06:49.560 --> 0:06:52.120 I mean, there are some exceptions, uss further advanced on 0:06:52.200 --> 0:06:55.440 the countries and less, but globally it's not that much higher. 0:06:55.720 --> 0:06:58.760 So it's not so much demand. What clearly happened is 0:06:58.800 --> 0:07:03.080 a demand shifted aestimily two goods against services. What we 0:07:03.240 --> 0:07:06.960 had is a massive disruption of supply chains. What we 0:07:07.040 --> 0:07:11.080 had as massive shocks to the system. But theoretically all 0:07:11.120 --> 0:07:16.400 of that prior to Russia's invasion of Ukraine started to normalize. 0:07:16.560 --> 0:07:20.040 If you think of most supply indicators and the value 0:07:20.080 --> 0:07:24.600 chain indicators that they really distressed. Maximum stress was about 0:07:24.600 --> 0:07:29.800 September October one. After that it was all easy back. Um. 0:07:30.240 --> 0:07:33.640 And so if you think of why titan today, why 0:07:33.680 --> 0:07:36.480 do we have a problem today, Well, because we're disrupted. 0:07:36.520 --> 0:07:40.960 We disrupted labor market with disrupted supply chains, we disruptive products, 0:07:41.320 --> 0:07:44.240 We disrupted everything. And so the result is there as 0:07:44.320 --> 0:07:48.560 massive shortages suddenly emerging that do you just leave it 0:07:48.600 --> 0:07:51.560 to work? It? So it's ways through the system. Because 0:07:51.800 --> 0:07:55.720 what we're seeing today already is that fiscal pulses massively 0:07:55.800 --> 0:07:59.920 negative global We're taking out amongst G five economies about 0:08:00.040 --> 0:08:04.520 three trillion dollars. Monetary pulse is becoming negative to we're 0:08:04.520 --> 0:08:06.800 taking out more and we will take an even more 0:08:06.840 --> 0:08:10.880 as we go forward. Uh. The result is that leading 0:08:10.920 --> 0:08:16.760 indicators are already weakening, reflation and cyclicality weakening. The system 0:08:16.840 --> 0:08:21.200 is already adjusted, and as it continues to adjust. Why 0:08:21.200 --> 0:08:26.040 why do you want to necessarily quote twenty two time 0:08:26.120 --> 0:08:32.480 deflationary bust by tightening interface of already declining pressures. Now 0:08:32.559 --> 0:08:35.000 you could argue, of course, you could argue, of course, 0:08:35.200 --> 0:08:37.840 lets look Russia Ukraine upended all of this and we 0:08:37.960 --> 0:08:41.880 suddenly have another shot. Absolutely, but monetary policy is not 0:08:41.960 --> 0:08:44.520 the best tool to use when you have a supply 0:08:44.679 --> 0:08:49.160 chain problems or or a geopolitical problem. So it's interesting. 0:08:49.280 --> 0:08:51.480 So I mean, god, I have like a million questions 0:08:51.520 --> 0:08:54.439 after that, and that was like a sort of fantastic overview, 0:08:54.920 --> 0:08:58.280 But I just wanna hone in on something very specific. 0:08:58.840 --> 0:09:01.920 I'm surprised is there for all of the talk about 0:09:02.000 --> 0:09:06.960 inflation in the wake or really with an ongoing pandemic, 0:09:07.480 --> 0:09:10.520 that I hadn't heard more about the inflation in the 0:09:10.559 --> 0:09:12.720 wake of the Spanish flu, because you think, well, if 0:09:12.720 --> 0:09:17.040 we're looking for historical analogies of pandemic and subsequent inflation, 0:09:17.120 --> 0:09:19.240 would be a pretty good place to start. And yet 0:09:19.320 --> 0:09:21.400 you don't really hear many people go there. Can you 0:09:21.480 --> 0:09:24.240 just talk to us a little bit more about that 0:09:24.280 --> 0:09:28.080 inflationary boom? Then? But what was the catalyst for that 0:09:28.200 --> 0:09:30.480 inflation and how long did it last? And then of 0:09:30.520 --> 0:09:32.720 course you mentioned the tightening and turn into a bus, 0:09:32.760 --> 0:09:36.160 but give a little bit more color on what happened then, Yeah, sure, 0:09:36.720 --> 0:09:40.600 essentially that the think to remember in nineteen thirteen nineteen fourteen, 0:09:41.200 --> 0:09:46.679 the world was incredibly globalized UM. And in fact, globalization 0:09:46.720 --> 0:09:52.320 of nineteen fourteen was thought again replicated until nineteen nine. Uh. 0:09:52.360 --> 0:09:54.800 And so there was a lot of books written back 0:09:54.840 --> 0:09:59.480 in nineteen of five, nineteen nine, nineteen basically saying there's 0:09:59.480 --> 0:10:01.839 a lot of job political pressures, but the war is 0:10:01.880 --> 0:10:07.240 inconceivable because we're so interconnected on a global basis. Plus 0:10:07.240 --> 0:10:10.679 our weaponryes are so dangerous and so deadly that you 0:10:10.800 --> 0:10:13.320 just can't have a war. And of course you did. 0:10:13.600 --> 0:10:15.439 And so one of the things that happened in the 0:10:15.520 --> 0:10:18.720 wake of global war of World War one is that 0:10:18.880 --> 0:10:21.720 all the supply and value chains were disrupted, all the 0:10:21.760 --> 0:10:23.959 things we're seeing today. Through the war, there was a 0:10:24.040 --> 0:10:27.800 lot of distruction of physical capacity occurring, uh and so 0:10:28.000 --> 0:10:31.560 and so there were shortages in ability to supply goods 0:10:31.880 --> 0:10:36.000 UH was very pronounced towards the back end of World 0:10:36.040 --> 0:10:38.439 War One. The other thing you had, you had a 0:10:38.520 --> 0:10:42.280 disruption of the labor market. Not as extensive. I mean, 0:10:42.320 --> 0:10:46.080 Spanish flu was much more deadly, uh, primarily because our 0:10:46.440 --> 0:10:49.640 medicine and science just progressed so much over the last 0:10:50.040 --> 0:10:52.520 you know, seventy eighty years. It was much more deadly, 0:10:52.720 --> 0:10:54.440 but in some ways it was a little bit less 0:10:54.440 --> 0:10:57.560 disruptive to the labor force because people just moved on 0:10:57.679 --> 0:11:00.360 with it. Uh uh And but nevertheless, there was a 0:11:00.440 --> 0:11:04.160 disruption of Spanish flu occurring at the same time, and 0:11:04.240 --> 0:11:07.280 so there was a very significant spike in inflation rates 0:11:07.360 --> 0:11:11.640 because of a global disruption, because of destruction of capacity 0:11:11.960 --> 0:11:14.959 on the global basis, because of the Spanish flu uh. 0:11:15.080 --> 0:11:17.800 And So what happened is that the Federal Reserve of 0:11:17.840 --> 0:11:22.320 New York massively raised the discount rates um. And as 0:11:22.400 --> 0:11:25.280 they raised discount rates and a fiscal policy were brought 0:11:25.400 --> 0:11:30.120 back into under control, in other deficits were reduced, you 0:11:30.240 --> 0:11:34.680 ended up with a significant past. Now, this episode was 0:11:34.720 --> 0:11:38.719 described by Milton Friedman and many others, and the view 0:11:38.920 --> 0:11:42.160 was that if perhaps Federal Reserve of New York acted 0:11:42.200 --> 0:11:47.040 earlier rather than waiting for inflation to persist, maybe they 0:11:47.040 --> 0:11:49.199 wouldn't have had to tighten as much. So there was 0:11:49.240 --> 0:11:51.480 there is a debate clearly going on what you should 0:11:51.480 --> 0:11:54.160 have done. But the net outcome was more than twenty 0:11:54.640 --> 0:12:01.079 deflation uh in twenty two. But nineteen twenties three, it's stabilized, 0:12:01.120 --> 0:12:04.240 and in fact the climate was slightly inflationary and or 0:12:04.240 --> 0:12:08.880 slightly decent inflationary all the way to the crash of 0:12:09.040 --> 0:12:14.160 nineteen um and so and so that's an example. This 0:12:14.280 --> 0:12:18.640 is the example of the government or the public instrumentalities 0:12:19.360 --> 0:12:22.280 either waiting too long to add and or acting too 0:12:22.360 --> 0:12:27.760 much and causing significant economic and a surprise destruction. Now 0:12:27.880 --> 0:12:31.680 in nineteen forties, on the other hands, remember the interest 0:12:31.760 --> 0:12:34.600 rates were fixed by then, and so there was no 0:12:34.679 --> 0:12:38.679 change in real interest rates, no change in the discount rate. Uh, 0:12:39.000 --> 0:12:42.199 fiscal deficits have come down, but only gradually. The government 0:12:42.240 --> 0:12:47.640 was prepared to spend money to either construction or restructuring 0:12:47.640 --> 0:12:50.960 of the industries from wartime to peace time, and so 0:12:51.000 --> 0:12:56.400 the result was a very strong inflationary spike in night 0:12:57.400 --> 0:12:59.839 was basically out of the system by the time you 0:13:00.040 --> 0:13:04.559 get to around nineteen nine, and only spiked again at 0:13:04.600 --> 0:13:09.520 the onset of Korean law. But then after it basically stabilized. 0:13:09.920 --> 0:13:14.880 So that's a result basically telling you that we've made 0:13:14.880 --> 0:13:17.800 a decision back then that we're going to have inflationary 0:13:17.800 --> 0:13:19.880 spike and we're going to work its way out of 0:13:19.880 --> 0:13:24.319 the system rather than fight it. Whereas in nineteen twenties 0:13:24.679 --> 0:13:27.880 decision was made that fiscal policy needs to be brought 0:13:27.920 --> 0:13:32.559 under control and monitory policy was significantly tightened. Now, if 0:13:32.559 --> 0:13:36.400 you think of today's experience, what we actually have decided 0:13:36.440 --> 0:13:40.800 in twenty is that we are we would like to 0:13:40.840 --> 0:13:44.880 have inflationary spike rather than deflationary bust. Remember when the 0:13:44.960 --> 0:13:49.240 onset of COVID started, banks were making huge provisions. And 0:13:49.280 --> 0:13:51.760 the reason that we're making provisions that we're expecting a 0:13:51.800 --> 0:13:55.160 deflationary bust. But it did not happen. And the reason, 0:13:55.240 --> 0:13:57.880 of course we know it didn't happen is because fiscal 0:13:57.920 --> 0:14:01.000 authorities and monitor resource is all step up and propped 0:14:01.080 --> 0:14:04.880 up demand. That's a cause for all the problems we're 0:14:04.880 --> 0:14:08.439 experiencing today. So in other words, we propped up the demand, 0:14:08.520 --> 0:14:12.079 demop shifted the goods against services. Suddenly we have shortages, 0:14:12.120 --> 0:14:15.440 Suddenly we have inflationary spikes. And so the question now 0:14:16.240 --> 0:14:19.120 is it's all working its way out of the systems. 0:14:19.360 --> 0:14:22.040 Logistics is getting better. Certainly prior to Rush it was 0:14:22.040 --> 0:14:25.920 getting better. Supply times we're getting better. Should we just 0:14:26.360 --> 0:14:30.880 let it through because we already have economic activities slowing down. 0:14:31.040 --> 0:14:35.280 Most leading indicators are slowing down. Global money supply is 0:14:35.280 --> 0:14:40.120 now only growing at three. Global credit is improving somewhat, 0:14:40.240 --> 0:14:42.720 but on the momentum it was negative for at least 0:14:42.800 --> 0:14:45.440 the last eight or nine months. And the global credit 0:14:45.560 --> 0:14:49.160 is only growing at about three. We're already taking out 0:14:49.200 --> 0:14:52.440 a lot of fiscal stimuli out of the system as well. 0:14:52.920 --> 0:14:56.880 Should we just let it run off and do very 0:14:56.960 --> 0:15:02.120 little to sort of to aggravate that situation? Russia Ukraine 0:15:02.120 --> 0:15:05.320 of course made a massive difference now. Uh and so. 0:15:05.400 --> 0:15:08.000 But but as I said earlier on um sins like 0:15:08.120 --> 0:15:13.960 geopolitics or healthcare crisis, is uh, they are their fat tales. 0:15:14.760 --> 0:15:18.800 They can never be estimated, they can never be predicted. Uh. 0:15:18.840 --> 0:15:21.960 And and the monetary policy has said is not necessarily 0:15:21.960 --> 0:15:23.920 the best. Not necessarily it's not the best, though it's 0:15:23.960 --> 0:15:27.080 not it shouldn't be the tool that actually addresses either 0:15:27.120 --> 0:15:36.480 of those things. When you look at the yield curve 0:15:36.720 --> 0:15:40.920 right now, it's clearly pricing in recession. But there is 0:15:40.960 --> 0:15:45.120 this big debate going on about how much informational value 0:15:45.160 --> 0:15:48.440 is actually embedded in the yield curve, given you know 0:15:48.640 --> 0:15:50.680 how much of the treasury market is locked up by 0:15:50.680 --> 0:15:53.960 the FED or in bank balance sheets and things like 0:15:54.000 --> 0:15:56.800 that nowadays. But clearly, just looking at the yield curve, 0:15:56.840 --> 0:15:59.840 you would think that the market sees some sort of 0:16:00.040 --> 0:16:05.640 policy error on the horizon. You know, rates rise too much, uh, 0:16:05.680 --> 0:16:09.120 and eventually we end up hitting economic growth in order 0:16:09.160 --> 0:16:13.440 to bring down inflation. Yes, that's exactly what the yields 0:16:13.440 --> 0:16:16.520 coasts are telling you. And when people say, look, let's 0:16:16.520 --> 0:16:18.160 look at the short end or the long end, that's 0:16:18.200 --> 0:16:21.240 that's that's incorrect. You should always look at the long 0:16:21.360 --> 0:16:26.520 end because that's where businesses the banks are expressing their 0:16:26.600 --> 0:16:29.920 views as to the trajectory of growth, as the trajectory 0:16:29.920 --> 0:16:33.120 of inflation rates, what the equity permeerates they should have 0:16:33.640 --> 0:16:36.480 in order to finance the balance sheds in order to 0:16:36.520 --> 0:16:40.520 carry on with their business. And what Clearly, whether you 0:16:40.600 --> 0:16:43.400 look at two by ten, whether you look at five 0:16:43.440 --> 0:16:46.440 by five, well, whatever you look at, there is this 0:16:46.520 --> 0:16:51.560 incredible flattening occurring. In most cases, you only have twenty 0:16:51.600 --> 0:16:55.000 bibbs left. In some parts of the curve you already inverted. 0:16:55.680 --> 0:16:59.320 And so it's federal reserve and no central banks can 0:16:59.400 --> 0:17:03.640 leave you'l curve inverted for any length of time because basically, 0:17:03.680 --> 0:17:06.800 as you correctly said, what it basically the message it 0:17:06.840 --> 0:17:10.080 can baste to the marketplace is that credit conditions are 0:17:10.119 --> 0:17:13.640 going to be too tight. Uh. And therefore interest rates 0:17:13.960 --> 0:17:17.000 ultimately will have to be at a much lower level, 0:17:17.640 --> 0:17:22.040 and that impedes economic activity as you as you go forward. 0:17:22.160 --> 0:17:25.160 So they can't just left it live it unattended, so 0:17:25.200 --> 0:17:29.000 to speak. And so the market is basically saying policy 0:17:29.160 --> 0:17:33.080 error is in the making. It will bring down massively 0:17:33.520 --> 0:17:38.359 economic growth rates. We might end up with recession, we 0:17:38.440 --> 0:17:41.800 might end up with a sequence of heart attacks potentially, 0:17:42.280 --> 0:17:46.000 but ultimately the inflation will get out of the system 0:17:46.320 --> 0:17:51.680 through our substantially reducing the demank. That's what the market 0:17:51.720 --> 0:17:54.680 is saying. But on the other hand, as you correctly said, 0:17:54.760 --> 0:17:59.880 informational value of youl curve has significantly eroded. The webb 0:18:00.000 --> 0:18:03.560 seply compared is to say, you know, private sector, the 0:18:03.920 --> 0:18:06.840 musician in the in the orchestra pit, uh, and the 0:18:06.920 --> 0:18:10.160 central banks are conductors in the past that we're happy 0:18:10.240 --> 0:18:12.840 just to conduct, but now they could often jump in 0:18:12.880 --> 0:18:16.359 the pit and start playing instruments as well as conducting, 0:18:17.080 --> 0:18:20.720 and so they do votes. Uh. And so whenever you 0:18:20.840 --> 0:18:23.520 have central banks starting to land to the main street, 0:18:23.960 --> 0:18:28.040 or buying collateral that they should never be buying, or 0:18:28.280 --> 0:18:33.640 breaching rules on state state financing, or having emergency reap 0:18:33.640 --> 0:18:36.680 A lines just because reaper market is the functioning properly, 0:18:36.720 --> 0:18:39.280 will just have a massive line out there to make 0:18:39.320 --> 0:18:43.399 it work properly the way we think it should be working. Uh. 0:18:43.440 --> 0:18:46.359 And so whenever you have that, now the question is 0:18:46.480 --> 0:18:49.159 how much informational value do you have when the market 0:18:49.440 --> 0:18:53.000 is so distorted. And that's part of the reason why 0:18:53.160 --> 0:18:57.360 I think term premium just disappeared. Even today it's negative, 0:18:58.160 --> 0:19:01.560 you knows, which normally it should be more like a 0:19:01.640 --> 0:19:04.879 hundred and fifty hundred and sixty bits. So as a 0:19:04.920 --> 0:19:08.320 result of term premium being so low, it's easy to invert, 0:19:08.840 --> 0:19:13.080 but it conveys less information to the marketplace as to 0:19:13.119 --> 0:19:17.840 what the real economy rather than financial economy, is doing. 0:19:18.359 --> 0:19:20.440 And the other thing I think it's important to highlight 0:19:20.760 --> 0:19:24.159 whenever you read I don't know all the all the 0:19:24.320 --> 0:19:28.680 all the important people, or you know Blanchard or Muhammadalarian 0:19:29.080 --> 0:19:33.800 or or Summers, they're all focusing on a real economy. 0:19:33.880 --> 0:19:37.400 It's all about labor markets, it's all about capacity constraints. 0:19:37.800 --> 0:19:41.680 Very little is discussed about financial economy. It is regarded 0:19:41.720 --> 0:19:45.199 as somewhat the redistribution mechanism, it is not really a 0:19:45.240 --> 0:19:48.359 creative of anything. But we know that is not true. 0:19:49.040 --> 0:19:52.160 And a financial economy is at least five six times 0:19:52.359 --> 0:19:56.000 larger than the real economy and it has can really 0:19:56.080 --> 0:19:58.880 crush real economy if it comes to it. So one 0:19:58.920 --> 0:20:02.040 thing with it is missing, And the discussion is asset 0:20:02.080 --> 0:20:05.879 prices and the impact of volatility of surprises will have 0:20:06.640 --> 0:20:10.360 on underlying economic activities. Said, we all talk about wages, 0:20:10.400 --> 0:20:13.280 we'll talk about wages per hour, we all talk about 0:20:13.400 --> 0:20:17.520 the capacity constraints ships trended in Los Angeles Harbor, but 0:20:17.760 --> 0:20:20.520 we're not talking about asset prices. And if we cause 0:20:20.640 --> 0:20:24.159 significant volatility of a surprises, what does it do to 0:20:24.240 --> 0:20:27.199 gross what does it do inflation? And the answer it 0:20:27.280 --> 0:20:31.320 actually crushes acrosses both of them. So I wanna drill 0:20:31.440 --> 0:20:34.080 into this further. And I should note for listeners were 0:20:34.080 --> 0:20:37.680 recording this March twenty three, so who knows will happen 0:20:37.680 --> 0:20:39.560 in the next few days while people hear this, but 0:20:40.280 --> 0:20:43.600 before people hear this, But I doubt that this volatility 0:20:43.680 --> 0:20:47.119 will have gone down so much. The counter argument, I 0:20:47.160 --> 0:20:50.920 guess to what you're saying is that you know, there's 0:20:50.960 --> 0:20:53.960 so much real demand that's been put in the pocket 0:20:54.359 --> 0:20:58.280 of um. Uh sort of. I'm thinking back to, say, 0:20:58.280 --> 0:21:01.080 a conversation that we had with Jeff Curry about what's 0:21:01.160 --> 0:21:05.040 drives what drives commodity inflation, and the idea of purchasing 0:21:05.080 --> 0:21:08.800 power being put into lower income households is incredibly powerful. 0:21:09.280 --> 0:21:13.080 It results in more goods purchases, or results in more 0:21:13.119 --> 0:21:16.840 commodity intensive demand and so forth. And so the argument 0:21:16.880 --> 0:21:19.200 that everyone should focus on the real economy is in 0:21:19.320 --> 0:21:21.800 part driven by the sort of fact that lots of 0:21:21.800 --> 0:21:24.320 people have lots of real buying power and their buying 0:21:24.359 --> 0:21:26.800 stuff and that's what's causing the jam at the ports 0:21:26.880 --> 0:21:31.840 and so forth. And Uh. The counter argument is that, well, yes, uh, 0:21:32.320 --> 0:21:35.040 rich people control a lot of the world's financial wealth, 0:21:35.240 --> 0:21:39.760 but not you know, really from a demand perspective, it's 0:21:39.800 --> 0:21:42.440 not as significant. Talk us through a little bit more. 0:21:42.480 --> 0:21:47.679 Why you see in this environment, uh, financial asset volatility, 0:21:47.680 --> 0:21:50.240 which we've particularly seen in the bond market lately, how 0:21:50.359 --> 0:21:56.960 that feeds through to potential bust, potential recession, potential disinflation. Well, 0:21:57.560 --> 0:22:00.560 if you sink all and your specific we're thinking of 0:22:00.560 --> 0:22:04.320 the United States, because other other markets don't have quite 0:22:04.359 --> 0:22:07.640 the same dynamics. But if you think of the United States, 0:22:08.440 --> 0:22:14.400 the top ten percent of households control roughly of that assets. 0:22:15.240 --> 0:22:20.879 Bottom households control absolute and own absolutely nothing on the 0:22:21.000 --> 0:22:24.439 net basis. UH. And so the whole idea is that 0:22:24.480 --> 0:22:28.040 the assets side of the balance ship is as our 0:22:28.160 --> 0:22:31.200 top ten percent of the households they control assets. The 0:22:31.359 --> 0:22:35.360 liability side of the balance is a bottom fifty, right, 0:22:35.640 --> 0:22:39.800 and those bottom must be encouraged to consume and to 0:22:39.880 --> 0:22:43.520 borrow because if they don't, then the value of the 0:22:43.560 --> 0:22:47.920 top ten percent of the of the households will come down. 0:22:48.000 --> 0:22:51.480 In other asset values will come down. But what we 0:22:51.560 --> 0:22:54.160 have seen through the COVID and what we have seen 0:22:54.320 --> 0:22:57.240 through every one of the episodes over the last twenty 0:22:57.320 --> 0:23:00.560 or thirty years, UH that the well screenation of the 0:23:00.600 --> 0:23:03.840 top ten just keeps on accelerating and keeps on accelerating, 0:23:04.240 --> 0:23:07.119 and that means the top ten percent getting more and 0:23:07.160 --> 0:23:11.480 more wealthy. That's your wealth inequality argument. And it's like, 0:23:11.640 --> 0:23:13.800 it's not just top ten percent. You have to remember 0:23:13.880 --> 0:23:18.960 top one controls about that wealth. So it's even more 0:23:18.960 --> 0:23:21.720 than just top ten it's more like top one uh 0:23:21.760 --> 0:23:24.920 and and so as the result is that they're accumulating 0:23:25.080 --> 0:23:28.280 more and more and more assets. They're accumulating assets at 0:23:28.280 --> 0:23:32.159 a faster pace that they can consume or at a 0:23:32.200 --> 0:23:35.919 faster pace that they will get provide for the retirement, 0:23:35.960 --> 0:23:39.680 for example. And as it continue to create this extra 0:23:39.800 --> 0:23:43.760 access wells that needs to be deployed somewhere and wayas 0:23:43.800 --> 0:23:47.560 doesn't get deployed. Well either get deployed in the Ferrari cars, 0:23:47.600 --> 0:23:51.080 you know, Hampton mentions, you know, Picasso painting and the 0:23:51.119 --> 0:23:54.440 rest of it. Maybe super jots and things like that, 0:23:54.760 --> 0:23:59.560 but mostly it gets distributed back to the bottom. To 0:23:59.680 --> 0:24:02.800 contin you need to encourage them to consume. Now because 0:24:02.800 --> 0:24:06.240 you're generating more and more wells, interest rates have to 0:24:06.280 --> 0:24:08.520 be lower and lawer, right, because you're generating more wells 0:24:08.520 --> 0:24:10.600 than you need, and you need to transfer that well 0:24:10.600 --> 0:24:13.760 els to the bottom. And the bottom is already barely 0:24:14.040 --> 0:24:17.320 keeping up with commitments, which means the cost of money 0:24:17.400 --> 0:24:20.680 has to continue to fall if you were to encourage 0:24:21.200 --> 0:24:25.560 those bottom fift to continue to consume. And so the 0:24:25.600 --> 0:24:31.440 problem becomes if the bottom cannot consume, and or if 0:24:31.480 --> 0:24:35.080 you slow down the well's accumulation at the top of 0:24:35.119 --> 0:24:37.520 the pyramid, then the cost of money will go up 0:24:37.880 --> 0:24:40.600 right because you don't have as much access capital to 0:24:40.720 --> 0:24:44.960 relocate to the bottom. And as it goes up, consumption 0:24:45.000 --> 0:24:49.639 at the bottom goes down even more. Uh And So 0:24:49.840 --> 0:24:51.880 the way I look at it, the role and function 0:24:51.880 --> 0:24:55.760 of Federal Reserve is to be an intermediary between the 0:24:55.760 --> 0:24:58.880 top one and the bottom six, or call the top 0:24:58.920 --> 0:25:01.520 ten percent and the bottom six to it, they're the 0:25:01.560 --> 0:25:04.080 conductor of the orchestra which they have to make sure 0:25:04.480 --> 0:25:06.919 that the two sides of the balance, all of the 0:25:07.000 --> 0:25:10.440 assets belong to the top one of ten percent, all 0:25:10.480 --> 0:25:14.080 of the liabilities belong to the bottom fifty or six, 0:25:15.240 --> 0:25:18.680 that those two are in unison, that those two are 0:25:18.720 --> 0:25:22.760 in in in relative harmony. Uh And and that's not 0:25:22.800 --> 0:25:26.479 an easy task. Now, one way of getting rid of 0:25:26.480 --> 0:25:28.920 this system is to say, let's just get rid of 0:25:29.040 --> 0:25:32.240 monetary system as we know it. In other words, we 0:25:32.280 --> 0:25:35.639 live in the world which is highly financialized, highly leverage. 0:25:36.280 --> 0:25:39.520 We're all dependent on asset prices. Is a queue for 0:25:39.600 --> 0:25:42.879 our decisions whether to spend or the safe, whether to 0:25:42.960 --> 0:25:45.240 invest or to share buy backs, or what sort of 0:25:45.240 --> 0:25:48.760 see your compensation you're going to do whatever, let's break 0:25:48.800 --> 0:25:52.120 that system and let's create a different system. Well, it's 0:25:52.160 --> 0:25:55.200 fair enough, but how do you break it without causing 0:25:55.400 --> 0:25:59.400 massive latility and massive collapses of esset prices in the meantime? 0:26:00.040 --> 0:26:02.600 Goues What what people will find if you create too 0:26:02.680 --> 0:26:05.800 much volatility? You know, for one case, are not going 0:26:05.840 --> 0:26:08.160 to be worse what you think they are. Pensions are 0:26:08.160 --> 0:26:09.800 not going to be worse what they think you are. 0:26:10.240 --> 0:26:14.200 Real estate prices won't be the same as what they're today. 0:26:14.240 --> 0:26:17.359 So when people are discussing that we should junk this 0:26:17.760 --> 0:26:22.199 monetary system that we have built since nine eighties and 0:26:22.320 --> 0:26:26.200 replace it with another system, I I basically say, good luck. 0:26:27.000 --> 0:26:29.520 I agree we should. We should have done it twenty 0:26:29.560 --> 0:26:32.520 years ago, thirty years ago. Okay, good luck. How are 0:26:32.520 --> 0:26:33.960 you going to do it? How are you going to 0:26:34.040 --> 0:26:36.840 go from point eight to point B? Clearly the answer 0:26:36.920 --> 0:26:39.920 is fiscal policy. That's how you go from point eight 0:26:39.920 --> 0:26:44.640 to point B. But fiscal policy is much more inflationary, 0:26:44.880 --> 0:26:48.240 uh than a monetary policy. Monetary policy is basically disinflation, 0:26:49.080 --> 0:26:52.159 but fiscal policy is inflationary because it takes the money 0:26:52.320 --> 0:26:55.199 from the cloud of finance and puts it down to 0:26:55.240 --> 0:26:59.400 the ground where real people live. Uh, and so as 0:26:59.400 --> 0:27:04.640 you create inflation, um, you're destabilizing your monetary system before 0:27:04.880 --> 0:27:08.040 you actually building a new system. So how do you 0:27:08.080 --> 0:27:11.840 make this transition? And so nobody in my viewer knows 0:27:11.840 --> 0:27:14.560 how to do it. We all sort of understand that 0:27:14.640 --> 0:27:18.480 it has to change over time, but most of the thinking, 0:27:18.760 --> 0:27:22.040 most of the advice is still very very conventional, still 0:27:22.119 --> 0:27:27.240 treating financial markets as an afterthought, still treating as serprises 0:27:27.400 --> 0:27:31.480 as an afterthought. It's all redistribution. If one got well, said, 0:27:31.480 --> 0:27:34.479 the other one got poorer. How you have a transfer wells, 0:27:35.320 --> 0:27:39.280 it's it's not treated as part of the system itself 0:27:39.920 --> 0:27:42.399 and a critical part of the system, given that it 0:27:42.640 --> 0:27:47.000 is five six times larger then the underlying economies are. 0:27:47.160 --> 0:27:49.600 So that's that's that's the answer. In the short term, 0:27:49.600 --> 0:27:53.560 You're absolutely right, you put more people into into poorer 0:27:54.000 --> 0:27:57.480 people's hand. They consume it. That's why you have increased 0:27:57.480 --> 0:27:59.960 in demand. That's absolutely correct. But they forget the other 0:28:00.040 --> 0:28:04.240 side of the bell where belong those sets belong in 0:28:04.240 --> 0:28:08.560 the top one percent of the households. Um I wondered 0:28:08.720 --> 0:28:12.399 if we could shift focused slightly and maybe talk about 0:28:12.440 --> 0:28:15.239 what's been going on in China. Because there have been 0:28:15.280 --> 0:28:18.560 a lot of headlines coming out of that specific market, 0:28:18.640 --> 0:28:21.960 but they've also been overshadowed a little bit by events 0:28:22.080 --> 0:28:27.359 in Europe. So we've seen a big route in China equities, 0:28:27.760 --> 0:28:30.760 tech stocks, and real estate stocks, and then it seemed 0:28:30.800 --> 0:28:33.879 like the authorities came out and seemed to suggest, Okay, 0:28:33.920 --> 0:28:36.920 maybe we went a little bit too far, maybe we're 0:28:36.920 --> 0:28:39.960 going to start rolling back some of these various crackdowns 0:28:40.080 --> 0:28:43.960 that have really hit those two industries. I believe you 0:28:44.000 --> 0:28:49.800 were fairly bullish on Chinese equities. UM, certainly for and 0:28:49.800 --> 0:28:52.960 maybe going into two. But just talk to us about 0:28:52.960 --> 0:28:55.560 how you're thinking about that market at the moment and 0:28:55.640 --> 0:28:59.200 whether or not the Central Bank seems to be um 0:28:59.240 --> 0:29:06.760 correcting its path. Yeah, you're absolutely right going into twenty two. UM. 0:29:06.800 --> 0:29:09.680 I was bullish on Chinese equities for a couple of reasons. 0:29:10.160 --> 0:29:13.400 First of all, remember China is the only major economy 0:29:13.480 --> 0:29:16.080 on the other side of the title everybody is starting. 0:29:16.280 --> 0:29:19.720 China is the only one which is completely contracyclical. Uh, 0:29:20.280 --> 0:29:23.760 China already was contracyclical over the last eighteen months when 0:29:23.760 --> 0:29:28.040 everybody was flushing but was money. China actually was contracted 0:29:28.720 --> 0:29:31.320 and for the next twelve eighteen months. It looks like 0:29:31.400 --> 0:29:34.800 China again will be contracyclical and being on the other 0:29:34.840 --> 0:29:38.160 side of tightening trade has a great deal of value 0:29:38.360 --> 0:29:42.719 for investors. Not only gives you more inflation growth in China, 0:29:43.640 --> 0:29:47.360 but it also assumes at least that a reman be 0:29:47.520 --> 0:29:52.040 probably don't balance ought to be weaker as China liquefies 0:29:52.200 --> 0:29:55.400 and the rest of the world titans. Uh. The other 0:29:55.480 --> 0:29:58.720 argument that I had was all to do with political, 0:29:58.760 --> 0:30:03.720 geopolitical and regular repressures. That whether it's Olympic Games, whether 0:30:03.840 --> 0:30:08.280 it's a party events, all the way through November twenty two, 0:30:09.080 --> 0:30:12.640 that China will try to don't play some of those challenges, 0:30:12.680 --> 0:30:15.560 whether it's political or regulatory. In other words, it's not 0:30:15.600 --> 0:30:19.280 going to be of primary importance. Now, don't get me wrong, 0:30:19.600 --> 0:30:23.280 China will not change its political system, it's political views, 0:30:23.400 --> 0:30:27.880 or its regulatory views. One uh, there will be no change. 0:30:28.720 --> 0:30:32.560 It's irreversible trend. But at least for a period of 0:30:32.600 --> 0:30:35.400 six or twelve months, I felt that the degree of 0:30:35.440 --> 0:30:39.520 pressure that China will be under will diminish. And the 0:30:39.560 --> 0:30:42.280 third reason, of course was China was a horrible performer 0:30:43.040 --> 0:30:46.080 through one and earlier part of twenty two, and I 0:30:46.120 --> 0:30:48.880 was assuming that at least some of that can be 0:30:49.480 --> 0:30:52.560 can be reclaimed. So if you think of it right now, 0:30:52.640 --> 0:30:55.800 it's been a wrong call because China and the performed 0:30:55.840 --> 0:30:58.520 so far, Asia, Japan as well as as well as 0:30:58.520 --> 0:31:00.880 a bergeant market universe by an the eight or nine percent, 0:31:01.040 --> 0:31:04.400 that's say, they got to perform by last year. So 0:31:04.560 --> 0:31:06.760 clearly it was the wrong call. Uh. And there are 0:31:06.760 --> 0:31:09.360 a couple of reasons for that. Reasonable one is what 0:31:09.440 --> 0:31:13.600 you've alluded to. Uh. The Chinese policymakers are really calibrating 0:31:14.120 --> 0:31:16.120 this idea that they're going to do the same thing 0:31:16.240 --> 0:31:18.320 is what they've done the last three times is well 0:31:18.360 --> 0:31:22.400 and truly debt. They don't want to add another ten 0:31:22.480 --> 0:31:24.920 or fifteen trillion dollars of debt, although they don't mind 0:31:25.000 --> 0:31:29.320 a little bit more leveraging. They don't want infrastructure investment 0:31:29.360 --> 0:31:33.720 to be galloping again. They don't want another massive bubble 0:31:33.840 --> 0:31:38.200 in real estate, and so they are trying to calibrate, 0:31:38.560 --> 0:31:42.480 trying to give you enough stimulus in order to achieve 0:31:42.600 --> 0:31:48.720 reduced gross expectations without complicating longer term picture. And so 0:31:48.840 --> 0:31:52.520 the result is you actually have less differentiation. I guess 0:31:52.560 --> 0:31:56.560 between tightening and easing countries. And so this argument that 0:31:56.600 --> 0:31:59.560 you on the other side of the trade so far 0:31:59.680 --> 0:32:02.320 has been as strong as I thought it might be. 0:32:03.200 --> 0:32:06.600 The second area, of course, is politics, your politics, and 0:32:06.600 --> 0:32:12.200 and the and the regulatory drive. UM. To me, China 0:32:13.000 --> 0:32:20.760 has no choice but to support Russia, UH, and and 0:32:20.760 --> 0:32:22.640 and and and the reason for that is very simple. 0:32:22.680 --> 0:32:25.640 It's nothing to do with the economics, it's nothing to 0:32:25.680 --> 0:32:29.120 do with markets, and it's everything to do with the 0:32:29.160 --> 0:32:35.040 fact that Russia, China, some other places like Iran, Central Asia, 0:32:35.360 --> 0:32:37.840 they look at the world in a similar way. In 0:32:37.880 --> 0:32:41.719 other words, their view is the status dominant debut is 0:32:41.800 --> 0:32:48.400 its interests of society and community trump interests of individuals. UH. 0:32:48.440 --> 0:32:51.720 They have their own view what international rules should be, 0:32:51.840 --> 0:32:54.840 whether it's rules or for the trade, including how you 0:32:54.920 --> 0:32:59.719 treat state or enterprises. UM. Absolute sovereignty sort of harping 0:32:59.760 --> 0:33:03.160 back to eighteenth century and part of the nineteenth century 0:33:03.840 --> 0:33:06.840 where there was absolute sovereignty. Nation is entitled to do 0:33:06.880 --> 0:33:11.720 whatever they want within their own borders. So whether it's 0:33:11.800 --> 0:33:15.960 internet and valcanization of internet, whether it's a rule of 0:33:16.000 --> 0:33:18.640 the state, whether it's a rule of state, US as 0:33:18.720 --> 0:33:22.320 private sector a boss Russia China believe that private sector 0:33:22.440 --> 0:33:26.320 is subordinate to the state and should be largely doing 0:33:26.480 --> 0:33:29.760 what the states sink they should be doing. China clearly 0:33:29.960 --> 0:33:32.760 is not Russia. It gives a lot more freedom to 0:33:32.880 --> 0:33:36.200 private sector. It's much more universal. So it's not the same, 0:33:36.240 --> 0:33:39.640 but the basic concepts are the same. And so what 0:33:39.680 --> 0:33:45.960 we're seeing is this massive illiberal Eurasian bloc forming led 0:33:46.000 --> 0:33:49.160 by China, what I called Sinus sphere. But within that 0:33:49.280 --> 0:33:53.120 will be nassault smaller you know, Russian Empire ing the 0:33:53.160 --> 0:33:56.800 empire Central Asia and many other parts. And to me, 0:33:56.920 --> 0:34:01.200 the objective of redefining global rules ready mining global behavior 0:34:01.880 --> 0:34:04.480 to be much more in line with the way countries 0:34:04.560 --> 0:34:08.080 like China think about the world is far more important 0:34:08.120 --> 0:34:13.040 than any particularly given trade relationship or a slight diminution 0:34:13.080 --> 0:34:17.560 of our GDP numbers. So the Russian invasion of Ukraine 0:34:17.960 --> 0:34:20.960 UH did not come at the good time for for China, 0:34:21.080 --> 0:34:23.719 and I'm sure China would rather not have that. But 0:34:24.120 --> 0:34:26.560 at the end of the day, at the end of 0:34:26.560 --> 0:34:30.440 the day, China has to be on on on on. 0:34:31.280 --> 0:34:34.359 They can't be completely neutral in this because as I said, 0:34:34.520 --> 0:34:38.000 they do look at world very similar way. The way 0:34:38.080 --> 0:34:41.799 places like Russia around look look at the world, and 0:34:41.880 --> 0:34:45.000 the same applies to regulatory issues because it goes down 0:34:45.080 --> 0:34:49.000 to the concept of a separation of state enterprises and 0:34:49.080 --> 0:34:53.200 state itself versus private enterprises. What we have seen since 0:34:53.239 --> 0:34:57.040 two thousand and twelve is increasing fusion between the two. 0:34:57.080 --> 0:34:59.560 Prior to two thousand and twelve, you actually have separation, 0:35:00.160 --> 0:35:03.520 and in many ways state enterprises were encouraged to behave 0:35:03.560 --> 0:35:06.920 more like private enterprises. Since two thousand and twelve there 0:35:06.960 --> 0:35:09.960 was a very strong link towards a few fusion of 0:35:10.000 --> 0:35:13.480 the two. So the space separating state and non state 0:35:13.560 --> 0:35:17.279 private public has been diminishing for more than more than 0:35:17.320 --> 0:35:20.160 a decade. And so when people say, hey, we're finishing 0:35:20.280 --> 0:35:24.399 with a regulatory aspect, no we're not. Uh. You can 0:35:24.440 --> 0:35:28.000 ease back a little bit tactically, but the basic strategic 0:35:28.080 --> 0:35:32.760 thrust of lack of separation between the two is something 0:35:32.840 --> 0:35:35.759 that is going to stay with us. UM And I 0:35:35.840 --> 0:35:39.239 was surprised a little bit that actually continued as aggressively 0:35:39.280 --> 0:35:42.960 as it did over the last over the last six months, UM. 0:35:43.120 --> 0:35:46.800 And so so to me, when I look at China, UH, 0:35:47.040 --> 0:35:49.640 people want an investors want to have a bit of 0:35:49.840 --> 0:35:54.320 ray of sunshine and any any any idea or any 0:35:54.400 --> 0:35:57.600 concept that somehow rush in Ukraine might be winding down 0:35:57.640 --> 0:36:02.120 in some form, any view that perhaps regulatory precious will 0:36:02.160 --> 0:36:04.719 get a little bit less, perhaps you're going to get 0:36:04.719 --> 0:36:08.120 a little bit more stimulatory action. As we progressed through 0:36:08.120 --> 0:36:10.680 the balance of the year. Still should be enough which 0:36:10.680 --> 0:36:14.600 I need is equity still off performed EMOJIU marks. But 0:36:14.680 --> 0:36:16.600 as I said in an earlier part of the year, 0:36:16.800 --> 0:36:20.440 that coal was wrong because basic ingredients that I was 0:36:20.520 --> 0:36:23.840 hoping I'm going to play through that didn't quite get that. 0:36:31.040 --> 0:36:34.239 I wanna expand further on this idea as you put 0:36:34.239 --> 0:36:37.880 in a sort of Eurasian illiberal coalition or block. And 0:36:37.920 --> 0:36:39.799 one of the things that's been striking, of course with 0:36:39.880 --> 0:36:43.960 Russia is beyond just the formal sanctions, the degree to 0:36:44.080 --> 0:36:48.080 which US companies are inner European companies as well as 0:36:48.160 --> 0:36:50.920 will have just sort of abandoned Russia, abandoned operations, in 0:36:50.960 --> 0:36:54.360 many cases severed ties with the local unit of the business. 0:36:54.760 --> 0:36:57.120 And I'm curious that you know what is if these 0:36:57.120 --> 0:37:00.880 blocks harden, these relationships hardened, what does that mean for 0:37:01.080 --> 0:37:05.040 the US China economic relationship? And could there be a 0:37:05.120 --> 0:37:09.280 slower version of that same process in play by which 0:37:09.520 --> 0:37:11.880 you know, if there is this separation, if there is 0:37:12.200 --> 0:37:14.800 two internets, if there is this sort of dramatically different 0:37:15.320 --> 0:37:18.719 regulatory environment, there will we see this sort of some 0:37:18.760 --> 0:37:21.880 sort of break with the companies that have trade and 0:37:21.920 --> 0:37:25.880 links in both countries. Yes, you will. I I prefer 0:37:25.960 --> 0:37:29.080 to call it a slow moving train wreck. Uh So 0:37:29.320 --> 0:37:32.680 Russia was an immediate implosion, a very very fast implosion. 0:37:33.360 --> 0:37:36.560 China is not Russia. China is critical to every supply 0:37:36.640 --> 0:37:39.640 and value chain. China as wasn't temper cent of the 0:37:39.640 --> 0:37:42.680 global economy, it's not less a two percent of global economy. 0:37:42.920 --> 0:37:45.359 So the things that could be done to Russia can 0:37:45.440 --> 0:37:49.440 never be done to China because the blowback to the 0:37:49.480 --> 0:37:53.200 Western economies and the Western societies will be just enormous. 0:37:53.200 --> 0:37:55.680 But what you're going to get, I believe as we 0:37:55.760 --> 0:38:00.279 continue forward, as the blocks hottened, sort of the anglist here, 0:38:00.360 --> 0:38:04.879 the U twenty seven, the signus feel Liberal duration block. 0:38:05.280 --> 0:38:08.960 As it haddens, you will find more and more separation. 0:38:09.360 --> 0:38:13.120 It usually starts with the software areas and more high 0:38:13.200 --> 0:38:19.319 tech areas. So for example, transfer knowledge, transfer technology, educational 0:38:19.360 --> 0:38:24.760 institution ability to acquire skills, uh, it progresses onto some 0:38:24.960 --> 0:38:29.719 more humanitarian pockets um, and then it progresses onto sanctions 0:38:29.800 --> 0:38:34.920 against certain individuals, it progresses to inability to access capital 0:38:35.600 --> 0:38:39.360 um and so so to me, that's an inevitable progression. 0:38:39.640 --> 0:38:43.479 Access to capital will be a privilege, not a free 0:38:43.520 --> 0:38:46.800 market opportunity the way it has been over the last 0:38:46.800 --> 0:38:50.120 three to four decades, but then gradual level creeping up 0:38:50.280 --> 0:38:54.400 into other relationships as well as we progress foward. Again, 0:38:54.440 --> 0:38:57.640 I want to highlight that China is not Russia uh 0:38:57.680 --> 0:39:02.560 and and this disconnect or ability to quarantine the country 0:39:02.800 --> 0:39:05.279 of the size and important of China is just not 0:39:05.360 --> 0:39:09.520 on nobody will ever contemplated, but gradually, bit by bit 0:39:10.040 --> 0:39:12.200 over a long period of time, that's going to be 0:39:12.239 --> 0:39:15.440 the answer. And so the question that becomes from an 0:39:15.440 --> 0:39:20.560 asset perspective or investor perspective, is China investable? Is a 0:39:20.640 --> 0:39:25.520 portfolio manageable? Because if we continue on this pass, which 0:39:25.640 --> 0:39:30.680 looks likely we will, then from international investors opportunity to 0:39:30.800 --> 0:39:35.160 invest in China and Chinese equities will become more constrained. Now, 0:39:35.200 --> 0:39:39.080 that doesn't preclude private equity participating in various ventures. It 0:39:39.120 --> 0:39:43.279 doesn't preclude companies investing into some plants, for example. But 0:39:44.239 --> 0:39:48.200 whether your private equity, whether you are company, or whether 0:39:48.239 --> 0:39:52.400 your portfolio manager, you'll be second guessing yourself. You'll be saying, 0:39:52.440 --> 0:39:55.520 should I do this? Well, I wake up on Monday 0:39:55.560 --> 0:39:59.360 morning and finding financial times and done something I shouldn't 0:39:59.360 --> 0:40:03.040 have done. Uh. And and whenever people start the second 0:40:03.040 --> 0:40:06.839 guests themselves, so to speak, they are slower. Uh, they 0:40:06.880 --> 0:40:09.480 will be a little bit less committed. And I think 0:40:09.560 --> 0:40:11.120 that's what you're going to see. You're gonna see a 0:40:11.160 --> 0:40:16.319 little bit less commitment, slower responses, more desired to look 0:40:16.360 --> 0:40:19.680 again and double check yourself whether you, in fact are 0:40:19.719 --> 0:40:22.240 doing the right thing. And it does wouldn't just apply 0:40:22.280 --> 0:40:25.200 to portfolio managers. It will apply to their trustees. It 0:40:25.200 --> 0:40:29.719 will apply to management teams that are running uh those funds. Uh. 0:40:30.160 --> 0:40:32.640 And so I think you're absolutely right. That's that's what 0:40:32.920 --> 0:40:36.480 the final trajector would look like. Doesn't mean that there 0:40:36.560 --> 0:40:39.240 is no capital in China or China will be stopped 0:40:39.280 --> 0:40:42.440 of capital. That's not the case. China has no shortage 0:40:42.440 --> 0:40:48.360 of capital. China needs expertise, um and knowledge rather than capital. 0:40:48.600 --> 0:40:52.200 So it doesn't mean necessarily disaster for China or a 0:40:52.360 --> 0:40:55.319 uration block or sinus sphere block, whatever you call it, 0:40:55.320 --> 0:40:57.640 it doesn't mean that at all. It's just it will 0:40:57.680 --> 0:41:01.480 be functioning by different rules, it will have different systems, 0:41:01.960 --> 0:41:05.200 it will have different rule of the state and private sectors. 0:41:05.320 --> 0:41:08.520 It will just be different. But it doesn't mean necessarily 0:41:08.600 --> 0:41:14.800 a disaster. So, given all this uncertainty that you've laid out, 0:41:15.000 --> 0:41:17.680 what are you actually recommending people buy at the moment? 0:41:17.719 --> 0:41:20.680 Because I feel like we often have these macro conversations 0:41:20.840 --> 0:41:23.959 and you know, it's like, here's a risk, here's another risk. 0:41:24.239 --> 0:41:27.200 Bonds clearly aren't good bet if rates are going to 0:41:27.239 --> 0:41:29.920 go up significantly. But on the other hand, you probably 0:41:29.920 --> 0:41:32.200 don't want to own stocks if you think that rates 0:41:32.239 --> 0:41:33.880 are going to go up and then lead to some 0:41:33.920 --> 0:41:37.279 sort of recession. It feels very very hard to advise 0:41:37.320 --> 0:41:40.680 people on what exactly to buy in the current environment. 0:41:41.040 --> 0:41:43.760 It is it is, and that's one of the problems 0:41:43.880 --> 0:41:48.040 was not having a normal distribution of events people are functioning, 0:41:48.080 --> 0:41:52.440 and corporate finance and investment theory functioning on the normal distribution. 0:41:52.480 --> 0:41:56.279 In other words, you can anticipate, you can predict certain outcomes, 0:41:56.400 --> 0:41:59.280 you can estimate what the impact that those outcomes will be, 0:41:59.640 --> 0:42:03.280 and so it is no longer normal distribution. UH. Those 0:42:03.320 --> 0:42:07.840 events cannot be predicted. Those events cannot be estimated. UH, 0:42:07.840 --> 0:42:12.799 and enhance As a portfolio manager, You're lost. Whatever bet 0:42:12.840 --> 0:42:15.120 you're making, it's just a bet. It's a gamble. It's 0:42:15.160 --> 0:42:18.360 not really an investable proposition. Now you might take a 0:42:18.440 --> 0:42:21.480 view that commodities is a way to go forward, absolutely fine, 0:42:22.320 --> 0:42:24.680 but more likely than not that actually over the longer 0:42:24.760 --> 0:42:26.800 term might turn out to be wrong unless you're in 0:42:26.840 --> 0:42:30.600 the right commodities. People will say, should I go into 0:42:31.400 --> 0:42:36.120 high asset, low return invested capital type company as well? Yes, maybe, 0:42:36.160 --> 0:42:39.320 but it depends what's going to happen, depends what is 0:42:39.320 --> 0:42:41.200 the role of the state going to be, What is 0:42:41.239 --> 0:42:43.480 the roll of fiscal policies are going to be the 0:42:43.520 --> 0:42:45.840 same applies to the bond market. The same way as 0:42:45.880 --> 0:42:49.279 we're worried about inflation, the same inflation could collapse very 0:42:49.360 --> 0:42:52.320 quickly as we go into twenty twenties three. Remember inflation 0:42:52.400 --> 0:42:55.400 is a delta, uh and others. All the prices have 0:42:55.520 --> 0:42:59.920 to be higher in UH. You know March April twenties 0:43:00.040 --> 0:43:02.360 three compared to March April two to give you a 0:43:02.360 --> 0:43:05.800 positive read on inflation. UH. And it is quite possible 0:43:05.800 --> 0:43:08.960 that the markets are right that by twenty twenty four 0:43:09.000 --> 0:43:11.440 you're going to have at least three or four interest 0:43:11.560 --> 0:43:16.640 rate cuts occurring rather than tightening of monetary policy. It 0:43:16.760 --> 0:43:20.080 is also possible that fiscal policy will go back into 0:43:20.200 --> 0:43:25.560 becoming a player after contracting for eighteen months. So all 0:43:25.600 --> 0:43:28.239 of this could change very quickly, and therefore ten year 0:43:28.280 --> 0:43:30.680 bonds could end up back at one one and a 0:43:30.760 --> 0:43:34.160 half percent easily rather than just marching onto two and 0:43:34.160 --> 0:43:37.480 a half three percent. Uh So, to me, in all 0:43:37.480 --> 0:43:40.040 the sea of confusion, and we haven't even talked about 0:43:40.200 --> 0:43:43.920 whether it's a healthcare emergency, so whether it's pandemics, or 0:43:43.920 --> 0:43:46.799 whether it's your political events, we haven't even talked about that. 0:43:47.560 --> 0:43:50.560 So in that sort of sea of confusion, to me, 0:43:51.360 --> 0:43:55.400 just identifying what are the right circular drivers, What is changing, 0:43:55.520 --> 0:44:00.080 what isn't changing, Well, financialization is not changing. Remember, but 0:44:00.120 --> 0:44:03.800 the only reason US has an opportunity to raise money 0:44:04.480 --> 0:44:08.640 or race cost of capital is because the policy rates 0:44:08.640 --> 0:44:11.680 today in the US are below neutral rates. Neutral rates 0:44:11.719 --> 0:44:14.640 in US are roughly around zero in real terms that 0:44:14.719 --> 0:44:17.279 means about two percent and nominal terms. But if you 0:44:17.280 --> 0:44:21.240 think of Eurozone, in Japan, their policy rates are in line, 0:44:21.400 --> 0:44:24.279 if not even higher that their neutral rates, so they 0:44:24.320 --> 0:44:28.080 can't really tighten. Uh, And so US has an opportunity 0:44:28.120 --> 0:44:31.080 to tighten. But as they tighten and get closer to 0:44:31.520 --> 0:44:34.240 our start or a neutral rate, what's going to happen. 0:44:34.280 --> 0:44:39.000 Molatility of enterprise increase. So financialization is unstoppable because as 0:44:39.040 --> 0:44:42.080 soon as molatility of enterprises goes up, central banks have 0:44:42.200 --> 0:44:44.719 to back off. And this idea that we need to 0:44:44.800 --> 0:44:48.960 generate more money and more liquidity than underlying economy is 0:44:49.000 --> 0:44:52.960 required cannot be reversed. So that's a given. The other 0:44:53.000 --> 0:44:56.200 thing is given is technology will continue progressing. Right now, 0:44:56.239 --> 0:44:58.359 we have shortages here and there, but at the end 0:44:58.360 --> 0:45:02.520 of the day, technology will continu your reducing marginal pricing 0:45:02.560 --> 0:45:07.399 power of both capital marginal pricing power products corporates as 0:45:07.440 --> 0:45:10.320 well as as well as labor. That should be that 0:45:10.400 --> 0:45:12.920 should be given. And the third thing that should be 0:45:12.960 --> 0:45:17.520 given is that geopolitical, social and political pressures will continue 0:45:17.560 --> 0:45:21.279 boiling over. It might get much tougher actually as we 0:45:21.360 --> 0:45:24.280 go over the next over the next five to ten years. 0:45:24.600 --> 0:45:27.520 So none of that stuff is actually changing. So if 0:45:27.520 --> 0:45:30.439 it is not changing, what do you want to buy? Well, 0:45:30.560 --> 0:45:35.200 you want to buy commodities that are actually replacing today's 0:45:35.239 --> 0:45:38.880 world and building the new world. That's your copper, your nickel, 0:45:39.040 --> 0:45:44.560 your aluminum, you're lythium, your rearse, your semiconductors. What else 0:45:44.560 --> 0:45:46.800 do you want to do well? Capital goods companies that 0:45:46.840 --> 0:45:50.080 actually will be rebuilding where I was destroyed, plus building 0:45:50.120 --> 0:45:52.719 the new the new era. What else do you want 0:45:52.719 --> 0:45:55.520 to do well? The new startups that will be operating 0:45:55.560 --> 0:46:00.600 new world, whether it's alternative transportation platforms, energy platforms, whether 0:46:00.600 --> 0:46:04.160 it's a fusion of infat tact and by attack all 0:46:04.200 --> 0:46:07.400 of that staff. Plus in addition to that, some software 0:46:07.440 --> 0:46:09.759 and select digital companies. You want to have, not all 0:46:09.800 --> 0:46:11.279 of them, but you want to have some of that. 0:46:11.880 --> 0:46:14.520 You want to look at any company in any sector 0:46:14.960 --> 0:46:18.680 that has not just pricing power, but ability to do 0:46:18.800 --> 0:46:21.680 things differently, whether their products are marketing, the way they 0:46:21.760 --> 0:46:25.600 use technology and therefore their productivity growth rates are faster 0:46:25.960 --> 0:46:28.960 so to meet the in the in the sea of confusion, 0:46:29.120 --> 0:46:32.600 the only thing is certain is that go with a 0:46:32.680 --> 0:46:37.480 circular strengths and go with the productivity drivers. In other words, 0:46:37.719 --> 0:46:43.120 those guys who consistently deliver access our productivity, circular strength, 0:46:43.200 --> 0:46:47.680 productivity drivers. To me, that's an easiest way to sort 0:46:47.680 --> 0:46:51.920 of conceptualize it in the short term. However, Yeah, you're 0:46:51.920 --> 0:46:55.520 absolutely right energy. If you take out energy, global markets 0:46:55.520 --> 0:46:58.400 would not have performed. Uh. And if you were an 0:46:58.520 --> 0:47:02.520 energy you're up to against any index. If you have 0:47:02.560 --> 0:47:04.880 a mix of energy and financials, you would have been 0:47:04.920 --> 0:47:08.680 up at least ten. If you are somebody like Cassi 0:47:08.760 --> 0:47:11.560 would have ARC, which is completely on the opposite side, 0:47:11.800 --> 0:47:15.719 you would have been down twenty five gains the indexes. 0:47:16.239 --> 0:47:20.640 So somewhere in between those extreme outcomes to me is 0:47:20.680 --> 0:47:23.759 the sort of the essence of resilient portfolio. Do you 0:47:23.800 --> 0:47:27.600 really want to pluck more on energy at the current 0:47:27.640 --> 0:47:31.600 prices or do you really want to completely double down 0:47:31.640 --> 0:47:35.840 and triple up so to speak, on on on extreme 0:47:35.880 --> 0:47:39.480 startups or profitable tech companies. Uh. The answer to me, 0:47:39.600 --> 0:47:42.160 both of those answers are wrong because both of them 0:47:42.200 --> 0:47:46.200 will lead to very high crystallized flatility. And somewhere between 0:47:46.200 --> 0:47:50.319 those outcomes I think lies sort of resilient performance. I 0:47:50.400 --> 0:47:53.200 just want to go back real quickly just to this 0:47:53.320 --> 0:47:57.560 idea of as you put it, prior to the invasion 0:47:57.600 --> 0:48:01.120 of your craned are already indicators of normalization and it's 0:48:01.120 --> 0:48:04.719 really not clear how much aggressive easing is needed, especially 0:48:05.200 --> 0:48:08.239 in light of the massive amount of fiscal that's being 0:48:08.239 --> 0:48:11.080 taken out of the system. What is the worry? And 0:48:11.160 --> 0:48:14.239 you know we talked about the deflationary bust after the 0:48:14.280 --> 0:48:17.080 inflation of the Spanish flu. How do you see a 0:48:17.120 --> 0:48:22.520 potential policy mistake playing out right now? Well, the the 0:48:22.800 --> 0:48:26.719 only number sort of to look at Israeli financial conditions. 0:48:27.200 --> 0:48:29.880 Different countries call it different the names. Some call it 0:48:29.960 --> 0:48:33.719 stress conditions, some call it some other names, but essentially 0:48:34.040 --> 0:48:36.800 all of them are the same, all of them taken 0:48:36.840 --> 0:48:40.520 to count. Variety of spreads are like high yield spreads 0:48:41.000 --> 0:48:44.879 and a variety of volatilities in various markets in order 0:48:44.920 --> 0:48:49.759 to define how how easy or tight financial conditions on 0:48:50.360 --> 0:48:53.200 what you have seen so far in the last sort 0:48:53.200 --> 0:48:56.840 of six weeks seven weeks is a fairly dramatic tightening 0:48:56.880 --> 0:49:01.120 occurring in Eurozone as well as in Egic market. But 0:49:01.239 --> 0:49:04.080 in the U s. Typing star far has been less pronounced. 0:49:04.440 --> 0:49:07.320 And the reason for that is that, as I said, 0:49:07.440 --> 0:49:10.880 the our star in the US is above the policy rids. 0:49:11.239 --> 0:49:14.279 So you still stimilitary, you still have the capacity to 0:49:14.320 --> 0:49:17.719 come to come up. The question is half far can 0:49:17.800 --> 0:49:20.040 you come? How close can you come to our star? 0:49:20.320 --> 0:49:23.360 Can you go above our star and actually become contraction? 0:49:24.160 --> 0:49:26.399 To me, the answer is you can't go above that. 0:49:26.680 --> 0:49:31.719 But as you go closing closer, volatility of esset prices increases. Now, 0:49:31.880 --> 0:49:35.719 remember theoretically our star is zero in real, which is 0:49:35.760 --> 0:49:39.560 say two nominal, So there is a room for fifty BIPs, 0:49:39.600 --> 0:49:42.200 maybe another twenty five, maybe a little bit more. But 0:49:42.400 --> 0:49:45.239 as you go up and get closer and closer to 0:49:45.280 --> 0:49:50.319 our star, volatility of enterprises will six potentially significantly increased. 0:49:50.800 --> 0:49:55.719 When that happens, it flows straight through into financial conditions indexes. 0:49:56.160 --> 0:49:59.160 And that's a cute four central banks to pull back, 0:49:59.200 --> 0:50:02.520 they have no true is spot to pull back very quickly. 0:50:03.040 --> 0:50:05.680 Uh and and so I I, as you know, I 0:50:05.920 --> 0:50:08.560 I I tended to believe that twenty two will be 0:50:08.600 --> 0:50:12.360 the year of removal of fiscal and monetary supports. Twenty 0:50:12.719 --> 0:50:15.040 twenty four will be the years of putting it back off, 0:50:15.719 --> 0:50:18.200 uh and and so and so I still maintain that 0:50:18.400 --> 0:50:21.839 that's probably will be the right answer, and the que 0:50:22.080 --> 0:50:25.640 will be financial condition indexes. If you want to look 0:50:25.680 --> 0:50:28.120 at specific areas, of course, you can look at the 0:50:28.200 --> 0:50:30.239 high yiel spreads. You can look at the plumbing of 0:50:30.360 --> 0:50:32.879 the banking system. There are specific indicators you can look 0:50:32.920 --> 0:50:35.680 at it, but all of that is kind of conceptualized 0:50:36.320 --> 0:50:40.640 into financial condition indoors. Now you can also argue that 0:50:40.880 --> 0:50:44.200 we talked about the yield curve, the more it inverts, 0:50:44.800 --> 0:50:48.880 the more federal reserve. We need to consider operation twist, 0:50:50.120 --> 0:50:54.120 or in other words, some degree of yield curve control. 0:50:54.719 --> 0:50:57.480 That's something that might be part of the discussion and 0:50:57.520 --> 0:51:00.720 debate as we go towards the end of twenty two. 0:51:01.400 --> 0:51:03.319 All right, well, Victor, we're gonna have to leave it there, 0:51:03.440 --> 0:51:05.640 but thank you so much for coming back on the show. 0:51:06.520 --> 0:51:10.360 Thank you. I'd really appreciate it. So, Joe, it's always 0:51:10.360 --> 0:51:13.600 great hearing from Victor, and he has this uncanny knack 0:51:13.760 --> 0:51:18.440 of bringing everything together under one sort of giant macro umbrella. 0:51:19.000 --> 0:51:22.359 But I thought what he was saying about the parallel 0:51:22.600 --> 0:51:27.200 to the post Spanish flu era was really interesting. And 0:51:27.239 --> 0:51:29.920 also to get back to this idea of, you know, 0:51:30.000 --> 0:51:34.480 we can have an inflationary spike, but that can easily 0:51:34.560 --> 0:51:38.120 tip over into deflation. This idea of it's not necessarily 0:51:38.120 --> 0:51:41.279 that prices are just going up and up and up 0:51:41.400 --> 0:51:45.279 right now. It's actually that they're really volatile and it's 0:51:45.320 --> 0:51:48.799 hard to measure. And what that means is that it's 0:51:48.840 --> 0:51:52.040 really difficult to get a handle on real demand versus 0:51:52.040 --> 0:51:55.799 sort of fake stockpiling. To Matt, yes, absolutely, and you 0:51:55.840 --> 0:51:59.200 know something that he touched on, and I've been writing 0:51:59.200 --> 0:52:02.520 a little bit about this, and you know, even Powell 0:52:03.239 --> 0:52:06.480 talked about it in his two recent appearances. Whatever you 0:52:06.560 --> 0:52:11.239 say about the two word transitory, transitory, some of the 0:52:11.280 --> 0:52:14.399 current inflation is still likely the result of it, even 0:52:14.400 --> 0:52:17.440 though no one uses that word. And there's been major disruptions, 0:52:17.800 --> 0:52:21.880 and uh, there's the shift in consumption from services to 0:52:22.000 --> 0:52:23.759 goods and all these sort of unusual things, and the 0:52:23.800 --> 0:52:26.120 trillions of dollars that spent which is not going to 0:52:26.160 --> 0:52:29.600 be spent in two there is physical tightening and so 0:52:29.760 --> 0:52:31.640 I do you know, no one talks about the user 0:52:31.680 --> 0:52:34.200 of the word transitory, but that is still an element. 0:52:34.360 --> 0:52:36.560 And if it's significant, and if we were going to 0:52:36.600 --> 0:52:40.360 see some sort of normalization naturally, plus you add in 0:52:40.400 --> 0:52:43.720 an aggressive hiking cycle, then you get to the scenario 0:52:43.800 --> 0:52:46.400 Victor laid out where by three they're talking about eating 0:52:46.400 --> 0:52:48.759 again totally. I mean, this is the other thing that 0:52:48.800 --> 0:52:51.720 emerged from the pandemic. We didn't really get a proper 0:52:51.760 --> 0:52:55.319 recession after the pandemic because we had all the stimulus, 0:52:55.920 --> 0:52:58.080 and then we sort of got shunted into a recovery 0:52:58.120 --> 0:53:02.319 that was really supercharged again thanks to that physical stimulus. 0:53:02.719 --> 0:53:05.359 And now it feels like we're sort of getting the response. 0:53:06.000 --> 0:53:08.400 I know some people say it was too slow coming, 0:53:08.480 --> 0:53:11.320 but it actually feels like it could come very quickly, 0:53:11.520 --> 0:53:14.839 with pal talking about fifty basis point increases and so 0:53:14.920 --> 0:53:17.440 it feels like we could get a whole another cycle 0:53:17.680 --> 0:53:20.200 happening very very fast. Yeah, you know, it's interesting. I 0:53:20.560 --> 0:53:22.960 had this thought about like this sort of I guess 0:53:23.000 --> 0:53:25.799 it's like the the fun house mirror version of the 0:53:25.840 --> 0:53:28.439 downturn and how fast this I'm trying to turn it out? 0:53:28.640 --> 0:53:30.640 And you know what day I felt like that specifically 0:53:31.440 --> 0:53:33.719 is that day, remember like the price of nickel went 0:53:33.800 --> 0:53:37.200 completely to shut down the nickel trading, And the day 0:53:37.239 --> 0:53:40.000 it reminded me of, weirdly was the day that oil 0:53:40.040 --> 0:53:44.719 went negative. Even though it's the exact opposite move it 0:53:44.880 --> 0:53:47.560 one is this huge spike, but both are these days 0:53:47.600 --> 0:53:51.440 that sort of like broke the market, except in opposite directions, 0:53:52.080 --> 0:53:54.560 and so to some extent it did feel like I 0:53:54.600 --> 0:53:56.960 don't know, like, yes, I think what you're what you're 0:53:56.960 --> 0:53:59.040 saying is we'll put like we're just getting this really 0:53:59.040 --> 0:54:04.400 extremely torqued version of what we experienced throughout hopefully thanks 0:54:04.520 --> 0:54:06.600 you know that. Hence that, hence the dream of a 0:54:06.719 --> 0:54:10.120 soft landing or just te normal. Yeah, the torque does 0:54:10.160 --> 0:54:12.560 a good word. Isn't it all? Right? Um? Shall we 0:54:12.640 --> 0:54:14.640 leave it there? Let's leave it there? Okay. This has 0:54:14.680 --> 0:54:18.360 been another episode of the All Thoughts podcast. I'm Tracy Alloway. 0:54:18.440 --> 0:54:20.880 You can follow me on Twitter at Tracy Alloway and 0:54:20.920 --> 0:54:23.040 I'm Joe Why Isn't Thal? You can follow me on 0:54:23.080 --> 0:54:26.760 Twitter at the Stalwarts. Big thanks to our producers Magnus 0:54:26.760 --> 0:54:30.000 Henrickson and Colin Tipton. Followed the Bloomberg head of podcast 0:54:30.000 --> 0:54:33.440 Francesco Levy at Francesco Today and check out all of 0:54:33.480 --> 0:54:37.480 the podcasts at Bloomberg onto the handle add Podcasts. Thanks 0:54:37.480 --> 0:54:37.960 for listening.