WEBVTT - Death of Austerity 0:00:04.120 --> 0:00:07.560 Strap on your parachute. It's time for What Goes Up 0:00:07.840 --> 0:00:14.960 with Sarah Ponzick and Mike Reagan. Hello and welcome to 0:00:15.080 --> 0:00:18.440 What goes Up, a Bloomberg Weekly Markets podcast. I'm Sarah 0:00:18.480 --> 0:00:21.560 pons a reporter on the Cross Asset team, and I'm 0:00:21.560 --> 0:00:25.040 Mike Reagan, a senior editor at Bloomberg. This week on 0:00:25.079 --> 0:00:28.480 the show, nothing about the past year has seemed normal. 0:00:28.880 --> 0:00:31.920 A global pandemic, widespread lockdown, so what could be seen 0:00:31.960 --> 0:00:34.879 as a medical miracle with vaccine creation? But then, of 0:00:34.920 --> 0:00:37.480 course there's the market angle. We had the quickest fall 0:00:37.520 --> 0:00:40.160 into a bear market on record, and that was then 0:00:40.200 --> 0:00:43.560 followed by a historic comeback. But according to our guests, 0:00:43.680 --> 0:00:46.159 we're now in the midst of an expansion just like 0:00:46.240 --> 0:00:50.239 any other, just likely a shorter one. He'll explain, And 0:00:50.320 --> 0:00:52.800 of course we will close out the episode with our 0:00:52.800 --> 0:00:56.360 tradition the craziest thing I saw in markets this week, 0:00:56.760 --> 0:00:58.840 and by all means, if you saw something crazy, give 0:00:58.920 --> 0:01:02.360 us a call on the Bloomberg Podcast Hotline at six 0:01:02.400 --> 0:01:06.200 four six three to four nine. Oh and let us 0:01:06.240 --> 0:01:08.600 know what crazy thing you saw. Leave us a voicemail 0:01:08.640 --> 0:01:12.000 and maybe we'll play it on the show. Uh And Sarah, 0:01:12.040 --> 0:01:14.080 I trust you have a crazy thing. You had two 0:01:14.080 --> 0:01:17.600 weeks a week off there to prepare, so I expect 0:01:17.640 --> 0:01:19.920 you to bring it this week. Yeah. So I brought 0:01:19.959 --> 0:01:22.080 you two crazy things this week. I might even throw 0:01:22.319 --> 0:01:24.959 in a third if you're lucky. But for everyone listening, 0:01:25.520 --> 0:01:28.000 I know you demanded it, and we did get the 0:01:28.040 --> 0:01:31.520 demand on our ratings on Apple Podcasts. So luckily you 0:01:31.520 --> 0:01:33.440 don't just have to stick around today for the crazy things. 0:01:33.440 --> 0:01:35.839 You also get to stick around for one of Mike's nicknames. 0:01:36.480 --> 0:01:39.280 How exciting that is. Remember this into it. This is 0:01:39.280 --> 0:01:42.119 not the high value nickname. I'm holding out for two 0:01:42.200 --> 0:01:44.920 hundred ratings to give the high value nickname. This. We're 0:01:44.920 --> 0:01:47.560 getting there. This is a bargain nickname. It's a flattering 0:01:47.640 --> 0:01:50.240 nickname to me. So I keep those ratings coming. I 0:01:50.240 --> 0:01:52.720 think we're at one seventy something now, so we get 0:01:52.720 --> 0:01:56.600 the two. I'll deliver the really embarrassing nickname for this 0:01:56.800 --> 0:01:59.200 right at this right, Mike, give it a week, give 0:01:59.200 --> 0:02:01.200 it a week, just so you can all roast me 0:02:01.240 --> 0:02:03.400 on Twitter. I know that is the entire purpose of this, 0:02:03.480 --> 0:02:06.120 which is fine. That's that's as it should be. But 0:02:06.560 --> 0:02:08.959 new guest, and we won't roast him on Twitter anywhere else. 0:02:09.000 --> 0:02:11.880 We're very happy to have him first time on the show. 0:02:12.560 --> 0:02:15.959 He is the chief strategist at the clock Tower Group. 0:02:16.360 --> 0:02:19.000 His name is Marco Peppitch. Marco, welcome to the show. 0:02:19.520 --> 0:02:21.000 It's a real pleasure to be here. Thank you for 0:02:21.040 --> 0:02:24.400 having me. Oh absolutely, Marco. Let's start. Let's talk a 0:02:24.440 --> 0:02:26.920 little bit about the clock Tower Group. Um, and it 0:02:27.000 --> 0:02:29.000 tell us a little bit about you know, what kind 0:02:29.040 --> 0:02:31.119 of work you do for them. I know the main 0:02:31.200 --> 0:02:34.160 business is sort of seating new hedge funds, right, um, So, 0:02:34.160 --> 0:02:36.480 so tell us about what else the company does and 0:02:36.560 --> 0:02:40.200 what your role is. We're in an alternative investment management firm, 0:02:40.280 --> 0:02:43.760 so we we do several things. We we set hedge funds, 0:02:44.160 --> 0:02:48.840 macro discretionary hedge funds. We also UM have a seating 0:02:48.880 --> 0:02:52.960 platform actually in China with on shore managers there. We 0:02:53.080 --> 0:02:58.240 also are doing private investing, specifically in fittex space, but 0:02:58.280 --> 0:03:00.919 we're also looking to expand from there as well. So 0:03:01.040 --> 0:03:03.760 there's several sort of business lines that we have. We 0:03:03.800 --> 0:03:06.200 have great relationships we've built over the last twenty years 0:03:06.240 --> 0:03:09.440 with institutional investors and we really listen to our clients. 0:03:10.240 --> 0:03:13.240 We hear what they are looking to do and um, 0:03:13.520 --> 0:03:16.920 we you know, we claim to be able to answer 0:03:16.960 --> 0:03:20.600 most of their challenges and deliver with some innovative business 0:03:21.000 --> 0:03:25.160 ideas and investment products. So just to expand on that 0:03:25.200 --> 0:03:27.639 a little bit, how do you go about deciding where 0:03:27.680 --> 0:03:29.520 to send money to if you're seating hedge funds? I mean, 0:03:29.560 --> 0:03:32.680 how do you go about doing that process? You know? Um, 0:03:32.720 --> 0:03:35.760 it requires a real in depth knowledge of the industry 0:03:35.760 --> 0:03:38.560 and I think also of m where the young talent is. 0:03:38.960 --> 0:03:42.800 I mean that's the fundamental, uh, fundamental issue. I mean, um, 0:03:42.880 --> 0:03:44.960 you have to know how to kind of have a 0:03:45.040 --> 0:03:48.280 draft board. Think about like a professional sports team. You 0:03:48.560 --> 0:03:51.800 throughout the season, you're looking at the college studs coming 0:03:51.840 --> 0:03:53.800 through the program and you're looking at where they are 0:03:53.880 --> 0:03:56.800 and how they rank. Um, So that's one part of 0:03:56.800 --> 0:03:59.400 the process. It's very difficult because of course the industry 0:03:59.720 --> 0:04:02.560 I mean not like you have statistics of hedge fund 0:04:02.680 --> 0:04:06.600 portfolio managers somewhere publicly available. But you also have to 0:04:06.640 --> 0:04:08.920 know where the sport is going, you know, so you 0:04:09.000 --> 0:04:12.120 have to know kind of whether three point shooters are 0:04:12.160 --> 0:04:15.840 more likely to succeed or you need big, big guys rebounding. 0:04:15.960 --> 0:04:18.520 So there's also that component where we have to constantly 0:04:18.560 --> 0:04:21.640 be thinking where is macro going? And so I guess 0:04:21.680 --> 0:04:24.120 my role is not really on the former. You know, 0:04:24.160 --> 0:04:27.080 I'm not really like a talent scout. I enjoy talking 0:04:27.080 --> 0:04:29.560 to really smart people and hopefully I can add value there, 0:04:30.040 --> 0:04:32.840 but my expertise really is on the ladder, so kind 0:04:32.839 --> 0:04:35.320 of thinking where the macro industry is going, where the trends? 0:04:35.720 --> 0:04:37.640 Do you want to see someone who is an expert 0:04:37.640 --> 0:04:41.599 in emerging markets stress that more classical macro. You know, 0:04:41.680 --> 0:04:44.240 those are questions we also have to ask ourselves. I 0:04:44.279 --> 0:04:46.520 can't quite say that you have a five star rating 0:04:46.640 --> 0:04:49.760 or four star rating a quarterback or anything like that. 0:04:50.360 --> 0:04:52.360 We don't you know, you don't have that. But you've 0:04:52.360 --> 0:04:54.120 got to keep your ear to the ground and kind 0:04:54.120 --> 0:04:57.200 of figure out who's who's out there, Who's who, who's good? 0:04:57.800 --> 0:05:00.479 So you're on Wall Street pets looking for writers. I 0:05:00.480 --> 0:05:02.520 assume that I'm I'm just kidding of No, no no, no, 0:05:02.600 --> 0:05:05.240 actually I think my eight year old son, you know, 0:05:05.440 --> 0:05:08.080 could could be good next, next one up. He played 0:05:08.120 --> 0:05:12.120 a lot of computer games. Yeah, absolutely absolutely, But let's 0:05:12.160 --> 0:05:15.320 get to that point. Then, your role, as Sarah mentioned, um, 0:05:15.960 --> 0:05:18.800 you have an interesting take on on what we can 0:05:18.839 --> 0:05:22.440 expect from this economic cycle. Uh, it's gonna be like 0:05:22.480 --> 0:05:25.440 a normal cycle, just shorter. Uh. And you wrote in 0:05:25.720 --> 0:05:28.480 a recent note, you know this augurs for a more volatile, 0:05:28.640 --> 0:05:32.359 manic and brief bowl market. Talk us through that a 0:05:32.400 --> 0:05:34.640 little bit. How do you see that unfolding and kind 0:05:34.640 --> 0:05:37.280 of you know, what inning are we in now in 0:05:37.640 --> 0:05:41.200 your view of this expansion and bowl market? You know, 0:05:41.320 --> 0:05:43.039 let me first give you sort of a sense of 0:05:43.040 --> 0:05:45.600 where I'm coming from in terms of my competency. Um, 0:05:46.040 --> 0:05:49.200 I feel that my kind of methodological bias is probably 0:05:49.240 --> 0:05:52.719 political analysis. So that's where I cut my teeth at 0:05:53.160 --> 0:05:56.280 on south side research. And so when I look at 0:05:56.360 --> 0:05:58.960 what happened in the last expansion and I sort of 0:05:59.040 --> 0:06:02.120 try to figure out, why was it as prolonged, tepid, 0:06:02.839 --> 0:06:05.440 Why was it all about secular stignation. I call it 0:06:05.480 --> 0:06:08.960 the Charlie Brown expansion because it was always kind of depressed. 0:06:09.760 --> 0:06:12.479 Um So why A lot of people give you a 0:06:12.520 --> 0:06:15.000 lot of really complicated answers like, oh, people are getting 0:06:15.040 --> 0:06:19.760 old demographics, you know, technologies deflation. Yes, okay, maybe to 0:06:19.880 --> 0:06:25.440 me it was very simple. Politics flipped and we got 0:06:25.480 --> 0:06:28.120 this huge push towards austerity. Not just in the US 0:06:28.200 --> 0:06:30.080 with the Tea Party, but even with David Cameron in 0:06:30.120 --> 0:06:35.479 the in Europe mircle of course everywhere. Only really could 0:06:35.520 --> 0:06:38.240 you say that abanomics kind of moved a little bit 0:06:38.279 --> 0:06:42.240 against that. But there was this big political consensus that 0:06:42.440 --> 0:06:45.080 we had to tighten our belts because what households did, 0:06:45.120 --> 0:06:47.479 so the governments had to do the same. And I 0:06:47.480 --> 0:06:52.080 think that was a huge component of prolonging the recovery, 0:06:52.360 --> 0:06:55.920 making it, you know, tepid, make ensuring that the output 0:06:55.920 --> 0:06:59.360 gap could continue to be basically open and not closed. 0:07:00.040 --> 0:07:02.960 I think that this time around, it's very clear that 0:07:03.080 --> 0:07:05.400 we're in a different paradigm, and so I think that 0:07:05.480 --> 0:07:08.839 we're probably done. I would say with you know, I 0:07:08.839 --> 0:07:11.160 don't know. I'm just throwing this out there, but like 0:07:12.760 --> 0:07:15.600 this recovery I think is behind us. We ask me 0:07:15.640 --> 0:07:18.360 again in twelve months, maybe I'll reassess. I think we 0:07:18.480 --> 0:07:22.680 have two stimulus programs coming through using reconciliation, which is novel, 0:07:22.720 --> 0:07:25.440 and we can talk about why that's novel. I think 0:07:25.480 --> 0:07:27.160 they're gonna be huge. I think there's gonna be no 0:07:27.280 --> 0:07:31.040 revenue offsets. This this fantasy that they'll be corporate tax 0:07:31.120 --> 0:07:36.080 increases likely will not happen, So we're just gonna have unadultered, 0:07:36.320 --> 0:07:40.680 high powered spending. That makes this, I think, meaningfully different 0:07:40.720 --> 0:07:43.800 from the previous expansion. And I will say, of course, Marco, 0:07:43.840 --> 0:07:45.920 you have a book. It's called Geopolitical Alpha, and it 0:07:46.040 --> 0:07:47.880 was ranked one of the best books by Bloomberg of 0:07:48.800 --> 0:07:52.640 so if you're intrigued, definitely check it out. So what 0:07:52.800 --> 0:07:54.880 that said, I mean, with the flip that we have seen, 0:07:54.920 --> 0:07:57.040 of course there's a lot of spending coming down the pipeline. 0:07:57.840 --> 0:08:00.360 If this is yes, it's a faster expansion in, but 0:08:00.400 --> 0:08:03.520 then it also means it's a shorter expansion. What is 0:08:03.560 --> 0:08:06.800 it then that is the nail in the coffin? What 0:08:06.960 --> 0:08:10.760 is it that actually ends the expansion? If it's faster 0:08:10.960 --> 0:08:13.800 yet also shorter, you have to assume the end comes 0:08:13.800 --> 0:08:17.480 sooner as well. Yes, and I think eventually we do 0:08:17.640 --> 0:08:22.320 run out of fiscal policy um at some point. And 0:08:22.360 --> 0:08:26.400 I think that sort of my my mental framework for 0:08:26.440 --> 0:08:29.960 this would be the short and quick recessions that happen 0:08:30.000 --> 0:08:32.680 after the Korean War or World War two, where you 0:08:32.720 --> 0:08:36.040 had a fiscal cliff recession. I mean right now, you know, 0:08:36.080 --> 0:08:39.839 speaking on February eighteen twenty one, I would say three 0:08:39.880 --> 0:08:43.079 looks like potentially the end end line. I think in 0:08:43.760 --> 0:08:48.720 two will get another two trillion dollar stimulus package infrastructure deal, um. 0:08:48.760 --> 0:08:51.120 And I think by three, after the mid terms, it's 0:08:51.160 --> 0:08:53.360 it's unlikely they will be able to keep up with 0:08:53.400 --> 0:08:55.920 this high water mark we've now established in terms of 0:08:55.920 --> 0:08:59.000 fiscal spending. But you know, that's a very low conviction 0:08:59.040 --> 0:09:01.440 of you. All I know is that for the next two, 0:09:02.000 --> 0:09:04.840 you know, two years, it's like diamond hands and to 0:09:04.960 --> 0:09:07.680 the moon. You know, I got anything else to tell 0:09:07.679 --> 0:09:09.480 you other than that, And let me tell you one 0:09:09.520 --> 0:09:11.320 more thing. Let me tell you one more thing, just 0:09:11.320 --> 0:09:14.880 really quickly, I think, uh, think about it this way. Okay, 0:09:14.960 --> 0:09:18.080 let's let's let's say we're listening to your podcast, amazing podcast, 0:09:18.080 --> 0:09:20.040 whichever one should listen to. Let's say they were listening 0:09:20.080 --> 0:09:23.120 to your podcast in a car and we pull up 0:09:23.120 --> 0:09:26.000 to the takeout window. All right, but I'd like to 0:09:26.040 --> 0:09:28.240 listen to your podcasts at three X. Okay. I don't 0:09:28.240 --> 0:09:29.920 know if anyone does that, but let's say I do. 0:09:30.880 --> 0:09:32.800 And so what I'm saying about the cycles, it's like 0:09:33.000 --> 0:09:36.720 listening to you guys. And then suddenly at the takeoff window, 0:09:36.720 --> 0:09:39.760 I realized they forgot my fries, they didn't put the 0:09:39.800 --> 0:09:41.840 milk I want in my coffee, and I'm arguing with 0:09:41.920 --> 0:09:45.000 you know, like whatever I get that done and coffee together, 0:09:45.720 --> 0:09:48.600 you know, like you got a tough day, you need 0:09:48.800 --> 0:09:52.360 energy and I guess whatever carbohydrates. Anyways, my point is 0:09:52.400 --> 0:09:55.960 that what happens is that when you come back to 0:09:56.040 --> 0:10:00.199 the podcast, you've missed meaningfully more of that pod. Kist 0:10:00.240 --> 0:10:02.440 him you did if you listen to it at one X. 0:10:02.520 --> 0:10:04.520 And I think that's the difference between the cycle and 0:10:04.559 --> 0:10:07.120 the previous one. If you're sitting on the sideline being 0:10:07.120 --> 0:10:09.840 cautious because evaluations this or that, waiting for a correction, 0:10:10.600 --> 0:10:13.160 three months on the sidelines, it's like nine months in 0:10:13.200 --> 0:10:17.200 the previous cycle. I do have a friend who listens 0:10:17.200 --> 0:10:18.760 to it. I think it like one and a half 0:10:18.880 --> 0:10:21.679 times speed. And then every time he sees me starry, 0:10:21.679 --> 0:10:23.120 he's like, you know, and I talked him. He's like, 0:10:23.160 --> 0:10:26.800 you really talk, you know, the same energy that you 0:10:26.880 --> 0:10:37.920 usually do when I hear you on your podcast, Marco. 0:10:38.120 --> 0:10:41.400 I wonder, you know, another thing you've written a little 0:10:41.400 --> 0:10:44.160 bit about is inflation, the outlook for inflation. I wonder 0:10:44.200 --> 0:10:48.120 how that fits into the sort of inevitable death of 0:10:48.120 --> 0:10:50.640 of the the expansion cycle. You know this sort of 0:10:51.400 --> 0:10:54.400 uh stereotype that's probably true of true of most times 0:10:54.480 --> 0:10:57.800 is that you know, the central banks typically snuff out 0:10:58.640 --> 0:11:05.320 expansionary time reacting to inflation uh and and raising interest rates. Um. 0:11:05.480 --> 0:11:07.640 And I think you make a good point. You say 0:11:07.679 --> 0:11:11.079 that there's obviously gonna be this second quarter bumping inflation 0:11:11.160 --> 0:11:13.880 as the world kind of gets back to normal. And 0:11:13.920 --> 0:11:16.840 you know, you have some you know, comparisons to prices 0:11:16.960 --> 0:11:20.439 last year that that we're obviously uh deflated because of 0:11:20.480 --> 0:11:23.880 the pandemic. So you think sexual banks will dismiss that 0:11:24.000 --> 0:11:28.600 sort of outlier of a big hot second quarter inflation. Um, 0:11:28.640 --> 0:11:31.880 But you do think it's it's coming. Uh. You point 0:11:31.880 --> 0:11:36.240 out to, uh, maybe oil going to eight dollars a barrel? 0:11:37.000 --> 0:11:39.480 So is it is that going to be a typical 0:11:39.800 --> 0:11:42.800 sort of boom and bust scenario as past cycles that 0:11:43.160 --> 0:11:45.720 ultimately it's the central banks that sort of ruined the party. 0:11:45.760 --> 0:11:50.520 And you know, how fast do we have to worry 0:11:50.559 --> 0:11:53.640 about inflation and the reaction function from central banks if 0:11:53.679 --> 0:11:58.000 not the second quarter? Yeah, So definitely that could be 0:11:58.080 --> 0:12:01.640 part of the calculus. And think three again could be 0:12:01.679 --> 0:12:03.800 a moment when central banks realized that they kind of 0:12:03.800 --> 0:12:08.280 made a mistake mathematically center a sparables like completely understand 0:12:08.280 --> 0:12:10.600 why they're saying it's transitory, But inflation is not a 0:12:10.600 --> 0:12:13.480 monitory phenomenon. It's not even a mathematical phenomenon. It's as 0:12:13.480 --> 0:12:16.560 many in many ways a psychological phenomenon. And I'm just 0:12:16.600 --> 0:12:20.480 not sure how economic agents, you know, households and CEOs 0:12:20.559 --> 0:12:24.440 are going to react to this coming quote unquote transitory 0:12:24.679 --> 0:12:27.360 about of inflation. I think they will react. And this 0:12:27.480 --> 0:12:29.760 is just my, you know, basically educated guess, but I 0:12:29.840 --> 0:12:34.000 think they'll react vibe uh forwarding their purchases to the 0:12:34.040 --> 0:12:38.120 present from the future. Um. So that's that's the first 0:12:38.120 --> 0:12:40.640 part of this. Now to your question of does Dad's 0:12:40.679 --> 0:12:42.839 then bring the end of the cycle, I think yes. 0:12:42.880 --> 0:12:44.640 I think you can add that to sort of the 0:12:44.760 --> 0:12:50.240 soup with the fiscal thrust argument, but I am not 0:12:50.360 --> 0:12:53.120 sure how fast it will happen. And and here's here's 0:12:53.120 --> 0:12:56.040 what I would kind of add a political lends to this. Um, 0:12:56.080 --> 0:12:58.040 they told us what they want to do, central bankers 0:12:58.040 --> 0:13:01.440 of tolls, they wan't hire inflation. It is the easiest way, 0:13:01.520 --> 0:13:03.840 and I know most investors don't like to hear this 0:13:03.960 --> 0:13:07.120 because their savers. But it's the easiest way to kind 0:13:07.120 --> 0:13:11.240 of redistribute wealth and to deal with because because a 0:13:11.280 --> 0:13:14.480 lot of people are indebted at very high levels. Of course, 0:13:14.520 --> 0:13:17.600 provided their wages rise as well, which I think they will. 0:13:18.320 --> 0:13:20.960 So I think that this is something that's coming by Paulson, 0:13:21.040 --> 0:13:24.120 because I think they'll delay the kind of acts of 0:13:24.200 --> 0:13:27.880 central banking that comes and cuts inflation in its tracks. 0:13:28.440 --> 0:13:30.360 I know that we know how to do it. I 0:13:30.400 --> 0:13:33.080 know that Paul Walker did. But Paul Wulker was a 0:13:33.120 --> 0:13:37.240 man of the moment and he managed to fight and 0:13:37.640 --> 0:13:42.360 you know, swat away inflation through two recessions that increased unemployment. 0:13:42.760 --> 0:13:46.079 I just don't see any willingness to impost pain on 0:13:46.120 --> 0:13:48.240 the media voter at this point, and so I think 0:13:48.240 --> 0:13:51.840 that we will look through inflation longer than most investors 0:13:51.920 --> 0:13:56.320 probably think. So. So speaking of inflation and looking at commodities, 0:13:56.360 --> 0:13:58.240 and Mike mentioned how you said oil could go to 0:13:58.240 --> 0:14:00.520 eighty dollars a barrel. Of course, as speaker, was a 0:14:00.600 --> 0:14:03.880 remarkable week in the United States. In Texas, we had 0:14:03.880 --> 0:14:06.760 the freeze, we saw oil prices shoot through sixty dollars 0:14:06.800 --> 0:14:09.880 a barrel. West Texas intermediate for the first time in 0:14:09.920 --> 0:14:13.120 a year. So is this just the beginning? And obviously 0:14:13.400 --> 0:14:15.800 that that's on the supply side of the equation, But 0:14:15.920 --> 0:14:18.719 what comes next to really push oil higher? Is is 0:14:18.760 --> 0:14:21.240 it the recoveries, the vaccine roll up, things getting back 0:14:21.240 --> 0:14:22.880 to normal, and then what does that mean for the 0:14:22.880 --> 0:14:25.920 inflation picture overall? You know, Sarah, I mean it's all 0:14:25.960 --> 0:14:28.400 of those, all of the above, you know. So, Um, 0:14:28.440 --> 0:14:30.360 I also think jue political tensions you can add in 0:14:30.400 --> 0:14:33.200 there too. Um. You know, the sort of the hope 0:14:33.240 --> 0:14:36.600 of a quick supply shock, positive supply shock because of 0:14:36.640 --> 0:14:41.000 a Biden administration is dissipating. Um iran elections midyear, it's 0:14:41.080 --> 0:14:42.800 unlikely we get a deal. I mean, it's a very 0:14:42.800 --> 0:14:46.720 complicated situation. But I think fundamentally, um, one of the 0:14:46.760 --> 0:14:51.800 most ironic and paradoxical uh kind of effects of the 0:14:51.840 --> 0:14:55.760 E s G sustainability push is that many energy companies 0:14:55.800 --> 0:14:59.120 just do not want to put topics in two very 0:14:59.120 --> 0:15:02.080 expensive projects. And so I you know, like you have 0:15:02.200 --> 0:15:07.080 demand which is basically stable around nine million barrels a 0:15:07.160 --> 0:15:11.120 day globally, and if Capex doesn't produce four to six 0:15:11.160 --> 0:15:15.120 million new barrels a year, of product of production to 0:15:15.240 --> 0:15:20.120 replace depleted oil wells. You can't make meet that demand. 0:15:20.560 --> 0:15:24.040 So we could have a meaningful problem when demand does 0:15:24.120 --> 0:15:28.880 recover to global kind of average demand and CAPEX doesn't 0:15:29.320 --> 0:15:32.680 show up to replace the usual depleted barrels that just 0:15:32.720 --> 0:15:35.440 happened through well depletion. So that's the first issue. I 0:15:35.480 --> 0:15:37.480 think the second issue and what it means for inflation, 0:15:37.680 --> 0:15:41.000 it's tricky. So I would actually say all price increases 0:15:41.080 --> 0:15:44.640 over the longer term are deflation ary if not accompanied 0:15:44.640 --> 0:15:48.720 by commensurable increases in wages. And this is really tough 0:15:48.760 --> 0:15:52.280 for economists and market participants to forecasts, like how do 0:15:52.280 --> 0:15:55.040 you forecast wage increases? You know, the Phillips Group hasn't 0:15:55.040 --> 0:15:57.920 really hopped in any way. There's also some ways in 0:15:57.960 --> 0:16:01.240 which we don't really know where kind of wage pressures 0:16:01.280 --> 0:16:02.840 are going to come from. But I think there are 0:16:02.840 --> 0:16:05.560 two things that are happening right now. One, many labor 0:16:05.680 --> 0:16:09.840 unions are seeing in this crisis an opportunity to renegotiate 0:16:10.480 --> 0:16:13.000 and to um you have a real problem in many 0:16:13.040 --> 0:16:15.880 major cities in the US as an example, where you know, 0:16:16.000 --> 0:16:18.640 schools are not going to open for a long time, 0:16:18.760 --> 0:16:22.320 and so if women can't and they've been uh, disproportionately 0:16:22.400 --> 0:16:24.560 hurt by dis crisis. If they can't get back into 0:16:24.560 --> 0:16:28.240 the labor force, they're an incredibly important input into the 0:16:28.280 --> 0:16:32.320 service economy of the US, and that will boost wages 0:16:32.360 --> 0:16:34.440 as well, I think in parts of the economy that 0:16:34.480 --> 0:16:37.240 haven't really seen much wage pressures. Putting all this together, 0:16:37.320 --> 0:16:40.040 I think trying to figure out if wage pressures show 0:16:40.120 --> 0:16:42.480 up over the next twell months is a critical component 0:16:42.760 --> 0:16:46.920 into figuring out whether any inflationary impact of commodities is sustainable. 0:16:47.240 --> 0:16:49.760 And I would lean towards yeah, there will be wage pressures, 0:16:51.080 --> 0:16:55.440 you know, Marcus, sticking in your wheelhouse stare of geopolitics. Um, 0:16:56.000 --> 0:16:59.320 there was one line in the notes we got from 0:16:59.320 --> 0:17:01.280 you that that I'm gonna be honest, that kind of 0:17:01.320 --> 0:17:04.480 scared my my shoes off here. So so of course 0:17:04.520 --> 0:17:07.000 you know I have to read that, Sarah, this this 0:17:07.240 --> 0:17:09.280 the scary stuff you gotta bring up. But let me 0:17:10.520 --> 0:17:18.119 let me just read this itself. Fear cells. Yeah. Um, 0:17:18.160 --> 0:17:20.760 so you write that the odds of a military confrontation 0:17:21.160 --> 0:17:24.440 with the US are rising as China achieves greater energy 0:17:24.440 --> 0:17:28.400 independence and gains a critical footprint in the global renewable 0:17:28.480 --> 0:17:31.960 supply chain. Um, I'm just glad I'm above the draft 0:17:32.000 --> 0:17:34.240 age when I read something like that. But but unpack 0:17:34.359 --> 0:17:37.040 us that for us a little bit. UM, I guess 0:17:37.080 --> 0:17:41.400 the argument is that um, China is becoming so competitive 0:17:41.840 --> 0:17:46.600 globally in technology, green energy. Recently, we we even saw 0:17:46.680 --> 0:17:50.399 headlines about China does not want to export rarer earth 0:17:51.200 --> 0:17:53.679 materials to the US because they can be used in 0:17:53.720 --> 0:17:57.719 military projects. That sort of thing unpack that for US 0:17:57.800 --> 0:18:00.240 is that basically it that that the trade, aid and 0:18:00.320 --> 0:18:04.240 economic competition is getting so fierce between China and the 0:18:04.320 --> 0:18:08.080 US that this UH necessarily raises the odds of an 0:18:08.080 --> 0:18:13.920 actual UH military conflict. Let me step back. I I actually, um, 0:18:13.960 --> 0:18:15.200 you know, I've had a view on this for a 0:18:15.320 --> 0:18:18.080 very long time. So I started my career in finance 0:18:18.119 --> 0:18:22.200 by basically trying to make politics and geopolitics investment relevant 0:18:22.280 --> 0:18:25.040 to my clients. And one of the frustrating things in 0:18:26.600 --> 0:18:29.480 thirteen is that nobody was paying attention to Asia, really nobody, 0:18:29.640 --> 0:18:31.800 and especially in Singapore in Hong Kong, they would like 0:18:31.800 --> 0:18:33.520 throw you out of the office if you said, well, 0:18:33.600 --> 0:18:36.159 I think China U s dnsion is good on no, no, no, 0:18:36.200 --> 0:18:39.800 it's all about you know, isis. It's all yeah, tell 0:18:39.880 --> 0:18:42.600 me about and so that was very frustrating for me, 0:18:42.600 --> 0:18:44.640 and I was trying to explain why there is this, 0:18:44.840 --> 0:18:48.880 you know, very very theoretical, very political science based problem 0:18:49.080 --> 0:18:52.640 between US and China that's been identified before Garhame Ellison 0:18:52.680 --> 0:18:54.480 wrote that great book, The CD of This Trap, and 0:18:54.480 --> 0:18:57.920 so on and so on. However, I think there's two 0:18:57.960 --> 0:19:00.440 things that are going on right now. Two man people 0:19:00.440 --> 0:19:05.719 are linearly extrapolating the last ten years into the future, 0:19:06.480 --> 0:19:10.159 and so they're extrapolating using the only mental framework they have, 0:19:10.280 --> 0:19:14.000 which is the Cold War. So ironically, Mike, I'm actually 0:19:14.040 --> 0:19:15.879 going to kind of disagree with you and agree with 0:19:15.920 --> 0:19:17.879 you at the same time. I would say that the 0:19:17.960 --> 0:19:22.480 trade tensions, the economic tensions, are likely going to surprise 0:19:22.600 --> 0:19:26.920 to the downside, you know. And and why well, because 0:19:27.520 --> 0:19:30.720 we don't live in a bipolar world where so union 0:19:30.720 --> 0:19:33.119 in the US can carve up the planet in two 0:19:33.320 --> 0:19:36.119 neat spheres and then tell their allies plain ice or 0:19:36.119 --> 0:19:38.640 will punish you. We live in more of a nineteenth 0:19:38.680 --> 0:19:41.560 century kind of a world, which is exciting. It's a 0:19:41.800 --> 0:19:46.760 swashbuckling there's just a lot of messiness and geopolitical volatility, 0:19:46.840 --> 0:19:49.239 and it's gonna be very difficult for US to keep 0:19:49.280 --> 0:19:51.600 its allies and chat in China to do the same. 0:19:52.160 --> 0:19:54.240 And in that world, it's going to be very difficult 0:19:54.280 --> 0:19:56.960 to actually have a clean break. Now. I fully expected 0:19:57.000 --> 0:20:00.480 Biden administration to be very tough on emergency knowledge is 0:20:00.560 --> 0:20:02.880 high tech and so on, for sure, but I think 0:20:02.880 --> 0:20:07.399 the tariffs and blanket, uh, the coupling is unlikely to happen. 0:20:07.760 --> 0:20:09.320 And we saw that last year, by the way, the 0:20:09.359 --> 0:20:12.840 height of the trade war, you know, we had massive 0:20:12.880 --> 0:20:15.280 inflows into China into the bond market that was one 0:20:15.320 --> 0:20:18.960 of the number like number one favorite trades for many 0:20:19.119 --> 0:20:22.840 investment institutional investors and so on. So that's the first 0:20:22.840 --> 0:20:26.840 part of this. You can have geopolitical rivalry and still 0:20:26.880 --> 0:20:29.240 trade with one another and still invest in one another. 0:20:29.280 --> 0:20:32.200 And actually history and political science tells us that this 0:20:32.240 --> 0:20:36.600 is what happens in the multipolar world. However, military conflict 0:20:36.680 --> 0:20:39.000 still remains a problem right as a risk. I mean, 0:20:39.040 --> 0:20:43.240 look at Germany and the UK before n Their trade 0:20:43.280 --> 0:20:46.920 increased right up until the day of World War One, 0:20:47.640 --> 0:20:50.640 and so those tensions are still there, and those are 0:20:50.640 --> 0:20:53.840 meaningful tensions of a rising power trying to carve out 0:20:53.880 --> 0:20:57.399 its sphere of influence and the status quot power trying 0:20:57.400 --> 0:20:59.520 to kind of limit its influence, and and that's just 0:20:59.760 --> 0:21:02.600 the that's just the world we live in today. So 0:21:02.640 --> 0:21:05.440 what I was saying in that particular analysis was that 0:21:05.840 --> 0:21:09.359 some of the emerging technologies is sustainability and alternative energy, 0:21:09.640 --> 0:21:11.920 which of course we all kind of welcome because they 0:21:11.920 --> 0:21:15.239 will resolve climate change. Ironically and paradoxically, there is an 0:21:15.280 --> 0:21:19.000 outcome here where they also allow countries like China but 0:21:19.040 --> 0:21:23.760 also US to become more energy independent, and that reduces 0:21:23.840 --> 0:21:28.560 constraints to conflict because if China US don't have to 0:21:28.560 --> 0:21:32.240 worry about international trade flows or access to commodities to 0:21:32.280 --> 0:21:35.879 fuel their economies, if they become more out of autarchic 0:21:36.200 --> 0:21:41.680 which is mouthful out tartic, they gain sovereignty and independence 0:21:41.720 --> 0:21:46.080 and can then decide to pursue, you know, foreign policy 0:21:46.119 --> 0:21:49.760 moves that could lead to conflict. You know, it's it's 0:21:49.800 --> 0:21:52.600