WEBVTT - Kopi Time E091 - Dr Nouriel Roubini on MegaThreats 0:00:06.340 --> 0:00:09.430 Welcome to Kobe time, a podcast series on markets and 0:00:09.430 --> 0:00:12.980 economies from devious group Research. I'm Taimur baig chief economist 0:00:12.990 --> 0:00:16.470 welcoming you to our year ending 91st episode. 0:00:17.030 --> 0:00:20.759 I first met Nouriel Roubini during the summer of 1998 0:00:20.770 --> 0:00:22.820 in Washington D. C. Where he was serving at the 0:00:22.820 --> 0:00:26.670 White House Council of Economic advisors. I remember vividly asking 0:00:26.670 --> 0:00:29.979 Nouriel one day if he had any favorite stock picks 0:00:29.980 --> 0:00:32.720 to which he replied, I don't know about individual stocks 0:00:32.720 --> 0:00:34.659 but I know that the overall market will be up 0:00:34.659 --> 0:00:35.600 in the long term. 0:00:35.830 --> 0:00:37.339 I want to ask him the question at the end 0:00:37.340 --> 0:00:39.269 of this podcast if he thinks the market will be 0:00:39.270 --> 0:00:41.640 up in the long run again. But that's later. But 0:00:41.640 --> 0:00:44.510 think about that if you had invested $10,000 after that 0:00:44.510 --> 0:00:47.170 conversation with no real back in the summer of 98 0:00:47.180 --> 0:00:50.230 you would have registered a cumulative return of over 400% 0:00:50.229 --> 0:00:54.700 by today which is an annualized return of well over 10%. 0:00:54.710 --> 0:00:57.440 Which I suppose would put that passive strategy to the 0:00:57.440 --> 0:01:00.860 top decile of any investment league table. Great advice way 0:01:00.860 --> 0:01:03.250 back then, even coming from dr Doom, 0:01:03.750 --> 0:01:07.750 Nouriel Roubini is Ceo of Roubini macro Associates LLC global 0:01:07.750 --> 0:01:10.780 macro consulting firm in new york city. He is also 0:01:10.780 --> 0:01:13.790 chief economist for atlas Capital LP and co founder of 0:01:13.790 --> 0:01:15.179 Rosa and Roubini Associates, 0:01:15.370 --> 0:01:17.810 he served as a professor of economics at N. Y. U. 0:01:17.810 --> 0:01:21.760 Stern School of Business from 1995 to 2021 has already 0:01:21.760 --> 0:01:24.220 mentioned in the nineties late nineties. He worked at the 0:01:24.220 --> 0:01:27.110 Council of Economic advisers and later at the U. S. 0:01:27.110 --> 0:01:30.080 Treasury department and some of you may know that he 0:01:30.080 --> 0:01:34.060 has recently released a book mega threats, 10 dangerous trends 0:01:34.069 --> 0:01:37.830 that imperil our future and how to survive them. Nouriel Roubini. 0:01:37.840 --> 0:01:38.880 Welcome to Covid time. 0:01:39.640 --> 0:01:42.929 Great being with you today. Timer Pleasure. 0:01:43.030 --> 0:01:45.779 Pleasure is all mine. Uh Well I look forward to 0:01:45.780 --> 0:01:48.080 talking about some of the mega threats discussed at length 0:01:48.080 --> 0:01:50.580 in your book and in a series of articles that 0:01:50.580 --> 0:01:53.000 you have published and project syndicate through the course of 0:01:53.000 --> 0:01:56.080 this year. But first on the near term outlook 0:01:56.700 --> 0:02:00.080 this year has been characterized by a spike in inflation, 0:02:00.080 --> 0:02:04.110 soaring interest rates war in europe and china's pandemic struggles. 0:02:04.120 --> 0:02:06.640 And still we are ending the year with global growth. 0:02:06.650 --> 0:02:09.590 Oh about 3%. And our friends and I M. F 0:02:09.600 --> 0:02:13.100 are forecasting only a 50 basis point slowdown next year. 0:02:13.110 --> 0:02:15.600 Your take on that near term Muriel? 0:02:17.520 --> 0:02:20.440 Well, in the near term the biggest question is of 0:02:20.440 --> 0:02:23.910 course is about growth and inflation 0:02:24.540 --> 0:02:28.490 in advanced economies and also some key emerging markets. 0:02:29.000 --> 0:02:33.570 My baseline for next year would be that there will 0:02:33.570 --> 0:02:37.500 be a hard landing for the global economy. The IMF 0:02:37.500 --> 0:02:42.800 is not predicting a global recession but at 2.5% that 0:02:42.810 --> 0:02:45.519 the lowest growth we've had globally in a long time. 0:02:45.520 --> 0:02:51.010 So they certainly predict economic slowdown. That is very very sharp. 0:02:51.020 --> 0:02:53.930 Um if you look at the data, I would say 0:02:53.930 --> 0:02:56.350 that the United Kingdom is already 0:02:56.490 --> 0:03:00.490 in a recession and actually stack elation as inflation is 0:03:00.490 --> 0:03:06.179 double digits. The eurozone is headed towards a recession with 0:03:06.180 --> 0:03:10.690 the latest economic indicators suggesting a significant slowdown of economic 0:03:10.690 --> 0:03:14.730 activity in the U. S. Is not yet into a 0:03:14.740 --> 0:03:20.590 recession right now. But I do believe that we were 0:03:20.590 --> 0:03:24.959 gonna see also recession in the United States uh in 0:03:24.960 --> 0:03:25.940 us uh 0:03:26.160 --> 0:03:29.160 History in the last 60 years we have never had 0:03:29.169 --> 0:03:34.680 a situation where the inflation rate is above 5% and 0:03:34.680 --> 0:03:39.900 right now headline is 7.7 and where the unemployment rate 0:03:39.900 --> 0:03:43.970 is below 5% and it's currently 3.7 that when the 0:03:43.970 --> 0:03:49.230 Fed then starts hiking rates to bring back inflation to target, 0:03:49.240 --> 0:03:52.050 you never get a soft landing, you always get a 0:03:52.060 --> 0:03:52.920 hard landing. 0:03:53.190 --> 0:03:55.920 So the issues only whether it's gonna be a real 0:03:55.920 --> 0:04:00.290 hard landing as opposed to a short and shallow recession. 0:04:00.300 --> 0:04:05.530 China is in a sharp slowdown and well technically it's 0:04:05.530 --> 0:04:08.930 not in a recession for china to grow this year, 0:04:08.940 --> 0:04:13.550 barely 2 to 3% is the equivalent of a recession. 0:04:13.560 --> 0:04:15.690 Uh I think that the 0:04:15.900 --> 0:04:18.960 easing of the covid restrictions gonna have only a limited 0:04:18.960 --> 0:04:24.080 impact on economic activity. Overall, I have to say stance 0:04:24.080 --> 0:04:25.289 of this new 0:04:25.550 --> 0:04:29.810 Regime is one of caring less about growth and about 0:04:29.820 --> 0:04:34.300 political and geopolitical factors. We are still bashing the private 0:04:34.300 --> 0:04:37.570 sector that is still overhang of debt. There's still too 0:04:37.570 --> 0:04:41.940 much state capitalism. So I fear that China is going 0:04:41.940 --> 0:04:46.050 to be stuck into a 23% growth range for the 0:04:46.050 --> 0:04:49.970 next few years. That is a significant drug, not just 0:04:49.970 --> 0:04:53.469 for China but also Greysia and for global growth. 0:04:53.710 --> 0:04:58.370 And so my baseline is one in which advanced economies 0:04:58.380 --> 0:05:04.200 enter an economic contraction, inflation peaks and starts to fall, 0:05:04.200 --> 0:05:08.770 but it's not gonna fall fast enough towards the target 0:05:08.779 --> 0:05:12.660 in part because there are still the lingering effects of 0:05:12.670 --> 0:05:15.820 the negative supply shocks. They agree at the level 0:05:16.050 --> 0:05:20.670 the lingering effects of covid, the lingering effects of the 0:05:20.680 --> 0:05:25.159 Russian invasion of Ukraine on commodity prices and the zero 0:05:25.160 --> 0:05:27.770 covid policy of china. It maybe it's going to be 0:05:27.770 --> 0:05:30.870 phased out only gradually. And the impact on growth is 0:05:30.870 --> 0:05:33.700 gonna be only modest given the rest of the stance 0:05:33.700 --> 0:05:34.320 of 0:05:34.600 --> 0:05:38.490 chinese overall economic policies. So it's a bit of a 0:05:38.490 --> 0:05:41.900 hard landing for the global economy somehow more pessimistic than 0:05:41.900 --> 0:05:44.060 the I. M. F. Baseline. Right? 0:05:44.060 --> 0:05:47.020 And that's very clear and I really appreciate your china points. 0:05:47.020 --> 0:05:49.530 I think the energy markets are sort of reflecting that 0:05:49.540 --> 0:05:52.540 lukewarm response that you know, we're getting some news about 0:05:52.540 --> 0:05:54.690 reopening but we're not seeing any rally in the energy 0:05:54.690 --> 0:05:57.330 markets around china's demand picking up anytime soon 0:05:57.550 --> 0:06:01.240 On the asset markets. And real. I mean 2022 is 0:06:01.240 --> 0:06:03.150 going to be one of those very rare years where 0:06:03.150 --> 0:06:07.169 both the fixed income and equity markets sold off substantially. 0:06:07.180 --> 0:06:10.549 Um your view on asset markets around that hard landing 0:06:10.550 --> 0:06:12.130 scenario for 2023? 0:06:13.690 --> 0:06:19.380 Yes, as you point out this past year, equity prices fell, 0:06:19.380 --> 0:06:23.729 but long duration treasury fell even more as the yield 0:06:23.730 --> 0:06:28.799 went from below 1% towards flourish. Um So you have 0:06:28.800 --> 0:06:34.140 the positive correlation between equity and bond prices. Historically, it's 0:06:34.140 --> 0:06:37.640 the opposite, you know, it's a negative correlation risk Congress 0:06:37.640 --> 0:06:39.690 cough growth and recession, 0:06:40.010 --> 0:06:43.310 but that assumes that inflation is low and stable when 0:06:43.310 --> 0:06:48.620 inflation is rising even gradually. The discount factor for equities 0:06:48.620 --> 0:06:52.180 and dividends. Uh that is the long bond rate is 0:06:52.180 --> 0:06:56.060 rising and that leaves a correction in equity prices 0:06:56.085 --> 0:07:01.265 more so for long duration assets like growth and tech stocks, 0:07:01.275 --> 0:07:04.745 but then a yield going up in price, the price 0:07:04.745 --> 0:07:07.245 of the bond is falling and the yield went up 0:07:07.245 --> 0:07:09.805 so much that the price of bonds fell more than 0:07:09.805 --> 0:07:14.475 the price of, of equities in terms of the year ahead, 0:07:14.485 --> 0:07:20.045 I'm still bearish about global equities because I expect the 0:07:20.045 --> 0:07:22.090 hard landing for the global economy. 0:07:22.920 --> 0:07:26.840 The markets have recently rallied. But in my view, this 0:07:26.840 --> 0:07:29.400 is gonna be a bear market rally like the one 0:07:29.400 --> 0:07:31.880 we saw in july and august. And the rally is 0:07:31.880 --> 0:07:38.070 based predicated on some combination of inflation dropping sharp enough, 0:07:38.080 --> 0:07:43.090 the softest landing of the world and then central banks 0:07:43.090 --> 0:07:47.150 being able to cut rates from the middle of next 0:07:47.150 --> 0:07:49.140 year on and so on. 0:07:49.360 --> 0:07:53.090 I think the, that conventional wisdom is gonna prove incorrect, 0:07:53.100 --> 0:07:56.380 inflation is gonna be more sticky growth is going to 0:07:56.380 --> 0:07:59.880 be weaker than expected and how you get growth we 0:07:59.880 --> 0:08:03.070 can expect of inflation higher if there is persistent of 0:08:03.070 --> 0:08:07.200 negative aggregate supply shocks. So only in a real soft 0:08:07.200 --> 0:08:10.080 landing scenario from current levels, 0:08:10.550 --> 0:08:14.050 Stock prices should be going higher. Even if you had 0:08:14.050 --> 0:08:17.800 a short and shallow recession, the market has to correct 0:08:17.800 --> 0:08:22.890 downward another 10%. If it's a more severe recession it 0:08:22.890 --> 0:08:26.290 can correct another 20% or more. So unless you have 0:08:26.290 --> 0:08:28.790 a strong view that is going to be a real 0:08:28.790 --> 0:08:33.440 soft landing. I think the downsides to us and global 0:08:33.440 --> 0:08:34.150 equities 0:08:34.860 --> 0:08:38.910 for fixed income, I think that the markets uh expect 0:08:38.910 --> 0:08:41.860 that the inflation is gonna pick Central bank's gonna ease 0:08:41.860 --> 0:08:45.679 and therefore uh the inversion of the yield curve is 0:08:45.679 --> 0:08:49.740 suggesting that uh you know, first rates will be higher 0:08:49.740 --> 0:08:53.400 but then they're gonna drop. And uh and in that 0:08:53.400 --> 0:08:57.189 scenario probably long rates would fall as well next year 0:08:57.190 --> 0:09:02.640 as you fight inflation successfully and then expected inflation remains anchored. 0:09:02.940 --> 0:09:06.800 I'm more bearish. I'm of the view that the the 0:09:06.800 --> 0:09:11.040 great moderation is over and the greater stack inflationary and 0:09:11.040 --> 0:09:15.540 that instability is upon us. I think that inflation is 0:09:15.540 --> 0:09:18.870 gonna remain high even if some of even if some 0:09:18.870 --> 0:09:23.380 of the short term supply constraints are phased out because 0:09:23.380 --> 0:09:26.770 as I describe in my book that at least 11 forces, 0:09:26.780 --> 0:09:31.030 they're more medium long term that are speculation ery that 0:09:31.030 --> 0:09:32.850 reduce potential growth, 0:09:33.070 --> 0:09:37.530 the increased cost of production And therefore they caused calculation. 0:09:37.540 --> 0:09:40.220 And the other view in the book is that while 0:09:40.220 --> 0:09:43.210 central banks are talking hawkish now 0:09:43.880 --> 0:09:46.880 saying we're going to fight inflation at any cost in 0:09:46.880 --> 0:09:50.240 my view they will have to wimp out and blink. 0:09:50.250 --> 0:09:54.370 Uh Not only because there is fiscal dominance meaning in 0:09:54.370 --> 0:09:57.979 the game of chicken between fiscal and monetary authorities, the 0:09:57.980 --> 0:10:02.240 monetary will have to blink when the fiscal policies to lose. 0:10:02.250 --> 0:10:06.390 But there is a broader idea of a debt trap. 0:10:06.400 --> 0:10:09.429 That's a concept developed by the B. I. S. Economies. 0:10:09.440 --> 0:10:13.250 There's so much private and public debt in the system, 0:10:13.690 --> 0:10:16.230 private and public debt has assured G. D. P. Has 0:10:16.230 --> 0:10:20.410 gone from about 100% of GDP in the seventies to 0:10:20.410 --> 0:10:27.260 350 rising last year globally. 420 rising advanced economies that 0:10:27.260 --> 0:10:30.850 if central banks fight inflation, not only they cause an 0:10:30.850 --> 0:10:33.520 economic crash a severe recession 0:10:33.750 --> 0:10:36.630 given the amounts of debt but there is also a 0:10:36.640 --> 0:10:42.680 debt crush, crush in credit markets in bond markets and 0:10:42.679 --> 0:10:45.870 faced with an economic and a financial crash central banks 0:10:45.870 --> 0:10:48.420 will have to win power because there is this debt trap. 0:10:48.429 --> 0:10:49.099 So 0:10:49.900 --> 0:10:54.010 and also see forces that are long term inflationary. Not 0:10:54.010 --> 0:10:59.340 only we have large fiscal deficits and debts today, but 0:10:59.340 --> 0:11:02.699 I see that the pressure are gonna be to spend 0:11:02.700 --> 0:11:08.030 much more with limited ability to raise taxes and if 0:11:08.030 --> 0:11:10.660 you have larger structural budget deficits 0:11:10.830 --> 0:11:13.650 either you finance them with bonds and that's going to 0:11:13.650 --> 0:11:17.140 crowd out growth with higher real rates or eventually that's 0:11:17.140 --> 0:11:19.620 demonetized and you know if you think about it where 0:11:19.620 --> 0:11:23.650 in a geopolitical depression today, so we'll have to spend 0:11:23.650 --> 0:11:27.630 more on security in europe against the Russian there, whether 0:11:27.630 --> 0:11:30.680 you like it or not in Asia us, its allies 0:11:30.679 --> 0:11:33.330 are going to spend more China's gonna spend more. There 0:11:33.330 --> 0:11:36.170 is this cold war they may get holder and eventually 0:11:36.170 --> 0:11:39.270 even end up into a hot war. So security spending 0:11:39.270 --> 0:11:40.200 is going to be higher. 0:11:40.530 --> 0:11:44.150 We'll have then spent so much more to deal with. 0:11:44.150 --> 0:11:47.040 Climate change, will have to spend so much more to 0:11:47.040 --> 0:11:51.099 deal with the next pandemic. Either to prevent it or 0:11:51.110 --> 0:11:54.420 if you don't do it. Exanta will spend a fortune 0:11:54.420 --> 0:11:56.610 like we did this time around to deal with the 0:11:56.610 --> 0:11:57.510 effects of it. 0:11:58.040 --> 0:12:02.500 We have also a i robotic automation machine learning that's 0:12:02.500 --> 0:12:07.980 gonna lead gradually over time to structural technological unemployment will 0:12:07.980 --> 0:12:12.180 have to support those left behind. Eventually even universal basic 0:12:12.179 --> 0:12:14.030 income that's going to be expensive. 0:12:14.290 --> 0:12:18.030 And finally there is so much income and wealth inequality, 0:12:18.040 --> 0:12:21.189 so much social strife, so much of a backlash against 0:12:21.190 --> 0:12:24.870 liberal democracy with populist parties that seem right and left 0:12:24.870 --> 0:12:27.530 coming to power that either they come to power and 0:12:27.530 --> 0:12:29.970 they become physically loose or to prove 0:12:29.980 --> 0:12:34.240 random from coming to power establish the parties will have 0:12:34.240 --> 0:12:38.020 to spend more to deal with these consequences. Transfer more 0:12:38.020 --> 0:12:43.050 money to workers unemployed, partially employed left behind the minorities. 0:12:43.059 --> 0:12:45.670 You name it. So we have a war 0:12:45.910 --> 0:12:50.380 against security issues. We have a war against climate change. 0:12:50.390 --> 0:12:52.830 We have a war against pandemic. We have a war 0:12:52.830 --> 0:12:55.730 against the consequences of ai we have a war against 0:12:55.730 --> 0:13:00.280 the income and wealth inequality. All that implies much more spending, 0:13:00.820 --> 0:13:05.600 limited ability to raise taxes structurally higher deficits and eventually 0:13:05.600 --> 0:13:09.280 they need to modernize them. You know, my friend Neil 0:13:09.280 --> 0:13:13.490 Ferguson recently wrote a piece saying when there are wars 0:13:13.490 --> 0:13:16.460 really hot wars, there are deficits and eventually you get 0:13:16.460 --> 0:13:19.740 inflation because you monetize them. It's not only called the 0:13:19.740 --> 0:13:22.070 not wars there are these other wars we're gonna be 0:13:22.070 --> 0:13:25.430 fighting and they'll be all expensive. They're gonna all lead 0:13:25.429 --> 0:13:28.660 to deficits and eventually monetization in inflation. 0:13:29.179 --> 0:13:29.969 Right? 0:13:29.980 --> 0:13:31.900 So no. Well I was gonna say let's talk about 0:13:31.900 --> 0:13:35.300 your book but I think you have preempted it very nicely. 0:13:35.300 --> 0:13:38.610 I just want to share with the listeners one coat 0:13:38.610 --> 0:13:43.690 from john Thornhill of F. T. He wrote. And I quote, 0:13:43.700 --> 0:13:46.960 readers of a nervous disposition may want to file this 0:13:46.960 --> 0:13:49.679 book in the bin before they turn the page, those 0:13:49.679 --> 0:13:52.219 brace for an ice bath of pessimism may profit from 0:13:52.220 --> 0:13:52.520 its gloom 0:13:52.530 --> 0:13:55.210 insights about the state of the world rubens warnings may 0:13:55.210 --> 0:13:59.250 be alarmingly scary, but they're also disturbingly plausible. And I 0:13:59.250 --> 0:14:00.840 think you know, you just did a very very nice 0:14:00.840 --> 0:14:04.079 summary of the key issues that you mentioned your book. 0:14:04.090 --> 0:14:06.290 I want to talk about them in greater detail, but 0:14:06.300 --> 0:14:07.689 I just want to stay with the short term just 0:14:07.690 --> 0:14:09.870 a little longer if I may to follow ups to 0:14:09.870 --> 0:14:13.140 your prognosis in the short term one is in the stagflation. 0:14:13.140 --> 0:14:15.000 I think in your book you use this phrase sticky 0:14:15.000 --> 0:14:15.870 stagflation 0:14:16.320 --> 0:14:19.620 material in the last few months around the global economic 0:14:19.620 --> 0:14:22.080 slowdown we have seen a substantial decline in energy and 0:14:22.080 --> 0:14:26.220 food prices. We will probably see rent prices begin to 0:14:26.220 --> 0:14:28.990 come down as high interest rates start denting the real 0:14:28.990 --> 0:14:31.970 estate market. So wouldn't you say at least in the 0:14:31.970 --> 0:14:38.000 near term this expected trajectory of inflation falling is also plausible. 0:14:38.010 --> 0:14:42.390 Yeah, no inflation may have picked 0:14:42.650 --> 0:14:47.440 in advanced economies and also in emerging markets where inflation 0:14:47.440 --> 0:14:50.220 was high in double digits. The issue is not whether 0:14:50.220 --> 0:14:53.330 it's a speak, but whether it's gonna fall 0:14:53.540 --> 0:14:58.320 Sharp enough and fast enough towards the 2% targets in 0:14:58.320 --> 0:15:02.540 advanced economies, my view is gonna be more sticky in 0:15:02.540 --> 0:15:05.380 part because the wage inflation is gonna be more sticky 0:15:05.390 --> 0:15:09.690 in part because some of the short term aggregate negative 0:15:09.690 --> 0:15:13.480 supply shocks are gonna remain with us. I consider the 0:15:13.480 --> 0:15:15.530 fall in commodity prices 0:15:15.545 --> 0:15:20.075 as driven not by a significant increase in their supply, 0:15:20.085 --> 0:15:23.955 but rather by expectation of lower demand. Given that the 0:15:23.955 --> 0:15:27.185 baseline is one of a something of a hard landing 0:15:27.195 --> 0:15:30.175 in the global economy. So those are a reflection of 0:15:30.175 --> 0:15:35.425 the weaker demand, not of easier supply condition and as 0:15:35.425 --> 0:15:37.535 I point out in the book, 0:15:38.360 --> 0:15:41.690 There are at least 11 forces that are medium long term, 0:15:41.690 --> 0:15:46.240 but they're all materializing even today that are speculation, very 0:15:46.240 --> 0:15:50.420 reduced growth, increased cost of production. We have the beginning 0:15:50.420 --> 0:15:54.990 of the globalization and protectionism and talk about, you know, 0:15:54.990 --> 0:15:59.310 secure trade rather than free trade. We have a re 0:15:59.310 --> 0:16:01.060 shoring of manufacturing from Lok 0:16:01.070 --> 0:16:05.270 because china to higher cost europe or US or even 0:16:05.270 --> 0:16:07.979 french shoring and even friends sharing is not going to 0:16:07.980 --> 0:16:12.220 be totally cheap but cheaper certainly than reassuring. We have 0:16:12.230 --> 0:16:15.760 aging of populations both in advanced economies and some key 0:16:15.760 --> 0:16:21.900 emerging markets like china like south Korea like Russia young 0:16:21.900 --> 0:16:26.870 people produce and they tend to save elder people don't 0:16:26.870 --> 0:16:31.040 produce and tend to spend and the safe that's inflationary 0:16:31.200 --> 0:16:34.660 in the past, the migration from south to north from 0:16:34.660 --> 0:16:37.840 poor to rich kept a lead on wage growth in 0:16:37.840 --> 0:16:41.610 advanced economies but now restrictions. The migration are becoming quite 0:16:41.610 --> 0:16:42.500 draconian 0:16:42.750 --> 0:16:47.010 in europe UK eurozone and europe. But even in the 0:16:47.010 --> 0:16:50.310 United States, you know, the migration policies of biden are 0:16:50.310 --> 0:16:54.840 not really different from those of say donald trump. We 0:16:54.840 --> 0:16:58.800 have this decoupling between us and china is becoming increasing 0:16:58.800 --> 0:17:02.500 by the day trading goods and services, movement of capital 0:17:02.500 --> 0:17:08.220 FBI labor technology. That information that that circulation erI we 0:17:08.220 --> 0:17:10.639 have the impacts of global climate change 0:17:11.280 --> 0:17:15.090 even before the Russian invasion of Ukraine. Food prices were 0:17:15.090 --> 0:17:20.580 rising sharply because there's desertification lack of water last summer 0:17:20.580 --> 0:17:24.350 with droughts from Pakistan to India to western europe sub 0:17:24.350 --> 0:17:27.750 Saharan africa. Most of the US in the west central 0:17:27.750 --> 0:17:32.580 America that's that's circulation eri. And on energy 0:17:32.730 --> 0:17:36.859 uh we're bashing right beso a big oil producer of 0:17:36.859 --> 0:17:42.190 fossil fuels there under investing into new capacity as they should. 0:17:42.200 --> 0:17:45.850 But we're not ramping up the production of renewable fast enough. 0:17:45.859 --> 0:17:50.040 So there is a structural supply lack given even normal demands. 0:17:50.050 --> 0:17:51.920 That's inflationary. That's why 0:17:52.100 --> 0:17:55.679 uh Brent was already at 100 even before the Russian 0:17:55.680 --> 0:17:58.489 invasion of Ukraine. And the fall right now in energy 0:17:58.490 --> 0:18:02.160 prices driven by expectation of a recession. We have this 0:18:02.160 --> 0:18:04.340 broader geopolitical depression 0:18:04.600 --> 0:18:08.060 is not just Russia, Ukraine is the U. S. And 0:18:08.060 --> 0:18:12.830 Israel against Iran is US. Uh And China over Taiwan 0:18:12.840 --> 0:18:15.550 is the noises that north Korea does and so on 0:18:15.550 --> 0:18:20.370 and so on. That's gonna lead to decoupling fragmentation, balkanization 0:18:20.380 --> 0:18:24.290 divisions of the global uh economy and 0:18:24.530 --> 0:18:28.690 global supply chains. We have cyber warfare. This exploration eri 0:18:28.700 --> 0:18:31.980 we have this backlash against a liberal democracy because of 0:18:31.980 --> 0:18:35.900 inequality is leading to fiscal policy. Pro labor, pro union 0:18:35.910 --> 0:18:39.840 for unemployed produce left behind. And finally the U. S. 0:18:39.840 --> 0:18:43.050 And its allies are weaponizing the U. S. Dollar as 0:18:43.050 --> 0:18:44.450 a tool of foreign policy 0:18:44.800 --> 0:18:48.220 that may eventually to a weakening of the dollar is 0:18:48.220 --> 0:18:51.670 gonna be inflationary for the U. S. Uh As I say, 0:18:51.680 --> 0:18:55.830 the strategic rivals of US diversify away from dollar assets 0:18:55.840 --> 0:18:59.330 plus you need the for the global trading system to 0:18:59.330 --> 0:19:02.350 work properly. And officially you need something that's like an 0:19:02.359 --> 0:19:05.030 oil in the system and they're all in the system 0:19:05.030 --> 0:19:07.710 that Greece is the system is the US dollar. If 0:19:07.710 --> 0:19:10.710 you throw some in the wheels of the global trading 0:19:10.710 --> 0:19:13.270 system by having all these weapons 0:19:13.590 --> 0:19:18.560 US dollar eventually, that creates a greater cost of transactions globally, 0:19:18.560 --> 0:19:23.659 whether trading goods and services, capital, labor, technology, data information 0:19:23.670 --> 0:19:27.700 and that it's also stuck inflationary. So all these forces, 0:19:27.710 --> 0:19:30.100 some of them are slow motion, but they are all 0:19:30.100 --> 0:19:33.720 actually happening right now and they're all reducing potential good 0:19:33.720 --> 0:19:36.200 and increasing cost of production. And I think those are 0:19:36.200 --> 0:19:39.189 forces are going to make the inflation rate more sticky 0:19:39.190 --> 0:19:41.760 than the consensus predicts right now. 0:19:42.350 --> 0:19:45.000 So real when we look at, say, the five cross 0:19:45.000 --> 0:19:49.700 five metric for inflation expectations or the steepness of the 0:19:49.710 --> 0:19:52.520 inverted yield curve that we have. So for you, a 0:19:52.530 --> 0:19:55.659 rally in long duration assets next year would be not 0:19:55.660 --> 0:19:58.090 necessarily a signal for holding onto them for a long time. 0:19:58.090 --> 0:20:00.940 You would actually take profit and be ready for long 0:20:00.940 --> 0:20:03.590 duration to sell off again past 2023. 0:20:04.720 --> 0:20:09.210 Yes, you know, of course the measures of expected inflation 0:20:09.220 --> 0:20:13.440 are not the anchor because so far the sabian other 0:20:13.440 --> 0:20:17.090 central banks are credible in saying we're gonna fight inflation 0:20:17.100 --> 0:20:18.220 at any cost. 0:20:18.410 --> 0:20:21.810 I don't think that's credible, given my analysis of the 0:20:21.810 --> 0:20:25.530 supply factors of the debt trapped in the longer term, 0:20:25.540 --> 0:20:29.060 how to say debt and deficits trends. And I'm not, 0:20:29.060 --> 0:20:33.640 by the way expecting in advanced economies hyperinflation. I'm not 0:20:33.640 --> 0:20:36.710 even expecting double digit inflation like the 0:20:36.970 --> 0:20:42.510 1970s. I'm assuming that over time because of all these pressures, 0:20:42.520 --> 0:20:46.640 the average inflation rates say in advanced economies from a 0:20:46.640 --> 0:20:51.570 target of two could be actual 56. Now it doesn't 0:20:51.570 --> 0:20:52.570 sound like a lot 0:20:52.590 --> 0:20:56.510 But if average inflation were to be 6% then long 0:20:56.510 --> 0:21:00.080 rates have to capture expected inflation of six plus some 0:21:00.080 --> 0:21:02.740 real rates and that real rates are gonna be higher 0:21:02.740 --> 0:21:06.960 because once inflation is high and volatile the inflation risk 0:21:06.960 --> 0:21:10.150 cream have to be higher. So you get six for 0:21:10.150 --> 0:21:12.929 expected inflation plus another 2% real. 0:21:13.109 --> 0:21:17.109 You get 10 year Treasury 8% and then mortgage there 0:21:17.109 --> 0:21:20.010 is gonna be spread over that. There'll be double digits 0:21:20.010 --> 0:21:22.240 and then high grade and high yield that's gonna be 0:21:22.250 --> 0:21:26.160 spread of that will be double digits in nominal terms 0:21:26.160 --> 0:21:29.810 and they're gonna be significantly higher in real terms. Considering 0:21:29.810 --> 0:21:33.500 also the amount of debt in the system private and public. 0:21:33.660 --> 0:21:37.540 So so you know Tiny Treasury went from less than 0:21:37.540 --> 0:21:41.280 1 to 3.73 point eight depending on the day. But 0:21:41.290 --> 0:21:44.320 if they have to go say eventually to 8% from 0:21:44.320 --> 0:21:49.429 3.8 to 8% of another 40% plus losses depending on 0:21:49.430 --> 0:21:53.300 the duration of the those bonds. That's a huge further 0:21:53.300 --> 0:21:56.990 loss for fixed income. So it's only if they are 0:21:57.000 --> 0:21:59.370 able to fight inflation successfully 0:21:59.540 --> 0:22:02.570 And push it down to 2% inflation expectation. I mean 0:22:02.580 --> 0:22:07.420 anchored and then you get the persistent rally in long 0:22:07.420 --> 0:22:12.630 duration Treasury assets. Um but that's not my baseline. 0:22:12.640 --> 0:22:16.350 Sure to follow up on the debt issue. So one 0:22:16.350 --> 0:22:20.879 is to your point that we might see higher bond 0:22:20.880 --> 0:22:24.889 yields around this higher inflation narrative and which probably would 0:22:24.890 --> 0:22:25.450 sort of force 0:22:25.460 --> 0:22:28.320 fed to not cut a lot. But if there is 0:22:28.320 --> 0:22:30.179 a deep recession around the high cost of interest rates 0:22:30.180 --> 0:22:32.950 and so on. The financial repression dynamic that we saw 0:22:32.950 --> 0:22:35.010 in many countries in the past that forcing sort of 0:22:35.010 --> 0:22:37.730 a negative real rate to be in the system. And 0:22:37.740 --> 0:22:41.540 from a debt equation perspective that sustainability equation perspective negative 0:22:41.540 --> 0:22:44.250 real rates of course you know create room for sustainability 0:22:44.250 --> 0:22:46.460 of death. So that's one question that you know, what's 0:22:46.460 --> 0:22:48.540 your view on the fact that negative real interest rate 0:22:48.550 --> 0:22:51.380 itself could be a support for the 0:22:51.390 --> 0:22:53.909 mountain of debt that we have. And the second real 0:22:53.920 --> 0:22:55.900 at least in the case of the U. S. Private 0:22:55.900 --> 0:22:58.010 sector balance is of course much stronger today than they 0:22:58.010 --> 0:23:00.790 were during the eight recession, which of course, you know 0:23:00.790 --> 0:23:04.050 you are famous for calling. Um but today it's really 0:23:04.050 --> 0:23:06.840 the public sector and haven't we seen that example in 0:23:06.840 --> 0:23:08.899 the case of Japan that the public sector can borrow 0:23:08.900 --> 0:23:11.200 a lot but if it is in its own currency, 0:23:11.210 --> 0:23:14.020 it has a privilege where the central bank and supported 0:23:14.020 --> 0:23:15.820 the issue ends. And it can just, you know, go 0:23:15.820 --> 0:23:17.310