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Quick Hit Cage Match: Van Metre vs Boockvar on Inflation (Part 2)

Van Metre vs Boockvar on Inflation (Part 2)

This is Part 2 of the inflation discussion with Steven van Metre and Peter Boockvar with your host Tracy Shuchart. In this second part, they talked about the possibility of the Fed tapering this year or early in 2022. How about the possible rate hike and what will possibly happen in other parts of the world like Bank of Japan and Bank of England if ever this happens? What is Powell doing exactly and why? Is there a possibility of a new Fed chair next year? And what do they think about stagflation?

 

For Part 1 of this QuickHit Cage Match episode, please go here. 

 

Steven van Metre is a money manager who have invented a strategy called Portfolio Shield. He also has a YouTube show that discusses economic data and the news three days a week.

 

Peter Boockvar is the Chief Investment Officer and portfolio manager at Bleakley Advisory Group. He has a daily macromarket economic newsletter called The Boock Report.

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on October 14, 2021.

 

The views and opinions expressed in this Quick Hit Cage Match: Van Metre vs Boockvar on Inflation Part 2 episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TS: Do you see the Fed tapering? And if they do, how much is this going to affect inflation? And also, I know the market is saying the Fed is going to raise rates in ’22, 2023. But is this a reality at all?

 

But before we jump into that, I just wanted to remind you to please subscribe to our YouTube channel.

 

PB: I think the Fed will at least start the taper and see how it goes. The thing that is different with this taper is that it’s coinciding with central banks around the world that are also beginning to remove accommodation. However slow, however glacial that process is, they’re all outside of the BOJ. They’re all doing it at once.

 

So if the Fed starts to taper in December, which they basically told you that they will, well, the Bank of England could be raising rates in December. We recently got a rate hike from Norway a month or two ago from South Korea. We’ve had Canada and Australia trimmed QE. Even the ECB has trimmed QE. So there’s a global shift to tightening. And I do believe tapering is tightening to define that. Just as we saw last year, the past 18 months obviously massive global easing.

 

Now I can’t even discuss the rate hike situation because I’m not even sure that they’re going to be able to get through the tapering. If you look back to 2010, every single notable market correction in equities and also fixed income markets outside of Covid and the one evaluation in August 2015 coincided with the end of QE, where it was a hard stop QE1 and QE2. And then obviously you had the taper 2013 and then obviously around rate hikes. Every single one coincided with a tightening of policy. And even again, it was gradual. It still affected markets. And we’re going to have it again to think that we’re going to somehow get through tapering without any accidents, I think, is delusional. And you believe that there’s a free lunch and it’s a matter of what kind of accident occurs by this.

 

Now QE itself essentially, at the end of the day, it’s an asset swap. And yeah, does some of that money sort of filter into markets? Yeah, maybe, I guess. But a lot of it’s psychological, but it also does help to, at least on the short end, suppress interest rates to where they would be otherwise. That said, when QE has been on, you’ve been paid to steepen the curve when QE is off, it pays to flatten it. And I think we’ve seen some recent flattening in the yield curve. And I think that that has been the right trade to do when QE is about to turn off.

 

But to Steve’s point about the bottom 50%. Well, if you get a short equity market correction, well, the top 50% is going to feel that as well. And yeah, can that filter into how they spend for sure? But that doesn’t necessarily resolve the supply issues.

 

That’s how this inflation story is going to recalibrate. The supply side is going to take a couple of years, and it’s going to be less demand. That is going to recalibrate this inflation story. And I think that is. No central bank wants to preside over a declining economy. But unfortunately, you’re going to have to have a trade off. You want lower inflation and a slower economy or an economy, as is but fast inflation, that’s going to hurt the people that can least afford it.

 

SVM: Yeah, this balance sheet taper thing is really interesting because I will be on record. I’ll hold on record still, and I don’t think the Fed’s going to do it. Although, as Peter mentioned, you just said that you think that the Fed is going to start and then quit. I’ve had to come to your side of the fence on that deal, mainly because when Powell spoke at Jackson Hole, it seemed like he was saying, we can’t make this mistake. We got to keep easing because we could let off the gas too soon.

 

And then for whatever reason, there’s this massive pivot between that and the last meeting. And he’s going to have a disadvantage going into the November F-O-M-C. And not have the non farm payroll report because he concludes me on Wednesday. Nonfarm payroll is out on Friday. Maybe he’s got some early access, who knows? But it seems like all of a sudden he’s in a panic to start tapering.

 

Now, could this be because we know the treasury is going to reduce their issuance of notes and bonds as we borrow less money, and he doesn’t want to be over purchasing? Sure. Could it be, as Peter mentioned, that the other central banks are tapering and starting to raise hike rates. And that’s interesting, because the way I look at it is that would be a catalyst if the Fed doesn’t start tapering, that the dollar goes higher.

 

Well, there’s part of the inflation story that almost nobody is looking at. What if the dollar gets up into 96, 97, maybe even close to 100? I mean, we’re talking about destroying the inflation story just from the dollar alone. And is this one of those things where we had coordinated easing? So now we need to have coordinated tapering to keep the dollar from going up too much? I’m not sure what his motivation is, but I will say this. There’s no way that they get to the end of that taper. There’s a 0% chance they’re going to raise rates. And even if they did, it doesn’t matter. They’ve effectively given the banks a pass by saying, look, there’s no reserve requirement because, well, you’ve got all these QE reserves you don’t need anymore.

 

The whole idea that we’re going to get this balance sheet unwound. I think the bond market is telling us the Fed’s making a mistake. I think, Peter, you and I agree that we don’t know how many months they’re going to go? The only question is, at what point is there a payroll report or some data that comes out that the Fed goes, “Oh, my God, we made a big mistake.”

 

PB: I’ll tell you why he’s doing this. Well, first of all, the whole purpose of monetary policy, as we know, is to push the demand side. And if you look at what are the two most interest rate sensitive parts of the economy — it’s housing and autos. So is Powell with a straight face going to say, I need to pedal to the metal, continue to stimulate the demand for housing and autos, when you can’t find an auto and the price of the home is worth 20% more than last year? They need to take their foot off that demand pedal. And he does not want to be Arthur Burns. He does not want to be Arthur Burns. And right now he is headed towards being Arthur Burns.

 

And the Fed is going to reach a pivot point, where if inflation still remains sticky and persistent, but growth is really decelerating to a greater extent than it already is. And we know that the Atlanta Fed third quarter GDP number has one handle on it. He’s going to have to reach a point, do I try to come inflation, but then risk further weakness in the economy and a fall in asset prices, which JPowell obviously inflated. Where is he going to just not really respond quick enough. And being in Washington, we can be sure he probably leans towards trying to save the economy, but then that creates its own problems.

 

The one thing in the dollar, the dollar is going to get tied into this, too, because if he remains too easy for too long, well, that may sacrifice the dollar. If he is more aggressive at dealing with inflation, well, then you can see a faster move in the dollar. So he’s just been an absolutely no win situation here. But there is going to be a pivot point where he’s going to reach that we’ll have to see, does he go down the Paul Volcker route, or is he going to go continue down the Arthur Burns route?

 

SVM: See, Peter, you just said it best. He didn’t know what his situation. And all we’re debating is, at what point does he back off and quit because he realizes it’s not working? I mean, we can look at the velocity of money and see the monetary policy is not functioning properly.

 

I mean, there was a lot of people that predicted at the end of the last quarter that as economy reopen, velocity would pop. But it didn’t because of the fact that monetary policy is not transmitting into the economy. And so now the real issue is if he starts tapering and it does do what it’s supposed to do, does he inadvertently tighten financial conditions? I mean, this is such a mess of what he’s got to deal with. And I don’t know if you’ll agree with me honest, but I don’t think they have a clue what they’re doing.

 

I think they’re just betting that this is all going to work out, that Powell, as himself, is going to get renominated. And somehow, in the end, either he’s going to look like a superhero and say, look, see, I did it and go out as one of the most celebrated Fed chairs ever. Or he’s going to find someone else to blame this on when it doesn’t work.

 

PB: The Fed has been winging it for decades, and this all goes back to Greenspan. In 1994, he raised rates aggressively. We know he blew up Mexico, he blew up Orange County, California, and he took that at heart. He learned a lesson. And so you go into the late 90s when everything is on fire. Stock market bubble. We know he was very slow to raise interest rates because he didn’t want to repeat 1994.

 

And then, of course, you have the blow up. And he’s obviously quick to raise interest rates. But remember the mid 2000s, every single. When he started raising interest rates, he did it every single meeting, and in every single statement, it said, we are doing this at a measure pace, because he didn’t want to repeat 1994.

 

And then what we have, obviously, the housing bubble and so on and so on. And then now you take Powell. We know Janet Yellen was afraid to raise interest rates. Took them seven years to get off zero. And then after finally raising, took them another twelve months to finally raise rates again. And then Powell started to pick up the pace. And then he blew himself up in the fourth quarter of 2018. And then that helps to explain why they’re going so slow now.

 

Then you throw in, of course, the whole social justice. The Feds become the Ministry of Social Justice now and how they view monetary policy. But yeah, to your point, they are winging it. And they’ve been winging it for decades.

 

SVM: And you bring up an interesting point about 2018. I’m really glad you did, because a lot of people forgot that we started easy to the point that it didn’t really make a lot of sense from the outside look in it. And so now this whole notion, and I don’t know what your reaction was, but I remember hearing the press conference when he’s like, okay, when Powell said, “We’re going to gradually unwind the balance sheet by mid 2022.” I’m like, since when is “gradual” six months. There’s no way this is going to work for you, buddy, but good luck if you’re going to pull it off.

 

PB: Yeah. And the Fed got lucky for a period of time. They got lucky in 2017 because the markets rallied and ignored Fed rate hikes and the beginning of the shrinking of their balance sheet. They were double tightening and they got bailed out because everyone focused on the corporate income tax cut. That obviously happened at the end of 2017. But that entire year, the Vix got down to eight. Every dip was bought because everyone was pricing in that tax cut. But once that tax cut was in place, the Fed then raised interest rates again in January 2018. And then we immediately shift back to the Fed is double tightening here between the balance sheet and rates. And that obviously coincided with the fourth quarter of 2018.

 

So we know in the Fed tapering, the Fed tightens until they hit a wall. The Fed tightens until something breaks, and you can be sure something will break in 2022. It’s just a matter of how deep they get. And also one last point here is that having low inflation gives central banks that Wayne’s World Concert pass that all access to do anything they want for how long as they want, when there’s no inflation. But once you get inflation into the numbers, into the economy, their flexibility is greatly diminished. And that will be an interesting sort of tug of war as they get further into the tapering and something eventually breaks.

 

TS: One last question, a couple of last question. How do you feel about Stagflation? I kind of amend the Stagflation camp. Do you think that’s a cop out or how do you feel about that?

 

SVM: I think it’s temporary. I mean, we’re supposed to be rising unemployment. I mean, I guess with people coming off the ranks, I don’t know. Maybe it’ll go back up. I don’t think that’s likely to happen. And then you tend to get that with higher prices. But when we start looking at the bond market. The bond market is starting to tell us that, hey, this Stagflation is going to be transitory. And then the risk that I see is that we get into outright deflation from here.

 

PB: To me, I just look at stagflation as just slower growth and higher inflation. And in an economist textbook, they think that slow growth means lower prices. Faster growth means higher prices. I’m just looking at the Bank of Japan. The Bank of Japan said we need to get inflation at 2%, and somehow that will then generate faster growth. To me, they’ve got that backwards. You need stable prices in order to develop and sustain healthier growth.

 

So right now. But the Stagflation it’s sort of intertwined in the sense that it’s the inflation and what is driving it. So it’s the inflation itself that is beginning to impact consumer spending. And it’s the factors that are creating the inflation, like the supply bottlenecks that in itself, are also creating slower growth.

 

TS: Excellent. One last question, just for a thought experiment. I mean, say Powell does leave the Fed next year and we have find a Dove, right. So what does the Fed look like at that point if we have a dove as a Fed chair?

 

PB: Well, 2022 becomes completely politicized. The Fed’s already politicized, but it becomes Uber politicized in 2022 because of the elections in November. And if a Lael Brainard becomes the next Fed chair in February, 2022, you can be sure that Steve and I are right, that there’s no chance in hell they’re going to finish this taper because the second something breaks, you know, they’re going to back off and they’re going to do their best to, or at least the Democrats headed by the Lael Branard will do their best to maintain control of Congress.

 

SVM: Yeah. I’ll put that as a low probability chance that Powell is out. If he does, I’m 100% agree.

 

PB: I agree. I think he stays as well.

 

SVM: Yeah, 100% agree. I think it’s a big risk for the Biden administration to pull him. He hasn’t really done anything wrong. But if he does, again, I think Peter is spot on. I mean, now it becomes even more political than the Fed is supposed to be. And he’s right, as soon as something goes wrong, I mean, we’re going to 120 billion a month. Yeah, right. It’ll be multiples of that in a second.

 

TS: All right. Well, I want to thank you both again for everything you shared with us today. Can you each tell us where we can find you on social media or otherwise?

 

PB: Well, I just want to say thank you to Tracy and Steve. Thank you for having me in this debate and discuss this with you. It was definitely a fun time. If you want to read my daily readings, you can subscribe to boockreport.com. boockreport.com And our wealth management business is at bleakley.com.

 

TS: Excellent.

 

SVM: I want to thank you as well. Peter, you and I know this has been a long time coming for us to be on the same screen together. I had a blast. Totally looking forward to the next time. If you want to find more about me, you could go to my website. stevenvanmetre.com On Twitter @MetreSteven. On YouTube at @stevenvanmetrefinancial.

 

TS: Great. And for everyone watching, please don’t forget to subscribe to our YouTube channel and we look forward to seeing you on the next QuickHit.

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QuickHit

Quick Hit Cage Match: Van Metre vs Boockvar on Inflation (Part 1)

Van Metre vs Boockvar on Inflation (Part 1)

This special QuickHit Cage Match edition is joined by opposing sides of inflation versus deflation with Steven van Metre and Peter Boockvar. Why one thinks we’re having deflation and the other believes in inflation? How soon will this happen and to which commodities and industries?

 

This is the first part of the discussion. Subscribe to our Youtube Channel to get notified when Part 2 is out.

 

Part 2 is out. Watch it here.

 

Steven van Metre is a money manager who have invented a strategy called Portfolio Shield. He also has a YouTube show that discusses economic data and the news three days a week.

 

Peter Boockvar is the Chief Investment Officer and portfolio manager at Bleakley Advisory Group. He has a daily macromarket economic newsletter called The Boock Report.

 

 

💌 Subscribe to CI Newsletter and gain AI-driven intelligence.

📊 Forward-looking companies become more profitable with Complete Intelligence. The only fully automated and globally integrated AI platform for smarter cost and revenue planning. Book a demo here.

📈 Check out the CI Futures platform to forecast currencies, commodities, and equity indices

 

This QuickHit episode was recorded on October 14, 2021.

 

The views and opinions expressed in this Quick Hit Cage Match: Van Metre vs Boockvar on Inflation episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TS: I kind of want to start broadly here. So if you could give me your two minute elevator pitch on your view on whether you’re an inflationist or deflationist, even though we already know who is who. And how fluid is your view?

 

PB: So if we just break down, inflation is just the simple, too much money chasing too few goods. We certainly have too few goods with supply challenges around the world and too much money with a lot of fiscal spending over the past 18 months financed by the Federal Reserve buying most of that debt that the treasury issued to finance a lot of this fiscal spending. So it’s combining with inflation situation where it’s really just a good side. That is the part of the debate.

 

Services inflation is rather persistent. For the past 20 years leading into Covid, services inflation XNERGY is averaged almost 3%, but goods have been basically zero. And it’s always that trade off that has resulted in an inflation rate of 1% to 2% over the last couple of decades. But now you are back on trend with services inflation, and I’ll argue that will accelerate from here because of rents. And now you combine that with a period of goods inflation. Now, goods inflation is typically cyclical, if history is any guide. But how long of a cyclical rise we have really is the question. And I just think it’s not going to be so short term that it could last a couple of years.

 

SVM: Yeah. So I think that the inflation story is going to be more, at least the former Fed’s view of being on the transitory side, and I take that view strictly from my understanding of how the monetary system works, looking at the velocity of money, the fiscal stimulus cliff going away.

 

While I do agree that Peter will be right and that we will likely see higher inflation, and I agree in where he thinks it’s coming from in terms of the supply chain. I completely agree with that. But I do think ultimately those higher prices will get rejected without a sustained amount of new money coming in from fiscal or other means or from lending growth. And so even though we’ll see rising prices and they will probably go up a bit more, ultimately, I think the consumer will reject them just like we saw during the great financial crisis and that we are more likely to see inflation turn down pretty hard and perhaps even into the deflation.

 

TS: Either one of you can jump in here. Where do you see inflation, deflation hitting the soonest and the hardest? We’re looking at commodities that are still running very hot, supply chains that are very stressed. At what point do you think we see demand destruction? And how long do you think that we’re going to see these extremes in the destruction and supply chains that are causing much of this current inflation?

 

PB: Well, we’re already seeing some demand responses. We are seeing a slowdown in economic growth. Part of that is a pushback against these price increases. If you look at the housing market, there’s particularly the first time home buyer that has sticker shock and doesn’t want to pay for a home that’s priced 20% more than it was a year ago. And they’re saying, okay, let me take a pause here.

 

So there is some of that. But then, of course, there’s also some forced demand destruction because enough product can’t be delivered and that an auto plan has to shut down an assembly line because they can’t get enough parts, and they’re not sure when they’re going to be able to get enough. Or it’s Nike that can’t deliver enough store product to foot locker because it’s going to take 80 days to get it from their factory in Vietnam rather than 40 days.

 

Now, at some point, goods, inflation is going to be temporary. The question is, how long does it take to resolve itself? And one of the things that I think will unfold here is that let’s just take transportation costs, because that is a main factor in the rise in inflation, because every single thing that’s made in this world ends up on a plane, a ship, a truck or a railroad to get it from point A to point B.

 

So let’s just say I’m a toy manufacturer, and my transportation costs are now 35% year of year on top of the cost of my wholesale cost to actually get the product, and my cost of labor is up 5% to 7% year over year. Well, I’m not going to recoup that all in one shot by raising prices to Walmart by 10%. It could take me a couple of years to recoup that. But I promise you, I’m going to do my best to do so, and I’m going to space that out. I’m going to try my best to cushion the blow to that end, buyer who’s buying for their kids for Christmas by spacing out that price increase. But I know I’m going to have visibility because everyone else is going to be doing the same thing for the next three years in raising prices so I can recapture, I may not be able to regain completely, but recapture some of my lost profit margin. So that’s one of the reasons why I think this is going to be sticky.

 

And to Steve’s point, yes, there’s going to be a fiscal fall up next year to some extent. We’ll see how much of the lost transferred payments are going to be offset by both the child tax money, plus people going back to work. We saw jobs claim have a two handle today for the first time since pre-Covid and to what extent wage increases can offset the rise in the cost of living? And yeah, we’ll have to see that. But the question is, how much do prices come back in?

 

You take lumber, for example, and I’ll give it to Steve right after this, lumber prices in the heart of the housing bubble in the mid 2000s was about $300. Now it went up to $1600 now it’s about 650. The cost of a home, construction wise, and what a builder would charge their customer is not going back to where it was. They are going to use this and fatten their margin as best they can, and it’s going to take years for that buyer to experience what is truly reflected at 650 lumber, but that’s even more than double where it was. So it’s still multiple years of price increases that are going to flew through the chain.

 

SVM: Yeah. Peter, you bring up some absolutely excellent points about how long this could go. And that’s something I really haven’t considered that it could run a couple of years because I look at this fiscal cliff and to me, you go back to the pandemic and we know all this was driven by fiscal stimulus. And without it, and I know we still have the child tax credit for a bit. I’m just concerned that this drop off comes a lot stronger than most people are expecting. And I do realize a lot of these goods are sitting off ports waiting to get shipped in, waiting for truckers to take them to warehouses and eventually on the stores.

 

The question I keep asking is when those goods hit the shelves, will consumers be there with money? Do they have the money to spend? Are they going to go back to work fast enough? And even though, as you mentioned, we had a two handle today, we both know that that’s almost 50% higher than normal.

 

So the question is we still see this huge amount of job openings everywhere. We’re not seeing people go back to work. We saw the jolt state. I know you looked at that recently from the other day where people are quitting their jobs. And so I keep coming back to the same question is will consumers come and spend and keep these prices up? If they don’t, then we get the reversal. But that’s my question. Do they come?

 

PB: It’s a great question of whether that will be the case. I don’t think the labor market is going back to where it was pre Covid. And all you have to do is look at the participation rate to confirm that, particularly for the age group of 25 to 54 year olds, which is sort of the core wage earning population, and it’s still well below where it was in February 2020. So, yeah, we’re not going back to a 3.5% unemployment rate with the same number of employed people anytime soon.

 

Now, what is replacing a lot of the lost sort of or not made up fiscal money that has been spent, particularly December 2020 with Trump’s last fiscal package and then repeated just a few months later with Biden, is that eventually we do have that child tax money that’s going out. We do have an increase in food stamps. Basically that reservation wage, which is basically the wage level at which someone has a tough choice of whether do they go take that job or do they collect all the government handout? That continues to go up.

 

So that person who may not want to go back to work while they’re getting a lot of benefits elsewhere. And while the aggregate, we’re going to probably see some sort of fiscal drop off. The question is, is that enough from the demand side to offset what’s going on in the supply side?

 

Now, again, supply side is going to normalize at some point. There’s no question about it. Just a matter of when. Taiwan semi is spending billions of dollars that just broke ground in June in Arizona to build a semi plant. Well, it’s not going to be done until 2024.

 

Now, there could be a lot of double ordering, triple ordering that’s going on in Semis right now. We’re going to have this major inventory hangover. We’re already actually seeing it in DRAM, for example. And that could happen. And there’s going to be a mess at the other end of this. I just think that this drags out and also a key part of this inflation debate, too, is in what context is this coming in?

 

If we had a Fed funds rate in the US of 3%, if we had a ten year at four to five, if we didn’t have such thing as negative interest rates, I’d say, “you know what the world can handle about of higher inflation because interest rates are higher. If equity valuations weren’t as extreme as they are and they were more in line with history,” I would say, okay, “we can absorb it.” But that’s not the case right now. We have valuations that are excessive in a variety of different things. Obviously, we have zero interest rates, negative interest rates, QE and so on. So even if inflation decelerated to, let’s just say a 3% rate for a year or two. I just don’t think that the world is positioned for that.

 

SVM: Yeah. I’m not worried about the upper 50%. I’m really curious about the bottom 50%, who is really the big recipients. I know a lot of people got the fiscal checks, but my wife is a fourth grade teacher, and one of the problems they’re having in schools right now, and you’ve probably been hearing about this is a kid or a staff or a teacher gets Covid, and next thing you know, they’re quarantining out segments of the classroom. They’re sending them home. And the parents are really struggling with this because they want to go back to work. But then all of a sudden, their kids back and they can’t.

 

And so they’re forced to stay at home and they don’t have the family support. Maybe they don’t want to send the kids to grandma and grandpa because they don’t want them to get sick in case their kid has it. And so I keep wondering, without all this fiscal support from the government is the natural expectation, particularly with higher energy prices, as we go into the winter, that these cash-strapped households are going to ultimately make the choice to I’ve got to buy food. We all know that’s gone up. We have to pay for energy. We know that’s gone up. As Peter, as you mentioned earlier, that rents are probably going up. So what does that leave in terms of discretionary income to spend to drive inflation?

 

And I kind of wonder, without their spending power, how is this going to last? And that’s my big concern is I don’t think it does. I think consumers are going to reject it. I don’t think they have the income. I don’t think the money supply is growing fast enough. And then you start looking at the dollar and interest rates and you would want to see the dollar going down. You want to see interest rates going up and we keep seeing the dollar fighting to go higher.

 

We keep seeing interest rates trying to press back lower, and it’s telling us that financial conditions are tight. And, of course, the Feds potentially about to taper and start to remove their support of that. And I just keep kind of shaking my head going, like, how are we going to get through the holiday season unless consumers come out and spend a big way? I’m just not convinced.

 

TS: Well, perfect segue into what I kind of wanted to get into next was talking about the Fed tapering. So first, because everybody’s talking about this. Do you see the Fed tapering? And if they do, how much is this going to affect inflation? And also, I know the market is saying the Fed is going to raise rates in ’22, ’23. But is this a reality at all?

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QuickHit

Quick Hit: Are you a deflationist or an inflationist?

Are you a deflationist or an inflationist?

Brent Johnson of Santiago Capital tweets, “If you believe additional QE is on the way, you are secretly a deflationist. And if you believe in the taper, you are secretly in the inflation camp.” What does he mean by that? Also discussed in this QuickHit episode:

  • What are the considerations around inflation this time?
  • “Negative velocity of money.” What does that mean?
  • Why are banks not the transmission mechanism that they should be?
  • How China plays a part in the world economy?
  • How long will the supply chain issues will be resolved?

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QuickHit

Cause and Effect: Are you a deflationist or an inflationist?

Are you a deflationist or an inflationist?

This QuickHit episode is joined by central bank and monetary policy expert Brent Johnson. He talks about inflationists versus deflationists and what makes these camps different in a time of a pandemic. What’s monetary velocity? And why banks are failing at their job, and why they’re not lending anymore money? Also discussed China and when supply chain issues will be resolved.

 

Brent Johnson is the CEO and founder of Santiago Capital, a wealth management firm. He works with about a dozen different families and individuals customizing wealth management solutions for them. He does that through a combination of separately managed accounts and private funds, also invest in outside deals, private deals, venture capital funds, and others. Brent have a focus on macro and loves the big picture.

 

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This QuickHit episode was recorded on September 28, 2021.

 

The views and opinions expressed in this Cause and Effect: Are you a deflationist or an inflationist? QuickHit episode are those of the guest and do not necessarily reflect the official policy or position of Complete Intelligence. Any contents provided by our guest are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

Show Notes

 

TN: Part of the reason we’re having this discussion. And is you posted something on Twitter a few weeks ago and I’m going to quote it and we’re going to put it up on screen. You said if you believe an additional QE is on the way, you are secretly a deflationist. If you believe in the taper, you are secretly in the inflation camp. Cause and effect. And I thought it was super interesting. Can you kind of talk through that with us and help us understand what you mean by that?

 

Inflation, deflation tweet

 

BJ: Sure. And before I get into that, I’m just going to take a step back because a lot of work I’ve done, a lot of the work I’ve done publicly and put out publicly over the last 10 to 12 years has really been about the design of the monetary system, how it works, how fund flows, you know, this currency versus that currency, what central banks do, etc. Etc.

 

And this is really a follow on from that and what I was, the point I was trying to get across in this particular tweet is that central banks are a reactive agency. They are not the cause. They are the effect. Now their policies can cause things to happen, but they are reacting to what they see in the market.

 

And so my point was if you think more QE is coming, then you believe they are going to be reacting to the deflationary forces that still exist in the economy. And so if they were to step back and do nothing, you would have massive deflation.

 

Now, the flip side of that is if you think that they’re going to taper and you think they’re going to pull away stimulus, then you’re actually an inflationist because you believe inflation is here, it’s going to remain. Prices are going to continue to rise. And the Fed is going to have to step back in reaction to those steadily higher prices.

 

And so I really get this across because I think there’s a huge battle between the people who believe deflation is next and the people who believe inflation is next. And I think it’s a fantastic debate because I’m not certain which one to come. I kind of get labeled into the deflationary camp, which I don’t mind for a few reasons. But I actually understand all the reasons that the inflationary arguments are being made. And I believe it was a few additional things happen. Then we could get into this sustained inflation. But until those things happen, I’m happy to be labeled into the deflationary camp. So I hope that makes sense.

 

TN: Yeah. So pull this apart for me. Inflation is ever and always a monetary function. Right. We hear that all the time. Of course, it’s hard to say something “always” is. But people love to quote that. And I think they misapply it in many cases. And I’ve seen that you’ve kind of pushed back on some people in some cases. So can you talk us through that and is this time different? Like, what are the considerations around inflation this time?

 

BJ: Yeah. So is this a perfect way to set this up because again, I understand the argument that those in the inflationary camp are making. And it would be hard to sit here and say we haven’t seen inflationary effects for the last twelve months. Prices have risen. Regardless of why or whatever prices have gone up. So I’m not going to sit here and deny that we’ve had inflationary pressures.

 

The question is what comes next. And I think what I would say with regard to the quote that you were just making, I think that was, I can’t remember who said it now, but it’s 50 or 60 years ago. And what I think was assumed in that quote was that monetary velocity is constant. And so you’ve seen these huge rises in the monetary base. But not just the United States, but Canada, Europe, South America, China and Japan.

 

And so the thought is that with that new money in the system, you’re naturally going to have inflation. But I think Lacy Hunt, who a fellow Texan of yours, does a fantastic job of showing, had the rate of monetary velocity stay the same. That is absolutely the case. But the reality is monetary velocity kind of took a nose dive starting about 20 years ago, and it just continued to lower and lower and lower.

 

TN: And it’s been negative, right, for the past couple years?

 

BJ: Yeah. It just continues to fall. And I think the rule is…

 

TN: Let me just stop you right there. “Negative velocity of money.” What does that mean?

 

BJ: What it essentially means is that new credit is not being created. And so the system is contracting. And this is really the key to it all. It’s the key to the way the monetary system is designed. It’s the key to the way it functions. And it’s the key to whether we’re going to have inflation or deflation next.

 

Because I do agree with the money, the inflation is always and everywhere, a monetary phenomenon, assuming that velocity is constant. But velocity isn’t constant. And it’s because of the way the monetary system is designed. And it’s because of the way that the Fed and other central banks have been providing stimulus.

 

Probably don’t have time to get into all the details of what a bank reserve is and whether it is or whether it isn’t money. But essentially what the central banks have been doing, especially the Fed, is re collateralizing the system. Now re collateralizing the system isn’t exactly the same thing as actually handing somebody else physical money. It sort of is, but it sort of isn’t. And it leads to this big debate on whether they’re actually printing money or not. It’s my argument that the Fed has been re collateralized the system and that has kept prices from continue to fall.

 

But in order to get this sustained inflation, I keep saying sustained inflation because I don’t want to deny, but we’ve had it. But to have it continue going higher, especially at the rate we’ve seen would require one of two things. Either the Congress has to come out and agree to spend another seven or $8 trillion, which this week is showing, it’s very hard to get them to agree to do that. They can’t even agree on 3.5 trillion and let alone another 6 to 7. Or the banks have to start lending. And the banks simply are not lending.

 

They lent last year because the loans that the banks made were guaranteed by the government. These were the PPP loans that everybody got.

 

TN: So. What you’re saying, it sounds to me, and correct me, what you’re essentially saying is that banks are failing as a transmission mechanism. So the government has had to become the transmission mechanism because banks aren’t doing what their job should be. Is that true?

 

BJ: That’s a very good way of putting it.

 

TN: Why? Why are banks not the transmission mechanism that they should be?

 

BJ: Well, they have the potential to be. And that’s what I say. The Fed has provided the banks all the kindling for lack of a better word, all the starter fuel to create this inflationary storm. But the banks haven’t done it. I would argue. Now there’s people to disagree with me. But I would argue that they don’t want to make a loan because believe it or not, banks don’t want to rely on getting bailed out, and they don’t want to make a loan where they are not going to get their money back.

 

Now, if you’re in an environment where businesses have been shut down either because of the pandemic or because of other laws or because of regulations that can’t afford all the regulations, whatever it is, you know, it’s hard to loan somebody a million dollars if you don’t know that their business is even going to be open the next day. Right.

 

So banks aren’t in the business of going out and making a loan and having and default on them. They want to get their money back. And I think that they would rather go out and buy a treasury bond that’s yielded one and a half percentage, than make a loan that pays them, three or four of them might go bad. Right.

 

TN: Okay.

 

BJ: So to me, that’s indicative of the deflationary forces that the banks who are closer to the money than anybody else, and typically the people that are close to money understand the money or benefit from the money the most, they are telling me from by their actions, maybe not their words, but their actions are telling me they don’t think this is a great investment.

 

TN: Yeah. I think we could talk about that point for, like, 20 minutes. So let’s switch to something else. So what you didn’t really mention is the supply side of the market in terms of inflation, meaning supply chain issues, these sorts of things. Right.

 

And so I want to focus a little bit on China. Now, there’s a lot happening in China, and I want to understand how that impacts your worldview.

 

In China, we’ve got the crypto regulation that’s come in. And the clampdown in crypto. We have a strong CNY, like an unusually strong CNY over the last six or nine months. We have the power supply issues. We have the supply chain issues. That’s a lot happening all at one time, at a time when a lot of people believe there’s kind of China has this clear path to ascendency, but I think they have a lot of headwinds, right. Of those kind of how are you thinking about those factors? The crypto factor, the supply chain factor, the power factor? How are you thinking about that stuff?

 

BJ: So I think about this a lot first of all. I mean, this is a probably, like it or not, for better force, the China-United States dynamic is probably one of the biggest macro drivers for the next ten or 20 years. It most likely will be. There’s nothing is guaranteed. But that’s probably a pretty safe bet that that’s going to be one of the main drivers. And so I think what you’re touching on as far as the supply chain, in my opinion, that is as big a driver as the “money printing” for the inflationary effects that we’ve seen for the last year.

 

You know, if you look at the efficiency with which the single global supply chain that Xi call it from 1990 to 2018 or 19, it’s pretty amazing, right. There’s one global supply chain, just in time inventory, you can predict with a very high level of certainty when you would get those things you ordered and at what price. But then with a combination of the US and Chinese antagonism and COVID, the supply chains are broke. And that makes it harder to get those supplies. And the timing of when you get them in the price, which you get to miss completely unknown or its delay, and the prices are higher.

 

And so I think that has led to a lot of the price pressure on commodities. Now, part of the reason that the decreasing supply push prices up was that demand stayed flat or went up it a little bit. And I think the reason it went up is a lot of people believe that the Fed would print enough money to cause demand to stay, solid and that China was growing and that they would continue. China has been the growth driver for the global economy for years and years. And I think a lot of people thought that China would continue to be that growth driver for these commodities and these other goods that were needed. And so if demand stays flat arise and supply gets cut, then price rises.

 

Now, I don’t think that China growing and ascending to economic hegemony or however you want to describe it is a given. I think they have more troubles internally than they would like to admit. And I think we’re starting to see that, with the Evergrande, real estate daisy chain of credit extension. You know, if you think that the US has a credit problem, take a look at China, they do as well. And it’s manifested itself nowhere more visibly than in the real estate market there and Evergrande.

 

Now, the problem is if they cannot send that credit contraction that is currently taking place in the Chinese market from a real estate perspective, then demand is not going to stay cloud. Demand is must start to fall, and demand starts to fall and some of those supply chain logistics start to get ironed out. Now, they’re not going to get fixed overnight. It’s not going to go back to the way it was 18 months ago. But if it even gets a little bit better and demand starts to fall, well, then you could have a move down in commodity prices and then move down in growth expectations.

 

And that is the way deflationary pressures could take whole. And as those prices start to come down, then you get more credit contraction. It becomes a vicious cycle both to the upside and to the downside. But based on the design of the monetary and I don’t need to keep harping on this. But based on the design of the monetary system, it is literally the stair step up in the elevator shut down. That’s just the way it’s designed. It’s an inherently inflationary system that it has to grow. Or if it doesn’t grow, then it crashes. And crash has always happened faster and steeper than the stairstep higher.

 

TN: They take longer, but steeper on the way up. Right.

 

BJ: That’s right. That’s right.

 

TN: Okay. So in terms of the supply chain issues, okay. I’m just curious, is this something that you think is going to resolve itself in three or six months? Do you think it’s something that’s with us for three years or what was I feeling out of this?

 

BJ: Some of it is gonna resolve itself in three or six months? And I think that will be a combination of just working out the kinks and demand falling. Right. I think that will help. But I don’t think it’s all going to get fixed in three to six months, and I think it might take three to six years to get the other part of it. And this is where I have to actually say that in the past, I’ve been somewhat critical of the people who called for stagflation because I kind of felt the top out, right? You couldn’t decide. So you just go down the middle.

 

But I actually think that that’s a very likely scenario. I think some things are going to inflate and some things are going to deflate and we’re going to have this kind of the stagflationary environment. I think the central banks are going to do everything they can to kind of offset those deflationary pressures. And in some cases, it will work. In some cases, they won’t. But the global debt, the amount of global debt and the global dollar… Is so big that deflationary scare, in my opinion, is always going to be there. And in my opinion, you can’t ignore it.

 

A lot of people just think, oh, don’t worry about it. Central banks, have you back. There’s a Fed put, don’t need to worry about it. I understand that argument, but I don’t think it’s correct. I think you do have to worry about it.

 

TN: Yes, I think that’s right. Brent, I would love to talk to you for another couple of hours. I think we could do it. And I’d love to revisit this in a few months. Thank you so much for your time for everyone watching. If you wouldn’t mind following us on YouTube and subscribing, we’d really appreciate that. That helps us get up to where we can promote more and other things. And, Brent, I really appreciate your time and really appreciate this conversation. Thank you very much.

Categories
QuickHit

Inflation: Buckle up, it may get worse (Part 1)

Nick Glinsman and Sam Rines are back in this QuickHit episode special Cage Match edition about inflation. Where are we in the inflation and what is the horizon? Both guests have different views and they explain exactly why they have such views. And what about China’s manipulation of CNY through hoarding metals and commodities? Is that a valid way of looking at inflation?

 

Part 2 of this discussion can be found here: https://www.completeintel.com/2021/05/06/quickhit-inflation-part-2/

 

Want the audio version? Play this on Spotify or find us in other podcast players. You can also find us in other podcast audio streaming services. Just search “QuickHit”.

 

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This QuickHit episode was recorded on April 28, 2021.

The views and opinions expressed in this nflation: Buckle up, it may get worse QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re talking about inflation. It’s been on everyone’s mind for the last couple months and we’ve got two macro geniuses to talk to us about it today. We’ve got Nick Glinsman from EVO Capital and we’ve got Sam Rines from Avalon.

 

We look at copper. We look at a lot of these indicators of inflation and it’s been on everyone’s mind over the last few months. A year ago, people were worried about deflation. Now the worry is inflation. Obviously we’ve seen a lot of monetary and fiscal policy in the interim.

 

So, Nick, can you give us your view on where we are with inflation and what that looks like over what horizon? Is it months? Is it five years? Is it, you know, how does this play out?

 

NG: The horizon is a little bit tougher. But my my thesis is based on looking back at historical precedence and I focused on the LBJ Vietnam War spending, combined with his great society fiscal spend, which ultimately led in the early 70s Paul Volcker’s fame containing huge inflation there was at that period.

 

And I’m sitting here having spent the last year but actually building this thesis up for a couple of years thinking that the equivalent of the Vietnam expenditure is Covid and the relief spending that’s been has combined Trump and now Biden, and then the great society equivalent would be Biden’s green infrastructure spending which, I slightly tongue-in-cheek called the green ghost plan, which is enormous. Amazing.

 

When I find myself agreeing with Larry Summers on inflation. I think his odds of a third in terms of this creating inflation, I would suggest a higher. In terms of timeline, it took five to seven years for the inflation to really kick in during the 60’s leading to Volcker. I think this time around, it will be much quicker due to the differences, a lot of globalization and supply chain management.

 

TN: Sam, can you kind of give us your view of where we are in inflation and what’s the duration that you kind of expect this to play out?

 

SR: I have a very different view. If you look at the lumber market, copper, et cetera, these are things that tend to sort themselves out rather rapidly. Being in Houston, the best cure for high prices and energy is high prices. We will pump more if oil ever goes to 80. It’s very similar with lumber and copper. Most of the mills are becoming much more efficient in lumber, for instance.

 

So we will see that begin to roll over and that will roll over in a very meaningful way as we begin to work through these supply chain issues that we know are coming in the summer and we know are probably going to persist in the fall. But as we get into the fall and we get into early 2022, even if we have a couple trillion dollars infrastructure, it’s going to be spread over the better part of 10 years infrastructure.

 

It’s not a fast spend and it will not save us from the fiscal cliff. It will not save us from the lower employment numbers that we’ve been seeing on an overall basis. Yes, unemployment is moving lower, but employment is not keeping up with the employment figures.

 

Once the economy begins to have to stand on its own two legs, even if it has a touch of a tailwind from the government, it’s still going to be very difficult to continue to see consumption going through the roof, continue to see the types of disruptions that we’ll see for the next six to nine months in terms of supply chain that will have one-off price implications.

 

But that to me says we’re probably getting towards the peak of the sugar high as we get into the summer and the other side of the sugar high is going to be very painful in terms of going back to a one and a half to two and a half percent growth rate in the US inflation that will be very difficult to get higher simply because it’s difficult to have sustained disruptions in supply and demographics that aren’t changing anytime soon. So we will continue to have a number of those headwinds. And I think that’s what the US 10-years is telling you, US tenure at 1.5 is telling you that the market’s looking through this summer and saying the next decade doesn’t look as good as the last decade in a lot of ways.

 

It’s something to at least keep in the back of our minds that the Fed doesn’t have great control over the 10-year. The fed has great control over zero to two-year timeframe. But nothing beyond that.

 

TN: Okay, so let’s look at common areas. It seems to me that both of you see inflation continuing to rise maybe not in terms of the rate of rise but certainly continue to rise until, let’s say say Q3 Q4? Do we at least have comic around there?

 

SR: Yeah.

 

NG: Yes, absolutely.

 

TN: When we look at some of the the pressures in inflation, part of my assertion has been, and I’m sure you’re both going to tell me I’m wrong, but as we’ve seen the CNY strengthen, my hypothesis has been with a strong CNY, Chinese manufacturers are stocking up on industrial metals, food, other things because it’s in dollar terms. They can get it pretty cheaply and they’re waiting for CNY to devalue again when their buying power will decline.

 

What I’m hearing is that a lot of these things are really going to China to be hoarded and as a play on a potentially devaluing CNY. What do you think of that hypothesis aligned with a lot of the central bank easing? Is that a valid way of looking at inflation? Meaning this is stockpiling more than it is demand pull?

 

NG: My view on China is that, if you look at food firstly, there is a food shortage crisis. And we all know what the CCP are most scared of, which is society unrest. And we can take the examples of the Arab Spring, food is the key. But I also wonder whether the Chinese are stockpiling in anticipation of decoupling? I think of rare earths, of which they have a large control of the refining thereof being problematic. Semiconductors, there is an issue there.

 

So if I extrapolate further, my view is I think the supply chain issues are much longer standing now because of various geopolitical forces creating a decoupling with China for sure. And we have this Anglosphere grouping that’s clearly beginning to take shape, which now looks like that will include India because of the health crisis there.

 

If we look at that, then the question is what happens with Europe? Again, I think that’s part of the supply chain problem whilst they decide which site they go to. Is it china-centric or is it anglers-centric?

 

So I think the supply chain issue is much longer standing, hence I suspect that we’ve got China positioning, because nothing goes on which in China without the government knowing about it, quite frankly. In terms of anticipating a supply chain issue, because all the commodities they’re importing they’re short off.

 

TN: Okay, Sam, first of all, what do you think about my hypothesis and then Nick’s qualification around the supply chain issues being much longer term on the back of decoupling?

 

SR: I would take the argument that decoupling isn’t an action. It’s a process, and the process takes a very, very long time. And that creates in my mind a much longer time frame for the United States to build out its portion of the supply chain, for instance semiconductors, et cetera. So I would say I don’t disagree that there is a decoupling underway. In my opinion or my argument would be that it will take much longer than a few years to really get that process to move and it’ll be particularly under this administration a much more diplomatic and less blunt force tools than we’ve seen in the past being used. So I don’t disagree with the supply chain eventually being at least somewhat disentangled from China. I would just argue that it will take quite a while to really begin to become an issue unto itself.

 

On your point that China stockpiling, that does appear to be happening. It does appear to be a hedge against a weaker CNY to come including with lumber. One of the reasons that lumber prices are spiking is because China’s buying a lot of lumber in the US. That is a significant problem. And I would point to, when they stop stockpiling, that tends to have a significant effect on the price of commodities in the opposite direction. We’ve seen that with copper a couple of times during their infrastructure builds.

 

The interesting thing right now is you’ve actually seen a pullback from infrastructure spending. From the peak in China, they’ve begun to do their form of policy tightening on that front already. Suspected will continue at least on the margin and that will be a significant headwind for those commodities that have been stockpiled when less of them are being used on the margin as well. So that that does play into a 2022 disinflationary type environment versus 2021.

 

TN: Given that we have all these different pressures, whether it’s supply chains, whether it’s stockpiling, whatever it is, what the people in the middle, so that the manufacturers, what capacity do they have to absorb these price rises? What are you guys seeing when you talk to people, when you read? Are you seeing that manufacturers can absorb the lumber prices, the copper prices and other things? Or are they passing that directly along?

Categories
Visual (Videos)

World economy, industries changing amid COVID-19

 

The world faces an unprecedented economic crisis as shops and businesses, factories and entire communities have been put under lockdown due to the coronavirus pandemic. Governments are doing their best to cushion the blow and keep their economies intact, but many people say things won’t be going back to normal… even when this pandemic is over. According to them we are in a “new normal.” To see how economies and industries across the world are already shifting to this new reality, we connect with Dr. Larry Samuelson, Professor of Economics at Yale University, Tony NASH, CEO and Founder of Complete Intelligence, and Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University.

 

Interview Notes

 

AN: My first question to Dr. Samuelson, which industries do you think will struggle to recover after this pandemic and even despite the huge sums of money being poured into them right now to try and keep them afloat?

 

LS: The huge sums of money are designed to get the industries through this initial period when much of the world is locked down and firms’ whole industries have no obvious or no steady source of revenue. Once we are past that, hopefully we see some opening of economies soon, we still have a recession on our hands. And at that point I would say that consumer confidence is the key thing to monitor it’s difficult to recover that under an ordinary recession. Now we’re gonna have to recover that in the midst of still dealing with the coronavirus.

 

We won’t have the virus behind us until we have a vaccine, which looks like it’s perhaps a year off and so we’re gonna have to try to reopen our economies where people are still worrying about the virus. So now we can ask about industries the ones that will fare best are those that people can reasonably, safely interact with. We expect retail some education to fare better than say mass sporting events and confine travel in that respect.

 

Can also look at which industries represent activities, purchase is that people ordinarily do that they have deferred and which are discretionary. The deferred ones we might expect to come back fairly quickly. As a frivolous example think of all the haircuts people are going to need when they come out of lockdown. Things like automobile purchases durables home maintenance might be in the same category. More discretionary items like travel are going to take a longer time to come back.

 

 

AN: So what you’re saying is that recovery will really depend on consumer sentiment and it looks like the sort of high-touch industries where you know and where it involves travel or social contacts those are going to be a bit slower to recover? Well Dr. Webb the, European Union they’ve agreed on a 500 billion dollar stimulus plan to protect workers businesses and their Nations in light of this pandemic but they haven’t been able to agree on issuing debt to raise long-term financing for the region what do you
make of this still is it really enough for the region?

 

OW: Well it appears to be clearly insufficient for for the requirements of what stands to be a 19 trillion dollar economy. We think about the European Union. 27 countries as a collective this is second largest economy you know in PPP terms after China. And so you know the amount of – a billion dollars pales in comparison to what other national economies are injecting in terms of stimulus packages to stave off the risk of a severe economic crippling, mass layoffs and so forth.

 

So I think the ECB was right to to campaign for about 1.5 trillion dollars and clearly we’ve ended up with 500 billion dollars and that’s not going to be near enough to what the region needs. But nevertheless, yes, there is this big issue in the backdrop of who’s gonna finance or finance all of this. And this is clearly a follow-on discussion from the one we had last week about the global debt crisis right. So no basic were looking at trade-offs here, which trade-off are we willing to live with, the one where we deal with or crisis now in terms of mass unemployment, crippling economies, whether we deal with a lengthy debt crisis down the road, you know, sort of alleviating the pain today.

 

So I think this is an ongoing discussion but clearly the $500 package is a compromise, a severe one. Southern European states have compromised themselves. They’d rather get something rather than nothing. But clearly it’s insufficient in terms of what’s already percolating in terms of small and medium enterprises folding up as we speak, people losing their jobs because of the slump in demand are all around for range of services and inability for those services to to actually meet consumer needs because of the of the lockdown.

 

 

AN: So it looks like there may be more coming out of the EU as this pandemic progresses and the economies continue to be hurt. Well Dr. Nash, here in East Asia China has actually restarted its economy factories are back online and lockdowns on cities even Wuhan they’ve been east. But with the rest of the world they closed for business. Many say that China is actually in for a second supply shock. What’s your your take on this?

 

TN: Sure. Our biggest worry about China, well, we have a number of them but we’re actually worried about the fall in manufacturing. The industrial production collapse in China that we see coming starting in, say, April and then going into third quarter should be unfortunately pretty damaging to China’s economy. We expect to see deflation starting in April, May in China. It’s not like 10 or 20 percent. It’s kind of half a percent, but still once you start to dip your toe into deflation, it can be pretty dangerous, so starting and then stopping.

 

The thing that we have to remember with all of these economies is that these are government-mandated shutdowns of the economies. These are not market failures. And so the EU issues 500 billion dollars and euros for a fiscal plan. It’s not the small companies, even the large companies’ fault that this is happening. So the governments have and will continue to push money into the economy because they know that this is their fault. It’s their responsibility. The companies aren’t failing. It’s the government that’s failed the companies by not having a plan and not having the resources in place to manage this.

 

 

AN: So that’s no need for such huge pessimism, I suppose. So you think that as long as the government’s take the right actions and the full might I mean that the second supply shock or another sort of sort of impact might not be as big. Well Dr. Samuelson some say that China could employ what some call it a trap diplomacy either by seizing other country’s assets or forgiving that to boost its soft power if it does employ this kind of tactic then could we see the world order actually change?

 

LS: We have to remember that the question of debt-trap diplomacy was here well before the pandemic. Critics of China have been concerned about this for some time. I don’t have a good idea. It’s very hard to say whether the pandemic is going to exacerbate. The concerns people have about debt-trap diplomacy, it might if it puts other countries that China is dealing with in a particularly adverse position. But it might not. It’s having an effect on China. That may make things more difficult for them.

 

I think more important is to remember that when we talk about debt trap diplomacy, we tend to think of international trade of economic relations between countries as a competitive or an antagonistic activity, where the most important thing to keep in mind is that international trade is at its heart a cooperative activity. We engage in it because countries on both sides gain from international trade.

 

As China invests in other countries, as it deals in other countries, it acquires some influence in those countries and some people are worried about that. That’s where the term debt trap diplomacy comes from. But it also becomes linked to those countries and has an interest in those countries and that creates a force going the other way. I think on balance it’s important to remember that there are some real gains to our world economy.

 

Some risk, some supply chain risks, that we have seen. Some political risks that some people worry about. But on that I think there are real gains from having the International economy linked together. We see these gains in terms of our economic well-being. I think we see these gains in terms of our political well-being as well. Countries, as they trade, as they deal with one another, tend to have common interests that in the long run are good for all of us.

 

 

AN: Well, so we really need to see more cooperation and continuous trade between nations especially in times of economic crises. Well Dr. Ron Webb, how do you expect this tug of war between the US and China to play out during this pandemic, especially as their bilateral relations worsen because of the COVID-19 pandemic?

 

OW: Well, you know the future is contingent clearly. But I think in terms of the current trajectory, it looks like this tug of war, this ongoing bilateral trade war between these two economic juggernauts, will continue unabated I mean from the recent news reports of President Trump’s speeches and his articulations on the issue, it’s quite clear that the US administration is doubling down on its protectionist measures against not only China but also even the European Union and also Mexico.

 

So I think the COVID-19 challenge which is having an impact of across various domains including economics and technology and so forth will continue without much foreseeable change. I think this effects you know the global economy. It has been even pre COVID, but I think it’s not helping the situation whatsoever in the current climate.

 

 

AN: Right. So, we expect these technological sort of competition and the sort of trade disputes that we’ve seen in the past, they’re not just going to stop short because of this pandemic that’s going on. They’re going to continue. Nevertheless, well just before we go,  Mr. Nash, some say that there could be a rebound in the latter half of the year. When do you think the worst of this pandemic
will be over on the economy?

 

TN: Yeah, I think it really depends. I think it depends on a country’s ability to issue a fiscal stimulus. I think it depends on the concentration of manufacturing of those economies, and I think it depends on let’s say workforce flexibility. So, with those, I think China is not in a great position. I think China is going to have a very rough year ahead. The official data may not report it, but we envision a very rough year ahead for China.

 

We think Europe will have a rough third and fourth quarter. Of course, late in the fourth quarter, we see Europe starting to come out of this. But both of those are constrained because they don’t have a U.S. dollar basis to issue fiscal stimulus. Their companies have U.S. dollar debt and their countries are having to borrow US dollars into their Treasuries in order to keep trade and other things going. So they have real problems.

 

The US has already issued 2.2 trillion fiscal stimuli plus a lot more from the Fed. And so, the US has had the ability to stimulate the economy. It hasn’t really had traction yet. But of the three kinds of general regions, what we’re seeing is the US, although they’re all very difficult situations on a relative basis, we see the US doing much, much better because of the US’s ability to issue fiscal stimulus and to play monetary policy with the US dollar. So the US dollar is a huge asset for the US.

 

The large millennial bracket is a huge asset for the US. It’s a workforce that’s actually contributing to the overall dependency ratio and then the ability for US companies to pull their manufacturing back to North America, this is not absolute it doesn’t mean a hundred percent, but some manufacturing will certainly be diverted to Mexico for a number of reasons, and we see that taking catching pace in, say, q3 and q4. And that allows the US to do more value-added activities through the course of recovery.

 

AN: Right. Well, each region is going to have its own challenges and an unprecedented pandemic really does bring unprecedented complexities when it comes to recovery. Well I’m afraid that’s all we have time for today it’s been a very great discussion.

Categories
Podcasts

Countries differ on ending coronavirus lockdown

Countries and governments around the world are starting to feel the strain of coronavirus lockdown, with some showing signs of easing up restrictions. But the World Health Organisation is urging serious care, saying it cannot be done in a hurry.

 

Also in the programme, the EU competition commissioner Margrethe Vestager has advised governments to prevent companies being taken over by Chinese firms.

 

Amazon’s share price surged after the company announced it would take on another 75,000 workers amidst increased demand, after already hiring some 100,000. Professor Scott Galloway at the New York University Stern School of Business discusses how we should interpret the move.

 

The world’s oil producers under OPEC and allies have agreed a record oil deal that will slash global output by about 10%. Paul Hickin, Associate Director at Platts, explains what this means for the future of oil prices.

 

Plus, with the internet full of memes and videos to help us get through uncertain times, the BBC’s Vivienne Nunis speaks to some of those creating internet content to make us smile during the long lockdown days. All through the show we’ll be joined by Rachel Cartland, author in Hong Kong and Tony Nash, chief economist at Complete Intelligence in Houston, Texas.

 

Listen to this podcast at BBC Business Matters.

 

 

Podcast Notes

 

BBC: What kind of restrictions are you subject to in Houston?

 

TN: Really it’s just mass gatherings, and there is a state home order. There are a lot of people outside. There are exceptions to essential businesses. And so a number of people going to work. Not many people to be honest.  I’ve never seen a lot of my neighbors outside, where they were out all the time.

 

BBC: That’s a positive of it, isn’t it? WHere you are, the restrictions aren’t as tight as they are in California and New York

 

TN: Texas has a pretty low death rate. So haven’t really put… there are restrictions. Dallas is on lockdown. Houston is on lockdown but not as stringent as Dallas. San Antonio and Austins are on lockdowns. But some people do get out of work. Some people, not a lot.

 

BBC: Is there a talk in Texas when it will be lifted given that the state is not as badly affected as other parts of America?

 

TN: The governor said that this week, he would announce when he would put an order together to get people back to work. I think you’re starting to see a real movement in the US. People are tired of being at home, they’re tired of being worried about their income, claiming unempoyment, seeing their friends being laid off or their friends claiming unemployment. It’s a scary time for people and regardless of the fiscal stimulus that’s coming out from DC, people just want to work.

 

BBC: Are people are scared that if they won’t catch the virus, their loved one will?

 

TN: They are. People are nervous about it. Some people are wearing masks. But I think what we’ve seen generally is it’s largely older people or people with tertiary, secondary conditions. It’s a worry. But people are adults and they can take precautions.

 

I think part of what may come about is a reverse action where people who are at risk may be advised to stay in and take precautions, while people who want to go to work are adivsed to go to work and take precatutions. What’s the difference in Texas is that we don’t have mass transit like New York does or San Francisco or some of the other places that are affected. Although some of those don’t like Seattle doesn’t have that mass transit. We don’t have those things here because we’re not densely populated. There is not much intermingling as you would get in London, Hong Kong, Singapore, or Beijing.

 

BBC: Do you see any evidence of this kind of thing is already happening or is this a fair of China kind of xenophobia in a way?

 

TN: I think there’s truth on both sides. It’s taking awhile to figure it out.

 

BBC: Should governments be buying stakes in companies whether that be in Europe, US, or whatever to make them American, or French, British or whatever?

 

TN: It depends on the company. If you look back in the Piraeus supporting Greece or the hydroelectric company in Portugal, Europoean governments were happy to sell those that 10 years ago. Was that the right thing to do? I’m not sure. But they’re quite happy to sell at that time. But now that the nationalistic environment has changed, I think European countries are being a bit more protectionists. So should Chinese capital be allowed to come in to buy European companies, it depends on how strategic those companies are to Europe’s economy and to Europe’s stake. If they are deemed strategically important, then they should be protected. If not they are not, then they shouldn’t be allowed to come in and buy.

 

BBC: Do you think this is the moment where 3D printing will enter the public conciousness and end up with people buying their own printers?

 

TN: It’s possible. I think it’s probably so early. But I think what’s interesting about this is the distributed nature of this. You can do small production run, it’s distributed, so you can make exactly what you want. The concern I have is affordability. The people with 3D printers, so if they have the funds, do it.

 

BBC: How is the state being affected by this plunge in oil?

 

TN: That’s pretty terrible. Houston is one fo the global centers for energy and a lot of the leading gas firms here are laying people off. It’s pretty terrible the way it’s affecting Texas.

 

BBC: You still work in the office. I’m broadcasting from my bedroom. Do you think we could see a change in a way people do work? Companies might decide they don’t need much office space because people can work from home?

 

TN: No. I think it’s nice to talk about this. I don’t think people are going to do less leisure travel. I don’t think companies are gonna have their staff travel less or people are gonna go to the office less.

 

We’re human beings. Once this is passed, it’s going to take some time for people to normalize. Things are going to go back because we like what we have. We like to take a holiday somewhere, we like to see the grandparents in another state. Things aren’t gonna change that much.

 

This economic downturn, it’s a government-mandated downturn. It’s not a market failure by anybody else. It’s government-mandated, so once the government mandates that we can go back to work and resume our life, we go back to it and we do what we do for the most part.

 

Our baseline expectation is that we’ll see deflation over the next year, and it’s already starting in China if you look at real estate prices and car prices because people don’t have as much money as they have a few months ago.

 

It’s a global phenomenon. We will see deflation in 2020. That is a fact. It’s a problematic fact. And it’s gonna force airline tickets, hotels, and other folks to lower their prices. Deflation isn’t just lowering prices, but it will force that, because people will have less money for a period of time.

 

BBC: What do you make about this concern about the role of Amazon? Amazon is not really having a good time. It’s stuck, closing almost at record level.

 

TN: I think, you know Amazon bought a company Pill Pack a few years ago. They already have health data on a lot of people. If there was a concern, why people didn’t raise it when we were in a different economic position?  I think many people are just happy earning on Amazon stock and subscribing to Prime at that time.

 

It’s concerning, but I don’t understand how this is different because it’s all health data on Americans. We all know that Amazon, Google, all these guys are going to monetize the data that they have on us. I’m not saying I love it and that I am perfectly at peace with it. It’s just strange that people wouldn’t be upset with their of Pill Pack a few years ago. But now they’re upset that Amazon is going to build organically facilities. And then there’s Bill Gates saying that he’s doing testing or planning to do the same stuff. Why are we comfortable with these corporate titans doing this stuff in one form when it’s as a foundation and not when it’s another form. I think it’s a little bit protective.