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In the latest episode of “The Week Ahead”, Tony Nash, Michael Kao, Albert Marko, and Ralph Schoellhammer discussed the current market trends and key themes in the world of finance. The discussion revolved around three main topics – “What kills the US dollar?”, “DXY to 112? Turbulence Incoming”, and “Inflation’s hold on Europe”.
Mike started the discussion by talking about the symposium on the Great Power Competition with China and the US Dollar’s primacy in an era of economic warfare. He emphasized that the US dollar’s status as the world’s reserve currency is at risk due to the rise of other currencies such as the Chinese Yuan. Mike further elaborated on the factors that could potentially kill the US dollar, such as a shift towards a new reserve currency or the decline of the US economy.
Moving on to the next topic, Albert spoke about the DXY, which he expects to reach 112 in the near future. He explained that this is due to the strengthening of the US economy, coupled with rising interest rates and the anticipation of the Fed’s monetary tightening. However, he also cautioned that the markets are likely to experience turbulence due to the uncertainties surrounding the central bank policy and the geopolitical risks.
Ralph then focused on the impact of inflation on Europe. He pointed out that inflation in Europe has been rising at an alarming rate, with Austria’s inflation rate being 0.9% m/m and 11.2% on year. Ralph also tweeted about the rapid increase in bankruptcies, and how this could lead to a domino effect on the European economy. He predicted that the European Central Bank’s (ECB) decision to tighten monetary policy would lead to further economic challenges, especially in Q2 of this year.
Key themes:
1. What kills the US dollar?
2. DXY to 112? Turbulence Incoming
3. Inflation’s hold on Europe
This is the 54th episode of The Week Ahead, where experts talk about the week that just happened and what will most likely happen in the coming week.
Follow The Week Ahead panel on Twitter:
Tony: https://twitter.com/TonyNashNerd
Michael: https://twitter.com/UrbanKaoboy
Albert: https://twitter.com/amlivemon
Ralph: https://twitter.com/Raphfel
Transcript
Tony
Hi, everyone, and welcome to the Week Ahead. I’m Tony Nash and today we’re joined by Michael Kao. Michael is @urbankaoboy on Twitter. He’s an ex-hedge fund manager and now he’s a private investor. We’re also joined by Albert Marko, who you’re well familiar with, and Ralph Schoellhammer, who is at Webster University in Vienna and he’s a political economics expert.
Tony
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So guys, thank you for joining us. We have a few key themes this week. First, Michael has written quite a bit about the dollar and about the kind of economic warfare happening now between the US. And China. So we’re going to take the other side of his typical argument and look at what kills the US dollar. We’re going to talk to Albert about dollar strength. He made a statement about the dollar going to 112 with some turbulence. So we’re going to dig into that. And then Ralph is going to talk us through inflation’s hold on Europe. So, should be a really broad macro conversation for us today, which I’m really looking forward to. Mike, you did recently attend this symposium on the Great Power competition with China, I think it was at West Point. And you spoke about US dollar primacy and an area of economic warfare, which must have been great. I missed my invite, but it must have been a great discussion and I think we’re all pretty jealous. I assume that much of the presumption or fears about the Chinese Yan, right.
Is that kind of what the basis was of this?
Michael
Yeah, I think generally when people are talking about threats to the US dollar system right. The most glaring contender is the Chinese Yuan, given all the scaffolding that they’re setting up with 60 plus odd bilateral swaps around the world and one belt, one road and all this stuff. Right. But anyways, if you want I can go. First of all, I love the fact that you’re forcing me to steal, man, the counter argument against my own thesis. Good. Which is great. Yes.
Tony
You’ve talked about the US dollar wrecking ball. Right. And you’ve really talked a lot about how the dollar has really kind of hurt some emerging markets. So I do have a chart of USD CNY, and we’ve seen the volatility of the CNY over the past really five years, ten years. And you know, part of my concern about the CNY is the PBOC.
And you know, we can talk about that in detail, but I’d really like to hear, what do you think? If the dollar was displaced, how would that happen? And we could spend days talking about this, but I guess in a summary conversation, how would that happen and what would be a potential other store of value that would be accepted globally?
Michael
Okay, so I was going to answer this question on different time scales, right? There’s short term and there’s longer term, but I believe where you’re going with this is a longer term time scale. Like what ultimately displaces the dollar as the global reserve currency. Right.
Tony
We can talk different timescales. I actually think that’s very interesting.
Michael
Right, well, look, let me dispense with the easy part first, which is the shorter time scale. I’ve been saying for a while now that I don’t necessarily think that we’ve seen the cyclical top in the US dollar in the short term just because I don’t think any of the competing regional blocks can outhawk the Fed. Or conversely, I don’t think the Fed is going to be in a position where it’s going to outdove the rest of the world either. Right. So either of those scenarios tell me that I think the US dollar is probably going to resurge. And so obviously the counter to that, what would have to happen for that not to happen? Well, I think that the US economy would have to suddenly take a turn for the worst and be in a much worse spot than the rest of the world. And the rest of the world would basically be able to become a much more hawkish visa vis the Fed. I see the exact opposite playing out in the short term. Okay, so now longer term and this is basically the topic of my paper, right? So I think the premise of my paper is that this notion that Breton Woods was basically this top down construct that it foisted a Trojan horse mechanism on the world where, hey, everybody, come use the US dollar because we’re going to be convertible to gold.
Michael
And then all of a sudden in 1971, nixon shocks the world and takes that gold tether away. But it’s too late. Everybody is stuck using a dollar. I call bullshit on that thesis because if you look at the Euro dollar, the rise of the Euro dollar banking system, it started happening probably 15 years before that.
Tony
And he was actually very popular when he did that.
Michael
Right? Yeah, well, it’s started happening by the way. It started happening the real catalyst to it first it was the failure of the tripartite agreement after World War II, which tried to stabilize the frank and the pound and the dollar exchange rates. But then in 1957, when Britain basically in a domestic flight against inflation, surprise, surprise, they they basically instituted capital controls. So there was a there was a tremendous global need for a liquid reserve alternative. And so the world actors on the world stage organically flocked to the US. Dollar. So the premise of my paper delves into what are if trust in the dollar already went well beyond its gold backing back then, right? What lent that trust? And so our paper posits that it rests upon national power. It’s a bedrock of national power. And I focus on three economic pillars of national power geography, which informs everything. But then geography also informs a country’s access to its natural resources and its industrial capacity. So in our paper, we talk about how, look, the US. It’s well known that the US. Is very, very naturally bowed with geographic assets that are really unparalleled in many ways.
Michael
And China is short a lot of those assets. However, because we have a federalist capitalist system, china is using essentially economic warfare to target that as a vulnerability, right? So they have unfairly competed and stolen IP in the world of semiconductors. Right. They’re trying very hard to replicate Taiwan success with TSMC. Fortunately the US. Controls critical choke points in that industry still. But yet, in that area at least, the US. Is finally starting to come around and make some very specific targeted export controls as well as changes to its industrial policy. The point here is that in that area alone, the US. Is starting to recognize the importance of reshoring and defending our flank from an industrial policy perspective. But when you compare and contrast that to oil and gas, which is the other critical supply chain where the US. Is currently the leading oil supplier in the world, and we are naturally long that natural resource, but because of blind devotion to ESG adoption and this erroneous assumption that an energy transition is going to follow Moore’s Law dynamic when it won’t right. Is going to leave us in a very dangerous lurch. I point out that there’s a real inconsistency there where we’re kind of shooting ourselves in our own foot when it comes to energy policy.
Michael
To answer your question, what has to happen for the US. To really lose its status? I started thinking. I said, well, number one, okay. Oh, the other thing is much ado has been made of the US. Weaponization and the criminal west seizure of Russian reserve assets and whatnot. Okay, well, look, I also point out in my paper that, yes, that should be a shot across the bow for US. Policymakers because, like the situation in the 1950s, right, it certainly creates an incentive for our adversaries to look for an alternative. But what are the alternatives? Because if you look at the eurozone, the yen, the pound. The euro is, frankly, the most successful challenger to the dollar to date. And yet, since its inception in 1999, us share of FX reserves has stayed constant 60%. It’s the euro that’s actually lost share. Now, the Chinese yuan. Here’s the problem. What has to happen for the yuan to supplant? The US number one, china would have to prove that it will be a better benefactor and more trustworthy sort of steward of the global commons than the US. I don’t see that happening in almost any circumstance.
Tony
So let me ask you just in that what allies does China have? Like, if China were to say, okay, boys, we’re going to war. Line up and let’s form a coalition, who would China’s allies be?
Tony
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Michael
Well, that’s that’s a really good question, because right now right now well, yeah, those those are the those are the two, right? And perhaps, perhaps Iran. Right? But, like, Russia is interesting because China’s relationship with Russia over decades and centuries and even centuries, certainly, right. Has been kind of a storied one. Right. I wouldn’t say that this dragon bear romance is necessarily that chummy, because, look, China is really happy that it’s getting big discounts to Russian euros, right. And that’s directly countered to Russia’s interest, I think this whole notion that right now they share a common interest in wanting to counter the US’s. Hegemony, but that is a very fragile bromance, to say the least. The other thing I was going to say is that the other thing that would have to happen for the US. To see dominance, I think, would be that the US. Willingly essentially becomes a vassal state to China and allows China to roll over. Basically, our interest in the Indopacific, that the US. Allows China to take over Taiwan and we just roll over and do nothing. I guess in a parallel universe, that could happen. I’m not seeing that happening.
Michael
I think that China’s significance alone, not just as an unthinkable aircraft carrier, potentially for China if seized, given its geostrategic position in the first island chain, but obviously Taiwan semiconductor alone is of critical significance.
Tony
Just to take the other side of that for a minute, you know, let’s also be very aware that, you know, the wars that the US. Has lost over the last 80 years have really been to China in Korea, to China in Vietnam. Right.
Albert
We didn’t lose those wars, Tony. Our military objectives were all met. We’re confusing the political opponent.
Tony
We lost those two wars. I mean, we had to negotiate the settlement, and the US lost those two wars. So the only people the US has really lost to over the last, you know, hundred years is the Chinese. And so, you know, I do sit with you and with Albert in terms of if things were to happen, you know, with the US prevail, I actually think they would I don’t think it would be a cakewalk, and I do think there are some scars there in Asia. Right.
Michael
I think you have to compare and contrast that to where the US. Was in World War II, like when Britain lost its hegemony, where the pound lost its hegemony is because the UK was in a very tough spot. It had essentially bankrupted itself after World War II and was completely beholden to the US. The US’s lend Lease program. Right. So the US essentially had all the cards. Now, here the two wars that you talk about. I agree with Albert. It’s not even close to the same thing. We withdrew, and it wasn’t a great withdrawal, but it wasn’t a situation where we had essentially bankrupted ourselves and we were completely dependent on the largess of somebody else. Right.
Albert
If I can interject Michael, we can.
Michael
Go on and on.
Albert
About to go back to Tony’s question, what would come next? I mean, theoretically, the United States would have to have some sort of societal breakdown. Our rule of law would have to break down, and we’d have to become a nonintervationalist nation. We wouldn’t be able to protect our interests globally at that point. Something could come along to dethrone the dollar. But even if we’re at that point, I think the next logical step of removing the dollar as a reserve currency would be an Anglosphere plus Japan digital currency, where regional players would secure their own interests in those regions and have a collective I mean, this is just theoretical and way out of our lifetimes, in my opinion. But I think it would be a step down to that first where our allies and the US. Would jointly have a currency block yeah. Running through all the scenarios, in my opinion, that would be the only thing that would take the dollar. That would be I mean, the dollar would still be a part of it, but it wouldn’t be the main part of it. It would be the sole unit polar one. But you could have an angle sphere plus Japan digital currency for just for trade settlement.
Michael
Now, you know what I think the highest probability sort of gray rhino would be out of all this. It would be that if China made overtures toward Taiwan and Taiwan willingly just say, Here, take me. Because I think last year, or maybe two years ago, I wrote a thread about this, how some of the older guard in Taiwan and you know this, Tony some of the older guards that are with the KMT, they really don’t like the DPP because the DPP wants to get away from the Chinese ancestral roots of the Taiwanese. So the old God doesn’t like that. And so what if China says, hey, we’re going to take you? And then what if Taiwan says, Here, take me to me? That is much more worrisome than an amphibious takeover of Taiwan, which I see is very low probability.
Albert
Yeah, exactly.
Tony
Yeah. I think that is the most likely scenario of the scenarios of China taking over Taiwan. Right. It’s a mutual but with the DPP in power and with DPP as a sizable political party there, it’s a north versus south issue for people don’t really understand. KMT is largely North, DPP is largely south, and DPP comes to power when their policies really align with people in the north from time to time. Right. And so that’s how the DPP gets into power. The DPP is much more nationalistic and independent than the KMT.
Albert
That would be pretty risky, I mean, for the United States if it didn’t intervene in some which way, because then you could talk about North Korea and South Korea unification and siding with the Chinese at some point, which is not out of the realm of possibility, in my opinion.
Tony
Right, okay. Can we agree? Is it eliminated for the next probably 2030 years?
Albert
Yes.
Tony
Do you think it’s eliminated, Michael?
Michael
I think so. I think so as well. I was on a different podcast earlier this week, and I keep alluding to this interesting podcast that Andrew Hunt out of the UK did, where he did analysis on 36 Chinese private banks. And his assessment is that there’s four there’s a $4 trillion liability gap that’s not captured in the in the balance of payments. China is much china is much, much more levered than the US.
Tony
Absolutely.
Michael
But but it’s but it’s hidden. It’s just pin behind the Opacity curtain. That’s exactly right.
Tony
Doesn’t look good. So if we if we push China out, say, 30, 40 years before they’re a contender, and they may not even be they may be too old by that time, because there really isn’t immigration to China right. Except for from North Korea and maybe a couple of other places. So we pushed China out. What about Europe? Will we have European decide for morale in 30 years? Will we have the demographic age of people who can actually work and contribute to the economy?
Albert
They don’t have a functioning military and solely reliant. Their banks are solely reliant on the US. At the moment. They’re insolvent, in my opinion.
Tony
So, yeah, that’s a good point. If you can’t defend yourself and if the demographics continue to get worse, they won’t have people that will defend the area. So if you can’t defend yourself, you can’t have a functional currency. Right.
Ralph
I guess that was a little bit an unintended consequence. And this is something Europeans hate to admit, but of course a lot of EU policy was kind of this dirty secret. The United States were constraining China and Russia, and the Europeans were trying to make deals with them. If you think back them in the entire Russian pipeline network to Europe, and I think with all of it also mentioned, kind of psychological effect was a certain form of infantilization. Right. This idea that military conflicts simply are a thing of the past in many ways, I see the biggest security risk for the United States. I don’t want to over dramatize it, but I see it almost more in Europe than in China or elsewhere, but not because of an actual military conflict, but the commitments to Europe for cultural and historical reasons that this is going to drag down American capacities. This is going to work out. But the European idea and we hear it again europe will now rearment the Titan vendors. They talked about the Germany. If you look at what’s actually happening, it’s just not happening because they know that the populations don’t really have an interest in that.
Tony
Yeah. Okay, so it’s not CNY. It’s not Euro. What else is a viable it’s not Japan.
Michael
Right.
Albert
This is what’s making me allude to the fact that I think that anglosphered plus Japan digital currency would be the only logical step. Next logical step. Just in my opinion. I just can’t see anything else out there. The Swiss francs is not big enough. The pound is not a relic of what it was without any actual alternatives that we can discuss. What’s out there? Nothing’s out there.
Michael
And by the way, all these, like, newfangled ideas of having some sort of pan global currency backed by commodities. But you know what? John made her. Cain’s backed the Bancorp during the battle for Bretton Woods. Harry Dexter White backed the unit. The SDR was tried and failed. The US. Dollar. Is that pan global currency?
Tony
Sure.
Albert
Yeah, it is. I keep arguing with these gold back currency people, and I’m like, what would stop me being the dictator of Albania, of spray paying some lead and saying, there’s my gold? But you can’t really look at it. You know what I mean? No nation gives you a transparent audit. So how could you even have a currency based on such a thing? It’s just silly to me, in my opinion.
Tony
Ralph, jump in.
Michael
Yeah.
Ralph
And I think one of the things this is what Mike did so well, I think in his paper that he presented at Westbourne, I think we have to look at kind of the structural conditions. And in many ways the United States has the occasional incompetent administration, but their structural is still more sound than any potential competitor, definitely more than Europe. And I think if one takes a closer look, they’re all structurally, at the moment, more sound than China. And in the case of a real conflict, I mean, these things really, really matter. And besides the rhetoric in America, we.
Tony
Expect our politicians to be dumb, and we just work around that.
Albert
Yeah, I mean, in a perfect world, the Pentagon would be working with the treasury to weaponize the dollar. I guess in the adversaries, I mean, that’s something the Pentagon has never really understood or really looked at, is like, you can place your adversaries in a certain position, being short commodities, short food, and you can really strain bingo, bingo.
Michael
By the way, that is the premise of our paper. Our paper is literally saying is literally saying that rather than rely on overt sanctions, that basically cause everybody to look for alternatives to the dollar. We’re at this really interesting macroeconomic window where a strong dollar policy inflicts asymmetric pain in our largest geopolitical adversary.
Albert
Yeah, it’s an absolute logical thing to do. And on top of that, not only can you use the dollar, but you can now use derivatives of the dollars, specifically grains. I mean, there’s only five companies in America that control the world’s grain. You can call them up and cause problems for the world or for China, for Russia, for any nation you really want to target if you really want to get down to that level.
Michael
And by the way, it also kills two birds with 1 st, right. Because it basically export our inflation problem because we are in a domestic fight against inflation.
Tony
Okay, that’s a great idea. Let’s do that. Great. Okay, so let’s just call this new currency TBD. How about that? Because I’m not really sure what to put in there. There are a lot of cheerleaders, as you guys have pointed out, trying to push other things forward, but I just don’t see the case for them. And outside of just suspending reality, I just don’t see the case for something else right now. I don’t say that as an American. I like, I’m not necessarily trying to kind of represent for the dollar. I just don’t see the viability of other options right now.
Michael
Yep.
Albert
I would be I would be the first one waving the red flags if there was an actual alternative out there.
Michael
Oh, there was one thing I was going to riff on. Albert, what what you were saying, or Tony, what you were saying in terms of, you know, our politicians being idiots and whatnot. So so my my view on that is that it’s because of the geographic endowments that the US. Has that’s enabled our federalist free market system to arrive and to survive. Because if you think about it, right, if you’re China or Russia with unbelievably shitty geography, it takes an autocratic system to try to hold that bucket of bolts together. To paraphrase Han Solo, why would you.
Tony
Want to own all that land if you’re Russia, why do you want to own the east? I don’t get it. It’s just hard to keep it all together. So that’s a great point, Mike. Okay, great. Hey, let’s go from talking to the dollar to talking about the dollar. Okay. You put a Tweet up earlier this week saying when the dollar started breaking upward, you talked about expecting Dxy to hit 112.
So it’s kind of we’re, we’re heading back to where we were last year, I guess. So can you walk us through that reasoning? And you talked about turbulence. Incoming. Can you, can you talk about what that turbulence is?
Albert
Inflation. It’s back again. And as much as the Fed doesn’t want to admit a mistake, they’ve absolutely created policies of mistakes and allowed inflation to rear its ugly head. I don’t want to leave it all on, all on the Fed. A lot of it has to do with Yellen’s actions and what she’s done with the dollar and then bringing it up and bringing it down. I mean, this goes to Michael’s point of the weaponization of the dollar is, you know, Yellen takes the TGA and she’s in charge of dollar policy. She can take the dollar up. And what she did, and it drove all the liquidity in Europe, back in Asia, back into the United States, which kept our markets propped up.
Tony
For people who haven’t watched this word, can you talk about what the TGA is?
Albert
And then if the treasury general account, she can use it in many ways, but basically it’s injecting liquidity into the economy.
Tony
And how much at what scale has she done over the past, say, nine months or something?
Albert
Prior to the midterms, she was doing about 160,000,000,000 a month.
Michael
Wow.
Tony
Okay, that’s a lot. When you say injecting, where was that going?
Albert
Well, I don’t know exactly where it was going. That’s not really clear. But she was absolutely using it and I’m sure it’s been dispersed throughout the economy and whatever sectors that she needed to send it out to to rally the markets. And she did a good job. I mean, the markets have stayed up here over 4000 for quite a long time and we don’t really deserve to be here at the moment. The problem that we’re having here now is as you rally the markets now, commodities start to rally. I mean, Europe was in a zombie status. China has been in lockdown for the most part. Yeah, I mean, they’re doing this, but as they reopen, inevitably inflation is going to come back. Wage inflation has been persistent. That’s not going to wave. I mean, I mean, honestly, the workers probably deserve wage inflation after 40 years of getting nothing. So, you know, I can’t really blame them on that aspect. But again, we’re, we’re sitting here with a hot PC PCE number today. You know, it looks like CPI is probably going to be sticky again next, next time around. And the Fed is going to be talking about 50 basis points when they, you know, previously the markets were calculating that we’re going to do a pause or a pivot in a later in the year.
Tony
That’s just not happening. A couple of meetings.
Michael
No. So I mean, this honestly feels like Q one of 22 to me. The whole setup right now feels like Q one of 22.
Albert
We’re right back where we started, Michael. Right back where we started. Because of Fed policies, they’ve done nothing to correct the situation with inflation.
Tony
Okay, so what’s going to happen to drive the dollar up? Yellen stops spending out of the TGA or doesn’t spend as much, or Fed policy, all the above. What happens to contribute to that?
Albert
I think it’s going to be a combination of Fed policy and then the ECB, the Europeans being hawkish themselves. But I think that we’re looking at 75 basis points, probably going up to five and 5.75 on the Fed funds rate by the end of the year, maybe even six. I don’t think they can go over that. But I mean, that alone should take the dollar up to 112. I’m sure they can, but taking the dollar over 115 to 120, you’re going to start causing massive problems. Rest of the world, you just start breaking things.
Michael
Can I ask Ralph a question?
Tony
Absolutely, sure.
Michael
So Ralph, I’m curious. I agree with Albert’s thesis. When I look at the inflation prints in Europe and in the UK, still so high, that gives me a little bit of pause right again on betting on the dollar continuing to rise, except when you look at the state of the economy. And so I’m curious how you see that, because I believe the last UK GDP print was very close to skirting the zero bound. So how much more can the BoE or the ECB really do?
Tony
Sorry, before we do that, let’s move into rough section, which is inflation hold on Europe, right? Which is exactly what you’re talking about. And so we saw Austrian CPI committed 11.2% year on year. When was the last time that happened, Ralph? I mean, what we’ve seen over the past few months maybe, I don’t know, 40 years ago or something.
Ralph
Oh, yeah, before I was born. And so this has been significantly long time ago. The problem is, despite what the ECB does for European politicians, it’s always the 1930s. So the answer, the economic problem is that it must be a demand side problem. So every time the ECB hikes rates, the government comes in with fiscal expansion. And Australia is the best example for this. Pretty much everything that would have been caused by higher rates has been softened by government spending and now expected government spending to happen in the future, which is they very slowly or not at all changed their behavior. So the, the idea to. Kind of, you know, pull money out of the system due to high interest rates is not working as as expected. I mean, we we saw it in Germany. It was when we met the last time, right? They said that there was actually slow growth in Germany in Q four 2022. Then they said that was a slight contraction of 0.2. Today we got the second revision. That actually it’s a contraction of 0.4. And that’s mostly because there was government spending. Otherwise it would have been significantly worse.
Ralph
And I think this is really the problem we are running into. So every time the ECB tries to high grade, governments will jump in with their own fiscal policies, trying to soften it. And what, of course, happens as a consequence, europe is losing its industrial base. So supply side politics, which would be necessary, they become more and more difficult. I mean, Tracy on the last weekend did a great job in kind of just listing all the aluminum smelters and all the heavy industry that has been closed down. We heard today that Germany’s chemical giant BASF is shrinking operations all over Europe. So at some point, you cannot just turn this back on again. So I’m very worried about the structural health of Europe, or even if we look at R and D and spending, right out of the top ten R and D spenders, there is one European company, which is Volkswagen, but all the other companies, most of them are American and some of them are Asian. But Europe is losing kind of connection to all of this just as a challenge to you guys. I mean, name one groundbreaking innovation or one groundbreaking area, and let’s say the high tech area where Europe or European nation was on the forefront in the last 20 years.
Ralph
Nothing comes to my mind.
Michael
Well, ASM Lithography.
Albert
Ralph brings up a great point, and one I usually harp on a lot is whenever you have political policies intermixing with economic policies, you have a problem because politicians want to get elected and their terms are a lot shorter than economic policies need. You know what I mean? That’s just the reality of it. I mean, the Germans, they say they’re tightening things up, but then they give 80% of their population, 80% of their paycheck to stay home. That’s not going to help.
Michael
And by the way, all this, right, all the slowdown in BASF and all that that you’re talking about, Ralph, this is with an extremely benign weather backdrop this year that enabled Ttf and NBP to collapse.
Tony
So huge benefit.
Ralph
I think there are two other very important issues that particular European politicians don’t get and that you and Mike had also talked a lot about, which is there is this weird idea that if Europeans and Americans stop drilling and supplying the world with fossil fuels, that somehow the prices will go down. But exactly the opposite is going to happen because we’re still going to consume it, we just no longer produce it, which is great for all the non European and non American producers. And the second part, what I think Europeans still don’t understand, is there is still this idea that the world will go back to as it was, let’s say ten years ago, like very early on. But even if there were, new should stop. Right? It’s obvious that there is a new kind of industrial policy happening that French showing that reassuring is going to happen and that will push upwards pressure on prices. And Europeans, at some point, they’re going to feel this. I mean, we see. With Germany, Europe is increasingly becoming a continent that has to import more and more, but everything we can export is becoming less and less.
Ralph
That is not a sustainable model unless we say we just become the world’s biggest retirement home tourist destination. But other than that, it’s really problematic.
Albert
That’s interesting because I remember Belina and I were talking about what Europe should do and it was definitely bring black your supply chains to Eastern Europe, north Africa, closer to home, something Europe can drive in investments and actually hold it close to close to their hand there. But they just have not done anything. They want to rely back on the old guard of let’s go to China and grab their market share. Meanwhile, Africa is sitting right there. That’s going to have a bigger population in the next 25 years than China and Younger and Hungary for innovation and products, but they haven’t capitalized on that.
Ralph
It’s like an inversion of the 19th century, right, when there was once a time where Europeans looked at the map and so everything is a potential part of the empire, not like they barely looked at the map at all. And I think it shows in their economic policies.
Tony
Yeah. Just going back over to what you were saying about the short termism of governments, and we see this, at least in the west, the bureaucracy is supposed to be the part of government that helps the office holders to see the longer term. But the quality of our bureaucracy has deteriorated so much over the last 2030 years that they just don’t care.
Albert
They don’t care. I put a lot of blame on social media right now. I mean, all these politicians get on social media and do catch phrases and this and that, and everything is in the real and now and immediate and so on and so forth, six months down the road. They don’t care. Simply, they don’t care.
Tony
Yeah. Ralph, one of the things that you tweeted out earlier, and I know Michael found this really interesting, was the bankruptcies in Europe. This was a Eurostat chart that came out looking at the rate of acceleration of bankruptcies across industries. Can you talk to us about that a little bit?
Ralph
Yeah, I mean, there’s a couple of factors not work. I mean, one is that a lot of these companies it’s kind of what happened in the financial sector during the Great Recession where you had these zombie banks. I think a lot of this is now also happening in the real economy and the industrial economy where many companies have been propped up during Cobit, they have been propped up by very low interest rates and this is now coming to an end. I can only speak for Austria, but there are many companies, of course, also have loans, some of them with not fixed interest rates. And of course they are squeezed now, so they have huge problems in refinancing themselves. And I think this is just the beginning. I don’t share the optimist. I’m kind of a little bit Albert here. Everybody who says that either inflation is going to be over, there’s no trustworthy indicator for me that inflation is ending anytime soon. And the second one is this idea and you mentioned this also, Tony, one of your tweets. I think the IMF forecast for growth in the Eurozone are too optimistic. I think that factors that are not yet calculated.
Ralph
Absolutely. And of course the big elephant in the room comes and go to mike, did you mention, is of course, energy. Like, everybody is like, oh, the energy crisis is over. But that’s only because elasticities in the energy sector are very low. So yes, if there is a lot available right now, it immediately affects the price. But there is no guarantee that it’s going to stay like this in the medium and long term. And if I look at European policy, I think that it’s going to get worse before it gets better seems more likely. And you see gradually signals like this coming from the International Energy Agency and from Goldman Sachs. So all of a sudden the optimists of two months ago say, well, it might be more problematic than we anticipated it to be. And one part of the story is something that also Mike mentioned. At some point, I think we have to say this also openly is this obsession with ESG and an energy transition that makes the promise that by 2030, 2035 the European economy is going to run entirely on renewables, which is an unrealistic. And we want to be more outspoken about it, which I think is a ludicrous proposal that cannot be fulfilled.
Michael
I call that the grativerse.
Tony
Yeah, we’ll all be driving.
Ralph
As a quick last point if we want to put real numbers on it. I mean, the German government alone, the Europeans spent almost a trillion dollars on energy last year. The Germans spent about $465,000,000,000 only on energy and all it got them was the declining economy by 0.4% in the first quarter. So what is their strategy if they want to do this again next year and we see it in the spread? At some point markets are going to look at Germany and say, listen, your reputation has been great for the last 40 years, but can you really still.
Tony
Deliver what what you germany’s got a lot of they’ve got a lot of capacity for fiscal spending. I just think they haven’t opened up as much as they need to yet. I mean, I think that’s part of.
Albert
Their they can’t they go into a doom loop of inflation.
Michael
What happens when Mother Nature doesn’t cooperate next time around?
Albert
Right?
Ralph
I think all of you are right. Tony’s right. I think there is still wiggle room. But what are they doing with the money? Right? Instead of making capital investment and saying, okay, we solve the problem, to do something they pretty much put it all into welfare checks, energy subsidies, but exactly. Encourage people to spend more and more products that are less and less available. So what’s the only thing you get? It’s inflation. I don’t know what the politicians are looking at.
Tony
Speaking of that, let’s talk about everyone’s favorite central banker, Madam Lagarde, and the choice that she has at the next meeting. She said earlier this week that they’re likely to raise by 50 basis points at the next meeting.
So what we’ve seen, the last two rate hikes were 50. We saw a couple of 75s in September and October. So there had been a hope like there was in the US. That things would not loosen or ease, but at least slow down on the rate hiking front in Europe. But with the pace of inflation, it almost seems like they don’t really have a choice, right?
Ralph
I would agree. Yeah, I think they don’t have a choice.
Tony
Okay, well, that’s it.
Michael
Well, I think they’re going to try. But what I really think reading between the lines of all the tough talk with all the world central bankers what I think everybody if you look through to their actions so far, I think everybody has been holding their breath, hoping that the Fed is going to engineer a global recession so that they don’t need to be the ones to have to administer the medicine. But the problem is, and I alluded to this in a thread a couple of months ago called geopolitical mosh pits, right? We’re in this every man for himself world where everybody’s got a domestic inflation problem. And so what the Fed does needs to sorry, the United States interests need to take precedence over necessarily worrying about other central banking interests and vice versa. But the problem is that right now the US economy is still humming along whereas the rest of the world’s economies are faltering pretty badly already. Your guess is as good as mine. I just think that Lagarde’s job is really tough because there’s no panned global bond market. Really. So she’s got this ridiculous Tpi mechanism where she’s trying to hold together sovereign spreads and the ECB’s sort of bond purchases as a percentage of GDP already at like 60% compared to the Fed at like 34% compared to japan at 120%.
Tony
Right.
Albert
I’m glad you mentioned that Michael, about nation states interest because it’s one of the things I harp on, especially when I talk to younger people and they ask me about geopolitics. The first thing you have to look at is a nation’s self interest and there’s no better time than right now to prove that example and you’re seeing it firsthand. All these nations, they have to have their own self interest that are before anything else at the moment.
Tony
And that’s normal, right?
Michael
That’s healthy.
Tony
I think that it’s so silly when we have to consider other people. Of course there’s a time for that, but it’s not right now. You have to really look after your own country, whether it’s India, Germany, US, China, whatever, it doesn’t matter. You have to look after your country first. Rough.
Ralph
But that’s the thing. Exactly what Albert just said and this I think makes it an even bigger ticking time bomb for Europe. You have notice absurd situation that politicians of member states of the EU, they want to continue to do populist economic policies while when they fail they can put blame on the Europe, on the ECB. So technically what probably should do before the next and out sort of a rate hike is to go out and say listen, cannot clean up the mess that you guys make in the domestic economic policies. And of course that’s not something that she’s probably going to say, but that’s really the dilemma. Data us almost have an advantage with the somewhat something that Albert is criticizing all the time, justifiably so with the kind of the chummy relationship between the Fed and the government. But at least it all happens within one state, right? It all happens within one country. And also going back to what Mike said about the federal structure. But in Europe, it’s kind of the worst of two worlds because the ECB tries to fine tune the economic problems via interest rates and the politicians that just go out and say, oh, I know you have to pay more on your loan, but here is an extra check for you.
Ralph
So you could almost say it’s like the nation states are mocking in the sense what DCP is trying to do.
Tony
Yeah, Mike, you said that Lagarde has a very hard job. I actually think it’s very hard because it’s very easy. There really isn’t a lot of choice there. It’s hard having the wherewithal I guess to go through with these things that are probably going to end up being.
Michael
Pretty painful, by the way, to steal man the other side a little bit. Okay, there are some that say that okay, well the Fed, because we have all these bilateral currency swaps, the Fed is going to take care of all its friends. Right. And so we actually saw a little bit about that. I wrote a thread last year about how, when the Yen, for instance, started its first approach towards 145 ish 140 ish I got some talk from a very well placed source that basically the Fed, in conjunction with the DOJ was allowing the BOJ to essentially buy us ten years to basically kind of paint a picture to stymie the depreciation and the yen. Okay? So then we saw this big risk rally. Remember when that happened and the yen corrected back? Well, then I get a call from the same source saying, you know what my people are telling me? My people at the Fed are telling me that, you know what? They can’t hold the line anymore. They’re going to basically stop. That’s when you saw the yen go to 150. Right now we’re in this sort of everybody calls it the transitory boldilocks, where things kind of came down and you’ve got Yellen’s games with the TGA, et cetera.
Michael
But I really think, and I think I agree with everybody on on this call, that all hell is going to break loose again when the dollar starts approaching 110 again. And this time maybe there won’t be that sort of bilateral help.
Albert
Yeah, michael is absolutely right. I heard the same thing about the Fed and the BOJ on top of that.
Tony
I thought you were a source, Albert.
Albert
Right, because I talked to you about.
Ralph
It a couple of times.
Albert
But they do the same thing with the Aussies and New Zealand and Canada. They give them marching orders, say, hey, we’re going to paint a picture over here, so gives us room to do something over here, so on and so forth. But like I said, that’s the Anglosphere and plus Japan. That’s why one of the things that led me to believe is like, next thing for a currency would probably be them. But they already work together as it is, whether the market knows it or not, they talk and they work together. Yeah.
Ralph
I think it very often comes back to this very point that this is something that Michael’s and I said before it’s that, of course, what underwrites the dollar as the global reserve currency and the most powerful currency is because the United States have the most powerful economy. Whatever problems they have otherwise, their economy in many ways is still the most dynamic and the most innovative. And this is what I interfere about. The European situation is we can criticize politics, we can criticize the ECB, but I think we also have to criticize European industry itself. Because like in Germany with heavy industry, they never say anything. Right? They could get together and say this. You hear occasionally a voice there and occasionally a voice there, but there is no concerted actions by representatives of the industry to do something about it. And my suspicion is because they kind of made it comfortable for themselves because they know they get government subsidies, they might have to produce less, but I’d rather depend on the biggest monopoly there is. The state than on those pesky customers or those potentially unsecured international markets. But that’s a very short time perspective.
Ralph
I mean, this is not something it can do forever. And again, the only reason why Europe could do what it did was because they could rely on the United States to provide with the bluewater navy to everything else. They provided the framework in which Europe could do what it did. But as this framework is changing, because Albert would never talk to me again, I’m not going to move all multipolar because you would because I don’t agree with that idea either. But it’s definitely changing, I think. I think Americans are becoming more sensitive to listen, guys, you have been pre writing for 60 years. It’s time to do something yourself.
Tony
Yeah, go ahead, Mike.
Michael
So, Ralph, you touch upon another theme that we raised in our paper, which was, again, it goes back to geography, right. Because the US has had these geographical advantages. It’s allowed its military strategy to focus outward on force projection and develop that blue water navy. Right? So when you compare that and compare and contrast that to China, right, where you could argue that they’ve got greenwater superiority within the first island chain by virtue of 350 vessels versus our 270, but the gross tonnage is one third that of the US. Navy. They cannot force project. And so if you talk about real force projection and geopolitical power right. Again, to steal man the other side, what would cause the US. To see the T hegemony? Well, it would be that scenario where China somehow decides that, hey, you know what? We are going to subsidize global maritime security for the good of the global commons. Do you see China doing that? I sure don’t.
Albert
Not for all of us to century. And it takes a lot of money to build up a navy. And then you need combat experience. And then on top of that, any kind of conflict in Taiwan or the South China Seas shuts down their ports. China cannot afford to shut down their ports. I was going back and forth with Elbridge Colby about this. He’s a military guy, and I love the guy. Right. But when you have to look at the economic aspects of it concerning the dollar and China’s food insecurity problems and their economy in general, if they invaded Taiwan and shut down those ports and their economy collapsed, she would be dead in 30 days.
Michael
There’s a little issue of China having to import 80% to 90% of its crude, all of which pretty much come through the Strait of Malacca.
Tony
Yeah.
Albert
I mean, so but this is this is something that it’s really important for you to talk to the military and get that USD thing out there and talk about commodities and talk about the economic ramifications and say this is a significant deterrence for China to invade. This is a significant deterrence for any nation to really go after because there’s just no money around. The economies are really weak. So it’s a great thing that you’ve done.
Michael
Thank you. I hope you guys enjoy the paper. Yeah, sorry.
Tony
Just going back to what you said, Mike, about China not having the blue water navy, really, to protect trade and waterways. They have tried that with the Belt and Road. It’s been less than a decade, but it’s kind of been a failure since the start of it.
Michael
The thing with belt and road, right? If you think about what it is, they are expending tremendous amounts of national treasure to recreate what the US. Is naturally endowed with.
Tony
Right. Yeah. It’s very inefficient.
Michael
It’s very corrupt, and they’re failing at that.
Tony
I start with those. When I was trying to put in a tendering system for the Belt and Road transparency, I asked them, how much are you comfortable losing to corruption? 20%, 30%, 50%? People just shrug shoulders. Nobody wants to even look at those basic transparency issues, much less understand that that spending is incredibly wasteful just for some sort of desperately seeking some sort of relevance with third tier countries. Right. I mean, no offense, they’re great people and all that stuff, but they are not necessarily economic powerhouses, and they’re not necessarily strategically placed. So it’s a big problem, and corruption is a big problem in those places. So not only are they going to have to buy off Chinese industry to go in these places to build, they’re going to have to buy off the officials in those countries to get the infrastructure done. Okay, guys, let’s bring this back to Europe. Since Europe is kind of our last group. Ralph, I get the sad sense that when Mike talks about dollar resurgence and Albert talk about dollar resurgence and inflation is pushed on the rest of the world and these sorts of things, europe and European industries show this as well.
Tony
Europe isn’t really a growth engine, of course. Right. So is Europe the worst place of the regions in the world generally, when we see a dollar resurgence and inflation and kind of these coming headwinds? Probably not.
Ralph
I mean, I remember I asked all about this, I think almost a year ago, once on Twitter. I think that the ties between the US. And Europe are still so strong that I could imagine that the US. Would be willing to adapt their policies in a way to protect Europeans from the fallout that will find some ways to support them. Okay, I think that, again, maybe I’m putting too much hope in the US. Maybe this is wishful thinking on my part, but I think that these ties are still strong. I think this is the US. I think they still view Europe as part of the national interest. But spoke to be very clear, I’m glad of I mean, something that bothers me, really, is I think the best thing Europe could do would be to place itself as Athens to America’s wrong kind of place I can feel to the strongest player on the block. But don’t try to be as again, Albert, we’ve discussed it many times to participate in this fantasy of the new multipolar world where you will balance the US in a quasi agreement with India and China. This is all fantasy.
Ralph
None of this is real. When push comes to Sharp, I think the US are still the best bet for the Europeans. But to be kind of a psychological problem in Western Europe, I think this is another thing.
Tony
Of course.
Ralph
I think the Eastern Europeans, particularly Poland and others I think are much more willing to attach themselves or kind of align themselves with the US. I think Western Europe and it’s mostly cultural, psychological that they still wish to be kind of a counterweight potentially to the rude Americans and the alcohol.
Tony
We’re definitely rude. We’ll take that. Okay, guys, we’ve been an hour, so I appreciate all of the thought you put into today. For everyone watching, please don’t forget about the promo. The Friends of Tony for promo promo 1st 25 subscribers. Guys, I really appreciate your time. Time. Have a great weekend. Have a great weekend. Thank you very much.
Michael
Thank you for doing this.
Ralph
Thank you.
