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Transcript
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RAEd is just nailing it time after time! I don’t Laude him on every one, but I just have to throw it out there again from time to time. His preparation is prolific and his rapport with his guests is not only dynamic, but genteel as well. His confidence is growing and his interviews are polished. What a great RV resource he has become! One really interesting thing that jumped out on this one was the bit the guest pulled out of Bernanke’s book about having the Fed establishing a “fiscal account” for the MMT Medicine chest so that THEY rather than the Politicians could dole out some medicine/money from time to time to turn over to the Politicians with instructions to SPEND it—give it to the Citizens or build infrastructure, but just SPEND it. Very interesting approach (not that I like it) to MMT so that it is not totally open ended spending by the Politicians which can never be stopped, but rather simply “doled out from time to time”. That one thought could change how MMT is viewed (not that I like it). Great original point/idea that I haven’t heard anywhere else.
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CLI been talking about the inflation risk since May @themacrostrat
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DKIf yields go up..... bonds go down.... if yields go up...... (IF inflation goes up)....... stocks have to go down because yield of their corporate bonds go up.... they can or can not pay these higher yields of their before hugher and hugher debt to buy , which they took to buy their own stock... which caused their stock to go up...... both (stocks and bonds) go down....Armagedon. Not permitted. What then ? If yields keep going down..(or just hoover below zero).. stocks can go higher, bonds will go higher... everybody (CB and goverment and Wall Street) happy. Inflation will go up, but (local) taxes will be made higher ... so Joe Sixpack (the 99 %) can’t afford inflation... so prices of food can’t go up with inflation.....so we have happy “everybody” and struggling Joe..... that can go on for a few more years.... And thereafter.... who gives a f..k
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RHFirst 40 minutes Kevin got the past right. Then the gas tax. Click. Glad you're not Prime Minister. Or even close to Ottawa. Maybe if you could get away from our Queen's Park might be safer. But thanks, love you 416'er, take'er easy eh?
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CRCouple of comments: (1) Let’s have Kevin sit down with Alex Gurevich and discuss this. That would be the best point/counterpoint. (2) I’m less interested in the “could happen” and more in the “if it happened.” If inflation returned and the bond bubble started to burst, would/could the Fed raise rates to 2-3? Probably, for a time at least. 4-6% or higher? Unlikely to happen for so many reasons. If the long end sold off, what would be the policy response? Yield fixing (i.e a bond market Fed put)? Currency crisis?
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LPI would imagine he is right on inflation risk in mid/long term, but the TIPS play does seem like bad way for profiting from it. Treasury defines what the official rate of inflation is (for the TIPS), and they have all the incentives to downplay the number and/or change how it's measured if it goes above the 2% target. The inflation for services has been way above 2%, yet it is conveniently excluded from the official numbers.
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RMGovernments are now out of the closet as protectors of the status quo, whether the status quo is good for long term growth and a fair economy or not. Governments cannot tolerate healthy market downturns to clear out the dead wood (an essential feature of free markets). This ultimately, and I really can't say when because you have countervailing demographic currents (retirees don't spend as much as working people), this must to lead to inflation and shortages of what people want. Why, because, in reality, it is no different than central planning of the old USSR. Here, our government issues bonds to fund government spending. Now, the government (Fed) prints money to buy those bonds so as not to roil the markets. It's really circular. The government could just skip the bond part and have the Fed print money to directly pay for all government spending. It would be more efficient if government contractors just sent their invoices directly to the Fed. Might as well do away with taxes while you are at it. The private sector that is left will be totally dependent on government for its existence. Then we will have an overtly centrally planned government just like the old USSR. The goose that laid the golden egg, free markets, will be "kaput". That, unfortunately, is were we are headed unless the electorate wakes up to this unpleasant fact. We are behaving like the pig in the Three Little Pigs that built his house of straw. The wolf will have no trouble blowing it down.
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WAGovernment bond prices will continue coming down for the next 5 years to a ddecade. Government bond prices are a function of growth + inflation + credit risk. Right now credit risk is perceived to be zero for the US and advanced economies. That leaves us with inflation and growth. Growth will be anemic for at least a decade due to demographics, high level of debts in consumer, corporate and government sectors. So the million dollar question is inflation coming back? I am in the deflationary camp because there are these powerful secular economic trends that are very hard to reverse. Demographics. Millennials are saddled with debt and can't spend much and are delaying household formation due to the debt. This is deflationary. Retirement of Baby Boomers. This reduces the size of the workforce which reduces the size of economic growth. This is deflationary. Inequality where a large proportion of economic gains went to the top 0.1% leaving the rest with little income growth. No income growth, therefore, no spending growth therefore anemic growth. This is deflationary. Technology which makes things cheaper and produces over capacity. This is deflationary. Money Velocity has been coming down since the beginning of this century and continues. This is deflationary. Productivity growth has been slow to due to high indebtedness. This is deflationary. Population growth is turning negative for some advanced economies. The rate of population growth for the US is positive but has been decelerating. This is deflationary. More capital will be used to service the huge amount of debt instead of being deployed into creating more capital. This is deflationary. Europe and China is one cycle away from Japan and the US is maybe two more away. The Japanification of the major economies is inevitable. We might get a few inflationary mini cycles but the long term trend is Deflationary. As far as MMT is concerned if deployed weather it will create the inflation required to inflate the debt away and create economic growth. My contention is that MMT will not create the inflation that Kevin is talking about because the fact is there are not enough workers to be deployed into the infrastructure projects. First like i mentioned above the growth rate of the work force is decelerating and negative in few countries. The work force is ageing and there is no way you are going to get a 70 year old person engaged in building roads and bridges. That ageing work force is retiring therefore you do not have enough workers for the infrastructure programs.
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SSLove Kevin and loved this interview. Thanks RV for giving Kevin a solo interview this time. I’m yet to hear an MMT expert tackle the question of the high risk of crowding out the private sector over time with public sector asset purchases, and reducing private sector purchasing power via taxation to control inflation (which in itself reduces purchasing power). It’s a recipe for equal and absolute poverty distribution, and government dependence, hence the obvious associations with Socialism. Would like to hear Kevin it any MMT proponent argue against this point. Flippantly dismissing the accusations that MMT is Socialist by its very nature, doesn’t cut it. It doesn’t matter which party backs it, it will eventually (maybe not initially) result in the degradation of private sector wealth, and the expansion of government power and ownership of the means of production and every other thing you can think of. MMT stinks if you ask me, but I agree with Kevin, it will appear to work brilliantly until it doesn’t. Austrian all the way ✌️
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BSSad to see you guys continuing to bring Keynesian thought pieces over and over. While I'm sure this guy is intelligent, it amazes me how these people RV brings on continues to advocate for the Fed or the government to "do something". Also, please inform these guys that we had inflation in the 70s because we went off the gold standard! My goodness.
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dwThese are two awesome Real Vision peeps! Glad you guys got to get together. This idea should be revisited again in 2020. It doesn't matter who gets elected, fiscal is coming.
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PGLove Kevin's emails/blog! Keep it up! Great conversation too!
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ABgas taxes result in riots, just ask Macron.
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SPDo you understand that if there is INFLATION and rates goes UP, ALL counties in the Western World go Bankrupt, as they are in debt over 100% of GDP ? rates cannot be allowed to go UP.
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SSI enjoy Kevin's blog, but could not find much of interest in this interview. If there had been a compelling case for why unexpectedly high inflation in the US is in our future, that would have been very interesting. As it was, zzzzzzzzzzz. I disagree with Kevin's take on MMT. MMT says: it's ok to spend government money, increasing deficits until inflation becomes problematic. That sounds like a tilt towards liberals. Just look at the politicians who use MMT economists. Don't see many Republicans beating the drum for MMT. Ed, please find out what a black swan is.
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JMTrudeau is tackling Canada's housing bubble (& affordability problem) by giving first time buyers 5-10% of the sale price of a home interest free (in essence funding their downpayment). This should boost housing demand. Also Trudeau Liberals have been raising immigration levels. This should boost housing demand. Lastly, Canada rates are low and likely to drop further, in line with other countries - this should boost demand. I think he's doing his best to blow the bubble bigger.
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BAKevin and Ed are on my macro fantasy team!
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CTthis guy nailed it. one of the few original thinkers left.
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ATI understand the desire to have a daily video release, but the last two videos were at least three weeks old by the time viewers were able to watch. I would much rather have timely video releases even if it means there are days where nothing new is posted.
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SHThought provoking for sure. Ed does a great job and regardless if you agree with Kevin or not he did what I come to Real Vision for, make me think. Cause me pain in questioning my views. Good job gents
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RMThe rate of inflation is grossly understated, not a great strategy.
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RKMMT is very much a need for the whole world except China who has taken their turn since GFC--> which increases the monetary base! and in-turn the much needed INFLATION. But care should be exercised not to abuse MMT which may lead to HYPER-INFLATION.
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JSInteresting interview. Couldn’t imagine turning over fiscal policy to the fed jackclowns. Like handing the keys to the mini fridge to an alcoholic.
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KEBrilliant
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DMIt was Larry Fink( Black Rock) who was talking his book.
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rrReally excellent discussion on a variety of topics, well done guys.
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EFKevin wrote a piece on Macro Tourist describing the IVOL etf by Nancy Davis at Quadratic Capital to hedge against inflation and fixed income volatility: https://www.themacrotourist.com/posts/2019/10/03/ivol/
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JHThis is fascinating, and I think Kevin nailed it. This is exactly the "endgame" I am looking at and have been expecting as well. Interesting analysis, and great interview. Thanks, guys!
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ISBreakeven Inflation is very positively correlated with Oil prices. It's like being Long Oil but with lower volatility... Also is positively correlated with the ratio of US Cyclical Stocks versus US defensive Stocks and with EM Stocks. I'm not sure how this will protect your 60/40 (Equity/Bonds) when both will sel-off...
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JMGreat interview. 3Ds - 'its all in the price' . Also what is the second order consequence or the 3Ds... policy makers will adopt and that will lead to a repairing aggregate demand and then higher inflation
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ARHail the “Drunken”miller of the markets. Shout out to all the market huddle fans.
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JBif you want to listen to a fun and informative podcast checkout the market huddle with kevin and patrick...very enjoyable. thought id post since kevin is back on rv again..
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NvFiscal spend = Higher Velocity of Money Thus: Largest money supply in history x higher Velocity of Money = huge nominal growth boost and most likely inflation Disinflation has been driven by Falling Velocity. Inflation will be driven by Rising Velocity. QE & rate cuts do very little for velocity. Same for tax cuts. Direct injections of cash is VERY different (infrastructure / send annual tax cut in single check)
KEVIN MUIR: Here we are in the third bubble and staring us right in the face and nobody wants to call it a bubble.
We've constantly tried to stimulate the economy with more and more monetary policy. We're going to get a wave of fiscal spending that will actually create the inflation and it'll be the old adage that be careful what you wish for, it might come and it might come too fast and too hard.
Crises always occur in stuff that people aren't expecting. That's by its very definition of crisis. If it was obvious, everyone would have already hedged for it.
ED HARRISON: Ed Harrison here for Real Vision. I'm in Toronto, Canada, talking to some of our Canadian guests about not just the Canadian economy, but macro environments more generally. We're talking to Kevin Muir first. I'm going to talk to him about his thesis about what the new Black Swan is that no one is thinking about and how to invest against it. We're talking about inflation and he has some very good ideas about this. I want to pick his brain, hope that you enjoy what he has to say, and enjoy this interview. Thanks very much.
Kevin Muir, it is a pleasure to talk to you. I think this is the third time that you've been on Real Vision now. I'm very looking forward to this conversation. We're going to talk a little bit about investing, macro, we're going to talk about Canada in particular. Let's start it off with what are you looking at, like what is in the investing world, the thing that you think that people are missing the most that you want to talk about?
KEVIN MUIR: Well, it's great to be with you today, Ed. The one thing that I find perplexing and the most unusual is the fact that here we are and I've had two bubbles in my lifetime that I've experienced, I've had the dot-com bubble and I've had the credit real estate bubble of 2007. Here we are in the third bubble and staring us right in the face and nobody wants to call it a bubble. To me, that's the very definition of a bubble, because everyone always tells me, "Oh, if I was around in the dot-com bubble, I would have nailed that trade. I would have been short because it was so obvious." I said, "No, back then, it wasn't so obvious. It wasn't clear that these things were going to collapse."
Yes, there were some people that called it, but on the whole, the reason that it got so frothy was that everyone truly believed that the internet was going to change the world. In fact, the internet did change the world but just the prices of those securities were mispriced. Fast forward to the real estate flash credit crisis bubble. Again, we saw a situation where everyone says, "Oh, it's so clear. The Big Short, all these guys nailed this trade." Well, no. A lot of guys tried and then they got their head handed to them and a lot of people gave up and by the end, there was very few people that were actually fighting against the bubble. That's the reason the payoff was so great, was because there was so few people actually taking the other side.
Well, today I'm confused as to why-- well, I'm not confused. I'm actually, I understand why everyone's not willing to call this a bubble, because that's the very definition of a bubble, is the fact that when you're in them, they're very difficult to know you're in them. I look at the sovereign debt bubble and I look at interest rates at minus 60 basis points in Germany and I see people telling me how 100-Year Austrian bonds are the greatest thing since the spread. I see that the summer just that reach for duration that was just epic. I think to myself, here we are, we're in another bubble.
I'm not afraid to be the guy that's going to stand out here and say we're in the midst of a bubble, and for now, everyone's telling me I'm a fool and I don't understand the 3Ds, the debt, deflation, demographics. I argue that those things are all in the price. When I think about the investing landscape going forward for the next decade and how you want to set up your portfolio, I ask what the bigger risk is. Is the bigger risk the thing that everybody's warning me about, which is more disinflation and interest rates going even more negative, or is the bigger risk that we get the thing that no one is expecting? That is inflation.
ED HARRISON: Very interesting. Yeah. How do I unpack that? The macro, let's look at it from the macro context. What are the macro factors that would lead to that bigger risk actually coming into fruition?
KEVIN MUIR: Well, one of the things that I'm a big believer in is the fact that we don't understand why we've had disinflation or disinflation over the last three, four decades. We look at it and we look at this trend in 1981, interest rates for the 10-Year were 15% and they're now 1.50%. We think to ourselves, well, this trend is going down, and it's just going to continue downward. Many people are drawing trend lines and saying, "No, no, this is going to go negative, the US has headed minus or to zero or maybe minus four, whatever the number."
One of the things that I think that we haven't understood is why we've had this. I've view it as-- it's actually a feeling of economics. It's a feeling of understanding what's truly driving the economy. We've focused on the monetary side of the equation so much that we've ignored the fiscal side. It was only once we hit the zero bound that we realized that the monetary policy wasn't is in control as we thought it was. All it was doing was actually affecting the behavior of individuals and encouraging financial speculation and other things of that nature, but wasn't really affecting the economy as much as we thought.
What's happening is that we've constantly tried to stimulate the economy with more and more monetary policy. We've done this to the point where in Germany, they refuse to do anything more, but to shove more and more negative rates into their system to try to fix it. What we finally have hit this point is when we realized that that's actually not effective anymore, and it actually doesn't do what we think it does to the economy. When I think about why this trend might change, it might change because we wake up to the fact that really the fiscal side of the equation is much more important than we ever imagined.
Then once we understand that, and you see it with Draghi recently calling for more fiscal, even Ben Bernanke in the time of the Great Financial Crisis was calling for more fiscal, as central bankers push back and say, "No, we've done everything we can, we now have to do more fiscal." Once the government's realize that they can basically go spend with almost no cost, let's face it, Germany can go spend and actually make money by spending. As long as they don't lose the money, they invest in infrastructure that is productive for their economy, they're actually better off as a society because the interest rate is negative.
Once people realize this, and once governments realize this, we're going to get a wave of fiscal spending that will actually create the inflation and it will be the old adage that be careful what you wish for, it might come and it might come too fast or too hard.
ED HARRISON: Well, a number of different places I can go with that. What I'm thinking in particular is-- the first thing I'm thinking actually is I'm thinking about like Bill Gross. I'm thinking about Jeremy Grantham, Jeffrey Gundlach. That's the third one. They were all saying that the end-- the bond bear market is upon us that just as you were saying that bonds are in a bubble at this point in time and it's only going to go higher. I think we were probably at like 2.50%, maybe something like that at that time, but the bond rates went lower. How do you time this if-- there's only so far down that interest rates can go most people will say, how do you time this? How do you know when this could potentially occur?
KEVIN MUIR: Well, I think that the thing they missed at that time was it was actually caused by the Fed being tight. That bond bear market like when they-- I think was Gundlach's famous two closes above two and a quarter, three and a quarter and that ended up being his technical signal for when it was about to break out, where yields were going to break out ended up being the absolute basically the top in yields, and from then, it went down. I think that that was caused by the Fed being too tight and it caused a bear market in US bonds and people misconstrued that. I actually think that the next bear market in bonds will not be from the Fed being too tight, it will actually be from the Fed being too loose.
If you think about a long bond investor, what is their number one concern? It's inflation. If you have a Fed that is on top of maintaining the purchasing value of your dollar, then as they raise rates, you should actually be more willing to go out the curve and buy long bonds. This is the same deal with the-- you see Stanley Druckenmiller talk about the fact that QE is actually bond negative. Everyone, that doesn't make sense for a lot of people. They say, "But wait, the Fed's buying bonds, why would that cause the long bond to sell off?"
The reality is that if you actually believe that QE is inflationary, and we could debate if it actually is or not, but if you believe that, at the very least, it should cause investors reallocate their portfolio and actually sell long dated bonds because they expect higher future inflation. I think that those that were expecting higher bond, sorry, higher yields because of higher rates in the US, I think they're mistaken, that will not be the trigger. In fact, the trigger will be a Fed that is too easy and doesn't actually chase the market higher.
That is what the true bond bear market will be created was when we finally get the inflation and the Fed should be raising rates and they deem that they can't afford to because there's too much debt out there. That will create a self-fulfilling inflationary loop in my opinion.
ED HARRISON: Well, rather than go further in terms of the macro side of that, let's talk about the how do you play this or how do you-- give me a scenario, a mechanism for being able to take advantage of this. Because I know that at The Macro Tourist, you wrote up something on this particular subject and you went step wise, right through how you would construct an investment to take advantage of this situation.
KEVIN MUIR: Well, one of the easiest ones most people will say is you should just buy gold. I'm not disputing that that's an easy way to do it. There's doubt that that might solve your problem but you don't want to be only invested in one asset class only, like as your protection against inflation returning. We spoke a little bit about this earlier, if you think about a portfolio that's long, let's say 60/40 traditional portfolio, that's long 60% equities, 40% bonds or whatever it is that you view is appropriate. I think about the return of inflation, I could see a situation where that inflation causes both bonds and stocks to go down.
You need something to offset that and so sure, gold will help, but another way to do it is actually to own inflation breakevens. Inflation breakevens are-- they are the difference in the yield between a TIP of a certain maturity and that corresponding treasury of the same maturity.
ED HARRISON: When you say TIP, just for people who don't know what TIPs are, what are those?
KEVIN MUIR: Those are Treasury Inflation Protected securities. Those pay you a yield plus inflation. If you go look at the, let's say, the 20/44s, the TIPs, they'll be yielding 75 basis points. Let's say that the equivalent Treasury is yielding, I don't know, let's say 2.5. Let's do the quick math, that's 25 plus 1.5, that's 175. That would mean the inflation breakeven, which is the difference between those two, is 175. 175 basis points.
If you think about it, if you were someone that was going to hold this to maturity for the next, whatever that works out, to 25 years, if inflation ends up being higher than 175, then you would have been better off owning the TIP. If inflation ends up being lower than 175, then you would have actually done better by holding the nominal just regular Treasury security. That inflation breakeven is in essence, the forward expected inflation that the market is pricing in, the difference between the two.
If you do the math and go through it all and hedge it, you can actually be long that security, that inflation breakeven. You figure out the proper hedging ratios, you go long the TIP and you go short that, and then what you could have is a situation where even if bonds go down in that environment where I was talking about where you see inflation rise and both stocks and bonds go down, you could have a situation where the TIPs yield is actually or the TIPs return over that period is negative but that the bond short that you have on is positive.
It ends up being that inflation breakeven could be a security or an asset that might be non-correlated to both stocks and bonds. We've talked about this in the past. One of my big concerns is, if we get a situation where the 20-year negative correlation between stocks and bonds breaks down, which is something that I'm deeply concerned about, because I think that many modern portfolios are built on the basis that you own some stocks and you own some bonds. When things go bad in the stocks, the bonds are going to save you.
ED HARRISON: It's a hedge.
KEVIN MUIR: It's a hedge, so it ends up being they're negatively correlated and saves you. Well, that might work but I really worry about if you're a German investor and you're buying something at a negative nominal yield, how much that's going to save you in a time of stress? Who knows, maybe they go to minus four, but maybe it actually goes the other way and they actually end up being a negative return. If you also include inflation breakevens into a portfolio, in a time with inflations rising, you could actually have an asset that is negatively correlated to those financial assets, which I think are elevated.
ED HARRISON: The first thing that comes to