Inflation Risk Amid a Scramble for Yield

Published on
October 29th, 2019
Duration
51 minutes

Inflation Risk Amid a Scramble for Yield

The Interview ·
Featuring Kevin Muir

Published on: October 29th, 2019 • Duration: 51 minutes

Is fiscal stimulus on the horizon? Kevin Muir, market strategist at East West Investment Management and author of “The Macro Tourist,” argues that the declining efficacy of monetary policy will force governments to run-up even larger budget deficits. In the face of central bank impotence, he predicts that politicians across the political spectrum will turn to Modern Monetary Theory, or MMT, to avert a disaster. Muir suggests that this flood of spending poses serious inflation risks and that a monetary “day-of-reckoning” is forthcoming, but not imminent. He argues that this trend makes negative yielding sovereign debt highly imprudent — particularly in Europe, where he sees a “sovereign debt bubble.” Filmed on October 4th, 2019 in Toronto.

Comments

Transcript

  • RH
    Robert H.
    6 November 2019 @ 01:58
    First 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?
  • CR
    Chris R.
    2 November 2019 @ 18:22
    Couple 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?
    • RH
      Robert H.
      6 November 2019 @ 01:52
      Agreed. As we see liquidity dry up real private borrowing rates rise, then the Fed will have to raise rates to attract buyers of the debt. If no one buys the debt, hello sovereign debt bubble. This scenario likely overseas first. But if governments can't sell debt they get a little jittery with MMT Major Milititant Tyranny and stuff, the cheese starts to slip off their cracker.
  • RM
    Russell M.
    1 November 2019 @ 18:02
    Governments 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.
  • WA
    Wissam A.
    1 November 2019 @ 10:12
    Government 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.
  • SS
    Shanthi S.
    1 November 2019 @ 05:50
    Love 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 ✌️
  • dw
    douglas w.
    31 October 2019 @ 17:28
    These 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.
  • PG
    Philippe G.
    30 October 2019 @ 15:48
    Love Kevin's emails/blog! Keep it up! Great conversation too!
  • AB
    Adam B.
    30 October 2019 @ 11:00
    gas taxes result in riots, just ask Macron.
  • LP
    Lauri P.
    30 October 2019 @ 08:34
    I 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.
    • VR
      Vladimir R.
      30 October 2019 @ 10:22
      Absolutely, this looks like a bad play. The TIPS is weakly protected in terms of real inflation. If prices start to rise, cost of living etc, it’s best to simply own the underlying products or manufacturers and look for unemployment hedge (what goes up in correlation with unemployment?)
    • DH
      Dale H.
      2 November 2019 @ 07:21
      Yes, I avoid TIPS like the plague due to the gross underreporting of govt determined inflation, plus typically the US exports inflation to the rest of the world, so gold is perfect for eventually reflecting the global impact of the US policies as the ROW scrambles for gold.
  • BA
    Bruce A.
    30 October 2019 @ 04:21
    Kevin and Ed are on my macro fantasy team!
  • CT
    Christopher T.
    30 October 2019 @ 03:12
    this guy nailed it. one of the few original thinkers left.
  • SP
    Stephane P.
    30 October 2019 @ 00:27
    Do 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.
    • LP
      Lauri P.
      30 October 2019 @ 07:29
      It's the real rate of interest that cannot go much higher, nominal rates can go as high as the inflation goes.
  • RA
    Robert A.
    30 October 2019 @ 00:09
    Ed 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.
  • JM
    John M.
    29 October 2019 @ 23:23
    Trudeau 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.
    • DC
      Daniello C.
      30 October 2019 @ 05:34
      Definitely pump policy.
  • SH
    Sean H.
    29 October 2019 @ 22:34
    Thought 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
  • BS
    Brian S.
    29 October 2019 @ 21:55
    Sad 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.
    • SH
      Scott H.
      30 October 2019 @ 03:25
      No, the US closing the gold window (USD convertibility to gold) was a result of inflationary pressures that had already been building up as the baby boomers globally moved through the economy, the spending on the Vietnam war, the government trying to regulate and fix the price of many inputs, not to mention the Middle East oil embargo etc.
    • RA
      Ross A.
      30 October 2019 @ 03:49
      I've lost a lot of money trading 'what they SHOULD do' and made some trading 'what they WILL do'. So although i agree with you that they SHOULD NOT do any more Keynesian / MMT stuff they wont listen to you or me and they WILL do the Keynesian/MMT stuff so we best listen to guys who have a view on how that will filter through.
    • SS
      Shanthi S.
      1 November 2019 @ 05:37
      Ross A. This is exactly why Kevin is the only person I enjoy listening to on the fraught subject of MMT. I don’t agree with his take on it absolutely, but he is pragmatic in the face of the inevitable, which I very much appreciate.
  • RM
    Robert M.
    29 October 2019 @ 20:36
    The rate of inflation is grossly understated, not a great strategy.
  • RK
    Roger K.
    29 October 2019 @ 20:25
    MMT 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.
  • SS
    Stephen S.
    29 October 2019 @ 20:22
    I 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.
    • CB
      Clifford B.
      29 October 2019 @ 23:57
      forget thinking lib or dem. think global. the US and most of the g7 got there on the back of the third world.
    • CM
      Chris M.
      30 October 2019 @ 01:30
      I agree with Kevin's comment relating to MMT and the current administration. You say it is a tilt to liberals yet the Republicans are running a MMT program right now by giving money back to taxpayers and funding it by issuing more treasuries. Trump would do even more of this if he could as he has publicly stated that he loves debt. This is not a typical conservative agenda.
    • CM
      Chris M.
      30 October 2019 @ 01:38
      Have to agree with Stephen on this point. While Kevin did a good job of explaining how inflation could change up the markets, he didn't really explain why inflation would kick in. I am still with Lacy Hunt on this one, taking the opposite side of the trade, that we will see rates head to zero. And while I agree with some posters that inflation may be understated, demographics, population growth, debt to GDP impact, and overall debt levels for all the major developed countries still favor deflation and not inflation. Hoisington just released their 3rd Qtr letter that gives more statistical insight for this argument: https://hoisingtonmgt.com/pdf/HIM2019Q3np.pdf
    • BM
      Bryan M.
      30 October 2019 @ 05:42
      Kevin is correct, and so is Lacy Hunt, because it all comes down to timing. So...for what? The next 5 years or so we could well see more of the same BUT, at some point down the road, pumping $ into infrastructure will cause inflation. Just take a look at a long term chart of the long term treasury. Rates slowly increased from say '46 to '65 and then took off in the Seventies so let patience be the byword...we won't likely see any inflation for at least 7 or 8 years...maybe longer...but it will get there.
  • KE
    Kathryn E.
    29 October 2019 @ 20:15
    Brilliant
  • DM
    Dom M.
    29 October 2019 @ 19:19
    It was Larry Fink( Black Rock) who was talking his book.
  • JS
    John S.
    29 October 2019 @ 16:37
    Interesting interview. Couldn’t imagine turning over fiscal policy to the fed jackclowns. Like handing the keys to the mini fridge to an alcoholic.
    • DS
      David S.
      29 October 2019 @ 20:19
      Lessor of two evils. MMT in Congress or the Administration's hands would be worse. DLS
  • AT
    Adam T.
    29 October 2019 @ 16:28
    I 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.
    • EH
      Edward H. | Real Vision
      29 October 2019 @ 17:49
      Adam, this interview was delayed because of the two weeks of Gold vs Bitcoin. It would have been good if we could have scheduled it earlier. But those two weeks effectively blocked that.
    • JL
      J L.
      29 October 2019 @ 18:38
      totally missing the point Ed
    • dd
      david d.
      29 October 2019 @ 18:56
      so the 2 stupid shitcoin weeks blocked real good content, thanks
    • GT
      Greg T.
      29 October 2019 @ 19:13
      Agree. Gold vs Bitcoin is all garbage from the doom loop idiot. Could have done with it. Didn't watch it. Why delay good content for that trash? Bonehead move.
    • MS
      Michael S.
      30 October 2019 @ 02:41
      It's not like there's something in that video that went stale over those two weeks it was in the can.
  • rr
    rlw r.
    29 October 2019 @ 16:11
    Really excellent discussion on a variety of topics, well done guys.
  • EF
    Erik F.
    29 October 2019 @ 15:43
    Kevin 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/
  • JH
    Jesse H.
    29 October 2019 @ 15:18
    This 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!
  • IS
    Ionel S.
    29 October 2019 @ 12:25
    Breakeven 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...
    • IS
      Ionel S.
      29 October 2019 @ 12:28
      Cash is King. You have in US a unique opportunity to get 2% on your 3 month maturity! This is huge!!! Take it when it is still there!!!
  • JM
    Jason M.
    29 October 2019 @ 11:56
    Great 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
  • AR
    Abishek R.
    29 October 2019 @ 08:40
    Hail the “Drunken”miller of the markets. Shout out to all the market huddle fans.
  • JB
    Jason B.
    29 October 2019 @ 08:33
    if 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..
  • Nv
    Nick v.
    29 October 2019 @ 08:18
    Fiscal 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)