The End of Deflation

Featuring Jawad Mian

Jawad Mian challenges the conventional wisdom of the apparent global deflationary environment, channeling the nexus of politics, policy, economics and markets, to present his view of the world economy. A stronger mandate for President Trump and the possible return of productivity, leads Jawad to envisage a reflationary boom with more upside for equities and a toxic environment for bonds. Filmed on August 14, 2017, in Saudi Arabia.

Published on
30 August, 2017
Topic
Global Outlook, Monetary policy, Fiscal Policy
Duration
32 minutes
Asset class
Currencies, Bonds/Rates/Credit, Equities
Rating
74

Comments

  • KC

    Klendathu C.

    11 4 2018 13:57

    0       0

    This is so good.

  • JF

    John F.

    19 11 2017 21:42

    0       0

    Wow! Well thought out. I concur. I also see the USD strengthening in the short term to allow it to spend down more in the future. Thus keeping it within a targeted range. Inflation will help to liquidate debt as old debt becomes a smaller percentage of revenues. People tend to purchase a new car if interest rates are rising in order to not get trapped with the highest interest rate on their car loan. It will be interesting to watch this unfold. Perhaps this will motivate home purchases initially, too. Jawad is a brilliant mind. Government & Fed decisions have intent. He has a good understanding of such things. And he offers a reasonable possibility. I see the pivot point for letting the USD fall being approximately 2nd or 3rd Quarter 2018. Republicans have a reputations for pushing the economy hard, pulling out all the stops to maximize growth and inflation.

  • DS

    David S.

    31 10 2017 11:36

    0       0

    Trump will continue, but it will be very difficult for Congress to actually pass his pro-growth policies.

  • JL

    James L.

    6 10 2017 17:05

    1       0

    So, I very much enjoyed Jawad's thesis which is beautifully explained and articulated. However, since stocks are really just a very long dated (i.e., long duration) asset, I don't see how rising inflation can be so bullish for stocks other than commodity producers. Companies have blown out their margins by benefitting from cheap debt and keeping wages low via robotics and relocation, but broader inflation will end those trends and compress margins regardless of revenues expanding with inflation to some degree. Yes, fixed rate bonds will get crushed, and yes, that will result in rotation from fixed rate bonds to floating rate bonds, stocks and other assets better able to weather inflation, but that is just means Jawad's thesis boils down to TINA, which I don't buy.

  • CC

    Charles C.

    30 9 2017 16:48

    0       1

    I'm going to watch this again. So many well reasoned contrarian concepts it caused cognitive dissonance for me the first time. Maybe the second time I can take off my predetermined blinders and really think this through. Great Think Piece.

  • RA

    Robert A.

    26 9 2017 23:24

    1       0

    An EXTREMELY well reasoned argument to many of the major seemingly consensus viewpoints. Personally I relish hearing clearly defined and well reasoned arguments against ANY position I may have. One can question his assumptions and each "a fortiori" argument that he presents, but the beauty of his presentation is that you are going to have some serious work to do in order to refute him either item by item or his thesis in its entirety! Thanks RV for presenting this excellent counter point to many of the other positions taken by RV presenters.

  • BW

    B. W.

    25 9 2017 03:44

    3       0

    I have to admit something to the RV audience: I signed up for this service about 2 years ago, and it really helped me to keep client money exposed on the long side to read the comment section for various videos. That was the value to me: a perspective is offered up, and hundreds of people are either embracing or pissed. There was a time not long ago at all when it was impossible for a piece to be published saying anything other than "the market is about to crash" and not receive about 500 thumbs down. That kept me in my framework of "contrarian bull". But now here we are, with this interview suggesting a much more durable recovery, accelerating growth, and significant further upside to equities, and yet it's all "thumbs up". This is a major indication of something important changing. The RV sentiment indicator is finally capitulating to the trend!

  • JD

    Jonathan D.

    16 9 2017 11:39

    1       0

    What we KNOW is that inflation is rising, equities have broken out everywhere, govts are ending austerity, c banks are reversing, commodities and EMs are soaring.

    Don't fight it, like you've BEEN fighting it for years.

    Jaw ad was right in 2016 and he's right still.

  • JK

    John K.

    12 9 2017 00:30

    0       0

    Rt

  • JV

    Jens V.

    10 9 2017 18:46

    1       0

    Very interesting and refreshing. Let's just say: either Jawad or Lacy Hunt will be very wrong about their outlooks.

    I find it hard to imagine a simultaneous bond bear market and equity bull market, because low rates have done so much to push up stocks.

    Overall I think 2017 is far too reminiscent of 2006 for the next five years to see strong equity gains.

    But sure, stranger things have happened.

    If Jawad's scenario plays out, he has certainly deserved the resulting investment gains..

    I do however suspect that Jawad and Co. has benefited more than most in the equity bull market since 2008, but that he has missed the bond bull market - and that this affects his thinking.

  • PB

    Pieter B.

    10 9 2017 10:06

    2       0

    A true independent thinker! Massive thanks for adding so much value

  • DG

    Daniel G.

    7 9 2017 17:59

    2       0

    The US central bank commentary was spot on, Trump to stack it with doves. I love his perspective.

  • HK

    H K.

    7 9 2017 02:06

    3       0

    Finally, someone who is thinking clearly!!! This is why I have a subscription to RVTV.

  • JH

    Joel H.

    5 9 2017 23:00

    4       0

    Covering a lot of topics in a short period of time. Wish more time dedicated to the reasons and evidence for the conclusions given.

  • JN

    John N.

    5 9 2017 00:08

    8       0

    Nice piece. I love anyone who challenges conventional wisdom. It doesn't have to be correct to enhance your process, it just needs to present another perspective that forces you to continually evaluate your own.

  • DR

    Daniel R.

    4 9 2017 06:47

    1       0

    Excellent diagnosis and prognosis Jawad. It seems its always a matter of degree and timing, mixed with exogenous events that makes for good discussion and eventual outcome. I'll be watching the effects of debt and inflation on consumer spending and the unanticipated consequences of higher bond yields on the stock market and retiree employment.

  • KS

    Kaz S.

    3 9 2017 12:41

    1       0

    Excellent interview!!

  • JM

    Jim M.

    2 9 2017 21:31

    15       0

    This man is very, very smart and more importantly, he's been correct. He's a real asset to us viewers given the tone of RVTV.

  • MO

    Mike O.

    2 9 2017 18:17

    3       0

    Wow ... I will have to listen to this again to appreciate the ideas that Jawad expressed, as I find it difficult to reconcile the notion of a volatile bond market peaking with a rising stock market.

    For those who may be interested in a fascinating discussion on the bond market, I recommend this interview with Julian Brigden on The Big Question podcast (unless, of course, you are already Macro Insider members): https://capitalistexploits.at/2017/08/julian-brigden-talks-macro-with-chris-macintosh/

  • CH

    Calvin H.

    2 9 2017 13:35

    3       0

    One his best pieces. Interesting pov on QT being counter intuitive. Was contradictory after bond bubble creating market turmoil but then saying the markets wont collapse ??

  • DY

    Dmytro Y.

    2 9 2017 12:35

    2       3

    It seems he contradicts to himself during interview. Very mixed impression. Sorry but very one sided and not the best ...

  • PB

    Pier B.

    2 9 2017 07:25

    1       1

    Excellent interview. Similar thoughts to Martin Armstrong except Martin thinks there is going to be a nosebleed rally in the Dollar.

  • MR

    Marten R.

    2 9 2017 02:07

    12       0

    Jawad has a very interesting 'probability assessment' framework and an eloquent presentation manner. I watched this twice, enjoyed it, and the 'Piece' did make me 'Think'... so it was a success and I give it a thumbs up.
    I don't necessarily agree with (most of) the conclusions which Jawad arrives at and by extension, the speculative positioning which he advocates... but that's what makes markets...
    For me, it's really important to differentiate between 1. causality, 2. correlation and 3. coincidence. the 3 c's if you will...
    The key is to identify causality, because that's investable.
    The problem is, when everything is corrupted due to financial repression... and in complex / dynamic systems / markets identifying causality is NOT easy.
    To quote the late great Yogi Berra... 'the future ain't what it used to be...'
    And so we are left with C number 4... Confusion.
    Keep up the good work RVTV.
    MR

  • KA

    Kelly A.

    1 9 2017 20:56

    4       1

    Kudos to Jawad. Kudos to all the viewers who commented. The robust discussions/comments are essential. Thank you to everyone.

  • DM

    Doug M.

    1 9 2017 05:03

    0       0

    Did I hear that a stronger dollar will be needed to support increasing U.S. gov't deficits to satisfy entitlements? I will be listening to this again. Great piece.

  • AH

    Andreas H.

    31 8 2017 18:28

    2       3

    Jawad made me 330k with his bull call in Feb 2016! Thank you!

  • AH

    Andrew H.

    31 8 2017 18:23

    3       0

    I do not see any way that a $trillion of capital is unleashed with capacity utilization where it is. I could see the economy and mkt doing well as fiscal stimulus blows out our deficit.

    While I am quite cautious due to high asset prices and the move to reduce global (I hope) monetary policy, his bullish stance has been more in line with recent mkt performance over the past year.

  • PU

    Peter U.

    31 8 2017 18:14

    1       0

    https://app.hedgeye.com/insights/61625-the-fed-fueled-bubble-in-residential-real-estate?type=guest-contributors

  • PU

    Peter U.

    31 8 2017 18:11

    4       0

    we live in an economic era defined by Darwinian dynamics. The asset-inflationary nature of quantitative easing has obscured the power of this progression, stemming the tide of creative destruction. The meteoric rise of passive investing may be contributing as well — disempowering price discovery, thus allowing more struggling laggards to slip through more cracks.
    However, with central banks in the process of normalizing monetary policy, the dollar falling and the power of digital technologies only rising, it appears a matter of time before reality catches up to this artificially-engineered stability, as is already apparent in retail. The rise of zombies is one more reason it is imperative to search for opportunities in markets largely untouched by extreme financial engineering.
    - a quote from 13D Research

  • PU

    Peter U.

    31 8 2017 18:08

    4       0

    Hermes Investment Management, Eoin Murray, encapsulated the threat zombies pose to markets:
    “Like animals in captivity, companies incubated on the milk of QE and low rates may no longer exhibit the natural behaviours needed for success in the wild of a stimulus-free market. Ultra-low rates and excessive borrowing may have allowed corporate financial alchemists to present ailing patients in rude health. Unfortunately for bondholders, the elasticity of unreality has a snapping point. QE and ultra-low rates have insulated many companies, and unwary investors, from the dangers that normally lurk; they are now treading a dangerous path…Central bankers have inadvertently managed to stem natural attrition, something which is paramount for healthy capital markets, with a knock-on effect on the flow of money into new enterprises. Eventually, the natural order must prevail.”
    Along with QE, digital technologies lie at the heart of the zombie boom. In 1979, 109 firms accounted for half the profits of all publicly-traded companies in the U.S. In 2015, that number had fallen to just 30.

  • PU

    Peter U.

    31 8 2017 18:05

    4       0

    Can we imagine this away?.... With corporate leverage continuing to surge—on record pace again in 2017—the threat of the “zombie” bubble popping appears increasingly real.
    The Bank for International Settlements (BIS) defines “zombie” companies as any listed firm which is more than 10 years old and has a ratio of EBIT-to-interest expense below one. According to a BIS study from earlier this year, zombies in the U.S. more than doubled between 2007 and 2015, reaching roughly 9% to 10% of all public firms. And given the surge in leverage over past two years, the number of U.S. zombies has likely continued to rise.
    Total debt-to-EBITDA of non-financial S&P 500 companies remains historically elevated (see chart below). Moreover, high-risk covenant-lite loans are now roughly 72% of total outstanding leveraged loans—up from 30% in 2007— meaning more debt is in weak hands.

  • PU

    Peter U.

    31 8 2017 18:03

    3       0

    The International Monetary Fund’s annual Global Financial Stability report included a stark warning about the health of the U.S. economy: 22% of U.S. corporations are at risk of default if interest rates rise. The IMF cited the rapid decline in the average coverage ratio over the past two years—the ability of current earnings to cover interest payments—as its primary evidence.

  • BL

    Bruce L.

    31 8 2017 16:48

    3       0

    thoughts on fixed income are so on the money. The deficits coming will be putting so much more new supply in play which hasn't been happening for a good while.

  • NH

    Neil H.

    31 8 2017 14:40

    11       0

    presentations by jawad are always interesting, and it is great to hearing opposing viewpoints, however I was waiting for the end to hear Jawad talk about the Feds response should what he proposes come true. The Fed for sure would realize they were behind the curve and would hike aggressively. since the last 11 recessions since 1949 were caused by the Fed hiking why will this time be different.

  • GF

    George F.

    31 8 2017 13:26

    0       0

    Not to keep flogging the shale horse but it really is spreading outside 2 regions in the US and some places in Canada.

    Fracking in the UK:

    Javid 'misunderstood planning policies' in approving fracking site, court hears

    https://www.theguardian.com/environment/2017/aug/30/javid-misunderstood-planning-policies-in-approving-fracking-site-court-hears

    If you want to stop fracking in the UK stop sterling from falling. Those that only see an upside to a falling currency may miss the hidden message in this article. And being of a certain age I can't help but take notice of the name of the bureaucrat that gave official OK to the first fracking project in the UK: Sajid Javid.

  • DY

    Damian Y.

    31 8 2017 12:10

    10       2

    Thanks Jawad for your interesting opinion.
    Jawad, try and look at things for how they are, not for how you"imagine" them to be. There's nothing wrong with using your imagination but there are a 1001 possibilities that can play out, and nobody knows the future.
    When I hear people saying, they can't see a recession coming, at this part of the game, it really make me thinks that we're not far off.

  • EF

    Eric F.

    31 8 2017 09:06

    33       0

    Disagree by all means, but with respect. Why do people have to be rude just because they don't like or agree with what is being said.

  • sp

    shashwat p.

    31 8 2017 07:25

    1       0

    agree on the stock to bond ratio, but that is coz nom gdp growth at 5% will blow the sov debt markets sky high. If they crack down on the nom yields that the commodity markets and gold will blow out. Bottom line this Goldilocks will last probably less than 1 year

  • NI

    Noah I.

    31 8 2017 06:15

    9       0

    Great to see a dissenting opinion to contrast the general consensus here. Always good to have your views challenged to see potential flaws in a thesis.

  • SD

    Stephen D.

    31 8 2017 03:15

    16       0

    This is interesting stuff and very much at odds with a widespread bearishness on Real Vision's contributors. One very impactful thing I take from Jawad's analysis is that we should all look at our bond holdings as a potential area of massive risk. Most investors see them as the safe part of the portfolio. If Jawad is even half right on inflation, bonds, especially the safest (and therefore lowest yielding) will collapse.

  • TR

    Thomas R.

    31 8 2017 03:05

    14       0

    First of all – really enjoyed listening. One reconciliation issue I had in the presentation was the discussion of the possibility of 4 to 5% GDP growth in the US and a bullish outlook on stocks and then, starting at about 6:50 left in the presentation, discussion of bond market volatility, dramatically higher budget deficits, a crashing bond and equity market, then as the presentation came towards the end a discussion of rising equity markets. It would seem that for this to happen it would be non-US markets rising against a back drop of falling US equity markets and a bear bond market.

    For myself, I can’t simply see how worldwide debt levels won’t be a major headwind to growth. If we are in a bear bond market going forward, and rising rates, how do we get real growth. Isn’t relative worldwide stagnation a another possible outcome that deserves consideration? Likely 90+% of the RV subscribers have invested in a post-1980 world and thus a tail-wind bond bull market to both bonds and equities with falling interest rate costs over time. Last year did mark the end of that time. I have a 20 year old son – what will his next 35 years look like? Will the bond bear market and strained equity market with rising interest rate headwinds last 5 years, 10 years, 20 years…

    Rather than buying equity weakness, wouldn’t the next logical area for capital allocation be commodities?

  • RT

    Richard T.

    31 8 2017 03:04

    9       0

    The thing I like about Jawad's approach is that he lays out clearly his assumptions and then proceeds to detail the implications. As mentioned by many others, this is an excellent piece making the case against current market consensus and is, therefore, highly valuable

  • FC

    Fractal C.

    31 8 2017 01:27

    30       1

    QE has been inflationary, Jawad. It has inflated all financial assets. So now, please ask your question again - if QE inflated all financial assets, what would lack of QE do to those assets?

  • DM

    Davis M.

    31 8 2017 00:27

    33       0

    Jawed states the past 8 years have been deflationary. I do not understand how he comes about this view. Everything is INFLATED. Stocks, bonds, real estate, government/corporate/consumer debt, my health insurance has doubled (not from $200 to $400 but from $1,100 to $2,200 a month!), my daughter's college fund is no longer adequate as the cost has increase by 30-40% over the past eight years. I could go on and on. Yes, I know oil and gas are down which helps with food cost, but these are some big increases.

    I appreciate hearing his view but cannot buy into this based on a lot of "imagination". I used to imagine I could fly when I was a kid but after jumping off the barn two times, I realized it wasn't going to happen.

  • PS

    Paul S.

    31 8 2017 00:18

    2       1

    Interesting view - but I cant see the de-risking of China he talks about - let alone the 'austerity' in the West

  • BM

    Bryan M.

    31 8 2017 00:17

    1       1

    I forgot...you also suggested that oil prices are set to increase. Really? It seems to me that when a few million gasoline powered vehicles are remeved from the "mix", oill prices have nowhere to go but down.

  • BM

    Bryan M.

    31 8 2017 00:13

    5       0

    Jawad, excuse me for being old fashioned but...I don't remember you taking into account the debt issue and I seem to recall your view that DT's tax cuts et all will be paid for by yet more borrowing. Can this be a plausible solution? Really? Seems to me you are suggesting the Bond Vigilantes will not mind a further deterioration in the U.S.'s fiscal house - which is already full of holes. Did I miss something?

  • RP

    Roberto P.

    30 8 2017 21:07

    3       0

    Since the Fed begun to rise rates, core inflation is down. I disagree with Jawad about QT bringing back inflation.

  • JH

    Josh H.

    30 8 2017 20:19

    5       0

    Regarding the high GDP growth he forecasts in the future, I think that's possible, but only under a scenario where we see a structural paradigm shift in productivity brought along by AI/robotics/etc. Of course, the likely resulting unemployment issues brought about by such a development would amplify the current social tensions we see in the world. Ironically, if a productivity jump led by AI/robotics did come about, I actually think Japan has the potential to take everyone off guard by becoming a major source of growth and productive investment. Reason being that because Japan has the most dire demographic problems right now, they are currently most incentivized to run quickly towards AI, robotics, and other such technologies. I actually think they are already one of the leaders (if not the leader) in pouring money into these areas. Such a head start could make Japan the first big beneficiary of these new technologies, particularly since they're chronic demographic problems and the homogeneity of their population makes them arguably least likely of the major world economies to experience any sort of policy/regulatory pushback to such developments.

  • JH

    Josh H.

    30 8 2017 20:01

    16       0

    Regarding QE/QT, I'd argue he's confusing cause and effect. Just because QE did not result in inflation does not imply that QE produced the more deflationary reality of the past few years as he states. That seems too simplistic. I see inflation/deflation as more of a dynamic tug-of-war with factors on both sides. In the case of our collective experience since the financial crisis, I'd say the persistently low inflation is likely not a direct result of QE, but instead is a result of and highlights the significant deflationary factors (debt/demographics/etc) on the other side of the equation that have built up to such an extent that they're overwhelming the inflationary ramifications of QE. If that is the case, it would seem the withdrawal of liquidity that would follow QT could only exacerbate the problem.

  • AK

    Anthony K.

    30 8 2017 17:07

    24       0

    Whether I agree or not, Jawad always offers a compelling conversation

  • DR

    David R.

    30 8 2017 16:37

    1       0

    The world needs more competition, not inflation.

  • tW

    tgwtom W.

    30 8 2017 15:21

    16       0

    Jawad, thank you for sharing such a comprehensive and well thought out worldview. The thought process itself is so enlightening and helpful. See you on Twitter :)

  • CM

    Carl M.

    30 8 2017 14:44

    3       0

    Jawad, you just kicked my ass and I thank you!
    The five years backward/forward theme, have you been talking to John Burbank? Brilliant!
    This "opposing view" still gets a 3% return globally? Did I hear that correctly?
    I guess if I am sitting on cash, "inflation" and "imagine" are dirty four letter words.
    Being "agnostic" is tough.

  • SW

    Scott W.

    30 8 2017 13:21

    16       0

    This was solid 2nd+ order thinking and a good summary of probable/possible outcome that doesn't fit the "things are so crazy right now - anything could happen" narrative. What if the world decoupled from the US not with a bang but with a whimper? Could the status of US sovereign debt as the safe harbor diminish, while at the same time Apple remained a global darling?

  • RI

    R I.

    30 8 2017 13:08

    19       0

    Would like to see more Think Pieces such as this one with various views.

  • RI

    R I.

    30 8 2017 12:51

    3       0

    Jawad - what are your thoughts on the influence of the labor force participation rate on GDP growth especially as baby boomers are now retiring in droves?

  • sm

    stephane m.

    30 8 2017 11:32

    10       1

    I think that Jawad 5 years views are correct BUT would like to remember him that in 1987 there was no recession...

    Please bring Martin Armstrong back!!

  • js

    jacob s.

    30 8 2017 10:59

    0       0

    over investment in trucks

  • PU

    Peter U.

    30 8 2017 10:55

    3       26

    Raul needs to toss a cold bucket of water on this guy.

  • PU

    Peter U.

    30 8 2017 10:52

    39       7

    I recall that the presenter was expecting the US 10 Yr to be above 3% over 18 months ago. He was bullish then and said that ' if the 10 Yr did not rise, and interest rates in general did not rise, then he would change his bullish equities and bullish inflationary view'. None of his earlier predictions have come to fruition, yet he remains steadfast in his belief of higher equity prices and higher inflation. When the facts change, you should change your views to reflect reality and stop relying on " a little bit of imagination". Your comments are full of bromides. . . . "we are in a paradigm shift". . . . If so, do a better job providing the rationale. In short, disappointed as I believe he is smart but suffers from position bias.