Inflating Away the Debt & The Wealth Effect (Lyn Alden)

00:00
but it seems like they’re fighting
00:01
deflation but probably more like
00:03
deflation of assets right so they keep
00:05
saying they can’t get the inflation they
00:07
want they can’t get it well i think i
00:08
think they’ve got it now
00:09
i think it’s a little bit over their
00:10
target at this point but
00:12
um the d but then at the same time we’re
00:14
seeing prices of everything going
00:16
through the roof from
00:17
used cars to use bicycles all the way to
00:20
all types of financial assets and all
00:21
those types of things
00:22
um so the deflation that they’re afraid
00:25
of is that really in the markets that’s
00:26
what they’re worried about stocks
00:27
dropping you know real estate dropping
00:29
bonds
00:30
crashing things like that yeah they were
00:32
well they were pretty explicit uh you
know a decade ago
00:35
when they uh point out that they wanted
to do the wealth effect so they
pretty much said they wanted to cause
asset price inflation uh you know they
00:42
just you know
00:43
described a little bit more plately uh
00:45
and so that was their goal was to
basically
increase you know housing costs again
increase uh the stock market again
00:51
uh and if you do a lot of monetary
00:53
policy without doing a lot of fiscal
00:54
policy that that’s
00:55
that’s what you tend to get now we there
00:58
were still disinflationary forces over
00:59
the course that decade because for
01:01
example
01:02
uh you know about a decade ago you had a
01:03
period of commodity over supply
01:05
uh you had the slowdown in china and so
01:08
we’ve been kind of working through this
01:09
period of commodity over supply for a
01:11
while we also of course have the rise of
01:13
shale oil which was largely unprofitable
01:15
but it still contributed
01:16
to uh you know a ton of extra supply and
01:18
therefore pretty low prices across the
01:20
board
01:21
and so we’ve been in that kind of
01:22
disinflationary commodity environment
01:24
but we had a target you know inflation
in asset prices inflation in health care
inflation and education inflation
and child care things like that where
01:32
you had you know deflation in electronic
01:34
goods you had deflation in commodities
01:36
uh deflation due to technology and kind
01:38
of offshoring things like that
01:40
uh and so you know from their
01:42
perspective uh you know they
01:44
would prefer the say the inflation rate
to be higher than the treasury yields
right because that’s how you can you can
stop uh you know debt as a percentage of
gdp uh from from continuing to grow to
control if they
01:56
have you know the potentially nominal
01:58
gdp growing faster
02:00
than the combination of debt issuance
02:02
and as a percentage of gdp and interest
02:04
rates
02:04
uh but of course i mean that’s a really
02:06
bad environment if you’re holding cash
02:07
or bonds
02:08
and so there’s no free lunch i mean
02:10
someone somewhere is getting uh screwed
02:12
over sometimes
02:13
there are certain policy regimes where
02:15
the debtors are getting screwed over
02:16
and there are other times where the the
02:18
you know the the
02:20
people that own the debt that the
02:21
creditors are getting screwed over and
02:23
so
02:23
in this environment of high leverage
02:25
they they’re they’re trying to err on
02:27
the side of essentially the the
02:28
creditors getting
02:30
uh you know screwed over uh but instead
02:32
of kind of abrupt kind of nominal losses
02:34
they’d prefer you know to basically just
02:36
fail to keep up with inflation and
02:37
that’s what you saw back in say the
02:39
1970s and 1940s
02:40
these inflationary decades ironically
02:42
they tend to deleverage things because
02:44
the bonds fail to keep up with inflation
02:46
uh but you don’t want to be the ones
02:48
holding those assets and that’s a pretty
02:50
big pool of assets
02:51
yeah definitely i guess that you kind of
02:54
talked about that and that’s what i was
02:55
trying to
02:55
figure out is like what are they trying
02:57
to optimize for because
02:59
uh to your point you know electronics
03:00
coming down and deflationary source
03:02
things like that and
03:03
for i guess it depends on which side as
03:04
you said which side you’re on but it
03:06
seems like that would be good things for
03:07
most people if prices were coming down
03:09
um asset prices i guess if you’re
03:11
holding asset prices you want them to go
03:13
up if you’re
03:13
if you want to buy them you want them to
03:15
be down right so i guess it depends but
03:17
like overall it seems like if most
03:19
people had their cost of living going
03:21
down that would be a good thing and nasa
03:22
prices going up
03:24
uh at the same time that would be kind
03:25
of a good thing so um i guess kind of
03:28
the the question was uh are they really
03:30
trying you know
03:31
i guess they’re kind of targeting the
03:32
cpi basket which is like this consumer
03:34
price of goods
03:35
basket but it seems like the big risk of
03:36
deflation is in the markets like
03:38
stocks could crash 50 80 percent the
03:41
real estate could crash 50
03:42
and that’s like a massive deflation hit
03:44
so you think that’s what they’re trying
03:45
to optimize for
03:46
i mean even though they’re always
03:47
talking about cpi pretty much i mean
03:50
they’re trying to keep asset prices up
03:51
they’re also
03:52
you know they’re increasingly talking
03:53
about kind of nominal gdp targeting
03:55
uh you know again trying to have nominal
03:57
gdp higher than uh
03:58
some of those interest rates and some of
04:00
the debt accumulation levels
04:01
uh and of course you know the the
04:03
perspective will depend on if you’re the
04:05
the monetary
04:06
authority or the fiscal authority so as
04:08
consumers we generally would prefer
04:10
uh you know price deflation uh while
04:12
still having our jobs so we don’t want
04:14
some some sort of economic contraction
04:16
uh but we want technology and things
04:18
like that to lower prices over time
04:20
so that our money goes further and
04:22
that’s you know that’s normally the best
04:24
case scenario
04:24
the only time that’s bad is if you have
a debt bubble right because then the the
04:28
real value of your debt
04:29
goes up relative to your incomes and
04:31
things like that so if you if you had
04:33
avoided that in the first place
04:35
uh then that that deflation is really
04:37
good but what policymakers are afraid of
04:38
is that because we’ve had this you know
this kind of mix of lower interest rates
and
and you know different types of policy
mixes we’ve kind of encouraged this big
debt build up
and now you know they basically have to
04:49
in their view inflate it away before
04:51
they can they can kind of stabilize
04:53
and so if you’re the federal reserve
04:54
you’re trying to hold yields
04:56
lower than the inflation rate you’re
04:57
trying to be accommodative
04:59
uh and kind of you know trying to
05:02
balance between
05:03
you know uh causing asset bubbles uh but
05:06
then also you know not wanting to crash
05:08
the market so that’s their perspective
05:10
and if you’re fiscal policy makers
05:11
mainly you want to get votes every two
05:13
years or
05:14
four years or whatever the case may be
05:16
and you want to avoid you know rising
05:18
populism you want to avoid
05:19
uh you know things like that from their
05:21
perspective and so you you know
05:22
depending on which side
05:24
you know where you work essentially if
05:25
you’re if you’re the fed or if you’re in
05:27
the
05:27
congress you have kind of two different
05:29
things you’re balancing yeah
05:31
so the tools as you’re kind of laying
05:32
them out the monetary or the fiscal
05:34
monetary being like
05:35
issuing more debt to the banks monetary
05:37
or fiscal actually like putting money
05:39
out of the streets into kind of people’s
05:40
hands
05:41
and um it seems like you know i mean i
05:44
guess as a central bank
05:45
uh what’s the quote if all you have is a
05:47
hammer the whole world looks like a nail
05:48
and they really only have a couple tools
05:50
um and really it’s you know monetary
05:52
tools and so that’s kind of like
05:53
interest rates and
05:54
and increasing the debt supply uh the
05:56
money supply but
05:58
with interest rates i mean they’re
06:00
already almost down to zero
06:02
uh nominally we can talk about real
06:03
rates et cetera which i do want to get
06:05
to
06:05
but it seems like a lot of those tools
06:07
they’re basically running out of right
06:09
interest rates are down to zero
06:10
debts at all time high economy is not
06:13
growing so the debt to gdp is is tough
06:15
to move
06:15
i mean do you see that they’re like
06:17
running out of tools i mean like how
06:19
much further can this can be kicked down
06:21
the road
06:21
uh so for the federal reserve i do view
06:23
them as as towards the end of their rope
06:25
in terms of tools and so they really
06:26
only have two tools that they mostly
06:28
it’s interest rate manipulation
06:30
and asset purchases or sales in some
06:32
cases
06:34
and they have some other tools around
06:35
the margin like lending facilities and
06:36
things like that but ultimately it comes
06:38
down to
06:38
controlling them controlling uh the
06:40
price of money uh
06:41
and uh buying assets now the fiscal
06:44
authorities they
06:44
they’re the ones that you know they can
06:46
say send cash to people
06:48
uh but then they you know they have to
06:50
issue debt to do it uh
06:51
and so you have kind of i’ve described
06:53
it as like uh you know if you have like
06:55
a movie where they’re gonna launch like
06:56
a
06:56
nuclear missile like two generals have
06:58
to put their keys in at the same time to
07:00
so i viewed i view policy tools and
07:02
fiscal tools uh kind of like the two
07:04
keys there
07:04
when it comes to generating inflation uh
07:07
and so if you just have the
07:09
monetary policy that’s not generally
07:11
very inflationary on its own because you
07:13
can’t directly get money to people
07:15
right so the federal reserve can’t send
07:17
money to people all they can do
07:18
is control interest rates uh and they
07:20
can increase the amount of bank reserves
07:22
in the system but then those get stock
07:23
banking system because banks aren’t
07:24
doing loans uh and so
07:26
you have reserves go up you
07:27
re-capitalize the banks but doesn’t
07:28
actually get out into the public
07:30
on the other hand the fiscal authority
07:31
can send money to whoever they want as
07:32
long as they have a consensus
07:34
but they have to issue bonds to do it
07:37
and then therefore someone has to buy
07:38
those bonds which sucks money out of the
07:40
system
07:41
but then if you combine the two and the
07:43
treasury sends money to people they
07:44
issue bonds
07:45
which the federal reserve creates new
07:46
base money and buys those bonds and
07:48
holds them forever
07:49
well then you’re just literally
07:50
essentially creating new base money and
07:52
directing it into the economy
07:54
and that’s how you get say that the you
07:56
know the 25 percent broad money supply
07:58
year of year change that we had you know
08:00
in 2020
08:01
and so that tends to be a more
08:02
inflationary environment especially if
08:05
they were to sustain it for several
08:06
years
08:07
and so i think you know as we go forward
08:09
obviously right now we’re having some
08:10
base effects
08:11
right so we’re in in say march april
08:14
may june you’re comparing it to the 2020
08:16
period which was like the
08:17
kind of disinflationary crunch they had
08:19
during the worst part of the lockdown
08:21
and so we’re going to get some pretty
08:22
high bass effects like we’re probably
08:23
going to see
08:24
uh you know even even official cpi we’re
08:26
probably going to see it over three
08:27
percent year-over-year
08:28
uh but then the big question is going
08:30
forward uh you know what are we going to
08:31
do with
08:32
are they going to do like an
08:33
infrastructure build that also gets
08:34
monetized
08:35
are they going to do another round of
08:36
aid things like that and some of those
08:38
if they were to continue could be pretty
08:40
uh inflationary to a certain extent
08:42
especially because
08:44
you know a lot of economists don’t
08:45
incorporate say the current situation of
08:47
commodity markets
08:48
uh and so of course you know that kind
08:50
of say 15-year cycle of commodity supply
08:53
and commodity demand
08:54
has a big impact on inflation and so
08:56
when you’re in a period of commodity
08:58
oversupply
08:59
as it were for the past decade you know
09:01
that tends to keep a lid on
09:02
on most types of inflation whereas when
09:05
you’re in a period of
09:06
you know you say you haven’t done a lot
09:07
of capex uh you know you haven’t kind of
09:09
brought new minds uh
09:11
to market you haven’t found like new new
09:13
big uh you know we haven’t done the
09:14
investment
09:16
if you were to get that increase in
09:17
commodity demand uh well then
09:19
uh you know you have higher commodity
09:21
prices and that’s what we’re seeing
09:22
we’re starting to see that kind of show
09:23
up in the market where
09:25
many commodities are still below where
09:26
they were 10 to 15 years ago with some
09:28
exceptions like beef lumber
09:30
gold touch new all-time highs most of
09:32
them are still below their all-time
09:33
highs but they’re starting to break out
09:35
from their their big declining trend
09:36
they had
09:37
and so it does look like the 2020s could
09:39
be a more inflationary decade with
09:41
tighter commodity markets uh big big
09:44
increases in the broad money supply
09:45
and that money getting to people rather
09:48
than just stuck in the banking system
09:49
which of course can benefit some people
09:51
but then you have that that that risk of
09:53
inflation
09:54
where you you increase the broad money
09:55
supply by a lot but you haven’t
09:56
increased the the goods and services by
09:58
an equal amount

Luke Gromen – Oil Cartel Siding With China Can Destabilize the Petrodollar

Sept 2018 prediction: early 2020 US Will have to monetize the debt

SBTV picks the mind of Luke Gromen, founder of Forest For The Trees LLC, about an impending dollar crisis and what likely scenarios can destabilize the petrodollar in the coming years. We also asked him what his ideal monetary system would be if he got to choose it. Forest For The Trees website: https://fftt-llc.com

Discussed in this interview:

05:08 Why a dollar crisis is coming?

12:14 US dollar still the center of the world?

13:07 Gold is wanted as a global neutral reserve asset.

14:35 Saudis’ view of the Petro-dollar: conflicted

23:10 A world where oil is priced in multiple currencies

28:33 No credible reserve currency alternatives to the dollar?

31:29 Bancor: A suitable replacement for the dollar standard?

34:08 How should investors navigate the impending dollar crisis?

Ten reasons why a ‘Greater Depression’ for the 2020s is inevitable

After the 2007-09 financial crisis, the imbalances and risks pervading the global economy were exacerbated by policy mistakes. So, rather than address the structural problems that the financial collapse and ensuing recession revealed, governments mostly kicked the can down the road, creating major downside risks that made another crisis inevitable. And now that it has arrived, the risks are growing even more acute. Unfortunately, even if the Greater Recession leads to a lacklustre U-shaped recovery this year, an L-shaped “Greater Depression” will follow later in this decade, owing to 10 ominous and risky trends.

The first trend concerns deficits and their corollary risks: debts and defaults. The policy response to the Covid-19 crisis entails a massive increase in fiscal deficits – on the order of 10% of GDP or more – at a time when public debt levels in many countries were already high, if not unsustainable.

Worse, the loss of income for many households and firms means that private-sector debt levels will become unsustainable, too, potentially leading to mass defaults and bankruptcies. Together with soaring levels of public debt, this all but ensures a more anaemic recovery than the one that followed the Great Recession a decade ago.

A second factor is the demographic timebomb in advanced economies. The Covid-19 crisis shows that much more public spending must be allocated to health systems, and that universal healthcare and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have ageing societies, funding such outlays in the future will make the implicit debts from today’s unfunded healthcare and social security systems even larger.

A third issue is the growing risk of deflation. In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labour markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.

A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetised fiscal deficits to avoid depression and deflation. Yet, over time, the permanent negative supply shocks from accelerated de-globalisation and renewed protectionism will make stagflation all but inevitable.

A fifth issue is the broader digital disruption of the economy. With millions of people losing their jobs or working and earning less, the income and wealth gaps of the 21st-century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism, and xenophobia.

This points to the sixth major factor: deglobalisation. The pandemic is accelerating trends toward balkanisation and fragmentation that were already well underway. The US and China will decouple faster, and most countries will respond by adopting still more protectionist policies to shield domestic firms and workers from global disruptions. The post-pandemic world will be marked by tighter restrictions on the movement of goods, services, capital, labour, technology, data, and information. This is already happening in the pharmaceutical, medical-equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.

The backlash against democracy will reinforce this trend. Populist leaders often benefit from economic weakness, mass unemployment, and rising inequality. Under conditions of heightened economic insecurity, there will be a strong impulse to scapegoat foreigners for the crisis. Blue-collar workers and broad cohorts of the middle class will become more susceptible to populist rhetoric, particularly proposals to restrict migration and trade.

This points to an eighth factor: the geostrategic standoff between the US and China. With the Trump administration making every effort to blame China for the pandemic, Chinese President Xi Jinping’s regime will double down on its claim that the US is conspiring to prevent China’s peaceful rise. The Sino-American decoupling in trade, technology, investment, data, and monetary arrangements will intensify.

Worse, this diplomatic breakup will set the stage for a new cold war between the US and its rivals – not just China, but also Russia, Iran, and North Korea. With a US presidential election approaching, there is every reason to expect an upsurge in clandestine cyber warfare, potentially leading even to conventional military clashes. And because technology is the key weapon in the fight for control of the industries of the future and in combating pandemics, the US private tech sector will become increasingly integrated into the national-security-industrial complex.

A final risk that cannot be ignored is environmental disruption, which, as the Covid-19 crisis has shown, can wreak far more economic havoc than a financial crisis. Recurring epidemics (HIV since the 1980s, Sars in 2003, H1N1 in 2009, Mers in 2011, Ebola in 2014-16) are, like climate change, essentially manmade disasters, born of poor health and sanitary standards, the abuse of natural systems, and the growing interconnectivity of a globalised world. Pandemics and the many morbid symptoms of climate change will become more frequent, severe, and costly in the years ahead.

These 10 risks, already looming large before Covid-19 struck, now threaten to fuel a perfect storm that sweeps the entire global economy into a decade of despair. By the 2030s, technology and more competent political leadership may be able to reduce, resolve, or minimise many of these problems, giving rise to a more inclusive, cooperative, and stable international order. But any happy ending assumes that we find a way to survive the coming Greater Depression.

Nouriel Roubini is professor of economics at New York University’s Stern School of Business. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

David Graeber: “DEBT: The First 5,000 Years” | Talks at Google

65:10
Everybody seems to be in debt, this is sort of puzzling in a way.”
65:17
And I would say, no, and one reason why is because there seems to be this feeling since
65:24
the 70’s that basically all social problems can be solved through debt.
65:28
One theory I saw, which is kind of interesting, it’s the autonomist reading, Midnight Notes
65:38
Collective, it’s a group of Italian autonomist Marxists.
65:42
But they had this very interesting reading of the two phases of post-war capitalism.
65:45
What they basically said is that after World War II they kinda gave a deal to the North
65:50
Atlantic white working class and they said, “Okay, if you guys don’t become commies we’ll
65:55
give you free education, free health care in most places anyway, we’ll give you social
66:00
benefits of various kinds.”
66:01
And social struggles between 1945 and 1975 where more and more people asking in on the
66:07
deal.
66:08
And there is a tie between productivity and wages.
66:11
So whenever, and the lines go up together, increases of productivity are met with increases
66:16
of wages.
66:17
Since the 70’s the deal is clearly off and one reason is because they reached kind of
66:21
crisis of inclusion that you can’t actually give that deal to everybody without fundamentally
66:28
changing the nature of the system.
66:30
So first minorities, so you have the Civil Rights Movement, other people who’ve been
66:34
left out of the deal want in, people in the Global South want in, women want in, feminist
66:38
movement.
66:39
It reaches a point where it just sort of snaps and you have this fiscal crisis, oil crunch,
66:46
ecological crisis and they say, “Alright, deal off, we’ll give you another deal.
66:52
No longer will wages be connected with productivity, you can all have political rights because
66:58
political rights don’t necessarily give you any economic benefits, but you can have credit.”
67:03
So the credit solves everything, everybody’s being, that’s why you have microcredit saves
67:07
the Third World, why you have 401k’s and mortgages and there’s this huge extension of credit.
67:12
And you could say the same thing happened, right?
67:15
More and more people want in on the deal and more and more people are getting credit to
67:20
the point where people they’re just doing these crazy sub-prime scams and things like
67:24
that are beginning to run the system.
67:27
And when it cracks it looks almost exactly the same, you get the oil shock, you get the
67:30
financial crisis, you get the visions of ecological catastrophe.
67:33
It’s the same thing all over again except at this point it’s not clear what they’re
67:39
[chuckles] gonna come up with next.
67:41
So, in that sense, yeah, you have this unprecedented series of bubbles, built on bubbles, built
67:48
on bubbles.
67:49
And I’m speaking as someone who’s working the Global Justice Movement and we were like
67:53
doing our studies for the G20 as part of like several intellectual collectives where they
68:00
kind of, the activists kind of told us, “Alright, well, they’re all meeting to come up with
68:03
their evil plan and tell us what their evil plan is likely to do so we can oppose it.”
68:07
And so we figure it and I guess they’re gonna have to do green capitalism, declare an emergency,
68:14
we had various ideas for what would be a viable solution.
68:17
And they kept not doing it; they just fight each other.
68:20
In fact one of the reasons why the Global Justice Movement fell into such a problem
68:23
is, like, at least in 2000 we knew what their evil plan was [laughs] and we could oppose
68:30
it.
68:31
And now they don’t seem to be able to come up with one, we had better ideas for their
68:34
evil plan than they did.
68:35
[chuckles]
68:36
So we were sitting around and saying, “Well, come on guys come up with your formula and
68:39
we can fight you.”
68:41
And they wouldn’t so they were sort of stuck on this credit like bubble system that fell
68:44
apart and they haven’t quite come up with what they’re gonna do next.

Recognizing the Scapegoating Dynamic: Coronavirus Scapegoating

Why the bulls are wrong

Equity markets have bounced well over 20% since the lows just over a month ago, so technically we are already back in a new bull market. With peak new cases now behind us in Australia, business is agitating to reopen and governments are starting to ease restrictions. With the biggest fiscal programs since WW2 and huge monetary stimulus in the pipes, are the bulls about to be proven spectacularly right? No. Not even close, according to Jerome Lander who manages the Lucerne Alternative Investments Fund.

In this 25-minute outdoor video interview, Jerome first set the stage by giving three reasons the bulls are wrong before then saying the bottom for the market could be more than 40% below where it is now:

“… it’s very easy to come up with figures around, 1600 or 1800 on the S&P 500. Obviously we’re up at 2800 on the S&P at the moment”.
Citing the risks of ongoing virus infestations, credit defaults, geopolitical risks, poor consumption and investment spending going forward, he paints a picture of a future that is vastly different from the past.

In this new paradigm, he argues, investors face the very real prospect of long-term asset price deflation as fundamentals reassert themselves, and that in this environment investors will require a completely different approach to the one that has worked for the last 40 years.

Discussion points through the interview

– Three reasons the bulls are wrong
– What could drive the bear market and how low it could go
– What the most imminent risks are, including conflict
– What ‘the new normal’ might look like
– The biggest mistakes most investors are making
– The lens investors should now view the market through
– Investment styles that reduce market risk
– A message for all anxious investors out there

You can access the full transcript here: https://www.livewiremarkets.com/wires/why-the-bulls-are-wrong

00:03
I think firstly the Bulls are pretending
00:07
this virus itself the problems gone away
00:09
and the problem hasn’t been solved so
00:11
although we’ve reached a peak in daily
00:13
new cases we we still haven’t got an
00:16
effective treatment or an effective
00:18
vaccine for the virus firstly secondly
00:22
we have valuations at all-time record
00:24
for earnings levels not with saying the
00:27
economic settings we have had we have
00:29
and thirdly I think the Bulls really
00:31
ignore the overall picture which is that
00:33
we have unsustainable and unsustainable
00:36
amounts of debt driving our economic
00:39
growth for many years now and that we
00:41
may well be becoming to the end of a
00:43
long term debt cycle which makes it
00:45
really very difficult to be optimistic
00:47
about the returns that you’re going to
00:48
get from traditional asset classes
00:50
there’s a lot of people out there who
00:52
just seem overly optimistic to me given
00:54
the the the settings we have at the
00:56
moment for investment markets so we
00:58
think about where we’re at we have
01:01
economies which are really operating
01:03
unsustainably still we keep on putting
01:06
on more and more debt we have
01:10
unsustainable situation whereby we we
01:13
keep trying to pretend that we can just
01:15
layer and layer upon layer of extra
01:17
extra debt and create some sort of
01:20
nominal growth the low amount of growth
01:21
given the amount of debt we’re putting
01:23
on and that somehow we’re going to we’re
01:25
going to be able to continue doing that
01:27
forever and I think the balls really
01:29
ignore those things so the Bulls often
01:32
focus on very short term short term sort
01:36
of settings and they’re overly
01:40
optimistic by Nature
01:41
I suspect so I think when you’re
01:46
investing it’s ideal to be flexible so
01:48
you want to be bullish sometimes very
01:50
sometimes neutral at other times and be
01:52
able to adjust yourself to the settings
01:54
and the opportunities that you have if
01:56
you think about where we’re at now we’re
01:59
in a position where valuations are
02:01
expensive you know we actually when you
02:03
price what markets are going to deliver
02:05
just normally based on historical
02:07
context given how they’re being priced
02:10
you come up with very low returns from
02:12
traditional asset markets
02:13
if you then layer on top of that you
02:17
know we’re at economically we’re really
02:20
we really look to be coming towards the
02:21
end of the long term debt cycle whereby
02:24
it’s becoming increasingly obvious and
02:26
increasingly challenging to actually
02:28
keep economic growth going given the
02:30
type of economic settings we have we
02:33
have a very imbalanced economy so we
02:35
have a lot of wealth in the hands of
02:37
relatively few parties and we have a lot
02:40
of people living unsustainably on the
02:42
basis of the fact they can keep on
02:44
borrowing money to to buy what they need
02:46
and that doesn’t really create a
02:49
virtuous circle in the long run or a
02:51
situation which can really resolve
02:53
itself favorably I think sure so if you
02:56
look at a traditional bear market you
02:57
know it sort of takes place over many
02:59
months so you don’t suddenly you don’t
03:01
see the bear market over in a one-month
03:03
period of time so if we are in a bear
03:05
market there would be strong reason to
03:07
suspect that it will take many months
03:09
for it to play out we might for example
03:12
see a significant default cycle over
03:13
time we might see further waves of virus
03:17
infestations should we not be in a
03:19
fortunate position to come across you
03:20
know better treatments or were
03:22
unfortunate with mutations or whatever
03:24
we might see all sorts of ramifications
03:26
further shocks to the system from
03:28
geopolitical risks there’s lots of X
03:31
factors that can still occur to mean
03:33
that shocks the system that mean that
03:36
people really re reassess whether their
03:39
prices they’re paying at the moment in
03:41
this rally actually are supported by the
03:44
fundamentals at the moment the the rally
03:46
the bear market rally you know is
03:48
supported by by the fact that that we
03:51
have got you know daily new cases piki
03:53
have piqued by optimism around that but
03:56
mainly really by massive central bank
03:58
liquidity and that central bank
04:01
liquidity there is a fight between bulls
04:04
based which the bull case is really
04:06
based upon central bank liquidity and
04:07
bears based on fundamentals and the
04:11
strong possibility of a high default
04:12
cycle and poor consumption and poor
04:15
investment spending etc going forward
04:18
and so you know that’s gonna be the
04:20
tussle back and forth now this this bear
04:22
market doesn’t have to be like any other
04:23
bear market we’ve seen before it can
04:24
definitely be different so I think while
04:26
history can inform
04:27
what we might expect going forward it
04:29
could equally be very very different the
04:32
thing that’s of concern to me I guess is
04:33
that many investors are assuming that
04:35
we’re going to go back to normal or that
04:37
although the asset prices are justified
04:40
and I think that I think that they’re
04:42
not there’s been lots of work done on
04:44
this to say well what is this support
04:45
what is a supported evaluation for these
04:47
markets and if we think about what what
04:51
earnings are doing this year and where
04:52
bear markets historically sort of get to
04:55
you know historically we’ve seen
04:57
valuations you know bottom at much lower
05:00
multiples and what we see now we’ve
05:03
obviously got earnings coming off a long
05:04
way this year so it’s very easy to come
05:06
up with figures around you know 1600 or
05:08
1800 on the SP obviously we’re up at you
05:11
know 2800 on the SP at the moment so
05:13
that would be a fall around circa 50%
05:16
plus to get to what you might argue is a
05:18
fair valuation level for the market now
05:20
clearly we’re not in a situation where
05:23
central banks have any interest or
05:25
wanting to allow valuations to fall to a
05:28
normal valuation level or experience
05:32
that sort of situation so they’re
05:35
fighting very hard to keep the bubbles
05:36
alive and they’re providing massive
05:38
amounts of liquidity and stimulus to to
05:41
to keep that secured basic prices afloat
05:44
now at the end of the day will that be
05:47
successful we don’t know you know how
05:49
long will they be able to do that for we
05:50
don’t know but there’s clearly a lot of
05:52
risk to the downside should for any
05:54
reason central bank’s not be successful
05:56
at continuing to stimulate stimulate
05:59
asset prices and support our set prices
06:01
one of the things I raised concerns
06:03
about was the valuations of commercial
06:06
property unlisted property and and where
06:11
that would go to going forward so you
06:12
think about the situation now with
06:14
everybody having you know a lot of
06:16
people being at home working from home
06:18
and a lot of people actually saying we
06:20
can actually work at home effectively
06:22
and employers saying well actually we
06:24
can have our employees and working from
06:25
home and they’re more productive you
06:28
simply aren’t going to have the same
06:29
sort of demand or need for office space
06:31
coming out of this coming out of this
06:33
crisis they needed before not to mention
06:35
the fact that you know unemployment
06:36
levels will be higher probably a
06:38
substantially higher so the demand for
06:41
commercial
06:41
property won’t be what it was and that
06:43
means that a lot of those you know those
06:45
evaluations probably are not sustainable
06:47
and you’re likely to see a lot of
06:49
pressures on on property property
06:52
evaluations moving forward also with
06:54
respect to you know residential property
06:56
we have to ask ourselves you know
06:58
depending upon what the unemployment
06:58
picture does and and how ugly this gets
07:01
are those valuations justified you know
07:04
can we can we really support valuations
07:06
purely on the basis of cheap money or do
07:09
we have to have people in employment
07:10
with good employment prospects being
07:12
able to grow their incomes over time and
07:16
people with the confidence to be able to
07:18
take out big loans banks with the
07:21
willingness to lend people in those
07:22
situations lots of money so they can
07:25
continue to pay the the high prices that
07:27
we have on on property more generally I
07:30
think one other issues I raised was the
07:33
valuations that are that you know that
07:34
are being used of unlisted assets within
07:36
super funds and so forth and there’s now
07:38
been more published on that whereby
07:39
people have raised the fact that you
07:41
know that valuations arguably weren’t
07:44
being priced fairly such that if you
07:46
think take the bottom of the market the
07:48
the short-term bottom in the market back
07:50
in March and the recovery since that
07:51
time a lot of super funds haven’t
07:54
actually recovered with the markets over
07:55
that period of time so if you had
07:56
actually invested at that time thinking
07:58
you were getting the bottom one of the
07:59
markets all had a been fortuitous enough
08:01
just to just to be in that situation and
08:03
you had of invested in one of these
08:04
super funds you were actually buying
08:05
into unlisted property prices unlisted
08:08
infrastructure price unlisted private
08:10
equity prices at at prices which were
08:13
inflated which didn’t really reflect
08:14
reality your fair valuation and those
08:16
valuations will need to now gradually
08:18
come back to what they really worth and
08:20
and that means is that there’s an
08:22
inequity in the way those those
08:24
investors are actually being treated
08:25
there is actually a much higher risk of
conflict post post two pandemic
interestingly enough and certainly when
you start doing funny things with your
money then also there’s a high risk of
conflict when you look at political
cycles and you think about people trying
to retain power there’s also an
incentive incentive there for them to
you know try and remove trying to move
the the attention of the populace onto
some external focus because they know
that if you’re at war with someone
you’re much more likely to vote in ink
to be conservative in that regard so you
can certainly come up with situations
whereby the likelihood of conflict you
know you can certainly assess the like
little conflict as being higher now than
what we’ve seen before
now of course we
already have a lot of conflict in the
world we have we have we have trade war
you know that’s been going on for some
time between China and us you know fight
for supremacy there we have cyber war
going on this is not something that
people necessarily focus on I talk about
but we have lots of that going on at the
moment already so the war doesn’t have
to necessarily be in the in terms of
physical confrontation we have economic
war going on at the moment and and that
can certainly be you know exaggerated
there’s a lot of focus in the media
recently on you know what was the real
cause of this forest did China you know
did China handle this appropriately when
they did certain things and certainly
you can point to those things very
easily and and be quite upset about the
fact that that maybe this problem should
have been contained a lot of earlier
than it was and it shouldn’t have been
the problem shouldn’t become the problem
that it did if certain state actors had
09:58
it behaved very differently than what
10:01
they had ever had that then they’d have
10:03
done so you know there might be a focus
10:06
of attention turned towards that and and
10:08
that might create you know D
10:11
globalization terms of people looking to
10:12
there’s a need that in fact for people’s
10:14
supply chains become much more resilient
10:16
out of this to move to move certain
10:18
industries which are strategic and
10:19
necessary or at least diversify them but
10:22
move some of them back to to kind of
10:24
more familiar territory and more home
10:26
territory in order to ensure they have
10:27
supplies of essential goods and services
10:29
for their economy so there’s a lot of
10:31
things that can happen out of this and
10:33
there is certainly a much higher risk of
10:35
conflict and I think he’s being
10:37
appreciated it’s one of those X factors
10:38
that’s out there in terms it’s not just
10:41
China there’s obviously the possibility
10:43
of conflict in the Middle East again all
10:45
prices have dropped very significantly
10:47
that’s going to be putting a lot of
10:48
pressure on those budgets and a lot of
10:50
those a lot of those those those
10:53
countries there’s obviously the the
10:56
tensions with Iran
10:57
there’s tensions with Venezuela there’s
10:59
lots of Powder Keg some places around
11:01
the world where
11:02
this can go wrong I think it’s some
11:04
things are definitely going to change as
11:05
a result of of this shock to the system
11:09
I think certainly we’re not going to go
11:12
back in a hurry to the levels of
11:13
unemployment that we had previous to
11:15
this shock very easily so we now have in
11:18
the US unemployment fast approaching
11:22
about 20% of the population and although
11:24
we may on the other side of this once we
11:26
do and if we do get to a solution to the
11:30
coronavirus have a rapid sort of
11:32
comeback in unemployment
11:35
it won’t quickly come back at all to
11:37
where it was before so we’re going to
11:39
come out of this with a lot more
11:41
unemployment and certainly a much more
11:44
challenged consumer than what we had
11:46
before and that will mean that will come
11:51
back with a lot of people much more
11:52
hesitant in the way they go about their
11:53
daily business and the way they choose
11:54
to interact with the world is it safe to
11:57
go and do the things you did before do I
12:00
you are you are you willing to sort of
12:02
travel overseas and go to exotic places
12:04
like you were before are you in a
12:06
situation financially where you can even
12:08
afford to do that will you be confident
12:11
in your ability to take on long term
12:13
debt and your ability to pay pay off
12:15
that debt given the fragility that
12:18
you’ve just learned with respect to your
12:21
employment prospects there’s a lot of
12:22
there’s a lot of reason to think things
12:24
will some things will change permanently
12:26
as a result of this crisis one of the
12:29
concerns I have is that when you look at
12:31
the big picture we have an economy
12:33
that’s operating it
12:34
you know that’s this size say you know
12:36
we’ve got an economy sort of this size
12:37
and we have asset prices which are this
12:39
size so there’s a massive misalignment
12:43
between the size of our asset prices and
12:45
the size of our markets and the size of
12:47
our real economy and furthermore we’re
12:49
not really growing this real economy you
12:51
know we don’t have and and this crisis
12:52
is really going to accentuate that even
12:54
further we’ve got a kind of low
12:56
productivity economy we haven’t actually
12:59
got the right settings to grow the
13:01
economy strongly and it’s laden with
13:04
debt you know basically and with the
13:06
debts been used to boost asset prices to
13:08
these levels and that’s just not a
13:09
sustainable picture long-term so
13:11
investors really should be conscious of
13:13
that in the back of their heads they
13:14
should be thinking and
13:16
really safe if I just go and buy you
13:18
know a broad basket of equities so I
13:20
just invest in a traditional way
13:21
am I really safer I’m really taking the
13:23
risk that one day this big these asset
13:26
prices that are all the way out here
13:28
this massive on the back of this massive
13:29
financialization and massive easy money
13:31
on that central banks have provided gets
13:34
collapse towards the size of the real
13:35
economy alternately do I really believe
13:38
with the way we’re operating the
13:39
economies today are we going to grow
13:41
those economies rapidly so they ask they
13:44
grow you know they grow the asset
13:45
they’re going to be asset prices so to
13:47
speak I think if you look at either
13:49
those situations there’s strong reason
13:51
to think that there’s going to be at
13:52
some stage you know you know there’s a
13:54
there’s a gravity that’s pulling asset
13:56
prices down there’s a force there that
13:58
asset prices actually naturally want to
14:00
collapse and the settings were right now
14:01
we have massive deflationary forces
14:02
operating on our set prices they want to
14:05
collapse the only thing that’s keeping
14:06
them up is really central bank easy
14:09
money and and that’s that’s becoming
14:13
harder and harder to do the real
14:15
question mark out of this is whether we
14:16
gonna get one more bubble you know
14:18
whether they manage to float those I set
14:19
prices higher again into one more even
14:21
bigger bubble how long will that last if
14:24
they manage to do that or whether this
14:26
is it this is the end of the long term
14:28
debt cycle and we have to change the way
14:30
we everything will change basically all
14:32
the things will change to mean that you
14:34
know the the returns you get from being
14:36
invested in a traditional way
14:38
long equities long property all along
14:41
all these long debt basically lot read
14:43
through an assets gets collapsed down
14:45
and so you know for me I can’t go to I
14:47
can’t I can’t sleep at night if I was
14:49
operating under that paradigm with that
14:51
with what I know now I wouldn’t I
14:53
couldn’t sit there and look at that
14:54
setting and say I should put all my
14:56
investors into that sort of risk in a
14:57
very concentrated fashion and just hope
14:59
it’s all okay because I think there’s no
15:01
reason when you look at it I think that
15:03
it will be okay in the long run so you
15:05
have to operate on the assumption that
15:07
that can collapse and therefore you have
15:08
to do things very differently from the
15:10
way most people are actually doing it
15:11
most investors are really operating
15:13
under a traditional or historic paradigm
15:15
so they’re really they’re really you
15:17
know they’ve got their equity dominant
15:18
portfolios and they really operate under
15:21
the assumption that this is a strategic
15:22
asset allocation type framework which is
15:24
based on historical returns and they’re
15:26
basically assuming that
15:28
the portfolio’s ahead for the last 40
15:30
years are the right portfolios are run
15:32
with going forward now I don’t believe
15:34
that is the case I think they’re quite
15:36
clearly we can mount a very very strong
15:38
case for why real returns will be very
15:41
low from here looking forward on the
15:43
basis of valuations or pond on the basis
15:45
of the unsustainable economic settings
15:47
we have and on the basis of all the
15:49
risks that are out there that were that
15:50
the world’s facing that investors are
15:52
facing that just aren’t being priced
15:53
into markets and and on the basis of
15:56
that I think you really need to you know
15:58
if you’re really assessing the world or
16:00
thinking about how risk it really is and
16:02
also thinking about what investors
16:04
really want for their money
16:05
you know this is don’t want a roller
16:06
coaster ride they don’t want to go up
16:07
and down like a yo-yo and end up going
16:09
nowhere at the end of that they want to
16:11
actually have absolute returns with low
16:13
risk of large you know substantial
16:15
losses and have their money protected
16:17
and genuinely diversified and if you’re
16:19
just running a portfolio which depends
16:21
purely upon you know interest rates
16:23
moving from very high to very low and
16:25
upon debt levels continuing to expand at
16:27
extraordinary and unsustainable rates
16:30
you’re not really running running a
16:32
portfolio that’s suited for what we’re
16:33
facing the next five or ten years I
16:36
think one of the things investors often
16:38
underappreciated as well is that you
16:39
know it’s geometric returns that matter
16:41
to most investors over time it’s not
16:43
arithmetic ones so if you return ten
16:45
percent this year ten percent next year
16:47
and ten percent the year after that but
16:48
then you do you do minus 30% you know
16:51
you’ve actually you’ve actually lost
16:52
investors a lot of money overall and
16:54
achieve nothing so the whole the whole
16:57
name of the game investing for the long
16:59
term is to make sure you avoid large
17:01
losses because if you have if you
17:03
experience large losses and you exposing
17:04
vistas to large losses and you’re not
17:06
you’re not giving them what they need or
17:08
want and you’re not really doing a good
17:10
job for them and I think our industry
17:11
really at the moment under the
17:12
traditional paradigm it’s it’s operating
17:15
under is really giving investors that
17:17
experience and it’s it’s really
17:19
necessary for a lot of people to sit
17:20
back and think you know given what given
17:22
what you know from operate from first
17:23
principles is this the way it would
17:25
design a portfolio for today or is this
17:27
the way the portfolio has been designed
17:28
a long time ago on a very with very very
17:32
different investment settings you’ve got
17:34
to assume that that asset prices are
17:36
going to be very low in the long run
17:37
you’ve got to assume that you know
17:39
crises are a normal part of the way
17:42
you know you manage money you have to be
17:43
your portfolio has to be resilient to
17:45
crises basically because this isn’t
17:47
gonna be the last crisis we face we
17:49
can’t just sit here and say this is a
17:50
one in a hundred year event and it’s
17:51
gonna go away even if we do somehow
17:53
manage to go over the coronavirus very
17:55
soon which as we’ve talked about there’s
17:57
no strong reason to think that will be
17:59
the case but let’s let’s say that we do
18:01
they’ll still be further crisis because
18:03
of the way we’ve set everything out and
18:04
because of the risks that there are in
18:05
the real world so we have to build a
18:06
portfolio that’s resilient to Christ as
18:08
it can still make us money and still
18:09
meet the objectives that we have now to
18:11
do that unfortunately we can’t all do
18:13
that
18:14
we can all do that by just investing in
18:15
a traditional way so we can’t say let’s
18:17
go and invest in a risky way let’s go
18:19
and chase equity risk and property risk
18:20
it inflated valuations and which is what
18:23
by the way think just about the entire
18:25
industry does so what I’m saying is that
18:27
the way the entire industry operates is
18:29
is flawed that’s what I’m basically
18:31
saying and in terms of what the
18:33
individual investor actually needs it’s
18:35
based on historical paradigm that
18:37
probably isn’t going to work very well
18:38
so we have to think how do we get away
18:40
from those risks you know if the stove’s
18:41
gonna be really hot and really dangerous
18:43
to touch how do i how do i trying to
18:46
avoid touch that i have to think very
18:47
differently you have to do something
18:49
very differently to what to what they’re
18:51
doing have to expose myself I have to
18:52
minimize that risk basically so you need
18:55
to have a lot less risk exposed to the
18:57
traditional long-only type of investing
18:59
and you have to move much more into a
19:01
more conservative more active more more
19:07
sort of long-short way of looking at the
19:09
world
19:09
so more skill-based
19:13
strategies basically so a lot of so a
19:17
lot of what I focus on is you know
19:18
finding skilled strategies that I can
19:22
use combined combined in a portfolio to
19:24
mean that I can get a return which is
19:25
along with what investors actually won
19:27
which isn’t as dependent upon
19:29
traditional asset process and
19:31
traditional asset Marcus remaining
19:32
inflated because that’s a very binary
19:34
risk so if you really want to build a
19:36
diversified or balanced portfolio you
19:38
need to think about how do i how do I
19:40
minimize the exposure to interest rate
19:42
risk you know how do I minimize the
19:44
exposure this asset price inflation risk
19:47
how do I make sure the portfolio can
19:50
survive the cry
19:51
SIB again face going forward so with
19:54
life basically what we do is we look at
19:56
we look for skills underlying
19:58
investments managers and strategies that
20:00
really bring something different to the
20:01
portfolio there’s not heavily dependent
20:04
upon you know markets so you want to
20:06
find sources of return that don’t depend
20:08
upon the markets basically going up to
20:11
achieve a good result for investors and
20:13
that’s why we’ve had such resilient
20:16
returns assess resilient results put
20:17
part whose have managed to find those
20:20
returns and we’ve managed to combine
20:21
them in a way such that we manage a lot
20:23
of the risks that are that are out there
20:25
and ensure that you know investors have
20:28
a have a have a true to label type
20:30
experience now investors in life you
20:34
know are basically looking for absolute
20:36
returns we have low risk of large
20:37
capital losses I mean one of the things
20:40
are published on as an example of
20:41
something we have used in the portfolio
20:43
which is a more traditional sort of type
20:45
of exposure in a sense but which you
20:48
know even other investors could could be
20:49
using a lot more of is precious metals
20:53
precious metals have been in a bull
20:55
market for some time now there’s still
20:57
strong reason to expect that bull market
20:59
might continue it’s amazing when you
21:01
look at you know your every Superfund or
21:03
average large institutional investor out
21:06
there how little if anything for having
21:09
precious metals it’s incredible giving
21:11
the settings we actually have at the
21:12
moment and it’s just an example of what
21:13
I was talking about before that most
21:15
investors really aren’t thinking outside
21:17
the square and aren’t really trying to
21:19
adjust their portfolios from a
21:21
historical paradigm to one which is
21:22
better suited to the sort of situation
21:23
we face today if you actually looked
21:26
under the hood of the way a lot of these
21:27
these investors operate you would
21:29
realize that bringing in an idea that’s
21:31
kind of considered you know
21:32
non-consensus is getting it into the
21:35
portfolio is actually quite difficult so
21:37
there might be in individual investors
21:39
within large institutions who actually
21:41
believe and who are themselves investing
21:43
in gold but they won’t be able to get it
21:45
in past Syria their investment
21:46
communities or their investment boards
21:48
and get it into the portfolio in any
21:50
meaningful degree I mean I saw a study
21:51
recently suggesting that even though
21:53
historically institutions had a couple
21:55
of percent of their portfolio in gold
21:58
more recently was only half a percent
22:00
which is incredible in this massive bull
22:02
market that were actually been on for
22:03
some time now
22:04
it’s amazing so some of the long short
22:06
exposures we have for example there’s
22:08
that one of the strategies that’s that’s
22:10
worked for a long period of time is in a
22:11
long short land it’s basically being
22:13
long you know higher quality companies
22:15
and low you know lower quality companies
22:17
there’s a generic sort of buckets so we
22:19
think about that there are a lot of
22:21
companies on the stock exchange which
22:23
really aren’t good companies you know
22:24
you shouldn’t be investing in them so
22:25
when you buy an index fund you’ve got an
22:27
exposure automatically to all these
22:29
crappy companies you’ve got exposure to
22:30
everything
22:31
you know actually differentiating
22:32
between the good companies and the bad
22:33
companies people are actually adding
22:34
economic value of creating value over
22:36
time and people who aren’t so the
22:39
benefit of being long short is that you
22:40
can you can you can actually say look
22:43
these are these are good companies these
22:44
are actually adding you know creating
22:46
value for their shareholders over time
22:47
and on the other hand here we have a
22:49
whole bunch of let’s call them bad
22:51
companies in and sometimes these bad
22:54
companies are really are really bad
22:55
companies they’re fraudulent for example
22:57
there’s a lot of frauds fraudulent
22:58
companies that are on stock exchanges
23:00
around the world and in the long run
23:02
they’re going to burn their investors so
23:04
if you’re able to create a basket of of
23:06
shorts to sort of fraudulent companies
23:09
or mismanage companies or highly
23:11
indebted companies at a time when the
23:13
economy’s turning south all sorts of
23:15
different strategies you can use as a
23:16
longshore manager to to have that bucket
23:19
of low quality companies and over time
23:21
the strong reason to expect you get a
23:23
you get a relative return out of that
23:24
that the good companies will actually
23:26
outperform the poor quality companies
23:28
and you’ll be able to extract a return
23:30
that’s not depend upon whether the
23:31
markets go up or down but it’s dependent
23:33
upon whether those good companies
23:35
outperform those bad companies over time
23:36
and and that sort of strategy is one of
23:39
the strategies we use if you think about
23:41
traditional asset assets if you like the
23:43
original asset classes are things like
23:45
you know equities bonds cash property
23:49
you know these are all considered sort
23:50
of traditional asset classes the ones
23:52
that make people feel most comfortable
23:54
most familiar with the ones that are
23:56
most mainstream and most you know used
23:58
in a traditional sort of paradigm you
24:00
think about alternate eternities they’re
24:02
really everything else so alternatives
24:04
can can be alternative asset classes so
24:06
things like precious metals often
24:07
considered alternatives some people even
24:10
think about
24:10
unlisted versions of of listed asset
24:13
classes as being alternative I don’t
24:14
really see them as alternatives I see
24:16
them as unlisted
24:17
unlisted versions of the listed version
24:19
but they still expose the underlying
24:21
similar economic risks for me but when I
24:25
think about alternatives I’m thinking
24:27
more about liquid alternatives so ways
24:29
of taking traditional asset classes but
24:31
operating with them very differently so
24:32
for example you know market neutral so
24:34
your long one company your short another
24:36
company against it you’re taking out the
24:38
market that you you you you taking it
24:41
down to another level and saying you
24:42
know within that within that asset class
24:44
what is there that I want to own what is
24:47
there that I don’t want to own what can
24:48
i what is going to outperform something
24:50
else so you totally getting a different
24:52
return stream out of it and that’s
24:54
that’s an alternative strategy in my
24:56
book it’s understandable that investors
24:59
are confused because lots of things are
25:01
changing and it’s important that your
25:03
investment approach also changes will be
25:05
my message
25:06
if investment markets if you don’t
25:08
believe investment markets are going to
25:10
offer strong returns going forward if
25:12
you don’t believe like I do that
25:13
economies are well set up to encourage
25:15
high productivity growth that the
25:18
valuations are attractive that settings
25:20
are sustainable that we don’t have a
25:22
debt bubble that’s a big problem in this
25:23
sort of thing like if you if you believe
25:25
everything is okay and you can continue
25:27
to invest in a traditional way and have
25:28
your portfolio or your your wealth and
25:30
your future dependent upon that but if
25:32
you think things that you know if you
25:34
think things aren’t like that and think
25:35
the world’s different place from that
25:36
now I think you really need to think
25:38
have I got the right investment approach
25:40
at all haven’t got the right investment
25:41
partners do I need to do something very
25:43
differently than what the industry at
25:44
large offers me and I think you do I
25:47
think people absolutely need to think
25:48
differently about how they manage money
25:50
and what’s a line with what they’re you
25:52
know not knowing that the way the world
25:54
is but what they are trying to achieve
25:55
for their portfolios the truth is most
25:57
of us don’t want a rollercoaster ride we
25:59
don’t want to be on this you know seesaw
26:01
and end up going nowhere we want to
26:03
actually have you know steady more
26:05
reliable more skill-based returns for
26:08
investment managers that aren’t depend
26:10
upon everything being okay and I don’t
26:12
expose us to so much crisis risks that’s
26:15
out there so my message to investors
26:17
will be just that you know really think
26:19
about whether you’ve got the right
26:20
alignment for what you’re trying to
26:21
achieve and is there a better way is
26:22
there a different way and do I need to
26:23
think
26:23
do I need to make sure I’ve got the
26:24
right investment partners for that

Stocks are in little danger of retesting the March low, top strategist Art Hogan says

National Securities’ Art Hogan believes the consensus view that stocks must retest the March low is wrong.

According to Hogan, there are too many unprecedented factors, including an intentional decision to freeze the economy, to suggest the market will follow a preset course based on historical trends.

“That pace at which we got to the correction here is the fastest that we’ve ever seen,” the firm’s chief market strategist told CNBC’s Trading Nation” on Friday. “Usually it takes the Fed and certainly Congress a much longer time to adjust to the here and now and to find the corporate polices to support the economy, and they did that in record time.”

Hogan’s view may be on the more optimistic side, but he’s not expecting a sharp, sustainable rally.

We’re in a middle ground where we’re a little bit more than 20% off the lows [and] a little bit less than 20% from the highs,” he said. “This is going to be a place we churn through for most of the first half.”

Stocks kicked-off May deep in negative territory. But since the March 23 low, the S&P 500 and Dow have surged 23% and 24%, respectively.

The rebound doesn’t surprise Hogan.

Five days before the S&P 500 and Dow hit their lows, Hogan predicted on “Trading Nation” stocks would bottom before coronavirus cases peak in the United States.

Now, he’s seeing some progress on the virus front.

“If new cases continue to plateau, then 2021 is certainly going to look a whole lot better than 2020,” he added. “I would argue that the second half looks way better than the first half of this year.”

Hogan, who has $15 billion in assets under management, speculates a slow and deliberate reopening of the economy will likely be successful and spark a demand frenzy.

There has been a lot of delayed consumption,” he said. “There is going to be maybe some pent up economic energy that explodes into the fourth quarter and certainly into 2021.”

It’s a scenario, according to Hogan, that should put Wall Street and Main Street firmly back into the green.

“Corporate America has the ability to get back into place relatively quickly. This is not a great financial crisis,” Hogan said. “Going into this, the U.S. economy was in pretty good darn shape, and so was corporate America’s balance sheets.”

Steve Eisman: “They mistook leverage for genius”


Steve Eisman: Quantitative Easing was a failure: it didn’t get corporations to borrow and invest. Rather, they borrowed and bought up their own stock.

 


Steve Eisman: Inequality was cause of Financial Crisis (10:17)

 

Steve Eisman: They made money because of their leverage (debt ratio) and they mistook their leverage for genius (12:19)

 

Steve Eisman was one of the few who predicted the 2008 financial crisis, and he made his name by foreseeing the collapse of subprime mortgage market.

Michael Lewis portrays him as one of the heroes in the bestselling book The Big Short and Steve Carrell plays an outspoken version of him in the Oscar-winning movie of the same name.

EFN:s Katrine Marçal meets Steve Eisman at Claridges hotel in London.


Transcript

00:00
they’re all getting screwed you know you
00:03
know if they care about they care about
00:04
the ballgame or they care about what
00:06
actresses went into rehab I think you
00:08
should try medication no no we agreed if
00:12
it interferes with work you hate Wall
00:14
Street maybe it’s time to quit I love my
00:15
job you hate your job I love my job
00:18
you’re miserable I love my job I love my
00:21
job honey
00:22
mark Steve Iseman welcome to the offense
00:25
I’m glad to be here so you’ve been
00:27
portrayed in a book and in a film what
00:30
did you prefer I would say they were
both fairly accurate as the way I was
back then and let’s just leave it at
00:38
that okay okay so I’ve heard that some
00:42
Brad Pitt’s almost caladium in the film
00:44
it’s not true I got a phone call from
00:47
Adam McKay who was the author director
00:50
of the movie in November of 2015 to say
00:58
that he was writing the movie and that
01:02
there was a possibility that Brad Pitt
01:04
would play me to which I responded that
01:08
the only thing Brad Pitt and I have in
01:10
common is that we both have really good
01:11
hair okay
01:13
so being one a few people who sold the
01:16
financial crash coming how did it feel
01:18
to have see this big disaster unfold and
01:20
not being able to do anything about it
01:23
the analogy I use it’s a little bit like
Noah in the ark yeah so you know Noah’s
on the ark he’s okay and that he saved
his family but he’s not exactly happy
hearing everybody screaming outside
01:38
that’s was sort of my experience all
01:41
right did you think the financial market
01:44
potential market from the financial
01:46
sector would get back get back to
01:47
business and get back to some kind of
01:49
normal as quickly as it did no I didn’t
01:51
expect it would it would happen that
01:53
quickly you know a lot of that was the
01:57
fact that the government backstop the
01:59
system and once the become a backstop
02:01
the system it was what the financial
02:04
markets did come back but the banking
02:05
system has been changed so in the book
02:08
and the film it becomes very clear that
02:09
you’re you betting against the subprime
02:11
mortgage market is not
02:13
just a trade but it’s kind of a moral
02:15
crusade are you still on this moral
02:17
crusade I’m not because a lot has
02:20
changed
02:22
you know dodd-frank I think really fixed
02:25
a lot of things leverage has come down
02:27
enormous ly the Consumer Financial
02:29
Protection Board has been put in place
02:31
to protect consumers I the world’s very
02:33
different from what it was pre-crisis
02:35
hmm but now many of these things are
02:38
threatening I mean Donald Trump has
02:39
promised to repeal vast parts of the
02:41
dodd-frank act for example it’s not
02:44
something I’m in favor of I think that
02:46
will be a big fight you know it’s
02:48
possible the industry is going to get
02:50
deregulated to a degree we’re not going
02:52
to go back to what we where it was so
02:54
for example you know Citigroup used to
02:56
be levered 35 to 1 today its levered 10
03:00
to 1 I feel if we go into some type of
03:03
deregulation maybe you get 2 to 3 turns
03:05
more leverage it’s not something that
03:07
I’m personally in favor of but I don’t
03:08
think it’s a calamity hmm so do you
03:11
think with Donald Trump be president
03:14
today if more than one banker had gone
03:17
to jail for the financial crisis it’s an
03:19
excellent question and the answer is I
03:22
don’t know you know I don’t know
03:24
I’m cold about it I’ve thought about it
03:26
a lot
03:27
I think there’s a definite very strong
03:30
sentiment that it was wrong that nobody
03:34
went to jail I’m not going to say if
03:36
that sentiment is right or not but
03:39
there’s definitely a very strong
03:40
sentiment in the country that that’s the
03:41
case and I think people are very angry
03:44
that nobody did go to jail again I’m not
03:46
going to say whether that’s right or
03:48
wrong and if people had gone to jail I
03:50
think that would have soothed some of
03:52
the hangar that was seen in the election
03:55
so it’s possible that impact of the
03:57
election but it’s impossible it’s
03:58
impossible to say right so now taxes are
04:01
going to be can’t and Finance regulators
04:03
because the populace to campaign against
04:05
Wall Street 1 correct correct okay so
04:09
what do you do with investment then I
04:11
hear you you are investing quite a lot
04:13
in bank stocks well I mean there’s
04:15
there’s two issues there’s what I think
04:18
about finance the financial system and
04:20
what I think about financial stocks and
04:24
the two don’t necessarily
04:26
correlate so with respect to the
04:28
financial system I think that what’s
04:31
been done has been a good thing but it’s
04:34
been very intense bank the dodd-frank
04:36
act and the Fed forcing people to
04:39
de-lever to de-risk etc so from a
04:43
financial system I’m very happy I could
04:47
say very strongly the United States
financial system has never been held
this healthy in my lifetime but it’s
been very painful for financial stocks
because as you de-lever and do risk you
make less money and therefore it hurts
your stock price so the last six years
05:08
or so have been extremely painful for
05:10
financial stocks especially banks as
05:13
they’ve de-levered and dearest well if
05:16
we’re going to go into world where we’re
05:17
going to deregulate and leverage is
05:19
going to go up at least some just
05:22
reverse the story
05:23
so therefore financial stocks should do
05:25
well right okay
05:27
like I said financial system financial
05:30
stocks but you are not necessarily the
05:32
same an interest rates in America are
05:34
going up yes that’s very good for banks
05:37
all right
05:37
so America is kind of moving from a
05:39
monetary stimulus to a fiscal stimulus
05:41
with something but it’s like that’s
05:43
something I’m in favor of yes I think
05:45
it’s a good thing the infrastructure
05:46
investment yeah that’s right until not
05:48
believe that quantitative easing is a
05:52
successful strategy why not there are
05:55
too many negative impacts for from it to
06:00
I mean look it was a noble experiment
06:02
there was no fiscal expansion there was
06:04
no other game in town so I don’t blame
06:06
the Fed for doing it the idea was that
lowering rates would cause people to go
up or out on the risk curve and vest in
the economy and really the other thing
happened was they went out on the risk
curve by buying back their own stock
they didn’t really invest in the economy
06:22
and with lower rates that hurts consumer
06:25
because they makes us money we pay the
06:26
money in the bank so I haven’t you know
06:30
when we started the monetary policy of
06:33
quantitative easing
06:34
us growth was one-and-a-half to two
06:38
percent and after we did it it’s one and
06:41
a half to two percent so in my view
quantitative easing is a failure
06:45
alright so in November you said to the
06:48
Guardian in Europe but Europe is screwed
06:50
you guys are still screwed referring to
06:53
their non-performing loans in the
06:54
Italian depends of the country yes
06:56
are we in Europe still screwed well my
07:00
wife wish I hadn’t said that
07:01
yes so okay oh we in big trouble not big
07:07
it depends on the country you know Italy
07:10
has a very large non-performing loan
07:11
problem I don’t see the Italian
07:14
government doing anything to really
07:16
solve that problem if they like before
07:18
Christmas that was a nasty suppose that
07:20
was just monte de Paz yeah and you never
07:22
like to say monte de Partie because it’s
07:24
such a great name and the world’s oldest
07:27
bank as the world’s oldest bank correct
07:29
and I don’t you know you could try and
07:31
Simmel to deposit ten times fast it’s
07:33
very hard but it’s not really solving
07:37
the problem I mean this is something
07:39
called a Texas ratio which is a ratio
07:42
that bank analyst Achon myself compute
07:45
which is non-performing loans divided by
07:49
tangible book value plus reserves
07:52
basically the numerators all the bad
07:54
stuff divided by the money you have to
07:57
pay for the bad stuff and one of the
08:00
great lessons about bank analysis is
08:03
that one in Texas ratio gets over a
08:05
hundred percent the bank is done and in
08:08
Italy the two largest banks are in paisa
08:11
and you credit and their Texas ratios
08:15
are at ninety percent and every other
08:17
Bank in Italy is over 100 percent so I
08:21
don’t envy Italy the problem ok famous
08:24
ahma is the country there’s the bigger
08:26
than I think it won’t come and I think
08:28
the problem with the banks generally in
08:30
Europe is that they are still under
08:33
capitalized and they they are they do
08:37
not make enough money per dollar
08:39
employed basically European banks don’t
charge enough for this
services they never have and they’ve
tried to make up the difference with
leverage and in a world where you have
to use less leverage that model doesn’t
work
what about Deutsche Bank quite the same
well don’t you make sort of the poster
child for that let’s think about this
09:01
this way so today if a bank has a 1%
09:08
return on asset and is loved or ten to
09:12
one the return on equity is 10% that’s
09:15
the simple formula so you know Citigroup
09:19
for example doesn’t even have a 1% ROA
09:23
but they’re not that far off but
09:27
Deutsche Bank today has a 30 basis point
09:29
ROA they need to improve their
09:31
profitability by more than three times
09:34
there’s no way Georgia Bank on its own
09:37
can improve its profitability three
09:39
times the entire European banking system
09:41
has to be price you know how that’s
09:44
going to ever happen I don’t know but
09:46
until it does your paint banks it could
09:48
be a problem
09:49
they’re going to be a problem so you’ve
09:50
been in here in London for a few hours
09:52
now and you must have realized already
09:54
that the only thing people talk about
09:55
here with breakfast yes
09:57
so what financial risks do you see
09:59
coming from brexit big question is a big
10:04
question
10:04
okay what will happen in March I have no
10:07
idea you have no I really have no idea
10:08
honestly I don’t think and more
10:11
importantly anybody else has any idea
10:12
that it’s going to be an adventure a not
10:15
so it’s going to be a fun adventure but
10:17
it’s going to be an adventure so you
10:18
said that we’re very bad at dealing with
10:20
crises that develop very slowly and you
put the blame on the big financial
crisis of 2007-2008 on income
distribution really do you see that
10:32
changing at all I mean let me explain
10:35
that yes because it’s not intuitively
10:39
obvious how the two are connected so you
10:42
know my thesis is that one of the
underlying causes of the financial
crisis it was bad income distribution so
you know when I say that people’s eyes
generally clays are like you know what
are you talking about
but I think that there’s a
cause-and-effect relationship in that
you know starting in the 90s when income
distribution started to get really poor
in the United States rather than focus
on that and what the solutions worth of
that problem let credit get democratized
that was the euphemism for will will
make loans to people that we didn’t make
loans to before so rather than get
people’s incomes up they let them lever
themselves [take out more debt] and one of the ways people
lever themselves was by taking out loans
on their homes and loving themselves
that way and so I think one of the
causes of the subprime mortgage crisis
is that you know post dodd-frank hard to
get a mortgage loan yeah you know
incomes have only started to start
growing again we’ll have to see what it
does the new administration can do
anything hmm
so it don’t Frank it’s harder to get a
loan but well it’s hard to get a
mortgage why although I don’t think that
I caused a defect of dodd-frank I think
it’s more of an effect of all the fines
that were imposed on the banks for the
mortgage crisis and so the banks I think
not unjustifiably are kind of worried
12:11
about making mortgage loans that they
12:14
might they might not should or should
12:16
not make so the financial crisis what he
12:19
said the main problem was the products
12:22
the tools available or the culture ah I
would say is one of the unsung aspects
of the financial crisis that people have
definitely not written that up about
which is psychology yes and what I mean
by psychology is you have an entire
generation of Wall Street executives who
grew up in the 90s in the early aughts
who really only had one experience which
is they made more money every single
year now what they didn’t really notice
was that as they were making more money
every single year the leverage of their
various institutions was increasing
every single year
now they thought they were making more
money because it was them but really
what was happening as they were making
more money because their institution was
becoming more levered and really what
happened was they mistook leverage for
genius
I wrote that sentence by the way I read
that I do it’s a good son it’s a good
sentence I don’t write a lot of good
sentences but that’s definitely one of
them tweetable yes it’s very good right
if I tweeted I would tweet listen I am
so let’s imagine you went to a Wall
Street executive in circa 2006 and you
said to the CEO of you know pick the
name of your institution and you’d say
dude listen the entire paradigm of your
career is wrong you have to de-lever so
did you ever have a conversation like
that I did I’ve never told this story
before there’s like AI now it can be
told story okay um so the day is
February 2008 and I have a meeting with
the head of Risk Management and one of
the big Wall Street firms we won’t name
them anyone else today but it wouldn’t
matter because I would have had the same
it would have been the same conversation
with any of them
given what was discussion one so I sit
down with a head of risk management of
one of the big farms it’s one month
before Bear Stearns almost to the day
and I say to him you have got to de-lever
and you’ve got to de-lever now because
Armageddon is coming the point of it is
the direct that’s almost a direct quote
I used the word Armageddon and he looks
at me and he says you know I hear what
you’re saying but you know we at X we
can be much more levered to the bank now
back then there was a bank based in
Detroit called net city it was a
medium-sized regional bank and it had a
lot of subprime mortgages so it was a
bit of the topic of the day and so I
said to him you know do you know what
happens if knacks City goes down and he
says no what happens I said nothing the
regulator’s come in they seize the bank
they pay off the depositors they fix the
bank they sell the bank the government
takes something of a loss end of story
do you know what happens if your firm
goes down planet earth burns who should
be more levered and he looked at me like
I was speaking ancient Greek like he
just it was so outside his paradigm it’s
like he didn’t know I was talking about
and I realized it was over that there
was no way these guys were going to do
what needed to be done before the world
blew up but I think we’re going to see
someone to go to jail right
I mean you can have to break up the bank
partido I don’t know I don’t know I have
a feeling in a few years people are
going to be doing what they always do in
the economy tanks they would be blaming
immigrants and poor people it’s not X
equate from you is that Hollywood’s a
great quote it’s a great mark it’s not
yellow it was written by Adam McKay with
the author and director and but did you
16:26
think in those terms back then oh I
16:28
always think in those times always
16:30
thinks in terms of disaster yes why is
16:33
that just I have a very strange DNA do
16:39
you see this paradigm changing at all
16:40
this culture I was told check it steady
16:42
change they’ve been beaten to a pulp
16:44
yeah
16:45
you know the dodd-frank gave much more
16:49
power to the Fed to regulate the banks
16:53
that power was put in the hand of
16:56
Governor Daniel Tarullo and I think he’s
17:00
done a tremendous job of de-levering the
17:03
banks in the United States you know I
17:05
would say the CEOs of the bank’s fought
17:09
him kicking and screaming but I’d say in
17:12
the last year or two they gave up and I
17:15
know you said before that Europe’s done
17:18
not as good of a job with that that’s
17:21
correct why well it’s what your starting
17:25
point so you know just pre-crisis
17:29
Citigroup is levered thirty five to one
17:31
deutsche bank is lowered over 50 to one
17:35
so today’s Citigroup is levered ten to
17:37
one and deutsche bank depending on how
17:40
you calculate is probably levered twenty
17:41
five to one so everybody’s leverage is
17:44
lower European banks have always been
17:48
much more levered than US banks so
17:51
they’re still more levered they just
17:53
left levered than they were right not
17:57
they’re not de-levered enough to my taste
17:59
yes
18:00
but that again we gets back to the Paula
18:03
Mills they’re not profitable enough per
18:05
dollar employed so the regulator’s in
18:08
Europe let them be more levered I think
18:10
it’s a mistake but that’s the way the
18:12
systems it works okay and everyone’s
18:16
asking you what the next one of the
18:17
crisis is going to be so I don’t have a
18:19
dick I know I’m not going to ask you
18:20
money I will ask you that question I say
18:25
you know everybody’s trying to pick the
18:28
next big short and I’ve done that
18:30
already I’m in no rush
18:31
okay thanks a lot Steve Eisman thank you