Global Macro

I have expected deflation right from the very beginning of the '87 crisis, when I first started modelling financial instability, because we have an excessive level of private debt.

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One of the problems that we have about understanding this crisis is about understanding money itself. We are continually getting it wrong.

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A big difference that can actually have them “succeed” in causing inflation is that instead of a lot of this QE winding up in asset prices and winding up in the financial system, a lot of it is getting injected into the economy in the form of business loans that turn into grants and helicopter money to consumers, extra unemployment benefits…

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I was hoping that the Russians and the Chinese would get together and form a currency basket system. The one thing I can say in favor of Donald Trump is he has accelerated discussions by central banks around the world about the need for, potentially, a basket of currencies; basically a version of SDRs to be for international trade as well.

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The Euro, itself, has become part of a symbol of Europe, and people like the fact that they can travel between one country and another and not have to change their bank accounts, or their banknotes, and so on. So, even the Italians, who I have said have economically suffered more than anybody…and they have been forced into austerity… Even the Italians are being wedded to it.

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What is actually causing the increase in GDP is increase in energy. We have a high level of GDP because we use more energy. The correlation coefficient between energy consumption and GDP, at the global level, is .997.

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The idea that government debt is a problem is a problem of understanding what government debt is. We know what the Federal Reserve can do with its keystrokes. If it decides to cancel that debt, it can cancel that debt. It can buy back all the government debt outstanding tomorrow and it could cancel it the day after.

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By the 1940s the private debt bubble was mostly worked off, but then, of course, we entered the WWII period; we had massive federal deficits as a percentage of GDP. … In order to fund those deficits, the Federal Reserve had to take over the Treasury because there wasn't enough natural appetite for the public to buy all those treasuries. So, the Federal Reserve did something that was, basically, quantitative easing, even though they didn't call it that back then.

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This time we have a very high federal debt and very high private debt at the same time. So, back then (1930s) we had one after the other; first, we had a private debt bubble then we had a federal debt bubble. So, they worked them off kind of separately, a decade apart. Whereas, in this time, we had a partial deleveraging ten years ago, but we did not have a deleveraging in the corporate sector. Then, of course, we've had an increase in the federal sector. Basically, we have a larger debt problem to work through…

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A big difference that can actually have them “succeed” in causing inflation is that instead of a lot of this QE winding up in asset prices and winding up in the financial system, a lot of it is getting injected into the economy in the form of business loans that turn into grants and helicopter money to consumers, extra unemployment benefits…

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You could have mid-single-digit sustained inflation with an occasional spike, especially in a yield curve control environment where they don’t raise rates to stop inflation. But, that could quickly get out of control if the global investors lose confidence in the currencies and bonds.

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You don’t want to rely on masks from China if you’re in a contest with China in a great war struggle. Even if it’s not a hot war if it’s a cold war you still don’t want most of your medicines made by your cold war antagonist.

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… it seems odd to me not to have, say, 1% in bitcoin because the market cap, right now, fluctuates between one and two hundred billion but gold's market cap is like ten trillion based on estimates for how much gold (above ground gold) exists in the world and what its current price is.

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Those supply chains for oil can be disrupted. We saw that happen in Saudi Arabia where they were attacked and they lost energy output. I do think we could see a period where we have more commodity scarcity this decade. I think there’s some of the tail risk to look out for is either certain commodity scarcity or how significantly we could have currency devaluations.

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… there are a lot of pensions that have to own bonds… We’ve had a forty-year global cycle in lower and lower yields so bonds have had a really great run. But now that bond yields are equal or less than inflation and debt loads are so high that they can’t really raise rates, I do think that there’s a pretty big risk to these institutions of having so much bond exposures.

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What we did this time that’s unique to all the other ones is that we effectively did a global economic shutdown. That’s never been done before. No one really knows what that means and we’re still all trying to feel around in the dark as to what its implications are.

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Investors have been bailing out of the bond market in a big way. They were selling corporate, they were selling Treasuries, and they were moving themselves into money market funds. Foreign central banks even sold over 150-billion dollars worth of Treasuries as well, too. At the same time that they were doing that, the Federal Reserve stepped in and was, at one point, buying over 100-billion dollars a day of bonds. But it looks like what they’ve been effectively doing, is the words you hear all the time: yield curve control.

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Trump thinks that if you ram the stock market higher it will create confidence, new jobs and GDP. The Federal Reserve and the Treasury Secretary thinks that too. Jerome Powell says this: “the free market was going to let these companies go out of business, but we prevented it and we saved those jobs.” Maybe the free market had a good reason to send those companies out of business?

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There’s one group larger than the Fed, and that is what Ed Yardeni coined forty years ago – The Bond Market Vigilantes. The collective wisdom of the bond market is larger than the Fed. If you get inflation, and then everybody is of the perception that inflation is here, eroding the value of fixed-income investments, then they become of one mind, and that one mind is to sell.

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If the Treasury’s projections and the Fed’s projections are correct, between March and August they are going to, in either a combination of either print or borrow the equivalent of four years of tax receipts in five months. So, they will have created four years of tax receipts in five months to go towards trying to battle the contraction in the economy and the pandemic.

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I think $40 is going to be a very tough problem for the oil industry to maintain and you’re probably going to see more cutbacks in production, maybe some bankruptcies. It’s probably going to put a floor on this market right now, assuming that the demand situation is somewhat stabilised and that we don’t have another violent downturn in the economy one more time.

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So, we will create new jobs. We just don’t know what they are. The old jobs will go first, the new jobs will come later, the old jobs we know what they’re going to be that are going to be lost – the driver job. We don’t know what the new industries or new jobs are going to be created because of driverless cars. So, I’m not afraid of the future happening in that respect, but I understand the anxiety and the stress that it’s going to cause to get there.

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Short-term risk markets go up, but longer-term I feel that they’re going to hit a ceiling and run into trouble after three months to a year. I think interest rates are going to meander sideways. I think for those in a 60/40 portfolio that think that that’s their edge, they’re going to be disappointed by it. I like gold, but I’m kind of mildly bullish on gold, I’m not wildly bullish on gold right now.

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Compression means that we go into a deep recession but we also come out of it and the numbers that we will see coming out of this recession will also be note worthy, and new records for positive increases.

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To raise taxes is toxic in terms of your electability. So, it’s easier to have some sort of inflation and blame it on the pandemic or something like that.

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I think, just looking at history, it’s really naïve to think that the U.S. will be the dominant currency forever. So, things change. So, economic tides come in and go out.

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I think governments will embrace this technology for another reason and that is tax. So, right now with the value-added taxes, especially in Europe, there are just so many incentives to basically transact in cash to avoid the VAT.

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I believe that technology will deliver a surge, in particular, to emerging markets; will spill over to the developed markets; the increased productivity will be striking. We will not be working 40 hour weeks in the future. There will be a lot more leisure time. There will be less income inequality as we’ve got equality of opportunity.

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