The Breakdown - Central Banks Cannot Print Jobs: Understanding Real Economic Recovery, feat. Daniel Lacalle

Episode Date: July 8, 2020

Today on the Brief: Social media apps get caught in geopolitical tensions  Pitchforks around the Paycheck Protection Program  Brazil blocks Binance Our main discussion is with Daniel Lacalle. Daniel is chief economist at Tressis and is the author of numerous books including “Life in the Financial Markets,” “Escape from the Central Bank Trap” and his most recent, “Freedom or Equality.” He has been named one of the 100 most influential economists in the world by Richtopia.  In this conversation, he and NLW discuss: Why the recovery will likely be “L” shaped and uneven, not “V” shaped Why the “bailout of everything” undermines capitalism and promotes zombie companies that can’t service their debts Why zombie companies crowd out space for startups and small businesses  How government programs can incentivize relationships with government over strong business practices  How the current economic crisis could become a banking crisis Find our guest online: Website: dlacalle.com Twitter: @dlacalle_IA

Because money creation is never neutral. The interventionists, modern monetary theory defenders, et cetera, try to tell us that there is a way of making money creation neutral. But it is not neutral. It is always going to massively benefit the first recipients of money, which are always government and the sectors close to government, and it's going to disproportionately negatively impact the last recipients of money.

of that money, that is real wages and the savings of the middle class. Welcome back to the breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond. This episode is sponsored by BitStamp and Crypto.com. The breakdown is produced and distributed by Coin Debtz. And now, here's your host, NLW. Welcome back to the. The Breakdown. It is Tuesday, July 7th, and today we have such an awesome conversation with

Daniel LaCalle. Many of you will know him from Twitter. He is an investor, a fund manager, an economist, a prolific writer, so I'm really excited to share that conversation about central banks and monetary policy with you. But before that, we are going to do the brief. Yes, we are back to our regularly scheduled briefs. And before the brief, I just want to quickly say thank you guys to everyone who listened yesterday and added a rating on iTunes or in whatever store. It looked like a couple of you came in. I would love and appreciate if any of you who haven't had a chance yet to rate and review the podcast, it makes such a big difference to new people discovering it. And I won't show this every day. I just wanted to kind of do a catch-up

because I never show for these reviews and ratings, but they do really help. Anyways, guys, thank you to all of those who have already. And thanks to all of you for listening. With that, let's dive into the brief. First up on the brief, social media and geopolitics. So this is one that I'm actually only really going to try to cover briefly because I think it's going to be a full episode at some point. But there is an interesting phenomenon of social media apps getting caught in geopolitical battles.

For example, last week, India banned TikTok, which is a huge deal for that company as India accounts for more than a third of downloads of TikTok. It also banned WeChat and something like 20 other different apps that were pro-China or associated in some way with the Chinese government. At issue here is the border standoff between India and China and the Himalayas that led to 20 Indian soldiers being killed over the last few weeks. And the question has to do with propaganda. And as crazy as it seems, if you'll remember on a brief a few weeks ago, we talked to

talked about how some TikTokers are trying out and experimenting with effectively pro-China messages to try to get their stories seen with some very anecdotal, let's say, evidence. So that was what happened last week. Now, this week there is a new issue. The national security law that has been at the center of Hong Kong protests since last year has gone into effect. And because of that, the relationship between Hong Kong and the outside world is changing. Yesterday, YouTube, Facebook, Instagram, WhatsApp, and LinkedIn all said that they would suspend compliance with government requests for user data in Hong Kong because they can no longer think that it's separate from China, right? Zoom jumped in and made a similar pledge today,

and TikTok also announced that today they are removing service for Hong Kong. importantly, this cuts the other way as well. Mike Pompeo has said that the U.S. is also considering banning TikTok from the United States. So why this matters? Well, my broad sense is that we throw around a lot of ideas of what the future looks like and America withdrawing from the world without any real sense of how that affects us on a day-to-day level. We are not used to as Americans having our options limited because of politics.

In fact, that is kind of the opposite of what it means to be an American theoretically. Basically, I don't think we have any sense at all what the balkanization of the Internet and the rest of the economic world would actually look like practically, and it's a hell of a lot more complicated than we think. Crypto investor Eric Meltzer put it really interestingly on Twitter. He said, China bans U.S. apps, a freedom limiting move. If the U.S. reciprocates, we've been forced by another country to limit our own citizens' freedom. If we don't, our companies are at a huge disadvantage.

Thorny. And I think that that's right. This is a complicated thorny issue and one that is worth paying attention to because it is a front line of a geopolitical issue that is going to have impact on what you are allowed to do if you're in America. Next up on the brief, PPP stimulus. So what happened? Well, the Small Business Administration finally shared who got loans through the Paycheck Protection

program and the rough ranges of size. So they didn't give the exact size, but they gave kind of big ranges, right? So in crypto, 75 or more companies got a total of 30 million across all of those companies. The biggest by far was consensus who got a grant of between 5 million and 10 million, or I guess I should say a loan. These terms actually matter in this context. But many other companies had smaller loans as well. Another notable area that had some people mad was private equity firms. There were something like 10 firms that got grants or loans through this program, even though in April the SBA said they didn't qualify. So why does this matter? Well, one, the pitchforks are out for companies that, quote, didn't need the money. And I am super sympathetic to that.

I think that it's very hard not to see this whole exercise as one in political capture, where, again, the companies who are best able to use their extra resources and proximity to policymakers to access the best beneficial loans or guarantees versus at the expense of the small mom and pops that theoretically we thought this was going to help. So I'm super sympathetic to that pitchforky argument of being frustrated with companies that didn't need it. The problem is that I'm also sympathetic to the other side, which is that if you're any company and there's really cheap money available in a circumstance of questionable economics going forward or just a big question about what recovery is going to look like, in some ways it makes sense to capture that money as much as you can,

right? It's responsible for your employees. It's responsible for your shareholders. So on the other hand, even though I'm sympathetic to the fact that this program probably was able to be captured by people who needed the money less than those who weren't able to benefit as much from it, it's because of the incentives, right? It's harder for me to get particularly angry at any one individual company. And frankly, I think that the issue that we should have and the frustration that we should have should be the incentives in the program design itself. And this is, I think, emblematic of a larger issue, which is that we get angry at, I mean, it's a stupid way to say it, but it's kind of accurate, which is hate the game, not the player. And I think that that's

basically the situation that we're in economically. It's the game that's rigged and people are just trying to make sense of it. I don't think that that means that you shouldn't be frustrated with companies that you felt took advantage of this program unduly, you are allowed to exert your will on that and I support you. I just think that the bigger issue is the way that we create these types of programs and how we structure the incentives. It's going to produce results like this at infinitum. All right. Last up on the brief, a Binance ban in Brazil. So what happened? First of all, let me say that Binance has the most unbelievable PR machine in the industry. Because when I was looking at this, There were something like three or four other Binance articles floating around.

So kudos to you guys, whoever is running that. But what I wanted to focus on was this ban in Brazil. And effectively, Brazil's equivalent of the SEC has stopped Binance from trading in derivatives, right? They said that the derivatives products are security and Binance needs to shut that down. Pretty simple reason why I think this is notable. Crypto derivatives are a growing important part of the industry, right? They are surging, whereas spot trading volume has been down for the last couple of months.

derivatives are growing up in a big way. This makes sense. It reflects the larger financial markets as well, where derivatives are much, much bigger than just spot trading the underlying assets. But because of that, we're likely to see more of these sort of regulatory questions and, frankly, more intense and not necessarily good regulatory scrutiny around some of these assets as these derivatives products become more important. So I think it's more notable as a reflection of a trend that I would anticipate going forward as derivatives take a larger and larger place in the industry as a whole. All right, and with that, let's shift over to our interview. Daniel LaCal is the chief economist at Tressis. He is the author of numerous books, including

life in the financial markets, escape from the central bank trap, and his most recent freedom or equality. He's been named one of the 100 most influential economists in the world by Rich Topia and is a prolific member of FinTwit. He's always tweeting, always writing. In this conversation, we talk about a huge variety of topics. We talk about the bailout of everything, the rise of zombie companies, the collapse of small businesses and startups, and why this moment that we're living through right now might be an opportunity to challenge some of the most intransigent economic dogmas of our times. As with any long interview, this is edited only very lightly, and so I hope that you enjoy this excellent conversation with

Daniel LaCalle. All right, Daniel, thank you so much for joining the breakdown today. It's great to have you. Thank you so much for having me. It's a true pleasure. So I've been a longtime follower of yours on Twitter. I really enjoy your articles. You're a prolific writer. I mean, I'm looking forward to getting into a number of the different topics that you've explored. Let's start off with something that I think is really tangible for people. We seem to have this obsession with using letter shapes to describe the economic recovery or potential economic recovery, I guess I should say.

What letter is it looking like to you from where you're sitting? It's very interesting because it's a very visual way of making people understand how the recovery will be. When we talk about a V-shaped recovery, most people see it as, well, then it doesn't matter. then the slump will not be so problematic because we will recover very, very quickly. And that's what government wants us to think of, a V-shaped recovery. Everything will be okay in a few months' time. However, if we look at the reality of the past three decades,

is that L-shaped recoveries are much more normal, are actually something that is the habitual way of getting out. of crisis. Every time that we have had either a financial or an economic crisis, the way in which economies recover is slower than in the past recovery and also more indebted with lower productivity. So so far, what we know about the May and June figures, both in terms of consumption and in terms of industrial production, is that it's going to be a slow and an easy, even recovery. I think that that is what matters the most, that there will be some sectors that will not recover where they were in February 2019 until at least 2023, whilst there will

be other sectors like technology, for example, that will recover in very little time, actually probably by the end of summer. So I think a couple of themes to pull out. One is this idea that even the notion of a V-shaped recovery is more sort of hope and narrative than it is probably substance to that, and I think that this is something that you were kind of getting at, that when we talk about recoveries, they're not completely separable from each other, right? In the sense that we have to use the context of where the economy was based on the last sort of recovery to understand what's going to happen going forward. And then I guess the third part is just almost the uselessness in some ways of looking overall

versus sort of parsing into sector by sector, you know, theme by theme to really understand how things are going to recover, shift, and change. Certainly. Certainly, because if you think about it, if somebody's job is in the manufacturing sector, certainly they won't be interested in a V-shaped recovery. when the manufacturing sector is not going to recover at least until 2022. You see what I mean? So I think that is why it's so important to be less, to talk less about aggregates.

Talking about aggregates is something that economists and governments like very much because they sort of dilute a lot of the challenges that we go through. And to go into the details of the sectors and the different parts of the economy. follow me. No, absolutely. There's a phrase I like to use on this show, which is that the story is always more interesting than the soundbite, but we live in a very soundbite world, especially as it relates to economic data. So I want to actually, I think that there's so much to dig into around this and to parse out with you, but maybe by way of setting a frame, I'd love for you to describe a little bit of the central thesis of your latest book, Freedom or Equality, and I guess specifically this

idea that you have of social capitalism. And the reason that I want to ask or start here, rather than kind of gradually coming into this, is that it feels to me like much of your, much of the observing that you've been doing around the current crisis, the context are these larger kind of challenges and structural issues that were happening even before the crisis. So one, I guess, is that, is that accurate. And then two, maybe we can get into the idea of the book. Yeah, no, absolutely right. There are long-term trends that we sometimes forget because of the headlines or the things that seem to be the latest, more important things that the media focuses on or economists focus on. Those challenges that I talk about in the book are the advance of technology.

the growth of the middle class in emerging economies and the aging of the population in developed economies and the weakening productivity of the developed economies, how we are growing in a bloated way, if that makes any sense. We basically are delivering a level of growth that is not generating the improvement in real wages and the improvement in disposable income that citizens would expect out of a growing economy when it grows. And that generates this idea that has been repeated over and over in the last few years about sort of saying that all of the problems of the economy come from inequality. And that what we need to do, therefore, is to give a lot more

power to governments and a lot more power to politicians in order to redistribute wealth as the solution to everything. And what I debunk in the book to start with is the idea that in itself, inequality is a bad thing. You and I, for example, can talk about our experiences and if I understand that you have reached the level of success that you have achieved with hard work, and through your own means, that helps me to take action and to improve my opportunities as well. And that is called mimic inequality, and there's nothing bad about that. The problem is when inequality is created by being too close to government, when the reason why citizens feel that there is a problem of inequality

is because some people are closer to government, and therefore it's not a question of merit. It's a question of political adherence. And obviously, giving more power to governments is not going to solve it. Therefore, what I use is this term, social capitalism, that what it tries to talk about is we have reached a level of prosperity and a level of improvement in general economic and welfare conditions

for almost everyone that is unparalleled in history. And we should develop from there. And the idea of social capitalism is precisely to eliminate the incentives that governments have to develop what is called crony capitalism, which is a trait of statism, that is to surround government by a number of so-called large, what is called champions and forget about the fabric of the economy, which is comprised fundamentally of small businesses and independent service providers.

So the idea is to develop capitalism in a way in which it has been developing in the last 20 years, but further, which is to let companies take more action in investment in healthcare, in education, in the environment, and provide an efficient and better managed solution to the challenges of the future without entering into the perverse incentives of giving increasingly more power to politicians whose objective is always to maximize the budget, not to improve the situation. So I think it's one of the things that I really like about this discussion and that I think happens too far is the economy. I mean, this has always been the case, but the economy is politicized currently in a way where isms are sort of wielded like weapons, right? Where instead of trying to understand cause and effect and have open dialogues where people can agree about problems but disagree about solutions, things become,

tribal, right? You are this or you're that. Your economic affiliation becomes your political affiliation, becomes your social affiliation, becomes your identity affiliation. And I think that this problem is manifest around the discussion of inequality. And certainly this is something that Bitcoiners are particularly interested in because a lot of the diagnosis in that area, which is kind of an Austrian economics bent, has to do with the, to your point, the proximity to government and just the sort of a policy that benefits basically asset holders, right? In America, less than 50% of people own stocks, but the net effect of Federal Reserve policy has been to inflate asset prices,

which in fact exacerbates inequality based on this sort of line of thinking, right? It keeps people farther and farther away from buying into the system of wealth creation in the country. That's a more nuanced conversation about the root causes of inequality that leads to some different conclusions. about how to address it than just inequality is an inherent byproduct of our kind of big C capitalism, whatever that means to us. And so we need to replace capitalism. And that's unfortunately, I think a lot of the state of the conversation, at least on a political level.

Completely. Obviously, the idea of total equality in itself is impossible. We as humans are never going to be completely equal. But we must strive for equality of opportunity. And equality of opportunity is something inherent to capitalism. You don't have equality of opportunity in socialism. In socialism, what you have is a political elite that accumulate all of the wealth and all of the privileges, and everybody else is extremely poor. So it generates equality by making everybody poor. That's not the way that we want things to develop. If we look at capitalism, and if we look, for example, at the

middle class, which is in itself a creation of capitalism. There wasn't any middle class before capitalism. We must remember that the history of humanity is that in which the vast majority, 90% of the population were not poor, but extremely poor. And there were very, very few close to the government and the church maybe that actually held some privileges. With capitalism, we created what is called the middle class. But the middle class is being depleted out of its incentives and its opportunities to improve in a society in which the economy. grows by a constant decision from policymakers to increase inflation and to incentivize the wrong side of the economy with monetary policy. So coming back to what you were saying about central banks, it's almost funny that you hear the president or the governor of a central bank talk about how concerned they are about the rise in inequality when they

pump money massively into the economy and that benefits those that are able to either hold stocks or that have access to debt. Because money creation is never neutral. The interventionists, the M&T, money monetary, modern monetary theory defenders, et cetera, try to tell us that there is a way of making money creation neutral. But it is not neutral. It is always going to massively benefit the first recipients of money, which are always government and the sectors close to government, and it's going to disproportionately negatively impact those are the last recipients of that money,

that is, real wages and the savings of the middle class. So in essence, what we end up having, and that's why in the book, and freedom or equality, one of the key elements to recover equality of opportunity is to return to sound money policies. Because in itself, a way of generating a perverse incentive that increases the wealth of those that are closest to power is precisely through money creation. So if we return to sound monetary policy, it would be one of the best ways to recover the middle class, apart from other measures that I mentioned in the book, but it's a very important one. So this is interesting. This is going a little bit on a tangent from where I thought I wanted to go,

but we'll get back to where I was headed. But do you think that part of the appeal of some of these theories and this idea that money creation can be neutral in some way has to do with the almost accident of history in some ways of the U.S.'s role as the dominant sort of unipolar power with the world's reserve currency. And I guess to piece that out or part that out a little bit more, people expected big inflation, right, to show up. There's a narrative post-great financial crisis that you were going to see inflation everywhere. And obviously from a consumer price and the classical measures of inflation,

people didn't experience it, right? We didn't go into some Zimbabwe-esque hyperinflation scenario. And so that's kind of wielded like a cudgel with mainstream financial media as look. See, you were wrong about that. Now, of course, people could bite back and there's a lot of good counter arguments. But holding aside even those counter arguments,

do you think that people are interested or sort of seduced by this idea because there has been this sort of strange or unique case of the U.S. dollar as the world's reserve currency that has some mitigating impacts based on just sort of the nature of the way that the dollar fits in the global system. Absolutely, absolutely. In fact, when you discuss monetary policy with people all over the world that defend Kienjean or aggressive monetary easing, they always come back to the United States. They always come back to, well, in the United States, there is no inflation, so we can do the same.

But it's a false narrative, because coming back to your point, the United States is in a unique position to export inflation out to the rest of the world, which is what it does through quantitative easing. What it does, basically, is that the demand for dollars is global, and therefore, when you increase the money supply, the Federal Reserve actually takes into account the global demand for U.S. dollars because it's the world reserve currency. It's used all over the world in commodities, et cetera, et cetera. However, that doesn't happen with any other currency. That doesn't happen with any other currency, so you cannot do the same. And there was a big, mistake and in my first book life in the financial markets I actually talked about this is that Austrian economists traditional Austrian economists said immediately when quantitative easing was launched that it was going to be hugely inflationary and that in itself created the this this concept that you that you just mentioned this this counter argument it was a mistake and I'll tell you why and actually there are a lot of economists, Austrian economists as well, that actually said, no, it's not

going to be inflationary. If anything, it might actually be price disinflationary. Why? Because it will perpetuate overcapacity. It incentivizes debt. By incentivizing debt, what it does is that the level of productivity of the economy comes down. Sectors that actually were in close to of soloscience or obsolete would remain sombified and therefore prices don't go up. You see what I mean? And obviously, where do you generate massive inflation in financial assets? Look at the multiples of private equity, look where bond yields are, look where the stocks are. That's where massive inflation is being created. Therefore, the mistake was to believe that massive money creation was going to generate inflation without understanding where the new money was going to go.

When new money goes to financial assets, then what you create is high inflation in financial assets, but you don't create as much inflation in real prices. We can debate, in any case, that real inflation is actually higher than official inflation. And I think that that has already been discussed in numerous occasions. And it's proven by the fact that you have an increased number of demonstrations and protests all over the world about the increase and the rising cost of living in an environment in which every central bank tells you that there is no inflation. So people are feeling it, you know, the average citizen. But in any case, it is not the level of inflation that. some were saying at the beginning, it has created enormous, actually bubble type inflation in financial

assets. Yeah, I think this is a really important part and why it's so important to kind of question definitions and conventional wisdoms, because when we have that inflation word thrown around, it's sort of we're taught to think in terms of bread, right? We're taught to think like what we're experience, what is it being experienced in Lebanon right now, where the price of food has gone up 100% in the last two weeks. That's inflation in our heads. And because there are these such big, kind of vicious examples that exist, plus the fact that, you know, when economists or sort of mainstream economists talk about the inflation, what they're referring to is that sort of basket of consumer goods, it actually distracts us from, I think, something that you point out quite precisely,

which is this gut level sense of falling farther and farther behind, which does show up in places like financial assets. It shows up in home prices, right? It shows up in basically anything where you can be, anything where debt can become more freely available to chase it, and that becomes part of the consumer experience, be it at college or houses or what have you, that's where we're seeing it, right?

Certainly. And if you look at, for example, healthcare, education, so many non-replicable goods, you have enormous inflation. And why? Because those are the parts of the economy in which higher debt immediately comes to mind to incentivize demand. You take a credit at very low rates in order to pay for an education that used to cost to $30,000 a year, and now it's $90,000 a year. You don't even blink. And the diminishing returns of that process are very evident in the way in which consumers perceive their ability to climb up the ladder and in their ability to improve social mobility in a society.

So I think that it's very important to talk about these things so that the rhetoric, used by central banks that we can continue to do all of this that we're doing and more without a problem because there's no inflation is debunked. And we need to debunk it because that that frame of mind, that way of thinking is actually like going down a highway at 200 miles an hour and looking at the rearview mirror and saying, oh, we haven't crashed yet, crashed yet. Let's accelerate. So the big problem I think is to show the huge imbalances that are already being developed in the economy for reasons that the only thing, that only show that the perverse incentives of monetary policy are generating not just diminishing returns in terms of growth,

employment and improvement of productivity, but also in the level of access to goods and services of the middle class and the average citizen. Yeah, you know, I think one of the other reasons that it's so important to have this discussion right now as well is that the cracks are showing, right? Harvard yesterday announced that all of its 20-21 classes would be online, but that its fees weren't changing. And this was a huge to do on Twitter, right? I mean, again, just a gut-level sense of the absurdity of that, that there's a one-to-one equivalence between sort of that online education and an offline experience, which you can debate as much as you want, whether it's worth the $50,000 to start with, but there's

no debate in most people's minds that there is something substantively different between those two experiences. The problem is that, and going back to this exact conversation about the kind of easy answers and turning back to the government versus more complex answers, is that a lot of people's answers to that is, well, college is too expensive, government should mandate that it's cheaper, government should subsidize it. right? When in fact, I think that you could make the argument that by making money so cheap and enabling such a debt-based culture, it has been subsidizing it. It's just been subsidizing it by forcing people to get higher and higher loans that allow them to go pay these

outrageous and growing prices. It is a subsidy. That is exactly a subsidy. It is exactly the same to subsidize the economy via transfers that are decided from a political perspective than to give everybody access to a level of debt that they probably cannot afford. It is exactly the same. Now, what I find interesting, especially with that argument that government should actually do everything, is that if anything, in an environment in which we see the same level of intervention from government, the reality would have, would be that access to education, education thanks to cheap debt is actually a more efficient way of accessing that education

than getting it through a government mandated subsidy scheme. Think about it from the perspective of the European Union. You go to any of the public universities, okay, some of them are good, some of them are actually not very good at all. But if you go to any of the public universities, you're subject to also the curriculum and the education that governments want to give you. So it's not, it is actually not necessarily the best experience for somebody. But in any case, as you very well said, it is exactly the same. It is the same concept to bring interest rates down to completely artificial levels and to give access to credit to anybody that even cannot have afforded, is exactly the same as a subsidy.

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crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September. This is a good segue, I think, to another piece of recent writing from yours, where you discuss something you called the bailout of everything. What is this concept? So this, I guess, brings it up a little bit more into the COVID-19 shutdown and economic recovery context. So what is this concept of a bailout of everything and why should we be concerned with it?

There is no progress without creative destruction. Progress cannot happen without some companies becoming obsolete, closing down, failing, and others picking up and doing things better and more productively. So what we're seeing right now, particularly in the Eurozone, and particularly in Germany, out of the Eurozone, I'm extremely concerned about that, is a... conscious decision from government to bail out anything and everything with the excuse of COVID-19. And this is interesting because it's not just bailing out or helping companies that have suffered because of the force shutdown of the economy. The companies that they're basically supporting bailing out are actually the ones that have higher access to credit and higher access to the markets. And in fact, companies that were already in trouble in 2019, 2018, 2017.

We're talking airlines, we're talking the automotive sector, refineries, steel mills, etc. By doing that, by bailing out anything and everything, you are, as a government, putting breaks on progress and eliminating the process of creative destruction. The one thing is to, help with some form of credit mechanisms, companies that are suffering for a particular reason because of this COVID-19. But governments have seized the opportunity. They've seized this opportunity to do the opposite, to give, to put money into companies in order for those companies not to undertake the structural reforms and the efficiency improvements that they were going to implement. So I think that that is a very dangerous thing because you're basically setting back economic

growth because on one side, they're bailing out everything. And on the other side, and this is the most interesting part, startups, small businesses, are falling like flies, are falling like flies. Why? Because startups and small businesses don't have access to credit and are not close to government. This is a, I mean, it's a really interesting point. And I think I want to bring in maybe a different context that I think reinforces the same point, which is the more sort of the more access to power you have, the larger you are as a company, the more often that government intervention and markets can be worked to your advantage. And we've seen this not just in this sort of bail. out context, but also in the context of like GDPR, right? What many would argue was well-intentioned look at user privacy and consumer data that effectively just radically increased the ability for Facebook and Google to capture the market because they can bear the compliance costs where

smaller, more innovative companies just can't, right? So they don't even try to go into that space or they're forced out of it. And I think it's a, you know, very different context, but I think part of a similar story. I think it is. And I think that one of the things that we find from this constant government intervention is that you find this very interesting dichotomy, which is on one side,

the government is massively intervening in a way that helps the incumbent and the large entities that are already existing. exist, but on the other side, they also make these companies less dynamic and more dependent on government. So it's an interesting thing. I call it the, instead of crony capitalism, I call it evil because what it, because what happens is that the government lets those companies breathe, but they don't let them out of the water.

You'll see it, for example, with the airlines. Well, so the airlines were an interesting moment in, at the beginning of this crisis, because there were a few loud voices, Chimot Pala'Hapatia in particular, who were arguing vociferously that the airline should be allowed to fail, right, right, when this crisis hit. And it was interesting because it showed just how illogical it was to people, or how easy the soundbite of a company is failing through no fault. of its own, quote unquote, right? This external, you know, exogenous force, this black swan or white swan or whatever type of swan you want to call it for. So why wouldn't the government help them? That was

sort of that side of the argument. The other side of the argument was much of what you're saying, which is like, well, what is the history of these companies that led them to be in an unresilient position or what would happen if they were allowed to fail? It doesn't mean that all those people lose their jobs. It means that it goes through bankruptcy and restructuring and yad, yada, yada. And I A lot of folks who are potentially in places like Silicon Valley were salivating at the idea of airline markets opening up and there being a chance for real competition. But that's not a realistic avenue based in the world that we have. And I wonder how much of this, the response to this crisis was predestined in some ways or predetermined by the last decade where companies just started to be pretty sure that if the government had bailed out banks and then the auto industry that, of course, if push came to shove, they were going to do. it for them as well. Certainly. And it's interesting to see how the average citizen has a very

clear and probably aggressive opinion about bank bailouts, yet that same citizen probably has a very benign view of airline or refinery or steel mill bailouts. It's interesting that, no? And we And because there's absolutely no difference. You're basically just using taxpayers' money to keep alive zombie companies that don't necessarily, and the key part is what you just said, is that people immediately think, oh, they're going to bail out these companies, they're going to bail out the airlines, and therefore there will be no job losses. Oh, that is completely incorrect. That is completely incorrect.

And the idea that there would be job losses if one of the airlines or if a couple of the airlines failed is also a fallacy. Because we, and it comes to the rhetoric that was built in the Lehman era, no? You remember those images of people with their boxes leaving the Lehman's brothers. building. However, very few people or very few people in average citizens have found out that the vast majority of Lehman workers either went to Barclays or went to Nomura. You see what I mean? So the idea that it is that it is better to subsidize a company than to let that company be restructured and repositioned in a different way and maybe in different types of

companies is ingrained in the citizen and it's completely false. And there are numerous examples in which the restructuring of industries have actually led to more jobs, better participation of the labor force and obviously better productivity and growth in those sectors. It's wild and really difficult to think about how on earth you could see an unwinding of this expectation, right? Well, who would it take to have the political will to actually walk back the clock on this sort of expectation? It's hard for me to believe or see anyone who would fit that mold. It's not going to come from, obviously, it kind of come from governments, because governments, whatever the party is in power, governments are always going to be extremely happy to present

themselves as the ones that are going to save jobs with other people's money. Of course, there's nothing better for a politician. You see it everywhere. You go to Italy where there's been a factory closing down and politicians immediately go to that city and say, we're going to bring back jobs. You don't bring back jobs. Politicians don't bring back jobs. So it's not going to come from politicians. It will come probably after this country. crisis from citizens themselves when they say, hold on a second, we bailed out the entire industry fabric and there's about 40 million jobs that have not come back. I tend to agree.

So I guess I want to make it move the conversation just for a moment over to, we were just speaking about banks, right, in the bank bailouts. But I want to talk about something that you've written about the risk for banks in this crisis. and you're talking particularly about European banks. And maybe this is a chance to also just talk about kind of how you see Europe's response to the crisis as compared to the U.S. is. But one of the things that you were discussing in some of the risks,

and I think this is a question for a lot of people, is does this move to the banking sector at some point? And one of the things that you were discussing is the fact that effectively you have a scenario right now where these government loans are propping up companies and also subsidizing job losses, but assuming a Q3-Q4 recovery. And if that doesn't happen,

it could put pressure on the banking system through loans, through negative interest rates. Maybe you could just talk a little bit about the outlook for the banking sector as we try to recover from this thing. Yeah, there's a message that is repeated over and over in this crisis, which is that banks were the problem in the previous crisis and they're the solution in this one.

It's false from both sides. They were not the problem in the first in the previous crisis, they were the symptom of a problem, which was excesses taking massive leverage. And leverage is not provided just by banks. Freddie Macon, Fannie Mae, were state-owned entities, our state-owned entities. And this time, what we're seeing is, if you look at the stimulus packages approved by most countries, the vast majority of those packages come from huge loans to businesses, which seems okay if the fundamentals of providing those loans, if the fundamentals of the companies and if the solvency and liquidity situation of those companies is adequate.

it. Now, the problem is, if what those governments are doing is basically just passing two banks in their balance sheet, using the balance sheet of banks to lever the economy to a recovery that doesn't happen. Because think about this. These banks are giving huge loans that are partially guaranteed by the government, but doesn't matter, because even if, as anybody that hears us today knows if I have a loan that is partially guaranteed by my parents, that doesn't mean that my parents are going to pay for it, I'm going to pay for it, and even doesn't mean that if I go bankrupt, that the entire loan will be paid by my parents, okay? And this is exactly the same with state partially guaranteed loans, is that you're using the balance sheet of banks to lever up the economy

to a recovery that might not happen. If it doesn't happen, then non-performing loans, which in the Eurozone banks are already very high, about 3% of total assets, then they will rocket. And the real economy in the Eurozone is very geared to the banking sector. Banking sector finances about 80% of the real economy. So it's very, so it can create a financial crisis out of a, of a, of a bail out that has used the balance sheet of banks to disguise the risk that is being taken. Interesting. That's a really interesting way to look at it. So I guess, you know, one of the things that has been a theme is maybe in this conversation is looking at the right numbers, the right factors, the right indicators, rather than the easy sort of presented

numbers and indicators. When you think about how we are actually recovering, or not, what are the areas that you're looking at? You know, should we be focused on new COVID cases? Should we be focused on stock markets? Should we be focused on jobs or within jobs or there's specific types of jobs that we should be focused on? I guess for people who are trying to make sense of actually understanding how the economy is doing,

what are the types of things that you're looking at to give you a better sense than maybe the headlines would give? I think you have to focus on continuing jobless claims because what that shows is how weak the job market is. I think that you need to be also focused on the recovery of the travel and leisure sector, which accounted for almost 20% of growth added value in 2019. So if you want to see a recovery, it has to come from that sector. And another important part of it is to see where the...

is a return of capital expenditure. I think that those three factors can tell you whether the business community is actually in a recovery phase or is in a survival phase. I think that right now, what the data is telling us is that the business community is in survival mode. Yeah, I think that it's really interesting. A couple points or follow-ups to that.

one is this notion of, it's been fascinating to me how many people are sort of ready to just assume demand destruction of travel and leisure and hospitality as though that's an okay thing, right? I mean, versus taking the standpoint that if this crisis was completely limited to them and it totally changed the nature of that industry, it's a huge part of global GDP, right? I mean, it's just been amazing to me how dismissive of that we are. It's very, very interesting. And the reason why is because in the day-to-day conversation, those sectors are perceived as low added value or low quality without understanding that they have a tremendous impact on many other sectors. For example, real estate doesn't exist without a thought. thriving travel and leisure sector. Just, and it might not seem intuitive, but it's a fact, no?

And so many others, you know, I always say that the travel and leisure sector is like a good business card for a country. And if your, if your business card is atrocious, you know that people, you know, you meet somebody, you see a bad business card. you don't even continue to talk with that person or think about business, no? And it's not dissimilar in this case. And I find it fascinating that how easily dismissive of the travel and leisure sector, how easily dismissive of the hospitality sector people can be without understanding

its huge impact on the economy, even on the manufacturing sector, No, I think it's a great point. And also another reminder to go more granular, right? Because if you look at a region by region or city by city level in the U.S., obviously, that picture changes quite a bit. But then especially if you go to on a country by country level, right, there are economies like Egypt, for example, that don't have the privilege of writing this off. You know, it is a driving dominant factor in their sort of national economic landscape. Completely. And it reminds me as well of how dismissive, for example, people tend to be about the energy industry. And in the conversation about climate change and things like that, we tend to forget how many jobs depend on the energy industry in emerging economies that cannot have the luxury of deciding to completely with,

from a certain technology. So, yeah, but we're going to see it. We're going to see it in this crisis. I think that this crisis, like the last one, is going to allow us to rethink a lot of the dogmas that we have created in the bull market. I think that that's true. And the question then becomes which answers are responding. to. So I mean, maybe that's a good segue to this question, but in that context, in that

rethinking of dogmas, you know, I think maybe your answers politically and culturally and socially sort of are pretty clear. But what assets, what themes, what industries are you looking at as potential beneficiaries through this process? technology, defense, health, everything that has to do with access to what is perceived as higher quality of living for emerging economies. So added value products in basic goods and services. Yeah, I think that those, for example, would be sectors that are going to thrive, in my opinion, after this crisis. I think that we are also going to likely see a very, very important change in the landscape of energy, and that is going to lead to massive transformation

of the sector, which is a sector that constantly adapts to change. So I think that there are numerous, but I would categorize those four as the main ones. What do you think about sort of investor perspectives, right? Because on the one hand, there's this narrative of, I mean, it's an extreme version of the Fed put. It's the next iteration of that and don't find the Fed to lean in. And you see this in the Davey day trade of globals and all that sort of thing, right? Stocks only go up. There is that sort of narrative on the one hand, but it also seems like there's more investors

who are also simultaneously, even as they are trying to sort of win short-term gains, also hedging into things like gold or Bitcoin. I mean, what's your take on some of those types of hedges? You see, one of the things about the previous crisis that has changed the mind of investors is the idea that central banks are going to bail you out of any bad investment you make. And I think that although absolutely you still have the central bank put in place very much so all over the investment world, it's very interesting to see how traditional asset managers that would maybe in the previous crisis would sort of,

adhered to the idea, for example, that gold is worthless. Remember what, for example, some big investors used to say, gold is worthless. I'd rather have a share of Exxon than a piece of gold because it doesn't generate anything. Well, I think that investors are changing their mind, and you can see it today in most portfolios. I work in a long-only firm that invests in different types of asset classes and gold cryptocurrencies are becoming assets that you need to have because fixed income and equities are too correlated and dangerously correlated. Because investors are happy to take a 2018 type of slump. But not a 2018, 2020, 2020, because they're starting to happen more and more frequently. You see what I mean?

So you need to have a more diversified approach. And the case for gold is very simple. When central banks increase their balance sheets, they also have to buy more gold in any case. And the supply demand picture is very evident, apart from the fact that it is a proven reserve of value asset and cryptocurrencies have proven to be more than just a fad. It's interesting, no, it's been years now since we've been hearing about the demise of cryptocurrencies and there, most all of them are there, no? So I think that investors are starting to look at those as good alternatives to have

a decorrelated asset relative to an extremely correlated equity and fixed income market. No, I think that that sort of decorrelation or uncorrelation is certainly a huge, a huge driver of people peering over into the sort of the Bitcoin world. You said before, and this may be a good way to kind of wrap up, that you think that there's going to be this good moment for challenging dogmas. Are you optimistic that we might come up with some better answers, or is the sort of outlook still a little bit to be determined? No, I'm optimistic. I'm, you know, I think that despite all the challenges that we live in and despite all the problems that we see, it's unbelievable.

But 2019 was the best year for humanity. We tend to forget these things because we always think about headlines and we always think about the negatives. So there's progress is happening. We just don't think about it because it does not conform to the to what is generating or driving our attention every day, which is what's urgent and what's in the headline in a particular moment. So I'm very, I am optimistic. I think that this crisis was taking aggressively by governments as an opportunity to increase interventionism.

And most citizens have realized that without companies, without competition, we would have had problems of supply apart from a healthcare problem. I think that the increase in technology is going to continue to drive progress. And I think that, yeah, I'm quite optimistic. I think that we will learn lessons out of this that will help us develop further. Well, Daniel, I really appreciate you sharing your insight with the breakdown audience. Where can people find you if they want to hear more? Oh, thank you very much.

Well, you can find me on Twitter. My Twitter handle is at D-L-A-C-A-L-E-U-L-E-U-S-S-C-A-W-E-E-S-C-A-W-E-E-S-S-C-A-A-A-A-W-E-S-S-S-E. My website is d-L-A-C-A-W-E.com. And you can also find me in my YouTube channel. It's not difficult to find. Wonderful. Well, again, I really appreciate you hanging out for some time today. And we'll definitely have to check back in on some of these conversations a few months down the line as we learn more.

Thank you so much. It's been an absolute pleasure. Really enjoyed it. Thank you. Three big ideas that I want to highlight from that conversation. The first is this idea that money creation is never neutral. I think that's a profound statement, and when we have an instinct to say, well, sure it is, and here's how, it may be worth asking who the cost gets passed onto.

Is it someone in this current economy, or is it in fact future generations, our kids' generation? But this idea that money creation is never neutral seems hugely important to me. The second theme that I think is really interesting is this idea that the United States is in a unique position to export inflation. We're seeing this in so many different parts of the world. Yesterday, I just gave my little update on Lebanon, right? But if you have a system, a global system that is based around one currency, it creates a very kind of warping effect around that currency.

And when you have net importer countries like Lebanon, it can create havoc, right, in times of economic turmoil. So a really interesting way to put it, though, this idea that part of why we don't see inflation in traditional ways, here is this exorbitant privilege of being able to export inflation to others. A third theme that I think is just so important is this idea that progress cannot happen without some companies shutting down. We have lost the destruction part in creative destruction, and without the destruction, I don't believe there can be nearly as much creation. We are terrified of the idea of companies

shutting down, but it's the only way that space clears for new companies to come in, for capital to move to higher productive uses, for people to deploy their talents for better types of companies. Without that destruction, there's no mechanism for cleansing, and we just get these zombie companies, companies that hold aside even thinking about being able to pay back their debt, can't even service their debt from profits. This is a major issue and a major theme and something that will continue to come back to. Anyways, I hope you enjoyed this conversation with Daniel LaCal as much as I did. As always, guys, I appreciate you listening.

Thanks for hanging out. And until tomorrow, be safe and take care of each other. Peace.