The Derivative - It’s Not a Fed Put, it’s a Fed Short Call! And more inflation thoughts with StoneX’s Vincent Deluard

Episode Date: June 16, 2022

In this week's episode, Jeff talks with StoneX's Global Macro Strategist, Vincent Deluard @VincentDeluard, who authors weekly research reports on global macro trends, asset flows, European capital markets, and quantitative topics. We catch him literally right after the Fed hikes 75bps, and learn quickly that Lagarde was an accomplished synchronized swimmer and that having a French accent sure helps selling “French” wine in China. But what about that Fed hike? Are we saved? Are we doomed?  Who’s got the cleanest dirty shirt in the global economy this time around? In this fun chat, Vincent talks about inflation, deflation, stagflation, and even some greenflation….but don’t insult him by saying he’s an economist. He’s a researcher, making calls and taking stands. We dig into his early inflation call, what different Inflation hedges look like, his unhappiness with Silver, commodity supercycles, the ticking corporate debt timebomb, a potential short squeeze to end all short squeezes in the Japanese Yen, and so much more! Vincent also gives us a hot take...that the real pain is yet to come?! Yikes..except he does it all with a smile and charm. SEND IT! Chapters: 00:00-01:50 = Intro 01:51-09:32 = Le Tour de France, selling fake French wine & a Live Fed report breakdown 09:33-22:20 = Inflation is here to stay, Stagflation, Deflation & why Japan is a sample size of 1 22:21-35:06 = You’re not Long a Fed Put, the Fed’s Short Gas Price Calls 35:07-50:29 = Inflation Hedges, Energy as the best driver & Commodity super cycles 50:30-57:43 = Companies aren’t going to be able to cover the debt service, joining Toxic blobs 57:44-01:17:23 = World Tour: Japan, Swiss Milkshakes, Norway, China, Brazil - & Pick your fighter 01:17:24-01:27:47 = Hottest Take: Real pain & a Second Leg Down Follow along with Vincent on Twitter @VincentDeluard and check out StoneX.com for more information.  Also, don't forget to check out Vincent's Global Macro reports and sign up for a free trial! Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, or LinkedIn , and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Welcome to the Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. Happy Flag Day week, everyone. Flag Day was in here this week someday, I think. Not sure when, but we've got some banner guests coming up on the pod see what i did there headlined by nancy davis we talk a bit about tips on this pod and i literally know next to nothing about them so excited to hear nancy

do her stuff and join us on the show on to this episode which was as much fun as i've had with a frenchman since well that's a story for another. We're talking with Stonehex's global macro strategist, Vincent Delouard, covering inflation, deflation, stagflation, greenflation. I should have brought up shrinkflation and hit for the cycle. We get into the Swiss milkshake, JGBs, global demographics, why nothing gets done in 2022,

and recorded right after the Fed hikes 75 bps, which was a bit of fun to hear his first thoughts live. It's a good one. Send it. This episode is brought to you by RCM's China Group. We talk a bit about China in this pod, and you know who's been on the ground in China for years, figuring out their derivatives markets? RCM's China Group, which has Chinese investors looking for and funding Western trading talent. To learn more, visit rcmalts.comcom slash China. And now back to the show.

All right. So we're here with Vincent Deluard. Did I pronounce that correctly? You pronounced it well enough. I've been here for 15 years, so I've heard a lot worse. Well enough. And where are you French originally? Yes, I'm French. I'm from Burgundy in the US about 16 years ago. All right. Are you a big Tour de France fan? I was when I was a kid. i mean i had you know the whole um doping stuff i mean it's been a it's been a bad few years but when i was a kid and i did not perceive any of that i just saw the guys on the bikes and and the landscape i mean it is it is one of the greatest races in the world would you go watch in person yeah i would go i mean it didn't go through my hometown a lot because it's not really the mountains. So I would go in the Alps or the Pyrenees, like the, you know, the big calls, like, you

know, when they have to like climb up. I mean, it's very, very spectacular. And I like the atmosphere as well. It's a very popular feast. Yeah, I've become addicted somehow here in America. So I spend coming up here in July. I'll spend most of my July watching hours and hours of the television till two in the morning. Right. And I just record it and fast

forward through it and catch the scenery. So it's on my bucket list to go actually check out a racer too. I think you, you should, and, you know, make a trip out of it. It's an experience, you know, being, being on the spot. spot um and speaking of burgundy so there's some nice wines from there right i heard so yeah that's the rumor uh and then i think you have a little bit of experience with doing some stuff in wines what's your wine link backstory well really the my main qualification for this is that I look pretty French and I talk pretty French, especially 20 years ago. When I happened to be in China, I was doing the English teaching gig back then. That was a big thing. It was just opening up.

And then because of the way I sound, I was approached by someone who was supposedly selling French wine to hotels and restaurants. Now, I only suspect that it was not real. I cannot prove that. But I think I was hired mostly to look French and go to dinners in weird second tier cities in China. You know, that's about 20 years ago. That was just after the SARS pandemic. So at the time, like this was a really different country. And my job was mostly to get a glass of wine, look at it in the sky,

make some absolutely absurd comment like, oh, taste of mushroom and butterflies and, you know, coconut and pineapple and then taste it in the most noisy way possible. And then all the guests would do, at the time, one was just starting in China, so just drink the whole thing

in one shot. So that was a very... But you must have tasted it. So did it taste legit or not so much? Well, after a few glasses, it tasted great. So maybe it just had been somewhere around France. Yeah, I would think it was actually probably Moldova

based on the people that I've seen around. It's a small country in Eastern Europe, which is probably next on Putin's list. But they do produce wine. I think it's probably the cheapest place you can buy grapes and then put them in a bottle with a French label on it, which I suspect was what was going on. And did you speak Mandarin? Did you speak Chinese at the time?

Very, very poorly, but it was a great source of amusement uh for my guests yeah like say something about wine and in mandarin um awesome and so then you made it from there back to france or straight to us yeah eventually yeah back to france and then i was fortunate enough my my school had a dual degree with uh columbia university so i got into that that brought me to the us in um oh six or seven this was you know pre-08 so if you could open up an excel spreadsheet you you could call yourself a hedge fund analyst uh which i could do uh and then yeah i've been doing research ever since and um yeah it's um you know funny how the ways that life takes. Right.

And so now where are you located? You're out in California? Yeah, Oakland. Oakland. All right. So you're rooting for the Warriors. Is that game tonight? When's the last game?

You know, you. Game six. I am more interested in the Tour de France than the Warriors. NBA basketball. Yes. So we happen to be recording right here at 1 p.m. Central, which is right about exactly when

the Fed just announced. So let's do a little live Fed report takedown, if you don't mind, for a quick second. What did they do? They were talking 50. I hear they cut by 50, surprising the market.

So I think 75 cut by 50, surprising the market. So I think, yeah, 75, these points, that's pretty much pricing with uncertainty. Yeah, and rates that, wow, 3.8. I think that's a little higher than people expected. What's that again? Say 3.8? Is there one? 3.8 for the terminal rate is what I see on the Bloomberg. Seems to be high.

Well, I mean, for me, it's pretty low, but I think compared to where the market was, it may be pretty high. Let's see how the market reacted. 10 years up. Two-year was down and then shot up looks like stabilizing

yeah looks like you know not too much drama which is probably what they were aiming for at this point just

you know no news is good news yeah some people are calling for just do 150 get it over with what's your thoughts on the whole

get it over with phenomenon well I mean I get the idea Just do 150 and get it over with. What's your thoughts on the whole get it over with phenomenon? Well, I mean, I get the idea. I think the logic behind it is, you know, if you have very few cartridges in your gun, you might as well just shoot them all at once at the beginning to make a big impression. I think that's the idea. Now, of course, the problem is that after that, what do you do?

I think the fundamental problem is the fact is, you know, they can, you know, I mean, they missed it. They missed it. There's no other way to say it. I mean, and I'm not talking about like the pandemic stuff that was fine, buying high yield bond, whatever. You had to do what you had to do back then.

But, you know, up until last month, for God's sake, they were buying mortgage-backed securities with the kind of inflation we had, the transitory stuff. So, you know, they missed it by about 12 months now. And they have to make it back. And there's probably only so much they can hike without seriously breaking things. I think we are in the process where they start to break things. So, yeah, there's probably only a couple of rate hikes they have left.

So, yeah, why not? You know, maybe front load everything, try to shock the market into submission, try to restore inflation expectations. Probably the best strategy. I don't think it's going to work at the end of the day. I don't think anything that they can do will work. I think inflation is secular, it's structural, it's mostly a supply shock. But probably front-loading is the logical reaction to having been so late for so long. But they didn't do it. So we'll see what happens. So speaking of those inflation thoughts, so you were kind of early on your inflation call versus other economists, which call yourself an economist or just a researcher.

I don't know if that's a bad word for you. Economist. Yeah, I would prefer researcher. I mean, economists, economists doesn't have a definition right anybody can be an economist it's probably the only science or and i use science with air course i don't know if it's recorded or where really anyone can just show up and make a forecast and call themselves an economist so uh no i didn't have the audacity to call myself an economist what i did and i i like that you said that was early, another word for early in my case would have been wrong because I was so early that, so I actually started worrying about it. My first report on inflation was, I don't know if you remember, Bloomberg Businessweek in the summer of 2019 had a cover called The Death of Inflation. There was a little dinosaur, infinity dinosaur on the cover,

which I thought, oh my God, this is the echo of The Death of Equities that they published, I think in 1979. The famous magazine indicator. Correct, right? So I went through this whole spiel of like reports saying, no, it's different. Inflation is not dead.

We have all these case demographic, technological for secular inflation. And that was even pre-COVID, right? And I remember my 2020 outlook was called only one forecast, reflation. And then boom, COVID hits, everything shuts down. You know, oil prices go negative. Tenure yield goes to 50 bps. Inflation expectation goes super negative.

And in April 2020, I remember looking at this and thinking, this is crazy. We are constraining supply like crazy. There's no way we can keep everybody locked down without giving them money. So we're going to have to push a lot of money. This is going to accelerate so many things, MMT, the digital transformation, work from home. This is going to be the biggest inflationary shock in a generation. So I published a report in April 2020 called A Crazy But Logical Call for Stagflation. And I still think to this day, this is probably the best report, best title I've ever done.

And of course, as time passed, you know, we had, you know, inflation slowly accelerated, reached 2%, then went a little bit over it. It was called transitory back then. Then it fell a little bit in 2021, which seemed to validate the five Ds of deflation, demography, debt, all of that stuff, disruption, but then it came back. And yeah, I think at this point, I don't have the burden of the proof. I think that the people who argue for deflation or even disinflation are

the ones who need to explain. I think that the base case should be that, you know, it's going to be stagflation and it's going to last, I think, longer than people think. I still think the transitory narrative is not that. It's still in the market. They just kind of extended the definition of what transitory means in terms of magnitude and length. But we still have this framework that it cannot happen here.

Yeah. I think you see that with stock market prices in particular, right? The market's down 20%. Inflation is going to be dead. This is going to snap back so far. Inflation is going to fall off a cliff. I'm like, I'm not sure you quite understand what it means. And at the same time, I'm paying $6.49 a gallon here in Chicago for gas. That's cheap, man. I'm at $7 here. I know. At Costco, when Costco goes over $6 here in Chicago, that's going to open some eyes. And interesting, your take. So secular inflation versus stagflation. Just give us a little definitions there of how those differ. Right. So by secular inflation, I mean, I think the inflation cycle is probably one of the longest. You have your commodity cycles are quite short, equity cycle around 10 years, and then bond inflation move very, very slowly. So basically you can think of

the four-year cycle really of disinflation since the Volcker Fed, so 1981, all the way down to 2021. This is what I meant, secular disinflation. I think we have something like that the other way. Kind of like the prior 40 years between the World War II, the Korean War, the Vietnamese War, you had secular rising inflation. like that the other way kind of like the prior 40 years with you know between world war ii the korean war the vietnamese war you had like secular rising inflation i think that's where we are

uh because of demography because of uh really mostly i would say demography but also geopolitics um even technology we can talk about this as well so that that's like the four-year picture. And then you combine that. Four or 40? 40, I would think. Four, zero. Yeah, like rising. I mean, in the sense that inflation will be a problem for a very long time, like the same way that certainly outside of the US, unemployment was the problem for pretty much since the end of the oil shocks, really, in Europe since,

you know, 1971, the biggest problem was not enough demand, unemployment rate. That was a problem for most of the world. The U.S. was a little bit better, but, you know, that was a reflect of the deflationary mindset. We moved to a world where unemployment is no longer a problem, inflation becomes a problem, and it will stay there. And, of course, it won't be a straight line.

It won't be at 8.5% all the time. There will be ebbs and flows. But in general, I don't think we'll see sustained period where we don't have to worry about inflation the way it was in the 90s, in 2000, 2010s, that that arise behind us. So that's the inflation part. Now, as far as the stack goes, I'm actually relatively bullish on the economy compared to consensus,

which consensus is so bearish that, you know. Yeah, not hard. Stack is bullish, right? Because everybody expects a recession, right? But obviously we are coming at a, you know, the economy will have to slow because of the amount of tightening we're doing, because of the strength of the dollar, because also of the difference in the fiscal impulse,

right? We had so much stimulus that, you know, just removing that is going to slow the economy. So in the short term, you know, stagflation is logical. Now over time, I would think it could actually be a high growth period. You know, you look at the 70s, I mean, it could actually be a high growth period. You look at the 70s, it was not that bad. We had two recessions in the middle, but overall, I think real GDP growth in the 70s was much higher than it is now. So it doesn't have to be, I think we're just entering a new era of the main difference is going to be inflation and then distribution versus concentration of wealth. And so some of this is tying in with your thread I read a little while back on saying nothing works in 2022. And so some of these underlying themes there,

which, so talk a little bit about what some of those underlying themes are there that you're seeing that can persist. Yeah, so basically going back on inflation, I think that the main driver is demography. And this is something that people get mixed up all the time. You know, we have the, oh, the Japan. I hate that word.

Whatever. It's a sample of one. Okay. Aging is deflationary. Why? Because Japan. Well, I mean, my view is that aging is, yeah, maybe it's deflationary at first

when you have a lot of high incomeincome empty nesters that can save. You know, when your boomers are 50 to 60, it's deflationary. But when your boomers become 65 to 75, it becomes massively inflationary because you have a lot more net consumers and you have fewer workers. And I think that's the problem we have in the U.S. all around the world. It's even worse in East Asia. It's catastrophic in Europe. So you have this kind of squeeze on labor. Too few people work, too many people in retirement or disabled, too few people working.

And then you at the same time, you have a squeeze on capital as we remove the central bank liquidity. So if you think of your production function as a function of capital and labor, both things gets squeezed. The only thing that can save you is productivity, which in sound economics is a residual you don't explain. So if you want to make a case for deflation, you have to make the case that productivity is going to spike. And indeed, I've seen a lot of that. And people like to make fun of Cathie Woods and a lot of that. I do think she has the most interesting argument for deflation. If you want to make a case that prices are not going to go up, you have to go all over the exponential age and argue that, you know,

oh, COVID is a positive productivity shock. So that's where I disagreed enough, Fred, you mentioned. I think that's a joke. I mean, you just go outside your window. COVID is not a productivity positive event. I mean, we are, you know, making, you know, people take their temperature and stick stuff up their nose and restricting travel and creating a whole class of consultant in COVID protocol, closing the Chinese economy, creating, you know, stop and go patterns and nothing works in 2022 like you know and you

can see that i was in france in the past two weeks you know i mean waiters even worse than usual hotels are booked that's saying something for a french waiter right notoriously bad yes but it's not just that it's just yeah you don't have enough people to work the people who who are working are burned out uh the level of uh anger rage you can feel it everywhere in the u.s of course the political stuff but even in europe and all that to me makes the economy kind of stickier and and and does not work as well like i mean i think we look back to 2019 as some sort of a golden age, even though it didn't feel like that back then.

Right now, people seem to miss that connection right there. Same thing, you're out there, you're with friends and they're complaining like, oh, well, they can't get help. That's why the food is taking so long. And these are first world problems to be sure. But right, or like, yeah, we can't get a car.

I ordered a refrigerator. It took all this time to get there. But then they're like, why is gas so high? So they seem to be sure but right or like yeah we can't get a car i ordered a refrigerator it took all this time to get there um but then they're like and why is gas so hot so they seem to be disconnected in people's minds and you're saying even in economists and other researchers minds and papers and so meant back to japan because you hate that word i want to hammer what why was that different why is their demographics deflationary for them, like famously so or infamously so? Right. So first of all, I think that the magnitude of the bubble in Japan

was just something else, right? I mean, you remember in 89, supposedly the Imperial Palace was worth more than all the real estate in California. So what you had to observe, right? I mean, Japan was like half of the world's market cap. It's a tiny island with, you know, I mean, yeah, now I feel the US is overvalued, but at least it's the US, Japan. So it was much bigger bubble to start with.

So you had to deflate that for longer. Then the other thing that I was specific about Japan is it's, you know, it's next to China and South Korea and all of Asia. In the 90s, what happened is the biggest macroeconomic shock in the world, the great doubling. Suddenly, you had basically the Asian continent, which shut off the global supply chain, shut off the global economy by communism, comes in with massively undervalued currencies in the case of China. And then throughout East Asia, after the East financial crisis, the Thai BAF, the Korean won, everybody comes in with depreciated currency by 80%,

has these very young productive workforces that come in. So it's a huge deflationary shock. And Japan was really like literally on the edge of that. A lot of the manufacturing capacity moved overseas. So this is where the deflationary shock came in. You had to work off that bubble, and then you had the impact of the entry of China into WTO. And then you have all the cultural peculiarities about Japan.

It's a massive net saving country. The corporate sector wants to save. The household sector wants to save. All of that is very, very different from the US. Massive creditor country. So I think we are trying to extrapolate from a sample of one. And in general, I'm not an economist, but I've heard something about sample size. Right. But that's even, it feels that's the global case now, right? So they may have been just the poster child of cheaper labor and globalization. And now if we're moving away from those two themes, they moved away from it 30 years ago.

And now maybe we're seeing that in the rest of the world today. Two other items I liked in that conclusions of that where there's no Fed put. So talk a little bit about that. They're out of bullets. What's your theory on there's no Fed put anymore? Yeah, I actually think of it more as a Fed call, a Fed short call. I think the market is obsessed about the Fed put because this is what we've been bred with, right? I mean, ever since LTCM, every time the

market, you know, drops enough for the big enough tantrum, you know, Fed comes in and saves the day. So, you know, now we're down 20%. I mean, I see all this parallel to 2018, right? Oh, look, you know, Powell back then, he was also talking a big game, but eventually, you know, we can will the Fed into submission, right? The repo market freeze is what did it last time. Maybe here it's, I don't know what's going to do it, the NASDAQ blowing up or crypto. But there is still this hope that the Fed will come and save the day. And I'm not sure because at this point,

inflation is a political problem and the Fed is a political entity at the end of the day. And yeah, inflation is more painful at this point than the closing price of the NASDAQ. I mean, the closing price of the NASDAQ is very relevant to people like us. But for most people, that's just a number out there. I mean, it really doesn't register even. What matters is the price of gas. This is what's going to make or break election. And elections are what's going to make or break the Fed. And the Fed has been late on this. So they have to double down by, you know, being extra cautious to make up for the mistake they made in the past. So I really don't think there is a Fed.

And you still see that in the euro dollar curve. I mean, if you see there's this kind of like March 2023, this expectation that the Fed is going to stop cutting. I think this is kind of crazy, crazy talk at this point. What I would think think though, is that we have a short call. And by that, I mean that if and when the market does stabilize or even go back up, then you can know that the Fed will just go back in and just like squeeze in another 75 basis points. So that's the more likely outcome.

If things do get better, I think that the Fed will be very happy to jump in and throw in more tightening, but I'm not sure that they have the capacity to cut or do anything to ease things if markets get worse and throw a tantrum. Preston Pyshko, MD, MPH, I thought you were going to go with, there's not a long Fed put on equities. There's a short Fed call on energies. Yeah, that too. I like that. Like you said, that's the thing people care about.

As you mentioned, what are your thoughts on, I agree with you, even in our space, I feel like people aren't talking about the NASDAQ bloodbath enough. You look at those list of ARK stocks down 60 to 90%. It, um, it feels, if you look through some of those names, like 2000, you know, the.com bust, but not nearly as much press, not nearly as much pain. So I don't, I don't know what I, uh, put that to, what do you

think is the reason for that? Just, there wasn't enough. Those were all speculative bets to begin with. Yeah. Also, I mean, I feel the bubble was so much bigger, right? That, you know, so something, I mean, still, even if you look at the market as a whole, I mean, you know, we're still up quite a bit from two years ago. I mean, if you should fall asleep in whatever, 2018, you just wake up, you open your brokerage statement, oh, I had a pretty good five years. So I think there's maybe more tolerance for that. And also, I feel we are just starting to see the stuff that hurts, which is layoffs, basically tech companies. But so far, it's been the small stuff like the Binance and the crypto stuff, you know, announcing like 20% layoffs.

But I think when you start seeing like maybe Apple or Microsoft and Google starting, you know, announcing like maybe even Amazon, like mass layoffs that could, you know, potentially affect, you know, hundreds of thousands of people. And keep in mind, and they can, by the way, I mean, there's just so many product managers at Facebook. What do they do? What's a product manager? I feel that's the next thing that's going to happen. It's just going to be like, you know, all this massive hiring that happened in tech, push wages like crazy in the Valley.

This is going to breathe out. And then maybe it's going to feel more real. At this point, it's still a little theoretical, I think. What's your marker for when that starts to happen? Like Bay Area real estate starts to tick down? Yeah, I would think... Or just literally like

Microsoft announces 8% of the workforce is getting laid off. Yeah, I think that. I mean, on the real estate, I mean, the issue we're going to have is so much of the bubble was due to a stock-based comp, right?

I mean, if you are, and that greatly bothers me, by the way, because, you know, friends of mine who credit at the same time as me and went into tech, and I used to make more money than them when I started. And now these guys are like destroying me because they're getting, I mean, they're getting 50% of their comp in stocks. And, you know, Google is straight up. So, I mean, most people like late 30s, you know, they're multimillionaires just by having a job, you know, not even like starting a, you know, selling, having a job. So, my point is really, that was the fuel. That was the kryptonite of the everything bull market in the Bay Area was stock-based comp.

And it was great for companies because it cost them nothing. Right. They can print. They can print. They can't print dollars, but they can print their stock. Right. It was on the back of the pensions and the institutions buying up the stock. It was perfect. You had this demand also from index funds and, you know, so it was fantastic. And then, you know, if you can outsource, because for big tech, your only expense really is labor, right? I mean, a couple of servers, but that's it, right? So if you can outsource 50% of your payroll to the stock market, yeah, your free cash flow, you know, oh, we have free cash flow machine. Yeah, of course you get great free cash flow because you pay your employees in stock.

So I think that's going to be the process. As the value of the stock rents is revised down, people who think they were making half a million a year realize that, no, they're just making 250, which is quite comfortable, but the bear is an expensive place to live. And then that's how it feeds into the real estate market. It's almost the perfect perpetual machine, right? Then they'd get that income, put it back into index funds

that would put it back into Apple. Yeah, we invented the perpetual motion machine. We did. I saw some good Twitter action the other day. It's like maybe paying a software engineer $400,000 a year for a free app wasn't a great idea. Maybe that's the cash flow problem. Yeah. And I would argue that feeds into the inflation problem also, in the sense that, you know, I call it the millennial lifestyle subsidy, right? Oh, your Uber, you know, it costs like, you know, 10 bucks to cross the city, or, you know, you can

pay some poor guy to cross the city on a bike under the rain to bring you a sandwich for $2, or the stupid little scooters. All of that was loss making. And all of that, you know, the idea was the whole unit economics, right? I'm selling a dollar for 95 cents and I'm making it up on volume, which of course never made sense. But the point is, you know, we've done that for 10 years and that effectively kept the lead on prices. Like, you know, a real cap has to compete to Uber.

So if Uber subsidizes, you know, drivers, then they have to drop the price. Hotels have to compete with Airbnb. So there was a hidden subsidy in the market from this kind of insanity. And I think it's being removed now. So the first step, I think, as we remove the punch bowl, is actually going to be inflationary because you have to remove all this uneconomical production that we have subsidized for a decade. And you, I've heard it argued, right? That subsidy was on the back of that guy who's biking the sandwich across, right?

He's using his bike, he's using his time. Right. And what's he really making on that? Or on the Uber drivers, I've been a lot of studies that, right? That's not such a great career and you're really making way less than you think. Yeah, no, it's funny i spent some time in you know poor developing countries say that and i it strikes me that you know when i come back to like silicon valley i'm like wow these guys have reinvented the coolie you know

it's like so much of the the innovation and the productivity enhancing stuff. I mean, you go to Kolkata or, you know, or Bangalore, or actually Bangalore is quite wealthy. Or, you know, Lagos. Yeah, there, you know, you have a guy, you know, fixes your sandwich, and you have a guy who drives your kid to school and you have another guy who's, you know, who cleans your pool. I mean, in a way, we've kind of reinvented this gray economy of, you know, massively underpaid people serving wealthy people. We just put an app in between and call that productivity enhancing. And that was one of your themes, right? That that wealth concentration is going to turn back to wealth distribution? Yeah, I would think so. I mean, personally, it would not necessarily be in my interest, but I think from a social political perspective, I mean, we restretched this so far. I mean, if you look at the ratio of, for example, the minimum wage for the S&P 500 index, I mean, you look at that over the past four years, this cannot possibly last. I think we start to have consequences like populism, riots that really threaten social fabric. I think we're

getting there before COVID and COVID sped up that increase as with many things. It wasn't unraveling on the surface, COVID just made it obvious. And then does all this Fed and inflation thwart that though, right? Of like, hey, the workers started making more money. It causes all this inflation. The Fed hammers it down. Right. Or they've reached a new minimum level

and they're not going to come back off that way. But I think at least so far the wages are growing faster at the bottom, which I think at least, you know, so far, the wages are growing faster at the bottom, which I think is very, very positive. Right. I mean, it's growing faster for uneducated, it's for a non-white, for hourly workers, for young workers. So that wage gap that used to be always in the favor of, you know, those who are doing well has inverted because the squeeze is on low qualified labor at this point. So I think nominal wages, they're not keeping up with inflation, but almost. And then what's really happening with the Fed hikes, the value of assets being written down. And that's

what you need. Or if you think about inequalities, inequality is really about who owns what. So if you write down the value of assets, that means that access to property, buying stocks is a lot easier than it used to be. In the 70s, we all hear these stories, right? Take a summer job to pay for college or pay back your mortgage in three years.

But this is the stuff that's required to kind of rebuild a thriving middle class. And I think in order to do that, you need to write down the value of assets. And it's painful for us as asset owners, but that's what we're witnessing right now. I have my doubts that that's going to happen anytime soon. Anecdotal, but we were at a lake up in Wisconsin and the realtor guy's telling us like, it's nice. He's like, for a million dollar houses i have a list of 120 people who are like it's there's nothing for sale on the lake as soon as one comes give

me a call for five million and up he has a list of 40 people and he has a list of 20 people who says call me no matter the price yeah right so i feel like there's so much money waiting to pounce and buy up values that i don't know if we'll ever get there unless it's massively painful. I 100% agree with you. That's why it's going to be a very long and slow process. And I think that's why the market is wrong thinking it's going to be over so quickly. Because basically, we're trying to address inflation with the wealth effect. And the wealth effect is a very crappy tool when it comes to controlling the price level.

And we saw that on the way up, right? I mean, when Bernanke started with QE and then started talking about the wealth effect, I mean, it didn't work for 10 years. For 10 years, it was like pumping, pumping asset prices. And then, in fact, prices did not respond. But I think the same way now that they're trying to take the liquidity out, hoping that asset prices will fall, and then that will eventually trigger the CPI.

That's a multi-year process. I mean, the market is expecting this to be over in three months. It's not over, especially given how, as you pointed out, huge the bubble is and how much liquidity there is in the system. So speaking of that, let's talk a little bit of what someone would use for an inflation hedge. We're not just here to talk about this, right? People thought crypto was going to be famously a bad call, but people thought crypto would do it. People thought tips would do it. I'm going to have Nancy Davis on, I think, next week talking everything TIPS. But my guess is people have been super disappointed with TIPS performance. Even though you could argue, as expected, the bond piece went down.

Trend has worked. Energy companies have worked. Commodities have worked. Gold hasn't worked. So what are your thoughts on what people can, what inflation hedges are out there and what they, why they perform the way they have? Well, yeah, I'm going to rebound on tips because I think that

is probably one of the most underappreciated signal in the past, you know, month or so is tips yield have flipped positive, you know, because of that duration effect,

right? But like on the 10-year tip, you're getting 70 basis points. Positive real yield for the first time since COVID. I think that is important. And yeah, I mean, I was bearish on...

I didn't think tips were a good hedge because of that duration component. But I think now that you can get them at a positive real yield, it's probably the first time in the cycle that, okay, I think they have a place in the portfolio. Gold, I've liked gold and precious metals. Silver is disappointing me more than anything in the world. That's quite a statement. I've been wrong on that. Although, I mean, gold is, the thing is gold is not a perfect anything, right? That's both the beauty and the downfall of gold, right? People tell you gold is

a hedge against political chaos. It's a hedge against inflation. It's a better, it is all these things and none of them at the same time. So I still think over the long- gold is there gold had a big big rally in you know 20 2019 2020 uh you know taking a breather there you know when you have days like what we had last week i mean everything's going to set off at the same time including the things that should not set off like gold but i would still think eventually you're going to make it back up on on precious metals just i think it's a matter of like setting the right expectation and in that sense like i feel a crypto bubble has really polluted our minds like you know like i mean i hear people like i need to double my money in the next three months you know what should i do i don't go to vegas you

know like if you look at you know three four year gold has had very good returns especially in non-dollar turn i mean gold is at an all-time high in Euro, in yen, and so forth. Not from the towel on gold yet. And so is that really the real yield differential at play there?

For those that are massively negative real yields, so gold outperforms them? Yeah, or the fact that the dollar has been incredibly strong and gold is, you know, for us, gold is priced in dollars, right? So that's, so really when we think of gold, we think of two trades, long gold, long dollar, right? But if you, so the gold part hasn't really the dollar part.

I mean, but for Europeans. So no, I think that really the best inflation hedge has been and will probably keep being energy because that is really the wrecking ball at this point. On days when everything's down, energy has been the only thing that's gone up because energy

is the driver of short-term inflation or short-term disinflation. And I think that argues for an allocation to energy and commodities, not necessarily based on a fundamental view, but on almost a risk management. We came from a world where deflation was the biggest risk, so you had long-term treasuries as a portfolio diversity fire.

It seems to me that energy and commodities are going to do that in the next decade. A few things there. So just plain old buy and hold commodities or some sort of trend approach? Well, trend works really well. As you know, in a stock fashion environment, you look at the 70s, this is really the best. CTAs are really finally, and you look at this year, I mean, you had amazing returns in CTAs and systematic trend following strategies.

Some funds are up like 50, 70, 80%. So this is the time for these strategies to shine. Of course, you need to be an institutional investor for most of these funds. So, you know, a way to somewhat replicate that is either, you know, you own the thing,

although it's kind of, you know, or it's kind of hard to store at your house, or you own the companies that produce that. Yeah. I was trying to find this post of like commodity companies aren't commodities, right? Because then you get all the debt and the leverage and the management mistakes and all the issues. Correct. But I would think that this, you know, it's always a risk.

But I think at this point in the cycle, it's less of a reason before. I mean, because we come out of such a brutal bear market. I get typically energy companies or gold miners there, you miners, they have a dollar in their pocket, they spend 10. And then they buy the other guy who has this. It's a very undisciplined, unstructured industry with a lot of capital destruction. And I certainly have seen a lot of that, especially shale in the past decade. But again, it's been so hard for them. And then on top of that, you had the ESG stuff, the drying capital from them that, if anything, for very rarely, but you haven't much more discipline,

much more return to shareholders, which is probably not economically good. I mean, at this point, these guys should just be keeping the money and just investing, increasing production. But it's not happening because for 15 years, they've been bleeding. And yeah, the dividend yield is pretty high. I think energy has the highest dividend yield of any S&P 500 sector,

which I don't think has ever happened before. Yeah, and I think that's a big hangover from 2014, right? When energy is... And then the banks were just like, no, right? I'm not giving you any more leverage. I'm not giving you any more money. Make do with what you have. So for sure, some better.

But and that's moving towards this secular theme, right? Of like metals miners, energy companies. Everyone hasn't put the money back into the infrastructure, back into getting the resources out of the ground and paying for it. Yeah. And there's a timing aspect to this, right? And it's the time to invest was five years ago. So, and then again, that comes down

going back to these inflation expectation and then, you know, still that transitory narrative that, you know, it's going to all be better by March, 2023. I mean, the problem is that we haven't invested for 15 years. I mean, how in five months, especially because we're still not, not seeing that pickup in CapEx at this point. I mean, all I hear about is, you know, it's criminal that these guys are making money and we need to tax

that money. That's, you know, it's not really a, still, I don't think there's a lot of appetite for funding conventional energy, long lifeline projects, deep sea offshore drilling or stuff like that. I've long said that's massively deflationary. We used to drill down, now you can drill down, drill

sideways 500 feet, get to these pockets like the technology growth there has been perhaps overshadowing the lack of of building new infrastructure indeed yeah yeah right well two things there so one okay if energy is so high right now is to that timing aspect is it too late you're saying no this could go on for another five years ten years yeah i would think so i mean you look at you know energy or the share of the s p 500 i mean it's still probably less than apple at this point or at least it was uh a month ago probably around you know four five percent i think the last time we were there or you know was probably in 2000 when you know all prices were a fraction of what they are today. And, you know, energy profits are a fraction of what they were today.

So, again, I think it's a slow-moving cycle. And sure, we'll… By the way, I like this expression, you know, the easy money has been made. Is there any easy money? Right. That was the definition of not easy money, right? if you were investing in exxon mobil like people were throwing coal at you coal is probably a bad example people are throwing rotten fruit at

you right you had a political problem you had a philosophical problem and you had a performance problem they were just in the dumps for years there yeah so i totally agree not not easy money so you mentioned cycles do you you think, what's your thought on commodities overall? Are we in a commodity super cycle? What does that word even mean? Yeah, I'm not a commodities analyst. So I think it'd have to be a little more granular depending on which commodities and so forth. Now, in general, what I'm convinced of is that we are in inflationary era and in inflationary era, commodities are valuable.

In general, I would think that it's a bad idea to own commodities because commodities do not pay dividend, they don't pay coupon and generally humans are smart. So when you own commodities, you're smart, you show human intelligence intelligence which is a pretty bad idea you know we'll always figure out you know new ways to produce more with less um part of it dwarf wheat is the uh they couldn't figure the wheat got so

heavy it would fall and kill itself so they genetically genetically modified it to have 10 times the yield on the same stock. Yeah, exactly. That's a great example. But I think there are an exception to this rule of thumb is when you have what we have, a period of structural underinvestment for many, many, many years. And yeah, you get a squeeze. If you look at the oil market, it's not balanced. I mean, you remove Russia, there's just not enough oil for the demand. I mean, all you have to destroy a tremendous amount of demand

to get back to balance. And you can do probably the same analysis for a lot of commodities. So there's that scarcity return, which usually means it can spike up because everybody needs it and you can't find it. That's one source, one reason to own it. And then the other reason is the diversification aspect, right?

In a deflation environment, your stocks and bonds have a negative correlation, right? So you can hedge one with the other. That goes away to inflation. And I would argue that commodities claim that mantle. So if you think in terms of modern portfolio theory, your efficient frontier, which had probably zero allocation to commodities anytime in the past 20 years, now you can improve your risk adjusted return, even though I would argue commodities are negative expected return asset because they're constantly carried.

But you can add an asset with a negative expected return and improve your risk-adjusted return because it's so diversifying. And that would also argue for a greater allocation to the sector from institutional investors, central banks, even retail investors, ETFs, and so forth, which

would get that talk of super cycle, whether it means something or not. And I'll bring in greenflation here. So, right. You could argue even with Russia in the picture, even if their energy is there, we're going to need so much energy to pivot to this new green economy over the next 20 years that we're going to use every single bit of fossil fuels to get there. Right. Like the amount of metal that needs to be mined, the amount of metal that needs to be mined the

amount of equipment that needs to be built the amount of the factories that need to be built to do that it's going to use up all that traditional energy sources uh what were your thoughts there i don't know i think that that's been the mistake right i mean because yes and i i mean i'm not anti-esG or whatever. I mean, I've been critical on it, but I theoretically agree with the goals. I mean, obviously we want to move to like renewable sources. We don't want to like dig holes

and pull the atmosphere to do that. But the right way to do that is to finance a transition. You're going to actually need more professional energy. That was a mistake that, I mean, talk about Germany, you know, Anna Givinda. I mean, that was, that was pathetic. I mean, fine. You want to do this, but don't close your nuclear plants at the same time.

I mean, or you end up depending solely on Russian gas and getting an insane amount of leverage to a bad actor. And then that's the part that politicians really missed. They thought they would just, you know, go from, you know, point A to point C and skip point B altogether. And that's what relies in horror today. And being a European, France has been a longstanding French policy since really even before the goal, basically realized during the oil embargo that we have no oil and we're dependent on foreigners. So we had to develop our own internal sources.

Well, there's no oil in the ground, but we could procure cheap uranium from Sahara. And so we built a very strong nuclear industry in the 70s, 80s. At one point, EDF, Electricité de France, was the largest utilities in the world. About 85% of electricity in France was generated by nuclear,

and it was significantly cheaper than the rest of Europe. However, we haven't maintained this very well. So now we get into this crisis where I can't remember the exact number, but I think at least 10 nuclear reactors are shut down. So at the time when we need the most, we don't really have it. Now, we're still in a much better position than, say, Germany, which cut it all together and end up buying nuclear power from France or or coal fire from from poland uh we

kept some of it but again and again with the problem of nuclear is a very slow investment cycle right i mean it's especially the new second generation etrs you know i mean it takes 10 years to build um so kind of paying the price of past mistakes here but But what, and it's just curious to me, if that differs from America to Europe, it doesn't seem like it if Germany shut them down. Like it's, nuclear has gotten lumped in with traditional energy sources, right? It's gotten lumped in with fossil fuels when it's...

I think that was a big deal at the COP, the big climate thing, the Glasgow conference, the French are really lobbying to include nuclear into the definition of renewable. And if you take a climate change view, I mean, nuclear comes with other risks,

but if you go really, if you believe that life on Earth will end if the temperature rises by more than 2 degrees Celsius, nuclear is an obvious answer to this problem. Yeah, I think it's people's emotional, right? You're more scared of dying in a fiery flash

when the nuclear plant reactor breaks than dying slowly over 40 years. Yeah, yeah, correct. So switching gears a little bit, corporate debt. I had Chris Cole was on the pod beginning of the year saying, this is the next big shoe to drop. You posted some interesting data recently. What are you seeing there in terms of the issues in the corporate debt world

and where rates are at? Well, I think it all comes down to bankruptcy suppression, right? Basically, you look at a chart of bankruptcies in the past, you know, 10 years just goes straight down. There's almost no bankruptcy anymore. You're like, what happened? How is it possible that for, since the Romans, you know, debtors prison, I mean, companies would fail. Like, why is nobody failing anymore? What does that mean? Well, that means that, you know, that's prison. I mean, companies would fail. Like, why is nobody failing anymore? What does that mean? Well, that means that, you know,

does that mean that everybody's smarter and making profits? Of course not. They're all using QuickBooks better or something. No, it just means that companies that would have otherwise gone under have been able to survive because they've been able to borrow money

at cheap rates because there was so much liquidity. So I was looking at the Russell 2000 index, so US small caps. I was looking for companies where operating cash flow, so the most generous metric you can find off, is not enough to cover just the interest expense. I'm not even talking about the tax or the depreciation or whatever, just like, can you just pay your interest bill? And then I also looked for companies on addition to that, who had less than 12 months of interest expense cash on hand. So that if the market is shut down for them, after a year, they're gone. That's more than 20% of the Russell 2000. And I ran the number as of Q1, so that the training 12-month interest expense

is based on a junk bond yield of about 4.5%. It's closer to nine. So that 20% is probably closer to 40%. And you're saying this isn't a projection. This is taking their actual cash on the book and actual rates, even a different rate than what is today. Yeah. So there might be a lag here again, because you know,

if you're smart, the duration of your liability is not a year, right? So, you know, they're not going to start paying 8.5% liabilities right away because they still have the old debt. Right. So I think for junk bond index, maybe duration on five, six years. So you only need to roll over 20 percent of your debt every year. So it's going to take five years to to pass the entire

yield shock, but it will come. And I think that's that. I think Chris Cole's right. I mean, the obvious big short at the beginning was the kind of speculative, profit-less tech with ridiculous valuation.

Some of them, no sales, right? So it's horrible, bubbly stuff, like dot-com style stuff. That was the story. That started setting up. Yeah. February 2021, you know, it's been getting hammered

for two years now. Most of these names are down by 90%. The next shoe drop is going to be, let's call that the zombie companies, right? Companies that, you know, have no economic purpose, but survive only because of the availability of cheap credit that's being pulled away. But so if a lot of those have already been marked down so much inside the Russell, inside the NASDAQ. Does that have a lasting effect for market participants at the index level? Yeah, that's a good point. Well, I mean, it's, if you look in terms of market value, I, like I thought I, I call that the toxic blob, you know, it's, it's like that.

And actually I think there are two of them. There's one now and then it's going to be the zombies. The toxic blob is the, you blob is basically COVID darlings, these stupid companies trading for like a hundred times sale with whatever. So these guys are getting, you're right, they're getting written down very, very fast. Now the problem is you also have new entrants in that blob. So you have these two forces.

And last time I checked, actually, the size of the blob was increasing because you have more and more companies, unfortunately, who meet this definition of having very low or negative earnings. And the valuation is not improving. I mean, if you think about the companies that had no sale, what's the multiple on this like it drops by 80 it still has an infinity multiple yeah exactly so that's kind of the problem with with real bubbles in the sense of where you're not really financing a an asset that produces anything is you could write them down but it's not getting cheaper but it's almost like the toxic blob isn't all that toxic like it hasn't infected these other better companies right that's this been the surprise to me of this has been this orderly sell-off

everyone's calling and it's just stair step down so correct yeah why why do you think that is i think because the economy is doing really well uh better than people give you credit for i think people are you know like worrying about recession like the reality is the economy is, you know, it's booming, has been, I mean, slowing down, but it was growing so fast that, you know, every company that was not in that toxic blob,

yeah, costs are rising and whatever, but the top line is growing so fast, has been growing so fast that, you know, things have been okay. Like you look at index level earnings, we see that positive earnings growth last quarter. We had, you know, really strong earnings growth

in the past two years. So I think it will come. It's probably coming, I think, for Q3, Q4 would be my guess. When we have this high earnings expectation, when we'll finally feel the effect of the slowdown. And I'm not calling for a recession. I'm just saying slow down. And then, yeah, the contagion,

maybe it happens with the credit markets. Maybe it happens through some very large investor blowing up. And who knows? Another way it could happen in tech is, I feel that a lot of that spending spending on on stupid unicorns and and companies you know be small ended up you know being buying adwords on on google um placing ads on facebook renting server space on aws so i think somewhere i read i actually i think it's a Chamath quote, so I should go with it. Be careful with it, yeah. I think Chamath said that 50% of every dollar raised

in VC funding ended up in the FANG. I mean, I don't know how it came up with the number or not, but it's a small- It makes sense, everything you just said. Yes. The ad spending, the server spend. Right, and now where do they refill that money? I've always wanted to do a blog post on that of like, you know,

when you're on some of these websites and you see this complete junk at the bottom of the page of like, right. I've just like, see, see what these child actors used to look like. And this, right. All that junk, like, is that really what we built? That's the internet. That's productivity enhancing right there. Yeah. And then invariably i'll always click on it like once a month like oh that sounds interesting so maybe they're the smarter ones lastly here i want to do a little world tour with you on some of the areas you've

brought to light get your quick thoughts we mentioned japan's we'll go back there but more specifically their jgb peg their rate peg what's that doing to the yen and what the end game there looks like i think some stuff yesterday was that starting starting to break well i mean there are two end games i mean um either they destroy the japanese economy which is what's happening now because you know you are a large industrial exporter with very thin margin in a highly competitive market and your currency collapses by like 30 every month and your ppi is running at 50 and you have no inflation so no ability to pass it through you get destroyed and i think that's what's happening now. Or, which I think is the more likely outcome given the historical tie between the LGP and Japanese elite and the manufacturing export business sector, there is a moment like, okay, guys, we keep doing this six more months of

this, we're no longer going to be an industrialized nation. So we got to stop that insanity. And then we get the mother of all fraud squeezes. And we see that. For me, the template would be, I think it was 2015, the Swiss Central Bank begged the euro. And then, you know, of course, the Swiss franc always wants to appreciate, right? Because it's a better economy. It's better run, you know, money flows to the banking sector.

And then the Swiss franc, the S&B was just trying to prevent it, prevent it trying to prevent it prevent it prevent it and then i wanted like okay we can't do this anymore just like shut up by 20 in one morning i think you got in japan like i think they'll just fold the towel give up your curve control and then you just see that thing of the yen just like pop up and the mother of all short squeezes um so that yeah i think we did research. I think it was 20 years of range was in that one daily bar on the Swiss that day. Yeah. I think it was a 76-dollar deviation event. Yeah.

And there's no, right, it's a free trading thing around the world. So there's no like limits or circuit breakers or whatnot, right? It just goes. It just trades. And so that would affect the dollar in a big way. I think so, yeah. I mean, I... So it's weird that everyone's putting on, which everyone I know is guilty of, right?

All the trend followers are short the yen in a big way. But you'd think you'd start to see little people starting to place bets on the other side of that yeah the thing is what worries me is that it's it's gonna be an event right it's gonna be one that is gonna be over so it's almost an impossible event to time right so i mean you can if you're on the wrong side of it just getting hammered hammered bleeding you have no idea when this bleeding is gonna stop so i to me it's going to be a low of maximum pain it's a very hard way it's very hard to profit from and where do the jgbs go from

there so they're they're pegged now so they you're saying they'd come out and say these are no longer pegged we're going to let them their new rate is three percent or something i have no idea because it's not a market yeah you know i mean they there are days when BOTGV changes hands. So it's at this point just an accounting game between the BOJ and the Ministry of Finance. So if you want to restore a market where it non-existed, I have no idea what the price is that could clear that. So does that put the death stake in MMT if this BOJ experiment turns out they throw in the towel? Well, I'd be, okay, I have some sympathy for MMT. I've followed it, I've been a believer for a long time. I would argue that everything that's happening is consistent with MMT. I mean,

what MMT people told you is eventually the only real constraint on the ability to monetize deficit is inflation. This is playbook textbook MMT. Now that's the problem MMT is weak is because it assumes that if and when inflation does pick up, then smart politicians are going to do the right thing and they're going to tax back. That's the part that never happens because it's so contrary to our instinct. Even in Europe, you see it.

It shocks me, by the way, on inflation. I still feel we have this view that it cannot happen here. We're not Brazilians here. I mean, we're better than that. Look at what people are doing. Government of Netherlands netherlands just said oh gas prices are high i'm going to send everybody 1 000 euro check in the us we have like price gouging oh no these guys are making profits let's stack them we are reacting in the exact same way that hugo chavez or you know your average peronist you know Argentine politician would react.

And still, we think we're so much better than them. Yeah, I don't get that. Here's a gas credit to buy more gas for when we have a gas price problem. All right, moving on. We'll move to this one, speaking of gas. So Norwegian Krona versus the Swiss. Well, I like them both um i mean the the virtue of the norwegian krona is the the energy play right and that's uh but i mean in terms of countries are very similar right so they're both you know very small very wealthy very well-run countries which were smart enough not to get into the european. And as a result, I think have the ability to like, you know, when the train wreck eventually

happens, or maybe not a full train wreck, but let's say I wouldn't want Lagarde's job right now. They have more flexibility. They have these huge reserves, right? I mean, I think for, I know for Switzerland, it's the equivalent of 120,000 euros per capita in FX reserves. I know for Switzerland, it's the equivalent of 120,000 euros per capita in FX reserves. So they can pretty much set the price of their currency the same way. For Norwegian, the government pension fund, the old fund is the largest investor in the world. I think they own about 2% of the world stock market cap. And my view is that we are in a new era where 10 years ago, it was competitive valuation. The central bank who won was the one who could devalue the currency the fastest to still

grow from their neighbor. Now it's the exact opposite. The biggest problem is import inflation. You want to keep your PPI low so you can keep your manufacturing sector competitive, so you need a strong currency. Who has the best shot at having a strong currency? I would say it's Switzerland and Norway because of the huge reserves. In fact, they've been suppressing the currencies for a long time. And because of the

fact they're so wealthy and generally well run. So these are the kind of places where people want to put their money anyway. And so your theme there is be long both. Yeah, I would say it comes down, you'll do better on the other side. Correct. And I would hold them against the euro as the clearest bet. I mean, the dollar is kind of a hard one. I mean, you know, I would be tempted to short the dollar, but I, you know, I don't know. Brent Johnson taught me better.

It's kind of, it's very frustrating for a foreigner that, you know, there are no consequences in the US. You can be as stupid as you want. And still, you know, when you have a big market event, your currency rallies so much. So that's why the best, you can be as stupid as you want. And still, you know, when you have a big market, then your currency rallies so much. So that's why the best, you know, take a bad,

a fundamentally flawed currency like the Euro as the other leg of that trade. So I didn't have that on my list, but since you mentioned it, so the Euro experiment will be shortly, will end one day? What do you think? I mean, everything ends one day.

I mean you bring the dollar uh so i mean i would you know which ends first the euro or the dollar probably the euro but i i think the you know at the end of the day i that uh i think it's about what you care about most. And the level of, I think people underestimate the level of attachment to the Euro for the European elites and their willingness to make insane sacrifices. It's like almost a sacred cow right i mean and i think that's why people underestimate in 2011 2012 and solving that crisis like yeah we are going to put you know half of europe in a depression in order to keep our stupid little currency because it's it's it's too costly for us to admit it we're wrong in the first place and i think that logic is still there um now they don't have the tools to do it. I think Legard is kind of working on it.

I mean, the problem now is you need to raise rates. As they raise rates, so do spreads. You know, spreads keep getting higher. You know, it's a problem. Now, I think people overestimate how quickly that's going to happen. Because, you know, Italy, the maturity of Italian debt is about eight to nine years. So it's going to take quite some time for Italy to start paying. They have the reimbursement from the PPP.

So they have a bunch of stuff they can do. And I sense, and that's something that I've seen, you know, covering European markets for 15 years. Americans are just so ready

to jump on the euro because they think, obviously, yeah, it's stupid. Okay, we all know that. But stupid things can last if there is the willingness to defend them. And I think that's the part they underestimate.

Bitcoin is still at 20,000. So, point in case. But if you had to fix it, what would you do? You get rid of Italy? You get rid of Greece? You get rid of who? How would you get rid of it? I mean, you do the full fiscal union.

I mean, you just do what you guys did after the Revolutionary War. And, you know, you have transfers. You don't, you know, in the U.S., you don't measure whether Alabama is subsidizing New York. Or I don't know which one it is. Probably. Well, we do. You see more and more of that. But, yeah, it's not.

It's not. But, you know, it's consolidated. Like, you don't keep the regional feds. You don't keep a separate balance sheet. Oh, you owe me. Yeah, yeah. So you mentioned the Swiss liking the Swiss. So you have been tweeting around the Swiss milkshake.

So that's a Brent Johnson steal off the dollar milkshake? Yes, yes, yes. I'm going to give you credit for it, though. I hadn't heard it before. It sounds better, right? It sounds more tasty Swiss milkshake than a dollar milkshake They make really good milk and really good chocolate in Switzerland

Which none of these things are made in the US So what's the theory there on the Swiss milkshake? Well same argument really That we've entered this new era where the game is which country can defend its currency the best. And you look at the world,

to me, it's clearly Switzerland. I mean, you have, I think this year, they're going to have a budget surplus. A surplus. Inflation in Switzerland, I think, is around, well, maybe it picked up a little bit, but I don't think it's above 4%.

Massive current account surplus. So if a country, and then these reserves, these insane reserves. Basically, after a while, the entire world has gone QE. And for the US, Japan, and Europe, we just bought our own bonds. It neither created a liability or an asset. We're just buying a claim on ourselves. In Switzerland,

they did QE, but they bought other people's stuff. The S&B, for example, is probably one of the largest holders in the stock of Apple and Microsoft. They've just been buying the German boot market. They have, I think, more than a trillion in currency reserves, which can be mobilized in order to defend the Swiss franc, which I think they will

do. I mean, remember, they had to import the policy of the ECB, which I think they hated, because of how integrated they are with the European Union. If the Euro does something stupid like negative rates, they have to copy it. The Swiss is generally smarter, and I think they hated it, but they had to do it because otherwise, you would have massive deflation, it would have become Japan. Now inflation is back above 2%, they can let go of it and the currency repression, let the Swiss franc appreciate. Again, I would play that versus the euro um because i think you know switzerland does not have to deal with italy or greece or spain so if you need to move fast the snb is probably the the best european central bank to do that and what about their playing along with

the us on the sanctions with russia they seems like they lost a little neutrality in that uh episode which yeah i think that's one of the reasons why my trade hasn't worked uh it's really on the sanctions with Russia. It seems like they lost a little neutrality in that episode. Yeah, I think that's one of the reasons why my trade hasn't worked. It's really, you know, I started pounding the table in January along the Swiss franc. And then, you know, a month later, you got Russia invade Ukraine. You know, generally, I don't want to ask a Swiss banker where the money is coming from. So I think, yeah, there was quite a bit of Russian money in Swiss banks. And yeah, Switzerland is not in a position, I mean, they have to go along, right? So the traditional role of the Swiss

banking sector, it's a place where it's safe to keep dirty money without many questions. That's probably a little bit under threat threat and that's probably way down on, on the currency and also on the performance of some of the big Swiss banks. And then also they own all that Apple stock that's down 20%. So, right. So at some point all those earnings are like, right. Some people are calling them the world's largest hedge fund, right. What, what if they went short? And then China and Brazil,

how have your thoughts evolved on each of those over the years? Well, I think for China, I think the mistake people make is kind of underestimate the demographic squeeze that's coming out of China and what it means. You know, I think the notion

that, you know, China will keep being the manufacturer of the world and keep subsidizing the West. I think this is strange. I mean, China now is, kind of reminds me maybe of, I don't know, Germany in the 70s or something like that, where their interests are going to change dramatically.

And they will try, you know, that instead of being a surplus country, they're soon going to be a deficit country. They will start to need a stronger currency. They will need currency integration. So I guess the long story short, the trade implication from the slowness of China, I think, is to be long Chinese government bonds. The same way it was a fantastic trade to be long German bonds in the 70s or Japanese government bonds after the bubble burst, because you'll get two sorts of returns, one much lower rates than the rest of the world because the population is shrinking and a stronger currency. On Brazil, to me, I've had this call for eight months.

It was very painful at the beginning. And then it took off. I think it's a very undervalued commodity exporter that does not share a border with Russia, where you have, you know, 10% plus overnight rate. So and that's who most of Latin America, I mean, this is very rare moment where Latin American central bankers have been smarter than the rest, like they saw the inflation come, or maybe didn't have a choice. But by the time the Fed started hiking, these guys already were up at 10%. So if you're if you're worried, you worry is you don't want to fight the Fed,

well, go to Brazil, go to Chile, go to Colombia, go to Peru. These guys have done probably 95% of the hiking cycle already. Trey Lockerbie I've talked with some Brazilian hedge fund guys who are like, well, our hurdle is like 18%. They have to get over because they can get 10% in the treasury. So tough game for a hedge fund manager down there, but in theory, the opportunities are big. You said you're not a Fed guy, but I had a question for you because you know the ECB and you know the Fed. So if we're starting a fictitious country or global economy

and you have to pick one to pick your fighter in Twitter meme style, pick your fighter to run our new fictitious country's banking system. ECB or Fed? Well, if we talk about Chairman, it's an easy one. I mean, I'd take anybody over the guard. Okay. And she's French, right? She is French, yes.

But she's not an economist. She's not, yes. But she's not an economist. She's not a banker. They're all lawyers. An attorney, that's right. Yeah. But primarily, she's a synchronized swimmer. And that's something that I, the one area where I really respect Christina Gard,

she made the French national team in synchronized swimming in late, before she was 20. And I think that that's her main skill. And you can really see it in the way she conducts herself at the ECB. I mean, she just watches what Powell does and just repeats it with a six-month lag perfectly. But that's probably not what the ECB means.

I thought, I mean, in general, I would say the ECB has the weakest hand among all central banks, right? Because of the flaws of the union. So you really need an extraordinary central banker to, it's like, you know, you're playing poker and you have like a pair of seven, right? And that's, that's all you got. You need a master bluff. And we had that with Draghi and I think we lost that.

And why can't they get her out of it? What do the mechanics look like for this? Well, so you have all the political stuff, right? So it's like okay, Northern Europeans already I think they made an exception to this, right? Because after Draghi, it should have been German but they wouldn't get Weidmann, the Bundesbank guy, because he was too hawkish back then. And then Lagarde kind of came in as a compromise. You know, she's French,

French is neither Southern nor, you know, and she's a woman and she's, I mean, she's very eloquent, like she, you know, and she's, you know, she was somewhat, there was basically this deal between Macron and Merkel where the Germans would get the Ursula von der Leyen and the European Commission. And then you have to give something to the French. So they agreed to give her the ECB.

So, again, with the it's all this horse trading. So you cannot just undo that very easily. And nor would I think that anyone in her shoes could do anything better at this point. I mean, it's just a horrible job. I mean, she's going to have to basically swallow her sword or fall into whatever the expression is. I like swallow her sword.

She'll have to get past her Hermes scarf to swallow her sword, right? Was that your little imagery, right, of like she's talking about the poor with her Hermes scarf on? Yeah. There is a strong uh uh marie antoinette vibe here you know let them eat cake when every ecb conference well i mean because it always ends up the same and i'm i'm not listen i don't know i don't know if i do

any better issues okay but it always ends, oh, we're not worried about inflation because wages are going up. I mean, what they're really telling you is that their plan is for you to starve because, you know, they fail to address inflation at the proper time. And now, yeah, you look at Europe. Yeah, we get our gas from Russia. We don't have a good way to deal with it. You know, we don't have an alternative. You know, we can't do anything. So the best hope for Europe at this point is that wages don't go up and people, you know, lose like 20% of their purchasing power

and don't protest about it because, oh, it's in order to fight Putin or to fight climate change. So, yeah, strong Mario Antoinette vibe here. And like, who would want that job in the first place? Kind of, you know, in the Fed too. It's like like you should almost be disqualified if you want to serve in that role last bit here give me your hottest take either something nobody's talking about something that you think one way and everyone else thinks the other way

um got any got anything for us sorry i didn't prep you for this one you did not prep me for about something that you think one way and everyone else thinks the other way. Got anything for us? Sorry, I didn't prep you for this one. You did not prep me for this. I don't know if it's a hot take or not. I suspect you share that view, but this is not a market route. This is a very orderly sell-off. We haven't seen, you know, the kind of stuff that you would see where, you know, you get margin calls everywhere, hedge funds blowing up, massive spike in volatility. Like, I think that, you know, after last week, there was this desire to say, oh, this was a big dramatic event. This was the bottom.

Like, you know, pretty much every stock on the NYC was down. I don't think that is it. I think that comes in the fall. I think we have another, you know, another 20% to go in the fall. And this is when the real pain will be felt.

I don't think this, for now, it's not real pain. Another 20% from downtime. So eventually we'll be 40% off the highs? Yeah. Nice. What does that put the NASDAQ at? 80 or something?

So basically an 0.8 redux of those types of levels? Yeah, maybe more on the NASDAQ. I mean, NASDAQ was on 80% between 2000 and 2003. So you look at where valuations have been. And again, at this time, keep in mind, we did not have the problem of inflation. We had a Fed put back then. So here we have, I would argue, we had a similar, if not worse, overvaluation of, you know, certainly the NASDAQ.

And on top of that, we have to face a beast that we haven't seen in 40 years, which is second inflation. And you think it happens more violently, that next leg down? I think, personally have like no one ever seen a second leg down really right it's been either the sharp spike right we never had this down sideways for 12 months and then another 20 down um since way back when like great depression level so yeah that's kind of the where my head's out of like nobody's prepared for that second leg down yeah and even worse they're probably saying they're oh there's not going to be a second leg down and they're piling in at these levels um and so where how do you

position with that versus just going short equities or when i use i mean milkshake yes with milkshake cash i mean i i stupid because i. I mean, it's stupid because I'm the inflation guy and I'm like, I have a ridiculous, seemingly far too large personal allocation to cash. But I mean, you know, I'd rather lose 8% to inflation than 50% to

a bear market. You know, cash is gaining value when it's measured in asset terms. We already discussed precious metals. As long as you have reasonable expectation of what they can do. Some energy. I still think Latin America

comes in stronger from this at least on a relative basis. At this point, it's not even an equity industry anymore. Latin America as a continent is, you know, less than Apple. You know, you're not taking a big risk there.

Now you want to be fun and have some fun and, and, you know, have a story to tell your grandkids, you buy the Japanese yen and hope that that event happens. And, and you're, you look smarter than everybody else.

That's the one I'm doing. I'm taking that away from our chat. Maybe there's a triple levered yen ETF we can look at. But you would have been It's probably already bankrupt. There's a triple levered yen ETF. If that was triple

levered long, you'd be down 99.9% so far. All right. Any last thoughts for everyone there? Tell them where they can get you on Twitter and all that good stuff. Okay. I'm at Vincent Deluard.

B-I-N-C-E-N-T D-E-L-U-A-R-D. I am active on Twitter. Not as active as some of my friends, but I enjoy it. I've met very many smart people, uh, including you. Uh, so you can follow me there. Um, there is a, uh, if you look at my pin tweet, there is a link to where you can, uh,

register for a free trial of my work. Uh, if you are a client of Stonex, we are, um, you know, big FCM, we have, um, you know, big securities business. You should talk to whoever covers the account and see if you can get added to my list. Talk to your friendly RCM broker. We'll get you added. Exactly. And if not, the research can be had as a subscription-only product. It's priced

very reasonably. We grant free trials to everybody who asks for them. And otherwise, yeah, Twitter is where it's at. I hope Elon Musk keeps it that way. Who are most of your customers on the research? It's mainly all the

StoneX customers, or you get some paid subscribers? Yeah, yeah no we do uh so initially yeah initially started with the stonex customers uh we have a lot of business in latin america so i have a big uh big following among uh um brazilian hedge funds pension funds across latin america and that's also helped me frame the kind of inflationary right well now i'm gonna say like i don't know if I trust your Latin America calls now. You're helping this client. Well, but no, but it's helped me kind of,

these are people who understand what inflation is and understand also the value of real assets. So there is that. And then, yeah, no, I mean, we've got a lot of interest. I mean, the inflation call was very early, but turned out to be very right. So we historically have a big following in Europe. So private banks in Switzerland, places like that. And we're looking to grow this business.

So hopefully this will help. That question popped in my head when you're talking to these Latin American guys. So do your researches come from talking to the practitioners, talking to the people trading these markets, or are you sitting in your ivory tower coming up with the thoughts? A bit of both. It doesn't look ivory. It looks wooded. You have these nice wood beams there.

Your wooded tower. No, but a bit of both and i mean also one thing that's helped i think it's it's things like what you're doing podcasts um twitter i mean you really have i feel i've seen in my career like so many more resources if you want to educate yourself about global macro about investing and access to really smart people and i must say i've been impressed and so you know people have taken the time to talk to me and to you know if i have a question about a very technical aspect i mean i can ask someone who's written you know a 20 tweet thread on this on twitter and more often than not these people will take the time and will share excel spreadsheets. And so it's fantastic.

I mean, when I started my career, that did not exist. And now I think, you know, this is actually truly productivity enhancing. So yeah. Someone had a thing once. He's like, it's like George Soros or Jesse Livermore or something like had a hotline phone on their desk and you could just call them at any time and they'd answer. There's some super smart hedge fund guys managing billions of dollars that will answer DMs and tweet intelligent stuff out. It's an amazing time to be sure.

And my last piece was going to ask you, were you at Stonex before they were Stonex? When it was FC Stone? Yeah, I started when it was fc stone yeah i started when it was uh intlc so i actually started after after brexit brexit is the uh i was at uh discovered as i had the europe product started the europe product from the davis research before that and um yeah i think when that how i got through stone x is when the brexit vote happened um where owned, NDR was, Ned Davis was owned by a British company who was very anti-Brexit.

And I didn't have very strong feeling either way about it. I just thought it's democracy, you know? And they asked me to write a piece of propaganda, you know, predicting like, you know, that, you know, frogs would fall from the sky and harvest would be dive because of that Brexit vote. I'm like, how do you want me to do this? And then I had been in talk with INTL for a while.

It's great, great, great company, great team. They wanted to build in their own global macro products. And they promised me that they would never ask me to write something stupid to please the ideological preferences of the CEO. So I'm glad I did. I was more going to ask you what you thought of the name, the Stonex. Stonex is good, man. I mean, I mean, I was more going to ask you what you thought of the name, the Stonex. Stonex is good, man. I mean, C-Stone was weird.

Yeah, I-N-T-L-F-C-Stone is where we started. Okay. So it's all about your benchmark here. Right. I'm showing my age because I just knew it as F-C-Stone. Then it was I-N-T-L-F-C-Stone and now Stonex, but all the same group. Awesome, Vincent. Thanks so much.

Have a great day. We'll talk to you soon. Thank you so much. I appreciate you coming on. Have a great day. We'll talk to you soon. Thank you so much. Appreciate you coming on. Yeah. Pleasure. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website

to read our blog or subscribe to our newsletter at rcmalts.com. If you liked our show, introduce a friend and show them how to subscribe. And be sure to leave comments. We'd love to hear from you. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and

carry a risk of substantial losses. As such, they are not suitable for all investors.