We Study Billionaires - The Investor’s Podcast Network - TIP491: Macro and the Energy Market w/ Lyn Alden

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Starting point is 00:01:07 where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors podcast. I'm your host, Dick Broderson, and dear listener,

Starting point is 00:01:29 we are in good company. With us, we have the one and only, Lynn Alden. Welcome back to the show, Lynn. Thanks for having me back. Happy to be here. So, Lynn, it's always great having you here on the show, and I wanted to start this interview by discussing the energy market.

Starting point is 00:01:44 And I'll be referencing your wonderful blog post, I have you right here, Energy, the area under the curve, for the first part of the episode. So in here, you're claiming that the industry is acting more rational than before, and you also refer to the US yell producers, which, unlike in the past, more disciplined now, and they only produce profitable oil and gas. And I found this very interesting, this statement, because we think and perhaps understand that a tech company think about Facebook or Google, like, they might be hopeful to utilize networking effects and achieve supernormal profits.

Starting point is 00:02:18 And they can be okay with being unprofitable for some time as they're getting there. However, the situation seems perhaps not to be applicable to all in gas producers. So could you please paint some color around why top line growth was more important than profits in the prior decade for U.S. L producers. Yeah, it's a good comparison. I would say even in the tech space, that can get over its skis, right? So the idea of tech is that, you know, you can start out on profitable, but because

Starting point is 00:02:43 you can scale exponentially, ideally your revenues will scale faster than your expenses because, you know, it doesn't, you know, if more people are using your server, right, that's pretty cost effective. And your increase of need for staff and servers is slower than your increase of revenue you can generate with those servers. And so that's the general idea of one of those, like, you know, big type of like scaling tech startups. And so they can manage five, ten years of unprofitability as long as there's a future vision towards profitability. That's realistic. I think actually what we've seen with a lot of these

Starting point is 00:03:12 recent gross stocks is they push that too far. I mean, they went into an environment where, you know, you're basically selling $20 bills for $10, which, of course, anybody can grow when they're doing that if you're being so generous with your pricing and just kind of using your stock to pay employees, and so you're, you know, you're kind of saving on costs there. And you're kind of just really pushing it far, it shows even tech companies, it can be irrational in terms of not having a vision towards profitability that's realistic. And, you know, with oil companies, just, you know, there was new technology, right? So there was, you know, it was a combination of new technology, specifically new implementation of those technologies. So it's not like, you know, there was

Starting point is 00:03:50 advancements in how to get that oil out, combined with, you know, just new visualizing tools and all sorts of those new refinements, that marginal difference that helps make it more profitable, or at least doable, combined with an era of record low interest rates. You know, they brought interest rates to near zero. There's rounds of QE. And then you had a number of pension funds and other entities like that being willing to buy up all the debt and equity that they were willing to issue. And then a lot of CEO compensation is tied to how big your company, it's not necessarily how, you know, what your net margin is or even what your total return is over, say, a five-year period. And so there's a lot of just problematic incentives

Starting point is 00:04:26 in the sector. And the idea is it's going to keep grow. It's always going to be demand. We'll get profitable eventually. And of course, the opposite happened. But a lot of these companies just had no clear vision towards profitability. They were over-investing in that period of pricing. And like any commodity markets, they get overextended, they got crushed pretty hard,

Starting point is 00:04:45 both in the aftermath of 2014. And then, you know, a second time, kind of not their fault in 2020. They kind of washed out any of the ones that kind of staggered, you know, to pass that that earlier washout. And so I think we're in a very different environment now where, you know, one is that due to ESG concerns and just bad returns, a lot of investors just don't want to, you know, to keep pouring money into that space anymore. And so those companies are forced you more self-contained.

Starting point is 00:05:10 They're saying, okay, instead of just issuing tons of shares and debt, we're going to actually focus on free cash flow generation. And then we're going to use that free cash flow to pay down debt, buyback shares, fund new growth, and due dividends, right? So it's a more self-contained type of model, which is slow. we're growing, but it's more profitable, less risky, and it generally results in less just oil and gas growth. And so that's, I mean, that's a more rational price. And until the price gets high enough that more long duration projects come online or other energy solutions materialize

Starting point is 00:05:41 that are, that are, you know, taking that share. I think you bring up a good part that we see so many weird things happening in the financial markets. You also mentioned columns for CEOs. Like, we all react to incentives. And it doesn't mean that they're aligned with shareholders or they're aligned with ESG, but we react to our own incentives one way or the other. And the oil market is notoriously known for being volatile. And it's important to understand that the boom and bust cycle, for example, the oil price is partly due to the time like that it takes to add, or it could also be removing capacity to the market. An oil project can be unprofitable in total cost, but can still be rational to continue

Starting point is 00:06:18 due to the differences in fixed and variable cost. And I don't know, Lynn, if you could give an example of such a project and then how that impacts the cycles for the price of oil? Yeah, so, I mean, shale oil, the reason people went to it, in addition to just, you know, new technology, new access, basically making life out of older wells, is that it's fast to market, right? So less upfront capital cost, but then you have quicker decline rates. And so it's, you know, you're just getting out oil and gas quicker. Whereas if you do a gigantic offshore platform or some of those gigantic OPEC wells, these are things that are very capital-intensive up front,

Starting point is 00:06:56 but then they have these long lifetimes. Kind of the same thing for like oil sands, right? So super capital-intensive up front, but then once they're in place, they're very like low decline rates. And during that environment, you know, that kind of like easy money, you know, new tech environment,

Starting point is 00:07:12 it was all about that rapid oil to market. And the problem is that's like the Red Queen syndrome. So running in place and you have to run twice as fast just as day we were going. and they have to run twice as fast again, just to stay we were going. And so that's the problem with shale, and that's why you can't just go from, say,

Starting point is 00:07:26 five million barrels a day to 50 million barrels a day. You know, at once you get up to 10, 13, 15, you know, whatever the number they get to right now is something like 12 or 13. The higher you get is just like your existing base is kind of dissolving under you as you're also trying to expand it. And so there's limits for how much you can push it. And in this uncertain environment, you know,

Starting point is 00:07:48 there's not a lot of incentive to go for these, longer duration projects because, you know, they're being told by governments and investors, hey, you know, we're going to phase you out in, you know, five years. And, you know, I think a lot of those targets are unrealistic. But they're being told that and they're also being told, you know, we're not going to give you tons of like financing. In fact, we're going to give a premium to these like green bonds over here instead of yours to make their cost of capital lower. And also like, you know, we might do windfall tax. Maybe we'll see. And then so you're doing a long, you have like the long term spreadsheet of, okay, do I want to want to, want to, want to

Starting point is 00:08:20 put a couple billion dollars into this like, you know, 15-year payback period project, probably not. And so right now we're kind of geared towards these quicker barrels of oil. But I think in order to solve some of these structural energy problems, we're going to need some of these longer-term projects. And right now the incentive structure doesn't incentivize that until maybe prices get crazy or there's more kind of a future clarity around, you know, maybe average pricing or that the fact that they know it'll be in demand 10 years from now. Yeah, and like the old market is just so fascinating. And, you know, we might have a few decades back if we did the same interview back whenever no one knew what podcasting was. You know, we might have talked about peak oil or who knows. Like the narrative just changes so fast whenever it comes to oil. And I also think it's important for people to understand that right now the focus is on we shouldn't have oil. And I don't want to go into the whole climate discussion necessarily. But there are plenty of oil. But it's also important to understand that the marginal cost of that oil is just very different.

Starting point is 00:09:18 where you're on the world. And so you can put a lot online. It just takes a lot of time. And it also requires different levels of price of oil before it makes sense. And then you have the other effect, which is whenever the oil price is expensive enough, you have this other incentive that now renewables, it makes even more sense to do R&D in that field because now the opportunity cost is different than whenever like a barrel oil was a 40 bucks. If it goes to $200, like we have different incentives. So you have this volatile environment for those reasons. so many others, I should say. Yeah, I mean, in a prior era, if you saw oil, say, double, you'd go, okay, drill baby drill,

Starting point is 00:09:55 let's get some moral out of the ground. And now they're like, no, no, like, we don't know if it's going to stay here and we don't know what the future clarity is. And so it's basically a different environment. It's a more bearish, cautious, defensive type of sentiment. I mean, that's long-term good for price. And, you know, that's part of why commodity cycles are so boom-bust is because of that delay between the price signal that tells you bring more oil online.

Starting point is 00:10:18 And then, especially outside of shale, the number of years it takes you to actually bring that oil. And so usually those bear markets are characterized by oversupply that was financed during that prior boom. And then bull markets are characterized by the fact that, you know, that spare capacity is eventually being worked out, either due to ongoing demand growth or just gradual decline rates and lack of sufficient new investment because of the bad pricing. And when that price starts to go up, you know, if you don't respond to it right away, I mean, even if you do, it just, it takes years for that. new supply to come online. And in the meantime, just demand is really pressuring the existing supply. And that's kind of the story of commodities in general. And that's why they tend to have these roughly 15-year cycles. I mean, it varies a little bit. But in some ways, it's like clockwork, because it's kind of just the overall investment cycle of what plays out. And then you can do

Starting point is 00:11:06 an overlay of fiscal monetary stimulus that kind of serves as some of the transition points of, you know, kind of economic acceleration or deceleration on top of that commodity overlay. And you get a pretty repeated cycle over the past century or so. Yeah, and going back to the point about reacting to incentives, and to your point, you know, sitting in Europe, I mean, don't even get mistaken. All the problems you have in Europe with energy. And we have all the incentives that we don't want nuclear, we don't want oil, we don't want gas, we only want renewables.

Starting point is 00:11:36 And we previously talked here on the show why we can't just use renewables, not short term and not even medium term. There are so many things that we can always go into later that would require for that to happen. technologies haven't been invented yet. So we have these different quotas we need to fail. And we can say then if we import gas for another country, that we can still fill out of those quotas because that quote-unquote pollution happens in another place because even though it's natural gas, it's still fossil fuel. So far, that project or here in Europe, like, the backup has always been Russia. And here we are. So this is not my plot for doing a lot of coal law. That's not what I'm saying.

Starting point is 00:12:13 It's just like you have to choose and there are choices and consequences regardless of with path you're going to take. But Lynn, it seems like the trend line of the price of oil is going higher and higher. And you point out that the U.S. broad money supply increased 4% since the start of 2020. So you have, in your research, used gold as a mystery stick to normalize the price level. What do you find and what are the implications for businesses and households that has energy as an expense? If you compare oil to gold historically,

Starting point is 00:12:43 It's not that expensive in the grand scheme of things. It's roughly around average. Basically, at that point, you're ignoring the Fiat denominator that, you know, everybody's seen those doom charts of like, you know, the dollar losing 99% of its value over X, Y, Z time period, you know, things like that. So you ignore that, you know, gradually debasing denominator, and you just compare two commodities. And so oil's roughly fairly priced in terms of gold. And even in terms of dollars, you know, oil was, it spiked up to like 140, you know,

Starting point is 00:13:10 a decade and a half ago. and even from 2007 all the way to 2014, it was like an average price that was equal or higher than it is now. It had valleys during the global financial crisis. It had crazy peaks over 100. And it eventually fell off a cliff after it got a supply glut from that shale we talked about. But really at the current time, it's not that expensive. Now, European gas is, no, that's horrifyingly expensive.

Starting point is 00:13:33 And so there are, and coal had a huge gigantic spike in price. So there are types of energy that are expensive. The oil market has not yet reached that point. I think it's, you know, in years ahead, it's probably going higher. And, you know, to your prior point, it's, I think there's a lot of issues around managing to expectations rather than managing to outcomes, which is, you know, trying to obfuscate, get anything dirty off the balance sheet, rather than making it not exist, you just like it's not our, you don't want it on our balance sheet because we have a bureaucratic quota to meet. And so there's, there was an example of European, like, they were chopping down old growth forests in Canada and then shipping those wood pellets.

Starting point is 00:14:11 And that's like an irreplaceable deep carbon sink, you know, biodiversity naturally occurring. It's not one of those like, you know, human planted forest that we just keep turning around. It's like old growth. And we're shipping those wood pellets to burn over in Europe. And that's counted as green. And that's about one of the least green things I can think of. And that's an example of managing to optics. Whereas managing to outcomes is like, you know, more of an engineering mindset.

Starting point is 00:14:33 How can we make this grid stable? How can make the air clean? How can we, you know, balance these different optimization goals and not just push it on to some other balance sheet or put out of mind. And the problem is that if a place does not have affordable energy, it becomes uncompetitive. In Europe, you guys have had some facilities shutting down, you know, fertilizer plants, aluminum plants and things like that because they're just no longer competitive at those electricity prices.

Starting point is 00:14:59 And so that can help put a cap on electricity prices, but also puts a cap on economic growth and likely triggers recessionary conditions. So an environment that can't get those cheap energy prices quickly becomes uncompetitive the global market, and Europe has been a strong manufacturer. So that's important to manage properly. You know, some countries that are more service oriented can get away with higher energy prices, but if you're manufacturing base, it's a little bit more acute. And then, of course, any consumer, if they have to spend more money on their energy bill, especially they're spending more in energy, and then that's revenue for another country because you're not producing it locally.

Starting point is 00:15:33 That's less money you can spend on local goods and services. And so that's bad for the economy. And so that's the environment that many countries are in. So right now the dollar is pretty strong relative to other currencies. So actual oil is pretty highly priced in euro terms or pound or yen and a lot of frontier markets. You know, not necessarily some of the major emerging markets, they've actually held up better, but compared to a lot of currencies, oil is very highly priced. And it is putting a lot of pressure. And then it's like I said, especially the natural gas, especially electricity prices, the coal.

Starting point is 00:16:05 And so it's a matter of competitiveness and displacement of more. more discretionary purchases. We follow Warren Buffett and his investments quite closely here on the show. And Buffett recently built a $25 billion position in Chevron equivalent to an 8%-ish ownership and almost a 30% stake in Occidental. Buffett also had a lot of warrants there. So that's why I came up with that number. You'd only look at common stock. It's 20-ish. What are your thoughts on the two stocks of the current market price? So long-term, I'm bullish on them. is one of the more expensive ones, but it's also one of the higher quality safe liquid ones. And so my approach has been more kind of geographic diversification and more different oil types.

Starting point is 00:16:48 So I have some of like that kind of company. I also have some of the Canadian companies. You know, I think that there are other ones around the world. I've also been like some of the pipelines. He also bought, you know, they bought a pipeline from a company, right? So it's about energy producers and infrastructure. I think like any good value investor, and he's, of course, you know, legendary for it, He knows what's cheap and he knows what underinvested in.

Starting point is 00:17:11 And it's kind of an anti-bubble in many ways. And so I think he's been smart to get into the energy space. And, you know, obviously with his size of his book, he's going to go for the big, liquid, you know, longer duration type of projects. And then also, I mean, he, you know, a couple years ago, he did those Japanese trading companies. So he put a few billion dollars into those. And those are, in many ways, they're commodity-oriented, hard asset, you know,

Starting point is 00:17:37 and some of them have energy exposure. So, and if you kind of tally up his overall kind of commodity, energy, you know, even the infrastructure from moving it like pipeline, he's made a pretty big bet on energy. And I think that's smart because, you know, he's obviously he's got that Apple position. It's very tech-oriented. He's got the banks. And so, you know, I think he wanted to add to the real asset side of his book

Starting point is 00:18:00 and specifically in areas that are underinvested in. So it's kind of, especially when he started doing them, It was less, you know, it's a little bit more contrarian than it was now. And a lot of, you know, sometimes he gets criticized for not being super early. Like when he bought Apple, people were like, Apple, really? It's one of the biggest companies. It's already done great. And of course, it did amazing after that.

Starting point is 00:18:19 So, you know, when he started getting into those oil companies, they already did pretty well. He didn't, like, buy them at the bottom in like March 2020. They were like, you know, isn't that kind of over? And I think we're in the beginning of like a five, 10-year story here for some of these companies and just this sector in general. And I think I think he sees that. and that he's setting up Berkshire to, you know, be well positioned for that.

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Starting point is 00:22:39 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. Chevron isn't priced cheaply, as you said. There's also a limited number, even for Buffett. or especially for Buffett of companies you can invest in. If you're sitting 140 billion dollars of cash, which most of us don't, because there are more exciting energy companies out there for sure. But,

Starting point is 00:23:07 you know, if the market cap is a billion dollars, it's just not going to move the needle. But I wanted to talk about OPEC Plus. It's been making headlines here recently. OPEC Plus is a castle of all-producing countries, including Russia, Saudi Arabia, two of the biggest. And they recently cut productions by two million barrels per day. For comparison, they produce 40 million barrels daily. And I just wanted to give you some approximate numbers for everyone to follow. So the total oil market is around 100 million barrels. The US is just short of 20 million barrels per day. Just so whenever we are like throwing out these numbers, there's something to compare it to. Anyways, what is explicitly not said, it seems like the members want a flaw under the price of all between

Starting point is 00:23:48 100 to 80 to 100 compared to say 70 to 80 per barrel before COVID. What can the Western world do to lower the price of oil. And do we even buy the premise of my question? So I would have reframed the question a little bit. So when OPEC cut, when they did that two million cut, it's actually technically not a production cut. It's a cut for the ceiling for how much they can produce. And what's interesting is they were already deeply under, they're already missing and underperforming that ceiling. And if you go back to OPEC historically, it's actually been a problem of the other way around. Like they set a ceiling and then their, you know, countries are kind of going over it, trying to, you know, sell a little extra around the margins, you know, kind of cheating a little bit. And so it's actually a matter of enforcing

Starting point is 00:24:30 not going above it. Whereas in this environment, there's been the opposite where, you know, the majority of OPEC countries or a bunch of OPEC countries are failing to even meet their ceiling. And there's been good research by a number of firms that specialize in the energy, you know, kind of all out more than I do. And they've done like the detailed work on analyzing some of these countries. And they've argued that there, a lot of these are near capacity that, you know, with the current level of CAPEX and sometimes, in some cases, just the amount of of reserves they have and just overall kind of maximum output they can do, that they're kind of tapped out. You know, I mean, there's a little bit around the margins maybe, but they don't have this

Starting point is 00:25:06 gigantic swing production that many people think they do, which is different than history. And then some, you know, they might have to trim the production ceiling just to, you know, if you keep failing to meet your production targets, eventually countries realize you don't have what you say you have. And so this is, you know, I think one way of managing the optics. There's also the question, because we're talking about OPEC plus, which includes Russia, due to the war, the Western oil companies have had to pull out, they had capital and equipment and expertise that was part of Russia's production. And so the question is, we talked about oil declines. You know, what happens in a year, two years, three years, if they can't recoup that level of investment to keep

Starting point is 00:25:44 that production as high or higher than it is now? You could see a mild fall off in Russian production, for example. And so I think it's actually a more matter of OPEC not fully having the ability to keep amping it up. Then there's also a matter of geopolitical alliances, deteriorating conditions between U.S. and Saudi relations. And so essentially what that is saying, though, is that there is a floor there. They're willing to defend that floor,

Starting point is 00:26:09 but also that they might not just have a lot of spare capacity. And there are ways, you know, North America and Europe do have oil and gas reserves that you can tap into. I know in Europe they've run into some earthquakes. So, you know, some of these things, and sometimes there's environment, groups that say we don't want to tap into this in the United States. Biden has issued an order of magnitude fewer drilling permits for federal lands within the first 19 months of his administration

Starting point is 00:26:34 compared to any post-World War II administration. And that's part of his campaign progress. He didn't want drilling on federal lands. That was prior to an acute energy crisis. And so now you have that dichotomy between, you know, you made a promise, but then you want to get inflation under control. Then there's that. There's also a matter of, there's only so much refined. and transportation capacity, right? So in the United States, we have pretty cheap natural gas. The question is, why can't we just send that all over to Europe? And of course, the problem is you need LNG infrastructure, which is expensive and time-consuming to build. And then even if we get it there, then you need import LNG infrastructure. And you need to, like, have then the

Starting point is 00:27:11 transportation to get that from the, you know, the coast to the points where you need it. And so it's a matter of that type of infrastructure. It's a matter of refining. So you can have all the oil you want, but if you only have so much diesel production capacity, you can have a diesel store even if oil is cheap, right? So there's multiple parts, there's multiple bottlenecks along the path to get right. So one thing that, you know, North American or Europe, like, Western countries can do, one is they could expand their exploration and production around the margins. They also can invest in more infrastructure, transportation, refining, things like that. You know, in the United States, we've not added a new refinery in like 50 years. We've expanded existing refineries. And that's because,

Starting point is 00:27:53 they're not the most environmentally friendly sites. And there's always opposition, not in my backyard, no more refineries. And it's like, well, there is a tradeoff for that. Either you have to import more of that product or you're going to have shortages and high prices of that product if demand does not fall off with your capped or slow growing supply. And so there are investments that can be done. And I think it's one of those things where when the price signals emerge immediately,

Starting point is 00:28:18 maybe there's the idea that it's transitory or, you know, you can blame some. one, but if it goes on month after month, quarter after quarter, year of year, eventually that starts to change how people vote. It changes how politicians to run the numbers. You know, they want to stay in power. That changes how companies will choose to invest longer term capital. And they say, okay, this shortage is here to stay. I may be a little bit more aggressive here now. And so, you know, price eventually can solve a lot of things. And it just, it just takes time. And it takes working through some of the headwinds that are present at the current time. Yeah, and I don't want this into you too much to come across as a lot of complaining about

Starting point is 00:28:59 the NG market in Europe, even though it's probably too late. But it just seems like there were no plan B. There's so much of that infrastructure that isn't, it just isn't built out. And something that's just always underinvested in is the power grid. Like it's so, it doesn't sell well, like to voters. And if you say, oh, let's just have a better power grid. Because what does that mean? Like, I can still charge my iPhone.

Starting point is 00:29:20 I can still, like, have lights in my home. But that's just not how works. And so what happens is like the power grids are just a mess. And they're a mess for so many reasons. Like we like to think, I don't know if I can come up with the best example of, you know, whenever we cook too much food and kind of feel like, oh my God, it would be so great if someone could like take this food so no one has to show it out. Sort of like almost the same analogy I want to save with energy because we have so much

Starting point is 00:29:42 energy that's being produced and we have so much to go to waste. And one of the reasons, there are many reasons why a lot of it goes to waste is that the power grid just can't handle it. And it takes a lot of time to build out. So it's not like, oh, there's a war now in Ukraine and like, let's just build out the power grid. Like, no, it takes a lot of time. And for power grids to be very efficient, well, it's slightly different in the States, even though I know you also have issues with your power grid, but like that's one country.

Starting point is 00:30:06 It's really difficult in Europe because something like a power group is just so crucial to your infrastructure. So whenever you're building things together, there's just so many different conflicts you need to hash out. And also to your point before, not a lot of people want to have upgraded the power grid in their backyard. Like, no, no, no, we want better power grid, so we're not depending on Russia. Just not where I live. But I still want the benefits. And that's just the nature of how we are as people, I guess. Yeah, there's been both in the United States and in Europe.

Starting point is 00:30:33 There's a problem with construction in general. It's just, there's a lot of headwinds for doing it. And like you pointed out, there's not a lot of incentive to, you know, run on a campaign of stronger grids unless you're experiencing like rolling blackouts, right? So once the problem has to get severe before it becomes a voter issue. And at that point, it takes years to fix. Right. So that's just how that works.

Starting point is 00:30:53 And, you know, like the funny stat that we have is, you know, the United States, it took like a year to build the Empire State Building in the 30s. You know, we can't build a skyscraper in a year now. We can, you know, we can barely build one in five years. If you try to build like high speed rail, good luck, you know, give it a decade and you'll still have like the permitting being done. It's just a lot of these, a lot of countries are now, it's very challenging to build these infrastructure projects. and that includes, you know, modernizing the grid, right? So, you know, a lot of these goals, they want to, you know, electrify things more. Right now, you can call it almost decentralized energy.

Starting point is 00:31:27 So you have, you know, let's say, you know, my house has electrical power. It also has a natural gas line. And then also my car goes to a gas lane, which is a whole other distribution point. Right. So all those, there's three different energy distribution points that are basically going to my home and my consumption. And the idea is if we want to fold that all into just electricity, So instead of using natural gas for my heating or my stove, a lot of communities are saying only

Starting point is 00:31:53 electric now. So that gets forward into the electric power. And then they say, okay, now we want to do EVs only, only electric vehicles. And so that whole like gasoline, you know, transport infrastructure, that gets forward into the grid, right? And so then suddenly instead of three different channels of energy, I'm relying on one channel of energy, that better be a super robust type of energy or energy transportation, electricity, because if it's not, if it's not ready for that, or if it goes down, everything goes down instead of having three different types of energy. And so that's, I think, the challenge with this long-term plan of electrification and also just the ability, even outside of energies, the ability for, you know, kind of wealthy developed countries that are already,

Starting point is 00:32:35 they already have a lot of infrastructure to build and replace that existing infrastructure. It's just a very costly, very bureaucratic, very challenging thing to do for a variety of reasons. And just one last comment on that. We can build that grid above the ground, but people just don't want that. It doesn't look nice. It's a cheaper option because if you dig into the ground, which you can also do, it's just so expensive because you have this irradiates a lot of heat. So it's just a very, very expensive thing to do. And then you have the incentive like with a different country. So they give you like one example. Like France, they've been providing us all this wonderful electricity and they're run on a nuclear. And so we have this thing where a lot of countries,

Starting point is 00:33:15 So, for example, Germany, like the green party do not want nuclear. And I'm not wanting to go in like pro or con. I'm just saying that if you don't want that, it's completely fine. Then you just need to use a fossil fuel because right now the renewables can't just, they're just not stable enough to do it. And even in Germany, they have three different grits. I probably make this way too nerdy, but they have different grids. And if they're not connected, if that's enough room on the cable, they just can't get that

Starting point is 00:33:40 electricity. So you have so much electricity that go to waste for some. many reasons. Anyways, it leads me to another question here, Lynn, can we fix inflation before we fix the energy markets? I think not persistently. Now, they, if you cause a deep enough recession and suppress demand enough, you know, if enough business is shut down due to high energy costs, if you create enough unemployment to suppress wage increases, then you can cure inflation, but it's like cutting off your leg to fix the infection, right? It's like, that's not what the patient asked for. What people really kind of think mean when they say that,

Starting point is 00:34:19 or like I think that what they should mean is how can you get back to a period of disinflationary growth? And I think that's only possible once you fix the energy situation. And even then there's some pressures. There's, you know, we had a multi-decade trend of globalization towards places like China. And that's stalling out or in some cases reversing just due to one is demographics. And, you know, we've kind of already already filled that bucket now. And also there's, of course, geopolitical tensions and reasons and things like that. So I think the short interest is, you know, I've been describing like holding a beach pole underwater. You can, you know, you can temporarily hold it down. You can, you can drain the Strategic Petroleum Reserve. You can, you know, China's doing recurring lockdowns,

Starting point is 00:34:57 which is, which is actually suppressing quite a bit of fuel demand. You can do, you know, you can, you can tighten monetary policy so much that no one's building homes and few prices can get control and shut down fertilizer and metals companies. And you can kind of press that down by having demand kind of fall to meet supply, the problem is then you start to get recession, you start to get unrest. And if you then try to stimulate your way out of that, those shortages are still there structurally if you have not taken that time to increase supply. And another challenging thing is that all these rate hike increases, admirable as they are, they increase the cost of capital for energy companies. And so the hurdle rate for them choosing to do a new

Starting point is 00:35:36 project is even higher now. And so it's actually, it's suppressing demand, but it's also pressing, in some cases, supply arguably. And so we're in an environment where until we grind through this, until we actually fix the energy situation, I don't think you're going to get disinflationary growth. It's kind of bouncing between either you're going to get inflation or you're going to get recessionary like conditions with maybe lower inflation, but nobody wants that either.

Starting point is 00:36:02 Then the period we're in, it's often in the financial media compared with the 1970s, early 1980s, giving how central banks are raising rates and fighting inflation. Now, the fight wasn't equally distributed if we're looking across the globe. From 1978 to 1984, Britain, Germany, and Japan cut their budget deficits while hiking rates in Canada and France did the same thing, though, not to the same extent. The U.S. was the exception of the major economies because Vogue was hiking rates, but they were cutting taxes during the Reagan administration.

Starting point is 00:36:35 And many economists today argue that while Paul Volgler got the credit, the inflation environment didn't structurally change before the monetary and fiscal policy worked in tandem. Do you agree with that assessment? And I guess depending on your answer, how does that translate into today's environment in Western Europe and the U.S. where we're hiking rates, but we're also running huge deficits? Yeah, I both agree. Also, the inflation didn't really resolve itself in the 70s until they fixed the energy situation, going back to the prior question, right? So you had multiple energy shocks in the 70s, and by the 80s,

Starting point is 00:37:09 those were largely sorted out. And so the combination of tight monetary policy and then, you know, the energy situation resolved. You know, that helped that, that went a long way. It wasn't just Volker. And then you have, you know, the fiscal situation is interesting because, you know, so Reagan did boost the deficits a lot. But it's like the deficit as a percentage of GDP we have now in the U.S. are bigger than most periods back then. So even that it's not just direction that matters, it's also magnitude. And so that's actually why I've used the 1940s comparison, where, you know, in the 70s, if you look at, so broad money supply was growing pretty quickly.

Starting point is 00:37:43 And money supply mostly is created from either bank lending or biased fiscal deficits. And in the 70s, the majority of the money supply growth was coming from bank lending. That was a kind of a peak demographics situation, you know, baby boomers were entering early adulthood, consuming, buying houses, getting jobs. And so that was a, you know, kind of a demand-driven, bank-lending-driven type of inflation environment. And then we added fuel onto the fire with like, you know, wars, guns and butter programs, right? So that we did add some deficits to that. But that actually was the minority monetary creation direction. Whereas like in the 1940s, you also had insane money supply growth. But it wasn't because of bank lending. It was because of massive fiscal deficits

Starting point is 00:38:26 that's to fight the war. And most of fighting the war means building facilities, hiring people trying to make like gun chips, right? So, or like supply chains and things like that. So it's actually, it's a type of fiscal stimulus,

Starting point is 00:38:38 even though the outcome is in many cases wasted. But when they come back, a lot of that could be repurposed domestically to make cars and to make other industrial things. And so in that environment, you know, that was a very inflation environment regards to what the central banks wanted to do. And so I think the issue now

Starting point is 00:38:52 is that we're in more of a 1940s environment where, you know, the past two, three years, most of the money supply growth has come from monetized fiscal deficits to deal with some of these shocks that are happening and to deal with the fact that the system's so levered that they'd rather print and let kind of defaults happen in a, you know, kind of a fragile economy. Now, if you look at, if you zoom in on the current time, because of the monetary tightening, you know, money supply growth is not growing very quickly in the U.S. anymore. It's been rather flat. And so that's part of why we're getting this kind of contraction in a number of, you know, sectors and things like that. But the longer-term story, I think, for this decade is that the money

Starting point is 00:39:28 supply growth is coming from the fiscal side. And so as long as that's unaddressed and as long as the energy situation is unaddressed, money tightening can only do so much. It can hold the beach ball under the water for periods of time, but all that upward pressure on the beach ball is from those other two forces. And I'd even go further to say even the fiscal budget, it's very hard for them to solve at this point because a lot of it is demographics entitlement driven type of spending. A lot of it's locked in. And then if they cut, you know, in many cases, like the GDP growth figures we look at, that includes those deficits.

Starting point is 00:40:02 So when you trim the deficits, in many cases, you trim the GDP growth. So if you're trying to optimize for like debt to GDP, basically austerity works in terms of preventing you from a cumulative debt. But once you're over, you know, 100% sovereign debt to GDP, austerity usually is unable to push it back down. You're kind of already past that event horizon. And so I think that's kind of the environment we're in in the 2020s where this is going to be a persistently inflationary force, but perhaps with periods of disinflationary fight back, hold the beach ball into the water type of environment that I think we're in now. And there seems to be some rumors that we don't need to

Starting point is 00:40:39 perhaps hold the baseball too long under the water. At least there have been some rumors around that the inflation target might be abandoned of two. There seems to be at least some that suggest a 3 or 4% target rate. This is not like an official announcement from the Fed or ECB or anything like that. It's just some economists that had some fun about exploring that. But some people have taken notice. And there would be different implications if that inflation target would be changed. Of course, it would inflate some of the, away some of the long, long-term public debt.

Starting point is 00:41:14 It would also lead to a redistribution from creditor to a debtor. and it would probably also lower trust in central banks. Now, if we just, if we were just to move in here and say this plays out that we're going to change this inflation target for central banks in the Western world, what are the implications for us as investors and citizens if inflation structurally moves higher or the target moves higher? Yeah, it's a good question. I mean, briefly going back to why they would go that.

Starting point is 00:41:44 So Volker, for example, under his watch, when he did. is big tightening, federal debt to GP was 30%. And so, you know, Powell's dealing with 130%. So he's trying to do the Volker playbook, but he's up against forces that even Volker didn't have to deal with. And so let's say we fast forward and, you know, they're unable to tighten, at least in such a way that they get back to disinflationary growth. They keep choosing between either recession or inflation. They can't manage to get disinflationary growth because of the structural force we talked about. If they then resort to higher average inflation targeting, you know, I think that that caused causes a number of issues. One, that's kind of like partially letting go to the beach ball a little bit,

Starting point is 00:42:22 right? So I think some of those more value-oriented hard asset type of things do well, right? So that could be cash flow producing things like energy producers and pipelines and chemical companies and, you know, refine, like, you know, these kind of like harder asset underinvested areas. It can also mean like hard monies like gold or Bitcoin catch a bid as you kind of have a recurrence of currency to basement and perceptions around, you know, forward strength of the fee of currency and people that want alternatives. One thing that's challenging is, you know, going back to the 40s and they're after, when they did that financial oppression playbook of, you know, hold rates, you know, basically let inflation run hot compared to interest rates, you know, eventually people won out. And so, you know,

Starting point is 00:43:01 like there was that IMF paper by Reinhart, Carmen Reinhart, and it was like, you know, I think she phrased it like, you need a captive audience, right? If you're going to inflate the debt away, you got to keep people in the debt. You know, And if your money is going to lose value, how do you keep people in the money? And to a lesser extent, this happens in emerging markets all the time. How do you keep people in the local currency? They all want dollars, right? They all want gold or dollars or, you know, other assets or stable coins or Bitcoin,

Starting point is 00:43:26 whatever the case may be. They want whatever it is, they don't want the Argentine pay stuff, that's for sure. And so the problem is then generally you turn to capital controls, right? So the United States, for example, they ban gold for 40 years. You could go to jail for 10 years for owning a benign yellow metal. And that's what they turn to, right? And so you also had just back then, there was just obviously worst technology.

Starting point is 00:43:48 So you had less information traveling around. You had, it was harder to move money around. And the question is what happens when you run a financial repression playbook in the modern environment of, you know, social media, easier ways to move money? I think that's a new experiment we're going to encounter. And I don't think anyone can fully tell you

Starting point is 00:44:08 how it's going to work out. I think generally money tries to move towards what is not being debased, which I think would, again, be a variety of scarce assets, some cash flow producing some more monetary, but it's whatever is perceived as outside of that captive audience, you know, kind of debasing situation. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do. do business. That's why VANTA is a game changer. VANTA automates your compliance process

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Starting point is 00:47:45 slash income. This is a paid advertisement. All right. Back to the show. Yeah. And I think that, Lynn, if you read about capsule controls, it looks good on paper, but in fact, it's really difficult to enforce. and you just almost seem to have this shadow economy going on.

Starting point is 00:48:05 You saw whenever capital control was applied in Southeast Asia, whenever they tried to restrict capital taking out of the country in the late 90s, how they just crashed the economy. It's just very difficult to do in practice. And like you mentioned before, in today's world, it's probably even more difficult that it's ever been before. Transitioning into the next topic, Until recently, you would think that when the Fed were buying treasuries, it pushes down yield.

Starting point is 00:48:33 But that's actually not the case. Could you please elaborate on this what seems to be a very counterintuitive relationship? So the prior decade, you know, QE was intended in part to suppress yields, right? It was one of the tools that they were using. But when actually people crunch the numbers, they found that at the time of purchases, that was not the case, that you'd actually have an environment of yields going up. And the way I like to structure, the way I frame it at least, is there's a difference between long term and short term, right?

Starting point is 00:49:05 So the short term is that, you know, when they're not buying, financial conditions are tighter, economy's slowing, financial markets are tighter, and a lot of risk assets are not doing great, and people buy bonds. When the central bank starts buying, it reliquifies the market, it eases financial conditions, you say they get an uptick and risk assets, people buy those and they sell the bonds. So, you know, the Fed's buying, central banks are buying, the private sector is selling. They're saying, okay, sold to you. And so in the near term, it actually has the counterintuitive opposite effect.

Starting point is 00:49:39 You know, people wouldn't expect that the biggest buyer buys the product, you know, the price goes down, yield to go up. You would not expect that, but that's how it works. But if you zoom out, the question is, you know, let's say the Fed wanted to sell $2 trillion in treasuries that decade. could they have done it without destroying the price? I would argue, and many would argue, no, that basically that even though the moment they buy it, it's actually not the price you'd expect, that the cumulative effect of taking that excess

Starting point is 00:50:05 supply off the market was important for holding down yields. And now that we're seeing more inflationary pressures and we have debt at higher levels relative to GDP and there's just supply glut of those bond issuances, you know, a lot of people were insisting that, you know, once the central banks try to throw to, Titan, you know, that's not bad for yields. But if you're actually doing supply demand analysis of who's going to buy it, who's going to buy it, who's going to buy it? You know, right now we're an environment where yields are going up as the central bank, you know, central banks have in many cases pulled back their purchases. And so that's more in line with intuition. And I think that's

Starting point is 00:50:44 more in line with the fact that we have an inflation environment and we have more acute over supply. And actually that relationship started breaking down in March 2020 because, you know, during the COVID crash, first it went how you'd expect, which is people sold stocks and they bought bonds, right? They're like, okay, we don't know what's going to happen. Let's get into treasuries. And then it got so bad and the dollar spiked because all these cash flows around the world were drying up, but they still have dollar-diaminated debt to service. So there's a scramble for dollars and safe haven't status. So everybody's, everybody's screaming for dollars. And then the problem is that countries with dollar-diamid debt, they have to sell. assets to get dollars to service the debt. So where they sell, they sell treasuries. And so basically, people bought treasuries, they sold stocks until it crashed so hard and got so illiquid and the dollar spiked so much that they forced sold treasuries. And it broke the treasury market. They're off their own treasury market. It went totally illiquid. There's like no bid. And you actually started to get yield spiking from a very low level at the worst point in that selloff, which is when you think there'd be maximum demand for treasuries. And that's, again, it's just, it's a mechanical supply

Starting point is 00:51:49 demand problem at that point. And so that's when the Federal Reserve had to come in and buy a trillion dollars of treasuries in three weeks. And they hammered down that little spike and they fixed the liquidity situation. That was kind of the first sign of a trend change, that this is not the 2010s situation. This is more a sovereign debt crisis situation. It's different. And that's really materialized here in 2022, which is, you know, we've gotten past, I think, that disinflationary commodity oversupply It's like that I've used the analog of the 1930s compared to the 2010s, just without the dust bowl and the better technology, so it's more fun, but it's still kind of this stagnant inflationary de-leveraging period. And now we're in the 2020s, which is unfortunately, which is, massive fiscal spending, rising geopolitical tensions, outright war in some cases. Unfortunately, the analogy got more literal than when I originally made that analogy. And that's more inflationary environment. And that's an environment where stocks and bonds can go down together if the central banks are not monetizing that debt, because they have trouble placing that debt. So right now you have, as long as the dollar

Starting point is 00:52:56 is strong, foreign sectors not buying treasuries. In fact, they're trimming their treasures to defend their own currency. It's not that their opinion is that treasures are, you know, overvalued. It's just a mechanical outcome. It's like, hey, we want to defend the yen. We're going to not buy treasures. We're going to trim some treasuries. That's how it is. Then you have feds not, you know, they're letting with treasuries mature off the balance sheet, and you have SLR regulations, meaning that commercial banks can only buy so many treasuries. So if the three biggest balance sheets are net flat to down and there's still issuance, then all these smaller balance sheets have to absorb them somehow. And that's how you get

Starting point is 00:53:32 disorderly liquid conditions with higher yields and lower prices. And so I think that, you know, I think that 2020s is marked by sovereign debt problems and currency problems. Not necessarily, the prior one was all, you know, it blew up in the banking sector and the private leverage sector, whereas now I think it's more sovereign debt currencies and then that underlying energy input because you can't, you can't print energy. Yeah, it is so interesting that you make this comparison to the 1940s and not like everyone else would say, well, high inflation, well, we had that in the 70s and the early 80s. And so I really like that you're such a student of history.

Starting point is 00:54:12 then the world is no short of pundits who want to give power advice and I'm definitely guilty as charged. Generally, whenever we talk about the called optimal monetary policy, I kind of like want to use the analogy that it's as wrong as whenever a person would ask you perhaps, what should I invest in? Because the answer is really, it depends on what's your goal. So if I'm turning the table here, and of course, also pointing out the irony that I'm now asking you to give Powell a friendly advice, I would change that question by asking, depending on what Powell wants to optimize for, what should he do with monetary policy? It's a good set of questions.

Starting point is 00:54:56 And I have different answers depending on timeframes or how fundamental I am in my thinking, which is, you know, my kind of bedrock answer is that I, so I'm not a fan of price controls, and that includes the price of money. So I actually kind of contest the whole notion of the way modern central banking works. You know, the United States is a country of 330 million people. Do I think that there's one interest rate that is suitable for the entire country? You know, is the industry rate for rural Alabama the same, you know, rate as New York? And, you know, should this be set by a small committee of elders, right? So I would say no, right? So I kind of just, in some cases,

Starting point is 00:55:36 throw out the model. But that is the model we live in. That's the model that we operate in. So then the question becomes, what do you do with that model? So I think if Powell's trying to optimize for inflation, which he's actually kind of legally mandated to do, right? He's got two, he's got really three mandates. One is, you know, low unemployment, which he's got officially, the way they measure it. Then it's stable pricing, which they define is 2% average inflation. They're currently way above target the way they measure it. So he's got to get that down in terms of mandates. And then they have kind of the third shadow mandate of financial stability. So if the treasury market blows up, they have no choice but to go in and fix that before it melts down.

Starting point is 00:56:14 Right. So he's got a clear mandate, which is increased unemployment and decrease inflation. So I think, you know, using the limited tools he has, he's kind of forced to do what he's supposed to do. So I'm not really sure what I would do different if I was Powell because I think it's almost an unsolvable problem. It's like, how do you give advice to solve an unsolvable problem? or kind of a bad algorithm for what you're supposed to do. So in general, I think in this environment, only solving for inflation is the wrong problem, and instead it's how to get disinflationary growth, which is mostly not a central bank question.

Starting point is 00:56:50 It's mostly a private sector and fiscal policy question. It's mostly how do you get more energy supply? How do you get more infrastructure, right? That kind of thing. And that's not something Powell has any control over. He's even said, we have no control over food and energy prices. So that might be even a hint at average inflation targeting if they just can't get the energy situation under control.

Starting point is 00:57:10 And they're like, well, we killed rents at least. So, you know, that's the best we could do. Right. So I think there's only so much any central banker can do it. It's the Kobayashi-Maru for people that, you know, no Star Trek, right? The unsolvable situation. And so I think that's kind of what they're in. And the only way around that is probably eventually to change some of the mandates or to

Starting point is 00:57:31 redefine how you interpret the mandates. which can include things like different levels of inflation targeting. And I think, but the longer-term story is I would like to see better technology so that there's not like, you know, a committee of like, you know, a handful of elders setting an interest rate for 330 million people in kind of a manual process. I mean, you see things like they do interviews. They're like, well, we're going to pencil some industry hikes in and we're going to. It's like, that's how we're running. It's, it's, we're in the 21st century and we're penciling interest rates, you know, we're penciling and basically price controls. for the price that sets all other prices.

Starting point is 00:58:08 And so, you know, different answers for different time frames, I guess. But I feel bad for pal. I don't know what I would do differently. No, like there are choices and consequences and he's just trapped between a rug and a hot place. Someone will get mad at him regardless of what he do. That's for sure.

Starting point is 00:58:25 And before, Lynn, you said 330 million people. I am almost inclined to say $8 billion. Because we hear that. Yeah, that's true, actually, yeah. I mean, yeah, because we hear that the U.S. is exporting inflation, given the continuous interest rate hikes. Could you please help us understand what does mean whenever we hear the U.S. is exporting inflation? And what is the implication of the U.S. monetary policy to the world? So most commodities are priced in dollars.

Starting point is 00:58:54 So the dollar is strengthening compared to most currencies that's making them harder to afford in their local currencies. in addition, most global financing happens in dollars, right? So if an entity in Europe wants to finance some Latin American debt, either government debt or corporate debt, it's a good chance it'll be in dollars. Now, there's some in euros, but it's a distant second compared to dollars. And so when Powell or anyone with the Fed, when they tighten monetary policy, they're basically hardening the dollar and then they're hardening everyone's liabilities. Right. So in addition, as you point out correctly, in addition to affecting 330 million Americans, you know, you have like, you know, an entity over in Turkey or Sri Lanka or Brazil or, you know,

Starting point is 00:59:37 China, country XYZ, they're getting squeezed due to a decision by a council in another country because they've, you know, for network effects, for global hegemony reasons, for all sorts of historical reasons. And then, and also just the fact that they haven't found a better alternative, they're using another country's money and assets as their money or their reserve asset or their debt financing and that they get squeezed by that. They're subject to, you know, they're basically subject to that foreign power. And so when the dollar strengthens, it can help us get inflation under control, but it's actually making it worse for the periphery. That's kind of how this whole system's been designed, which is to push volatility to the periphery. Right. So the core is the U.S. Secondary Ring is like all the other, you know, leading and developed

Starting point is 01:00:24 countries. And then the periphery is like, especially the frontier, the emerging market and frontier countries. We just, we push volatility to them, which is, you know, many would say unjust, but that's how the system's designed. And that can work as long as the treasure market is functioning. Because the feedback loop, you know, one thing that has happened over time, you know, for example, in 1980s, when Volker tightened, it broke Latin America. It just, you know, it basically calls all these, and currency crisis down there. It was a big contributing factor to that. Whereas now, a lot of those countries have more reserves than they had back then. And then another example, actually a stronger example is late 90s. You know, strong dollar broke Southeast Asia. It broke their situation.

Starting point is 01:01:05 Now, especially Southeast Asia, has very strong reserves. They've learned their lesson and they've accumulated a lot of reserves during good times. And so when the dollar strengthens, they have a lot of reserves that they can use to defend their currency and sell. And then the question becomes, who breaks first? Is it the whole world or is the treasury market? And the answer is, I think, a little bit of both because the periphery, unfortunately, still breaks first. You know, the poorest countries, the frontier markets, they just don't have the reserve, they have the debts, they have, you know, just weak pricing for the import commodities they need. So they unfortunately break first. But then it becomes a question of major emerging markets kind of versus the

Starting point is 01:01:45 best. So, you know, it's like the question is, like, can Japan and China sell more treasuries than the U.S. private sector can buy, right? And so they each of these have like a trillion dollars of treasuries, give or take. And then you add Switzerland. It's another developed country, but then you go into emerging markets and, you know, Taiwan's got a ton of U.S. assets. Brazil has a decent amount of U.S. assets and they also have commodity exports. And so it becomes that it is like a global kind of, you know, that, that, you know, that, you know, that, you that type of knot. I forget the name of it. It's like all tied up together. How do you unfold that knot? And I think the thing to watch is the treasure market, because there are feedback loops here.

Starting point is 01:02:26 It's not, that goes back to the impossible question. You know, Powell can't, he doesn't have complete control over what he does because, you know, he's got limitations like the treasure market and things like that that he's got to deal with. And so it becomes how far can you push it? How many kind of twist or tools, can he do it in his shop to keep the treasure market functioning while he's trying to tighten elsewhere? And so, yeah, basically live in a system where we do our best to push volatility to the poorest of the world, the periphery. If we look at emerging markets, they're definitely in a world of pain on so many ways. But to your point before, it is interesting that they have stronger reserves. They learn a lot from what happened in the 90s. And one of the

Starting point is 01:03:06 things that they also learned was to have less debt and denominated in dollars, which just gets so much more expensive whenever the dollar gets expensive and because of high rates. Because I was still surprised knowing that to learn that many emerging currencies, including the currencies of Brazil, Mexico, and Peru have performed better than the US dollar over the past 12 months or at least this year. And much better than the traditional seen stronger currencies like euro, pound, the yen. Of course, we could also like point two currencies like the Turkish lira and say, well, it doesn't go for all emerging markets, but I still want to point out the irony that many

Starting point is 01:03:45 emerging markets are forced to be more hawkish when times get tough than the more developed economies. Why is that? Because historically, they have the weaker currencies. They're the ones that are more prone to currency crisis, and so they have to be hawkish. And that means, you know, the U.S. gets the luxury, usually, of easing into a recession and tightening into a stronger economy. There's a lot of emerging markets have to tighten into a weak economy just to defend from a currency crisis because the, you know, the Fed's tightening, right? So they have to defend against the fact that the rich people of the world are trying to push volatility to them, and they have to use their reserves and also tightness to try their best to defend against that.

Starting point is 01:04:26 And over time, some emerging markets have matured. They've entered the higher level of emerging markets. And so they build up more reserves and they have more resilience. So when people just say, quote, emerging markets as though it's one group. It's actually very different groups. And so ironically, why a lot of the bigger emerging markets are holding up better than the developed country currencies this year is because right now, it's, you know, a lot of them have decent reserves and they've been pretty hawkish. And so the areas of weakness are countries that have either a combination of energy inputs that are now higher priced, so they've worse in their current account bounce, and they have so much debt that they can't.

Starting point is 01:05:07 raise industry rates properly. So that includes like Japan. That includes, you know, parts of Europe. And so those are the ones you're seeing a lot of crises in. Whereas Brazil, you know, they front ran the Fed. They jacked up industry rates super high. They also have a decent commodity situation, obviously. And so, you know, they're not being as punished as, you know, some of these Western sovereigns or these developed ex-US sovents. And then, but you still have, you know, Turkey, they have a lot of dollar damage debt. They don't have a lot of reserves. And then they have kind of unusual beliefs about interest rates. So, you know, they're super high inflation and they don't want to tighten the interest rates. And so, you know, until you kind of fix the energy situation, the fiscal situation,

Starting point is 01:05:50 and, you know, positive rates, it's hard for that currency to fully stabilize. And so it comes to a very country-by-country-specific issue rather than, you know, developed markets versus emerging markets. Because even among developed countries, there are some that They have a ton of reserves. Maybe they're energy sufficient, right? And so they're doing okay. And so it becomes more about the energy and the debt. Well, Seth, Lynn, before we end this interview,

Starting point is 01:06:16 and I definitely want to give you a hand off too, is there anything you feel that we haven't covered in this interview? I think we covered quite a bit. I think it's about, you know, going forward, it's obviously going to be volatile in a lot of ways. And I think it's just important to folks on the fundamentals. You know, disinflationary growth generally comes when your necessary input costs are cheap and abundant, which is things like commodities and basic labor. And there's, you know, there's freedom to innovate and grow and increase productivity, right?

Starting point is 01:06:46 So when people had to farm by hand, then they got tools, then they got tractors and then maybe get self-driving tractors, right? You keep increasing the productivity of a per farmer basis to feed the rest of the world. And that applies industry after industry after industry. And when you go through, you know, the long arc of history is especially once we discovered like hydrocarbons and these denture energy sources, it's been this upper trend of more and more productivity. But there are periods of setback. You know, there are, you know, wars, for example, are very malinvestment.

Starting point is 01:07:19 They're inflationary. Same thing with like, you know, if there's things that prevent productivity from increasing, things that prevent business from functioning that can suppress productivity. than if you have underinvestment in those input costs, those raw commodities, that's inflationary. It's bad for productivity. It's more expensive to afford basic things that we were affording cheaply before. And so I think investors would do well to think of it like that, which is just, it's very simple. So what are the input costs? What is the productivity like? Are we more or less productive and efficient than we were four years ago? And so it's no wonder that we're having this type of inflation. And then you overlay that, of course, with the money supply growth.

Starting point is 01:07:59 and the flexible ledgers that we use to try to deal with this. And so I think that's the environment that we're navigating, which is we're dealing with currency to basement, but then we're also dealing with real-world physical limits on productivity and input CAP-X. A lot of those are solvable, but they take time. That's so well said. It's not too long ago.

Starting point is 01:08:21 It probably was just a few days ago. I said to my wife before we're going to bed, not to put her to sleep, but I did tell her that, you know, in 10 years, people would be reading about now, like with all the things going to happen. The financial history books are being rewritten right now. Thank you as always. It's always so much fun having you on the show.

Starting point is 01:08:42 I'm sure the audience would like to connect with you. Where can I learn more about you? And please also give a plug for your wonderful blog. I appreciate that. So, yeah, they can find my work at lyndalden.com. I'm also on Twitter at Lindelton Contact. And so I have a variety of free material and content that people can explore. Fantastic.

Starting point is 01:09:01 Lynn, thank you so much for taking time out of your business schedule to speak with us here today. Yep. Thanks for having me. Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors

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We Study Billionaires - The Investor’s Podcast Network - TIP491: Macro and the Energy Market w/ Lyn Alden

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