Transcription
what I think people need to do is take a
moment zoom out look at history so we
tend to forget that in 2007 the FED cut
by 50 basis points it was actually on
the exact same day September 18th and
what you saw at that First Rate cut is
CPI running at around
3.5% and then what they did is they cut
another 25 they cut another 25 and then
going into 2008 they were supposed to
have a meeting January 29th they
actually had an emergency meeting
January 22nd because things got so bad
where they cut by believe it was 75
basis points and then a week later they
cut by another 50 basis points so these
massive interest rate Cuts now during
that time what was happening as far as
the narrative is people were saying that
they're cutting too much inflation is
going to re accelerate which oddly
enough it
did if you fast forward to August of
2008 the CPI went from right around 3.5%
up to 5 six so then if you read the Wall
Street journals around that time which I
like to do when the CPI report came out
in August for July and it printed the
5.4 5.6 what the narrative was back then
is the Fed is going to have to start
hiking rates so going into the end of
the year they've made this huge mistake
they're way off sides they cut interest
rates way too low because they're afraid
of the boogeyman the economy isn't doing
that bad even though the stock market
went down so now they've let the
inflation Genie out of the bottle now
we've got to worry about not
disinflation or deflation but we've got
to worry about a reacceleration of
consumer price inflation because the FED
has totally lost control and oh by the
way the 10-year treasury yield from that
time in January 22nd to August it went
up so they're saying look at the FED has
lost control the long end of the curve
and the biggest concern that we have is
a re acceleration of consumer price
inflation this was August of 2008 and
I'd like to remind the viewers that just
two or 3 months later interest rates
were at zero and you fast for about a
year and and the inflation rate was -2
in other words 2% deflation not even
just disinflation I'm not using that
example to predict and say we're going
to see the exact same thing in 2025 that
we saw in 2008 but what I am saying is
just because we see interest rates long
to the curve go up after the FED cuts
and just because we see the CPI go from
2.4 to 2.6 doesn't necessarily mean that
there's 100% probability that we have
let the inflation Genie out of the
bottle and then if you go back to 2001
you see that to a lesser degree we saw
the same cycle that once the FED Cuts
rates the 10year treasury yield actually
goes up it doesn't usually go down for
quite some time but then what happens is
what the yield curve is predicting that
usually over the next year or year and a
half plays out once the FED starts
cutting rates you know when you look at
the yield curve the the crash or the
recession or whatever you want to call
it the hard Landing it rarely occurs
when the curve is actually inverted it
usually occurs after the FED starts
dropping rates and that's what makes the
curve steepen out and uninverted
out this way the end game if you just
fast forward a year or two is very
rarely a reacceleration of consumer
prices it's usually disinflation that's
Then followed by an acceleration of
inflation due to the response mechanism
from the central planners so that's my
base case right now and that's just
based on what has happened over the past
Cycles well I think what you have to ask
is why did they cut in the first place
like why did they cut 50 basis points
it's not because the economy is booming
and I get it they're no more focused on
unemployment as opposed to inflation but
they're doing that because growth and
inflation expectations are declining you
know you look at the Som roll that's a
great indicator as to just that in and
of itself you know look when you see
that go up by 50 basis points or
whatever it is you know you're usually
very close to if not in a recession so
it's not just that if that was just the
only indicator that we had you look at
the inversion of the curve you look at
all these other things I mean nobody
would sit there and say that the poor in
middle class is doing well right now so
then it becomes why is the upper class
why are they doing well well it's
because of asset prices okay so what
you're telling me is the entire US
economy is built on asset bubbles and
yes those bubbles may be able to
continue into the future but they can't
continue indefinitely into the future
right so then you have to say Okay what
is the PIN that's going to prick that
bubble to where it'll impact the
aggregate demand of those people at the
top to where they join the poor middle
class and then that's usually when you
see a recession it doesn't mean you have
an absolute crash like the GFC or you
know during Co or something like that
but you just see a balance sheet
recession that may be very similar to
what we saw in 2001 but oh by the way
the fed dropped by 5050 basis points to
start that interest rate cycle as well I
don't think we have a debt problem is
because we look at interest rates right
now and we've got the 10-year trading
under fed funds still even though the
10year has gone up if we had a debt
problem that would be reflected in
interest rates if fed funds as is at
whatever 4.5% and we had a debt problem
meaning that we've got all this Supply
that's coming on we have all this demand
that's deteriorating because all these
foreigners are dumping treasuries and
they look at the off balance sheet
liabilities whatever they said there's
no way I want to hold treasuries anymore
the interest rate on the tenure would
not be underfed funds it would be 8% it
would be 9% so since you have an
inverted yield curve that in and of
itself tells you that there's massive
demand for treasury just look at the
price don't take my word on it so let me
give you a quick example let's say
you're a bank in the Cayman Islands and
on the liability side of your balance
sheet so you're dollar funding you're
paying 2% right and let's just assume
that you can match up the maturity with
your deposits with a treasury so let's
say that you have a time deposit of two
years and that's $10 billion and you're
paying 2% for those dollars how many
treasuries would you buy the answer is
Limitless because your dollar funding
costs are 2% but yet you can get let's
just say 4% on that treasury you're
pocking the 2% you don't care how many
two your Treasures Janet yelling issues
because you're going to buy more and
what happens is if the interest rates go
up because of Supply you're just going
to buy more that will bring them back
down to the fundamentals as to what
moves rates at the long end which is
those growth and inflation EXP because
if you think that growth and inflation
is going to be higher then you're going
to take that balance sheet capacity and
you're going to allocate it to lending
into the real economy as opposed to
buying the treasuries and then interest
rates go up because that inverse
correlation between price and the the
rates themselves so my point is I don't
think we have a debt problem but the
problem is the spending well it is
sustainable unfortunately the problem
with the debt crisis is there's no debt
crisis because if we did have a debt
crisis that would actually constrain
government spending the problem is we
don't have a debt crisis
and there's going to be Banks out there
that are willing to buy this debt
because that spread that Dynamic it's
one of the Dynamics that we just talked
about so this gives the government
basically an unlimited credit card to
sit out there and spend and spend and
spend and the problem with that
government spending is that's what
distorts the economy you know a lot of
people will sit here and say well my
goodness gracious if we could just get
the government spending back down to 50%
of GDP well that's solves all our
problems because then the foreigners are
you know with all this additional Supply
there's going to be balance sheet
capacity there's going to be demand no
no no know that makes the problem worse
it's the example the heroin addict that
I always use let's say he's got a credit
card he runs it up to 100,000 injecting
more and more heroin into his
bloodstream that destroys his body and
destroys his mind and you say well the
problem obviously is that he maxed out
his credit card so let's just go ahead
and give him another credit card are you
helping him or are you hurting him
you're hurting him because now he's
going to inject more heroin and that's
the problem the debt isn't the problem
it's the fact that he's injecting heroin
and more and more of it into his
bloodstream and destroying himself
killing himself right and that's the way
you have to look at the US economy it's
the injection of heroin it's the
government spending it's not just
getting the debt under control toward
it's 50% of GDP as opposed to some
arbitrary number let's say 125 or 120%
so going back to why I'm bullish when we
get this talk from all these influential
people of reducing the size of
government that's what really gets me
excited because I know that's the real
problem so Commodities I think you have
to look at it through the lens of a
commodity super cycle and then you have
look at it in a short-term basis right
so what Commodities do over the next 6
months I don't think is really
indicative of what they'll likely do
over the next 10 years so when you look
at early 2000s as an example that was
the last you know big commodity super
cycle that we had right and I think that
we probably were at that Mark in 2020
I'll bet you 10 years later if we look
in the rearview mirror we'll say that
the bottom in commodity or especially
oil prices was when it got to negative
like $38 a barrel you know was that
April of 2020 that was probably I doubt
oil's going back to negative numbers so
from there you say okay it's the the
trend is likely up that doesn't
necessarily mean that it goes up in a
straight line nothing ever does so I
think that you could see some downward
pressure in commodity prices over the
next maybe six months or year if that
yield curve plays out but that's going
to be your opportunity to go in there
and buy you know another thing I'd point
out is look at the price of oil right
now trading around $70 a barrel it was
under you know 6667
and that's with two Wars going on and
that's with massive suppli restrictions
from OPEC plus so if you take that out
of the price of oil I mean we'd be
trading at 40 45 something like that so
that tells you that the global economy
is very sick from a demand standpoint I
don't understand there Supply increases
but a lot of that is demand driven right
so that leads me to believe along with a
lot of the other things that I'm saying
that we could see a downturn in the
economy which would be negative for
Commodities overall again like we're
just saying is I think that's your time
to step in and buy because you've got
that asymmetry where the upside is a lot
bigger than the downside gold is really
interesting because if you believe that
we're likely to have a recession then
you have to ask yourself would we have a
liquidity event because if we don't have
a liquidity event like we had during the
GFC gold probably is still going to
continue to Trend higher right again
with that volatility it never goes up in
a straight line but if you have a
liquidity event like we had during the
GFC or the beginning of Co that's
usually when gold sells off because
ironically it's doing its job because
that's the only thing that has a bid and
these big hedge funds they have to sell
something to generate the cash and the
only thing that they can sell is gold
they sell it which makes the price drop
but again if you look at the GFC you
know at the end of 2008 like we were
talking about or the beginning of covid
when you saw that big price drop in Gold
that was your opportunity