I want to start with this. It's a comment I heard on your podcast,
The Acid Capitalist, about a month or so ago, and you had an investor on the used
a line that I've heard a million times. We've all heard it a million times.
I'm long equities because over the five year period, usually equities provide me
with a positive return. And you question that.
And I think we all need to question that in this environment.
What did you say back? Well, I mean, it's it's, you know, the
Warren Buffett line never short America. And I certainly don't want to go against
that. But also, it's the conceit and the
arrogance of a well-formed argument. It is true.
There has never been a 10 year rolling period where it has not been the right
thing to be long. It doesn't make it right.
Moving forward, you know, there has never been a period where nationwide
U.S. house prices had fallen together until
it happened. And when it happened, it devastated the
global financial system. And today, we're still trapped in the
mire of what happened 15 years ago. So you're saying that a century's worth
of market data is not long enough. You have to take history back a little
bit further. Is that how you think about this?
No, no, no. I mean, this is Asian philosophy.
You only free yourself from the shackles of being a slave to market rhythms.
When you recognize the impermanence of things, things change.
Things like the Fed put, things like the Fed's understanding of money, things
like their devotion to done and is rather spectacular jacket and his
recommendation for Apple. Yeah, things change.
Do you think a fence in a policy trap? I think the Fed is confronted with Fed
fog. I mean, again, I keep asking people,
when was the last time we we admired a step taken by the Fed that we thought,
wow. Yeah, that really has helped my life.
Why is the default position to crush the economy?
So the hikes are the wrong call. I believe the hikes will not result.
They're dealing with a political problem that generated this without a doubt.
We have seen an elevation to the tune of 10 percent in general global prices.
Right. And that 10 percent in coming back to
zero is the point for me as an elephant passing through the body of a snake, if
you will. Right.
It refers to a supply shock. There's been.
It's gone. We're looking at Amazon's results.
Okay. Amazon had one hundred head to
warehouses full of inventory. So because they overestimated.
And what's what's your headline again? We're looking at Amazon's worst holiday
sales ever. Okay.
And and we've had two consecutive quarters of GDP decline and the Fed took
recession. What recession?
This is a recession is getting bigger and bigger.
And that's the fog you've picked up on it.
The mismatch between demand and capacity.
And it was a clear mismatch in 2020, 2021.
But it was different. We didn't have the capacity.
We just had tons of demand as it flipped already is that we're seeing major signs
of that that's flipped already. And what does that speak to when it
comes to the inflation code? It's flipped.
I mean, sure. Show me the evidence in the commodity
sector in terms of the higher prices. Show me the evidence, actually.
I'll show you the evidence in terms of the households reaction.
There is a default reaction whereby I think if the economy is like one giant
wall, it okay. And the VIX, the expenditure going out,
we know is up 10 percent. And general prices show as if you
maintain your average consumption of goods and services, you need 10 percent
more money coming into the wallet. Okay.
If I don't see you coming in, this is back to the Friedman notion that
inflation is always and everywhere a monetary phenomenon.
You need a spigot of 10 percent coming in to accommodate.
If it's not coming in, you're cutting back.
Where are you cutting back on discretionary spending?
Let's look at every discretionary stock in the market.
Where is it? Is on his ass.
So if we start a hedge fund tomorrow and we put together an investment committee,
I'd have Mohamed El-Erian is the chair to keep us well behaved for the whole
meeting. I would have the likes of Druckenmiller
that the ingenuity of Druckenmiller. I'd ask the conviction of a 90 Soros.
I'd have to discipline if, say, Michael Platt over at Blue Cross, and I'd have
you at the end of the table throwing grenades.
Sam, what if you could say what if right now what is the big what if you have as
you need? The Joel Weber is the unintended
consequences. And I keep looking with a wary eye at
our Chinese causes in France and I look at their currency.
You've got to remember that they were loathe to devalue back in 1994 with
after tonight. Whereas the currency today, it's like
knocking on seven and a half. Right.
It's having it like all currencies views of the dollar is having.
It's weakest, if not at its weakest year to date performance.
Heaven forbid a trades nine because that's where the yen is going.
This is it. It's an Aesop fable.
Now, why did why did the scorpion sting the frog halfway over?
It's a bit like why did Taiwan in 1998 devalue?
There was no economic rationale. But when all the American tourists are
devaluing, boom, I can't give it up that God forbid that happens.
That would be the most deflationary item to ever hit the global monetary system.
Is that something you'd be willing to position for right now?
Yes. What would that look like?
That's just that. That's a short position in the currency.
How would you express it elsewhere? Well, you know, elsewhere with restraint
that I keep saying you don't always have to be invested in markets.
People give me a safe, give me a riskless, asking why.
You know, I've lived long enough. I lived through 2008 and the safe
assets, supposedly gold went from near 2000 to near 500 because we got
liquidation. Okay.
So for me just now, listen. It used to be you mentioned 2018 19.
The Fed was raising rates. The S&P went down 20 percent.
The Fed rate. I changed my mind.
Yeah, well we had twenty eight. Twenty five.
The Fed boring. No, not this time.
So maybe it's 30, maybe it's 35. Okay.
My comfort level for trying to own any acid.
I rise when we pass 35 or 40. Something interesting.
A moment ago I've said many interesting things for the one with the gold and
perform the asset. It was meant.
Perform. Didn't perform.
Is that treasuries right now? Or do you think the surprises did in our
future? This is the killing zone for treasuries
presently. Just chart wise like this is where Lucy
and either the treasury bond bull market is over and so years will continue or
this is the point where we're just recirculating ownership.
But in terms of let's talk gold, let's talk treasuries.
Real rates, if we look at five year tips, are close on 2 percent.
Our system doesn't work and gold doesn't work when rates are poised.
Real rates of positive thinking that we've got debt to GDP circa for X.
Okay. If real rates are 2, you're effectively
transferring 8 percent of GDP from the debtor class, from the household sector
to the creditors, and the creditors have no idea how to spend money.
That's regressive, right? We need financial repression.
It's just simply a function of the mass of four times GDP.
Did you ever think we'd see an 11 handle on German CPI?
Well, we're talking about going back to the 50s.
Let's keep going back. Let's go back to 1948 when U.S.
CPI was running at 20 percent. And yet we don't talk about the
hyperinflation of the late 1940s. Again, why?
Because money? Because inflation is a monetary
phenomenon, right? It requires like funky.
We are getting funky in the studio is a blue.
Right, but it requires funky Banksy. Yeah.
I want to land. Do you see that in Europe?
I don't see that in Europe. Right.
I see an elevation in the energy. Right.
And I see, believe me. Right.
The blind this boss of the central banking community is the ECB.
Yeah, right. The guys who raise rates in the summer
of 2008 and again in 2011 and 2011. And what if they just doubled rates
yesterday? Hallelujah.
Right. I'm thinking the other way.
You think the mistake is what? I think the mistake is.
They don't understand that money, monetary conditions that they talk about
financial conditions, monetary conditions, OK.
Have superseded their ability to to see the entire picture.
We're talking about the repo market, the euro dollar market.
We're talking about where monetary creation is no longer taking place
within the sovereignty of their around. They don't see it and
things are happening. The collateral is being called NIKKEI
Yamani is actually being destroyed. The euro dollar system just no is
destroying its contracting money is contracting and is pushing asset prices
down. And this is a reflective system,
reflexive system. That's what they don't see.
That will be the solution moving forward.
Guy, jump in here. Well, I'm curious, Hugh, central bank
independence. It's a very new phenomenon.
And I wonder whether or not we're about to see potentially that being tested as
well. Georgia Maloney in Italy is already
questioning the rates at which the ECB is raising rates.
She, as you says, is they talk about the fact that this is a this is a supply
side problem that we've got here. It's not a demand issue that the
eurozone is facing. You've got the French president starting
to talk. As well, others are likely to follow.
Helping a clash, do you think we could see between politicians and central
bankers and who do you think will win that fight?
Well, I would extend that outside the European region to where you are in the
UK. I think you just saw
a Kabul of the Bank of England chief and the jokers at the IMF.
Forgive me about, you know, ousting the British prime minister for
having the audacity to suggest a fiscal expansion in a depression.
UK prices. The UK stock index is below where it was
when we entered this new century. Right.
It's it's in it. It's not growing.
And what is the answer to raise interest rates?
I mean, what planet are these people want?
So what you think a central bank should have done?
What should Governor Bailey have done accommodates it, be accused of fiscal
dominance? What do you think he should have done?
Well, I said a budget. Let's consider what he did.
Okay. So, yeah, we're doing quantitative
tightening, which itself is just baloney.
Right. But, you know, we're raising rates and
we're restricting this supposed money growth.
Right. And what did you say you then Tom
Mackenzie? You know, I said we were restricting
much. Now we're doing QE again.
All right. So
there he he was the one that pivoted. Right.
And then what else was happening? It revealed again that the repo man
revealed himself the pension funds, who again were deemed to be the smart
people, markets disciplining the British government.
Well, these disciplinarians were leveraged up to the eyeballs and they
were getting margin calls. The system is pulling itself apart.
What I believe sanity will prevail when a central bank says I'm cutting rates.
We're nowhere near that kind of level. But what we you know, you talk about a
market pushing the central banks to make a move, to push for a pivot.
Where is that level? Where's that threshold?
We all agree one exists. What do you think it is?
Well, again, it's when asset prices are down considerably more than they are
today. Right.
It's easy. Right.
Profound economic recessions are brought on when we lose when we vaporize 100
percent asset to GDP ratio. As we started this cycle, it's seven
were fast approaching five. We don't even have a good mark on
private equity. Right.
So we've lost 200 percent of GDP already.
That was fictitious oil wealth. It wasn't fraudulent.
It just overstated things. All right.
But that was NASDAQ crash in 1999.
2000. That was 2008.
Yes. Oh, wait.
That's all happening. No.
But it's happening outside the you know, the threshold of central banks is like
that. And you've got to expand your vision.
And when you're out here, you're seeing dead people.
So if we've got about 60 seconds left, I have, you know, actually st dead people.
Let's finish here. If I could summarise this conversation
we've had, you're pushing back quite aggressively against recency bias.
And we're all sort of blinded by what's happened recently.
Is that the ultimate gist of what you're trying to communicate?
Here it is. And I think we have to recognise that
all of the fascination we have, we have to go back 120 years to Germany and the
buying MMR and the inflation. Why has it not happened here?
Because we have fire bricks. We have the outsize position of publicly
traded debt markets and the reprice immediately and they tighten policy, not
the Federal Reserve. We have discretionary spending where
people pull back. That's what's happening.
And those two factors together usually mean that the inflation fear remains a
fear. And as we move forward, metaphorically,
I'm seeing dead people. Okay.
And the Fed seems to be that's what the Fed's doing.
It has to trash our system. Once we're all aware of how bad it
really is. Thank you, Amazon, for again guiding us
that way. Then the Fed will pick it 10 seconds to
make a trade. Literally 10 seconds if you could make
one right now. What is it?
I when I look at collateral, I'm beginning again.
The the Italian B.T. piece spreads versus burns, right?
Yeah. Only 15 percent of boons are in market
hands. Okay.
And the Italian is being used as collateral, as if it was a boon.
Italy is not Germany.