Daniel Lacalle: Inflation Is Back: How To Protect Your Capital

[Music] i'm keith mccullough and welcome back this time i get to spend some time with one of my favorite people in the business one of my good friends who has had a similar path as i and i think that that's why we speak uh along the same wavelengths and don't confuse each other daniel lacaye welcome back to the summit hi thank you very much keith always a pleasure i think you were i'm i'm pretty sure you're one of the first people that we had at the first summit and uh and over the years and and i think over the years many people have gotten to know you uh quite well and and and see uh how diligent you are on twitter just you know communicating your process you're not one of these people that just kind of flies in on a helicopter pops in and out you're always there and and that's really the story of our lives in this profession is it not like we we we are you know bolted to the chair we're there uh and you worked at citadel you're a hedge fund manager you're very well versed in a lot of different things including the energy space but when i want to have a conversation today i'm like if i need to talk to somebody about the fed inflation expectations what is can you know what is the forward outlook of inflation on a longer term basis versus short term and what is the fed actually doing i'm like i got to call lakaye you know the guy knows you know you're going to have an informed view so let's just start with that i just had a great conversation with the bond strategist george he was talking uh uh and about getting towards two on the tenure i'm looking at you know your most recent tweets it's like of course uh lakaye says rate hangover when the tenure hits two percent so um i think we're talking about the same level of interest rates what do you mean by that the rate hangover well the rate hangover is basically that what we have seen in the last two years in particular is that central banks and investment banks have been leading investors to bet on one thing and the opposite at the same time now one thing is that central banks will continue to inject liquidity and rates will be perennially low while at the same time betting on a strong recovery and a healthy increase in inflation so you basically have this situation by which what would be considered by anyone a normal event which is that bond yields creep up a little bit as the economy grows and the uh and the inflation outlook uh improves somewhat becomes a big threat for markets but but that is basically just because too many people were betting on one thing and the opposite which is which is growth plus extreme liquidity and low rates well the um the bet on and george and i were talking about this as well that big deflationary bet at precisely the wrong time you know when when interest rates you know were at the most negative point obviously on the european side but quite literally at the low in the us this is when you saw things like gold peak you saw you know duration heavy portfolios outperform those found their way into mega cap stocks which people had to crowd into them in august it was interesting in august as you know those five mega cap stocks and and gold and long term bonds were the best portfolio you could have had so now here we are today and that's a big time offside portfolio that is latent i think in terms of deflationary expectations because you just had something that was not deflation from there do you agree with that yeah absolutely absolutely what we've had is is a double effect no already during that period of time that you were mentioning um the goods and services that we purchase on a day-to-day basis we're already rising faster than real wages and then real disposable income so there was already an underlying factor of inflation embedded in education healthcare fresh food you name it but now what we're seeing is on top of that is the base effect as you have the base effect of the reopening the impact of some of the supply chains being negatively negatively affected by the lockdowns and the rise of commodities so you have that double that double effect and i think that what you're seeing right now is that the idea that we would have no inflationary pressures from the massive liquidity injections of 2020 which were in all for all purposes actually historically high no so i think that that level of money supply growth added to those you know subdued inflationary pressures that we had seen in the past uh have created the situation that we're living right now which is pretty evident i think in in uh in the in bond yields and investors are actually taken action relative to to that evidence no yeah and what blows people's minds on that that money supply growth and you've heard it you know there is a chorus of people that have written books that are far less practitioner oriented as the one the many that you've written at this point you know the the they think that the long-term trend downward trend in bonn yields which george just showed everybody one more time and i mean like you know again the 30-year uh downtrend to a series of lower highs and inflation in the series of lower highs and bond yields they think that the mother of all inflations was always coming and that the money supply and the money printing was going to create that and they still believe that today of course if you're going to go to your grave with with a belief you know you're going to keep going now what do you say to that well i think that we need to understand that disinflationary pressures for example in due to technology due to aging of the population due to over capacity and the fact that when you inject so much liquidity and it goes fundamentally to uh perpetuate bloated government spending those are this inflationary pressures and they will continue to be so and i think that another important factor here is to understand the disinflationary impact of high debt uh is that the higher the level of debt that we uh that that countries build once the the economy starts to recover after a crisis leads to disinflationary pressures coming from the fact obviously that most liquidity injections and most actions from central banks and from governments are there to perpetuate that uh that level of debt and deficit spending so the point that i'm that i'm trying to make is that what we're seeing right now is likely to uh we're likely going to see headline cpi uh come back somewhat after the base effect reduce that level of of pressure that we're seeing right now however however we cannot forget that before covet 19 there was already an important divergence between headline cpi and the perception of cost of living by the majority of citizens if you remember we discuss that actually that that we had seen protests in france and germany and chile and in in turkey and so many countries about the rising cost of living while at the same time central banks were talking about no inflation and obviously that comes back to the point that i made before is that the goods and services that we purchase on a daily basis and i think that's the point was shown today for example in the in the eurozone inflation eurozone inflation came at 0.9 percent for february however all of the all of the most important uh components the things that we actually buy on a day-to-day basis were up 1.5 1.6 and it came down because of energy however in the case of inflation in the eurozone if you add taxes and surcharges very few european citizens have seen uh a fall in their energy bills so i think that that's what's happening that and that is and and the long-term disinflationary pressures that we that have been built because of efficiency because of aging because of technology those have not changed i think guys i don't know if you still have george's chart on disinflation just that slide 13 just so that people that are watching this segment you know know what i'm referring to this is emblazoned in people's minds like daniel and i because we're just math geeks and paying attention to long-term cycles but also the cyclical inflations within long-term cycles and and that to me i mean you nailed it demographics debt deficits i mean it's easy to remember 3ds right there i mean the 3d risk associated um with all of this stuff i guess when people um let's just take it one more step and then we'll go go to a new topic but i want to make sure that we park this because i get tons of people at this point saying this is the first of all i'm long inflation i have been long inflation since june and so my question is when the hell do i get out of it i have some questions to you about that i'm starting to see some early signals on that as are you um but i have this other community that's like oh i'm back i'm back i'm back mmt that's the thing that's going to uh really do it this time keith and you know what do you think about that okay let's start with uh let's start with when do i think it will start to roll back i think that the the base effect that we're seeing right now on headline cpi will uh be offset between june and september so the same abrupt uh upward moves that we have seen in the first part of the year because of the comparison year on year will be negatively affected by the same comparison year on year in the sa in that part of the year i agree mmt mmt as an inflationary as a highly inflationary [Music] policy well obviously it is you know anyone that lives in argentina anyone you know if you decide to if you the the the thing that makes quantitative easing relatively safe for savers and for wages is that the mechanisms of the transmission of monetary policy have a number of backstops in which consumers and borrowers have the ability to stop the inflationary pressures of money supply growth which is the credit mechanism you can put all of the liquidity out there to make people borrow more but if you don't borrow more then the disinflationary pressures uh remain so that's the one that's what what keeps quantitative easing as inflationary on uh financial assets bonds equities etc but not inflationary on prices for goods and services of consumers at least at our headline cpi level what's the problem with mmt the problem with mmt is that it breaks it completely breaks the transmission mechanism of monetary policy it it subverts the credit mechanism and basically just throws money at government to spend it in any shape or form okay now the problem with the bet of mmt as being hugely inflationary is when and how and this is the key to me is that the risk that people take because we live on our as investors on a month-to-month basis on a year to youtube when and how and the when is that at first the inflationary uh pressures uh don't seem very evident it when when you start to see the breakup of the conference in the in the fiat currency that the government is printing non-stop that is when you create massive inflationary pressures but the point about mmt and its impact on inflation is it's absolutely disastrous effect on uh investors think about venezuela think about argentina etc you look at what a fantastic return you've made out of those uh equity markets in any real currency okay so the the point uh is be very very careful about betting on cyclical stocks and the companies that actually are the most negatively impacted by something like mmt which are the rent uh seeking businesses what the what so many people call value sectors value sectors actually are absolutely destinated by mmc as we have seen in those countries why because inflation creeps up they cannot pass the inflation increase to consumers they lose money the goods and services that they import are much more expensive they don't export more because they're less efficient and they just uh go down and get destroyed so if i was an investor believing that mmt will be implemented and we can say why that will not happen in the united states in my opinion i would very i would very much recommend not to invest through the sectors that will be obliterated by mmt which is what they have done in any country in which they have been implemented you know the the oil companies the uh rent rent-seeking businesses the the traditional value or uh conglomerates well that um you know it's interesting and and you've said this of of of all your uh if there was a king a spanish king of one-liners i mean the best one-liner on mmt for those of you that don't know modern monetary theory what kaya says is not modern nor is it a theory you know so because because again and again i think you're you're just bringing to life and it's interesting because you know in stephanie kelton's book which i'm sure you've read or and i try to read all all of the propaganda just because i want to understand their perspective i think it's an important thing to do um and there are some good like good punching points that they land in there but not one of the one of them is not where they say hey look they did it in argentina i mean she she wrote that i was like i had a i was drinking a bottle of wine i just finished it at that point in the chapter i'm just sitting here saying this is not a good example um so and then not new part that's what you mean by that obviously so can you can we do you think it's fair you're familiar with my four quadrant model um you know quad 2 is the good kind of inflation and growth because you have real growth accelerating you have inflation accelerating but you have real growth i think what you say is just to make this is and i want to simplify the complex is that what mmt does is that it perpetuates quad 3 or economic stagflation and stagflation uh is very bad absolutely you've you know it's the best summary out there mmt is the most aggressive and uh abrupt means of expropriating the real wealth of a country in favor of political spending that says it all that says everything so you basically are consistently and constantly eroding the purchasing power of real uh goods and services uh and uh oh sorry of of real wages and salaries and at the same time as an investor as a long-term investor if you're a company what you're being is expropriated in the short term and in the long term from any profit that you might generate out of an investment via via fiscal policy with very high taxes and by a monetary policy via inflation so the uh so you're absolutely right is that the problem with mmt is that it basically basically for doesn't forget they know i mean obviously they know but the the problem with mmt first as i said it's not modern and it's not a theory it's been implemented for centuries since nero decided to tweak the amount of silver in the coins for that it played the army with and since the ass and yachts and so many other examples in the past but the point is the following when you are constantly forgetting the first and most important thing about money creation money creation is never neutral it disproportionately benefits the first recipient of money government and the indebted sectors and it obviously disproportionately negatively affects real wages and salaries therefore when you break the transmission mechanism of monetary policy that allows consumers and savers to reduce the inflationary pressures and you simply pass all of the money creation directly to government spending the perverse incentive to malinvest and the perverse incentive to bloat the sectors that don't need it at the expense of the ones that are actually producing is enormous and you come back to the point it has been implemented it has been implemented numerous times with always the same result which is stagflation and a constant erosion of the long-term investment in the economy because obviously any investor that is looking at a to to to build a plant or to to to put an investment in place that looks at its uh net present value and sees that inflation is going to erode the net present value monstrously but uh taxation is also going to erode the net present value you just simply don't invest for the long term which is what happens in argentina which is what happens in so many other countries that you just simply cannot take the not the risk you cannot take the certainty that the government will always try to cover its imbalances by destroying further the purchasing power of real wages and salaries i think again for those of you that are taking good notes i mean you're learning a lot now subverting the the credit mechanism expropriating the purchasing power of the people write it down and and by the way ask your professors ask your friends the people that are just you know on voyages you know intellectually talking about all this stuff we need to have answers on why that's what you just said is not the case and my fear here is that that discussion given and grant williams who you know i i think you did a wonderful job yesterday explaining the sad reality that we can't actually have objective debates anymore you know the the civil you know debate or the civil discord you know has been broken and and and i sadly that is true so guys like you and i are not going to have a debate with stephanie kelton they're going to do it and we're going to sit here rotate on it and like it now what do you think you're going to have to do it in spain and i'm in the the canadian irish guy here and has to do it in america but do you think that there's any way out other than it just failing on itself um unfortunately the people that are confronted with all of these things that we have just mentioned will go and say two things now the first one is they will end any debate by saying you know nothing about money okay there you go coming from people that are saying that the magic monetary sorts out everything second they'll say this time is different and this and those two elements basically justify any insanity that is presented to a government but if but the more important thing is that if there is an absolutely intellectually dishonest approach to this which is how lucrative it is to go to a government and say oh come on you don't have to worry about deficits you don't have to worry about spending you are not like the an average government in a in another country no your god and i am going to show you how to play god and obviously when it fails because this let's remember that these people advised venezuela argentina et cetera et cetera et cetera when it fails they go back they go back home no and they say uh it wasn't done properly let's do it again so this is the problem that that you have is that is that going out there and saying it's worth trying even worse the argument that you will hear and the people that are listening to us watching us right now will hear is the following oh if it's good to give money to banks and to uh and to equity markets why is it not good to give money to the people what a stupid thing to say first you're not giving money to the people you're taking money away from the people you are diluting real wages and and uh their savings second that doesn't justify quantitative easing either we have been criticizing you and i so many of us we have been criticizing the excessive monetary policy for years so the the problem is this idea that oh so you agree on giving money to banks as if banks kept them somewhere safe like i don't know uncle scrooge and uh instead of giving it to the people and the fact that it's called quantitative easing for the people is the biggest uh subversion of language one can imagine because it's against the people yeah think about it brutal it is brutal think about this once that is in place and the government is issuing all of the currency that it wants to expropriate the wealth of the country ask yourself one question what are you going to do with that currency when you receive it from your work you're going to exchange it for gold for anything for bitcoin name it anything else anything else than keeping it knowing that it will be worth 40 50 percent less at the end of the year which is what happens in argentina so the i come back to the point of this of this dangerous idea is the reason why it's dangerous is that is because once it's implemented governments will never go back on it governments never say oh gosh we made a mistake inflation is through the roof everything is gone no because the use they when inflation rises who do they blame they blame the business owners yeah when uh when uh the purchasing power of goods and services collapses and uh people get poorer then what do they say oh we are the solution we're going to give you a subsidy a subsidy with what with an useless currency and people say well the united states has been printing money for years and nothing happens hold on a second this is the key point that is the most fallacious comment i've heard in my life the increase in money supply of argentina or venezuela is multiple times that of the united states and the federal reserve so far is the only central bank in the world that looks at the real demand of dollars globally when issuing uh when issuing new notes of credit or when increasing money supply is the only one so therefore that's the reason why the dxy the dollar index remains in a very tight range between 90 to 100 more or less for years because they're constantly looking at the real demand out there of dollars emerging markets increase their debt in dollar denominated assets then they can increase the the money supply a little bit further so they're not followed they're not doing what the mmt uh proponents say what the m t proponents say is the following they say when governments increase their debt and increase their deficits they are and kid you not creating savings what the absolute nonsense they are creating savings and therefore by creating savings they are incentivizing the economy so demand and supply of money go in tandem that is complete nonsense absolute nonsense which because a currency is as subject to supply and demand as any other goods and service if you increase money supply well above the demand of that currency then the destruction of the confidence in that currency and in the central bank is inevitable what i think people are sitting there thinking to themselves now is that you're explaining to them what they couldn't potentially explain to themselves now if it was ironic about this this shot of you and we've had many conversations over the years there are two books at least that i can see behind your right shoulder or to my left that really have addressed this the first on the right is life and financial markets that you wrote which is you've taken the way that you're talking about this is what happens in the real world what happens in the real world from a purchasing powers perspective from purchasing power perspective or from a consumer's expectations or a business builders expectations of future profits all these things are real word things but you also learn these things by trading and risk managing financial markets and then the book on to the left of that that you have which is again the freedom and equality book kind of gets to the point where the thing that is upsetting everyone whether they be bitcoin maxis or not or be people that just don't trust that this mmt thing is neither modern or a theory is that they don't know but they know it's wrong and they're looking for something to change that in a quality gap i don't think there's any data to support what wherever the printing was done or wherever the handouts were made that there is anywhere any data to support that the us in equality gap in particular hasn't widened as we've increased the vague and increase the bet um absolutely i think that and this is again coming back to the the uh intellectually dishonest discussion about mmt is that they complain about inequality and they want to address inequality by implementing the most unequal policy that can be made which is artificial money creation artificial money create i come back to the point money creation is never neutral they have to tattoo this on their i don't know wherever they want [Laughter] money creation is never neutral it always disproportionately benefits the first recipient of money and always disproportionately hurts the last recipient of money which is real wages and salaries money creation artificial money creation always generates inequality ah the question here is that they don't like inequality when it is that bond or equity investors make a bit more money which by the way doesn't hurt any of the two others because real wages and and and savers at least these those people can save and put some money in the market okay but they're very happy with the idea that monster inequality will come from politic from political adhesion ah very interesting so it's not and i it's not about uh reducing inequality it's about engineering politically adhered inequality which is a different thing i mean if you want to go and uh relive uh living in poland in the 1980s or you want to pick a country it's not just argentina like you said this is not new this is not new but remember the uk because everybody this is another problem with the debate about mmt so they say oh come on argentina venezuela poland turkey no we're talking about serious countries like uh like like the uk yeah like the united kingdom the united kingdom used to be the world reserve currency that the british pound you forget that for years the united kingdom was uh considered i remember henry kissinger used to say that the uk was bound to beg borrow or steal because of its massive problem with inflation and the disaster on the economy and it wasn't until it until until sound money policies and sound budget policies were implemented that the things started to change but you know we and again i come back to the point it happened in germany it happened in france it's happened in it well by the way it was happening in all of the southern european countries uh that had their own currency before they joined the euro in spain no in spain we went from a 20 devaluation to a 20 evaluation every so often years and unemployment remain above 20 percent of the economy was a disaster i mean as long as everybody doesn't know they won't know yeah but you're you're that's you know you said it's fallacious i mean i to me it's preying on unawareness it's um it's at the at the core it's it's having an unawareness by the architects of these ideas themselves and so to me it's just uniquely un-american uh that's not the country i moved moved to in the 1990s but anyway okay so i got i have to get to the q and a and there will be questions about this then hopefully you all go back and rewind a lot of what daniel said please read his books by the way a lot of these things and it just conveniently was over i didn't tell them have those two books over his over shoulder but they're they're right there the first question is actually the question i was going to ask you too and when i mentioned that there's some early signals of inflation peaking and and i am right on the screws the same same timeline pretty much as you uh which is again it's you're going to see the peak prince you know march april may so by the time we get to june and july the base effects kicked in et cetera so what we're seeing now and this question is from bill from montana about oil as being a very good leading indicator for inflation which is true um oil in my model today uh and really was actually a big higher low and a new higher high in the risk range that just means you know it's likely going higher but copper signaling its first lower high and that's new copper was as you know moved well ahead of oil and the doctor copper as we like to call him or her is is is a great leading indicator it's you know it's it's it's it's there so what do you think about that leading indicators fully loaded that's what uh bill's asking about and and why do you think there's a divergence between copper at least again and i'm assuming that you're just taking my word for it on those on those two in particular yeah on oil it's not a leading indicator right now for a simple reason is that you have to add on top of all of these things that we have mentioned the base effect recovery and demand etc and an abrupt change in the opec policy by the new cut that was implemented by saudi arabia so therefore the the signals on oil are probably going to last a little bit longer than on copper but i think also very important iron ore copper and iron are telling us uh a lot about this uh peak of the inflationary cycle you have you have seen how the the weak not the weakness but the the that they start to lose some of the momentum and uh those are very good indicators of two things now of the growth in china and of the growth in the industrial sector therefore i think that uh when we look at copper i think it's a pretty good signal and we have seen also some other commodities that are less uh less industrial but uh but uh but those two copper and iron ore are showing us that we are probably starting to look at this at this uh sort of peaking of the inflationary cycle in uh in industrial commodities yeah that i mean this is about as new of a signal and again it can either mean a short-term consolidation and then it's back to new highs that's actually what copper uh did back a month and a half ago and then it blasted to a new high quickly um but again you get you know you obviously had the the shutdowns in texas on the wti side there's a lot going on in in the oil market um to me because so many of our clients and subscribers want me to get out of quad 2 and just get on with it into the quad 4 setup uh i deal with this one a lot so thank you for uh holding my hand a little bit on that the um this this next question from logan's a very interesting one and i'm assuming it's something that you said uh that triggered this but if it didn't just you know say so daniel can you explain your thesis on how a small rise in bond yields may create a financial crisis and how um how does how does this go for the ecb in particular yes um think about this any central bank in a normal environment of recovery would be more than comfortable with a small increase in bond yields like the one that we're seeing which is basically just from very depressed levels depressed artificially go to at least move in tandem with inflation expectations so that would be a healthy signal of a recovery and of improving inflation expectations wouldn't it however in the case of so many economies countries have become so addicted to low rates that a very modest increase in bond yields would create a solvency issue think about the eurozone you have all of the eurozone economies all of them uh issuing bonds at negative yields okay so what is the problem the problem is that a marginal increase a marginal increase in the cost of borrowing can shake very quickly the foundations not of just of the sovereign issuer but also of all of the uh issuers in the in investment grade and in in the high yield area why because the economy is so leveraged to very low rates and high liquidity that a very small increase in bond yields can cause a domino effect that starts with sovereign bonds continues with investment grade goes to high yield goes to equities and generates a big hole in banks that were already in trouble in 2019 remember that the european banks had 900 billion of non-performing loans already in that time so imagine where non-performing loans go in that domino effect scenario think about emerging markets emerging markets for the first time in a very long time and i'm not sure you and i have seen this in a long time we are seeing commodities rise exports rise but their currencies are falling no so i think that one of the big problems that we have right now is precisely that is that the economy is so indebted and is so geared to a very low rate and high liquidity that a very small change can cause an abrupt move in the financial markets yeah in in fractal math we would say those are emergent properties when the rates of change move the other way then the direction that created the stability uh whammo it happened slowly and then it happens all at once we say this all the time it's not unlike an earthquake that's why when we're when we're talking about a the question had to do about a crisis or a crash i mean that's that's quite quite literally how it works um so that's that's a very good answer to that question uh this question has to do with uh bitcoin and uh rocky asking this question uh legard was first to come out and speak on regulating bitcoin's funny business uh powell doesn't seem to be very vocal on it and yellen speaks negatively on it um do you see governments influenced by central bankers towards regulating this this bitcoin or or not like how do you think about the the future path in terms of adopting it ignoring it fighting it etc um governments in central banks don't like competition in issuing money they don't like you okay and right now bitcoin is a concern but not a worry is it's sort of an anecdote that they're looking at in surprise in all but they're not but it's not a threat when it becomes a threat mr hayek frederick vong hayek many years ago before the internet existed wrote this book choice in currency now a way to stop inflation in this book frederick von hayek explained how governments start by talking about alternatives to fiat currency to government fiat currency as uh as a as an anecdote to uh considering them a threat now regulating bitcoin from the perspective of facilitating transparency improving that is not a problem when they talk about regulating they're not talking about that when they're talking about regulating they're talking about looking for ways to suppress the possibility of bitcoin or other cryptocurrencies becoming a threat to fiat currencies why because central banks are considering the possibility not the possibility the the project of a digital currency [Music] so what they're aiming at is not to reduce the control and the uh and the discretionary policies of central banks but to increase them now and in in that environment it is unquestionable that governments and central banks may do whatever they can to stop bitcoin from going from an anecdote or uh or a headline to a threat i think neil house was he's at least one of the first people that i've heard said and when it was a while ago he's like look you know these governments are going to eventually just copy the technology and adopt it as their own it's not something they want to control this that's what you know to your point that that's that's what they do um yeah so it is interesting i mean janet yellen's uh interesting in a lot of political regards isn't it amazing that she was apolitical as the head of the federal reserve and then uh magically transforms at this age into this political wonder um but you know so she she's of course bought and paid for by wall street so she doesn't like bitcoin at all uh that that's it's an interesting one um i i do have a question for you on that like when you look at uh when you look at the current cause this is a different cocktail than you and i have have had on any other st patrick's day uh this one is the one where you quite literally have two labor economists cece rouse from harvard who's running the cea of course and then janet yellen the labor economist from princeton you know combined on both sides of powell and and and that's a different setup than what you and i have had to pay attention to for our entire career where there's the treasury you know the treasury is what it is it's politicized but it isn't anything remotely close to what we're seeing now yeah absolutely i think that what we're seeing right now is for the first time um very ideological perspectives on our fiscal and monetary policy not just from the uh position of one of the members of the cabinet or but from both and i think that that makes a big difference i think that it makes a big difference because i think we will see any and every opportunity taken by the new administration to try to uh break whatever is left of the central bank independence the federal reserve's independence to break it as quickly as possible i think that that is a risk yeah yeah that's uh i'm just upset that they they busted my cartoon guys on slide 87 my favorite uh bob rich cartoon on the history of the fed i think you've seen this it was much better before you got the tall guy at the end of it i mean it's been you know maybe we'll turn that red and red tape into toilet paper i don't know but at the end of the day yeah she's still there and that's um yeah that's uh you guys go to the slide before that this is another question that i want to pop to before we go she is the mother of all doves i mean and i think that like when you look at a market like this and the liquidity and really the window like i don't i i i'm long okay i'm not gonna i'm not gonna make up like i'm not i mean i'm long i've been long for a while here it's as recklessly long as some may have accused me of being and i like it you know because i've never really got this part of the movie right um i was too young in 1999 to even know i was in a movie uh now so here we are and i if it ends on april the 28th or on my wife's birthday on the 17th then i'm fine i'm out you know but in the meantime we still haven't seen what she and bernanke truly believe which they can suppress gravity they can take market volatility and put it to the all-time lows if in that chart the atl on that chart the all-time low of the vix as you know you know she's got her name on it and to me that's still one part of the movie we haven't seen this equity market's gotten in the us to where it is on a vix that you know chops between 20 and 30 not below 10. i think that um we need to remember we need to remember the tenure of uh miss yellen at the federal reserve because it was the biggest missed opportunity to normalize policy ever seen she had a growing economy she had a recovering economy with unemployment coming down with all of the figures uh being in line with the target yet into the latter part of the tenure decided not to hike rates and decided to maintain policy at any cost i think that that that shows that there she has a view which she has always had of that that the risk of seeing bubbles generated in equity or or bond markets is much smaller for her than the uh alternative which is that there could be uh significant backlash in terms of the economy now the problem is leverage no the problem is leverage the problem is that it's funny that we talk about today that uh that things are a lot different than when they how they were before but just we just have to see the elevated levels of debt and the elevated levels of uh complacency that there are that there that we see in in markets so i think that you still have until you you have basically right now three things hope uh narrative and policy hope is based on after the reopening massive increase in consumption huge return to growth and back to party uh very difficult because we need to look at where we were in 2019 when the economy was already slowing down we're not going back to high growth high productivity we're going back to low growth low productivity second is the idea that policy will keep every single risk subdued well that cannot happen eternally it can happen for a while of course but it cannot happen eternally particularly because there is a point in which the diminishing returns of policy are so evident that we are seeing it right now i mean i was speaking with some ecb european central bank officials after they made a very dovish comment uh a couple of weeks ago and they were saying i don't understand why markets are not uh correcting uh rapidly the increase in bond yields well because because of the diminishing returns of monetary policy is that it's not the same to have rates uh that are at a nominal re and real negative level than to have them slightly above that level so i think that the the biggest threat to the fed right now and to the biden administration is that you cannot bet on one thing and the opposite all the time is that you cannot bet on the need to massively increase the deficit and increase monetary policy and low rates while you believe that the economy is growing and unemployment is coming back to full employment so she will test those limits i'm completely sure because she did it's not like um oh here's somebody looking at the future i'm looking at the past and she will test the limits because she did and biden will test the limit the limits because they did that's a it's it's such a great point and and i think that this is uh if you were to take a a unifying theme of all the conversations i've had and unfortunately we have to to come to an end with this one you know people really understand at this point that it is using your word it's an ideology and when you have an ideology about an asset you know holding of of a certain thing or of a certain policy path you're gonna ride that as you've said multiple times in this conversation right to the end and unfortunately history does not look back kindly on perma ideologies or perma positions and anything and that's um yeah that's a thank you for doing that i mean all the books that are behind you in addition to the ones have you actually written uh i believe that of all the people that i know in the world that does all of his historical time series reading and homework you're looking at that guy right now and i i think you did a great job educating people so thank you very much for that thank you very much it's been a great great pleasure as always and and keep the good work because it is so important to have people uh talking about reality and and giving good investment advice uh in real time that is that you know it's invaluable thank you very much great to see you man uh he is daniel v daniel lakaye thanks for joining us i'll be right back with the last one mike t [Music]

Channel: Hedgeye

Views: 20,023

Rating: 4.875598 out of 5

Keywords: finance, wall street, markets, stocks, trading, macroeconomics, hedgeye, keith mccullough, bloomberg, options, day, Daniel Lacalle, Tressis

Id: l_ClRz4fsA8

Length: 48min 18sec (2898 seconds)

Published: Wed Mar 31 2021