Raoul Pal & Hugh Hendry on Real Vision: deep diving into negative rates

[Music] hmm [Music] hugh welcome back to the latest edition of the caribbean beach club how are you my friend um yeah i i'm looking kind of bedraggled um i kind of people keep sending me these cbd creams and i thought my hair was dry and i thought i'll rub it into my hair but i'm thinking maybe that was a bad idea maybe we should end this conversation but you're not bleeding this time that's true and i have to tell you your reputation is spreading far and wide i'm meeting fellow members of your audience and and they're approaching me saying oh say hi to raul and uh so you're you're you're right there your footprint is has encroached upon my territory how dare you insane yeah see you're the rock star here not me so listen i i wanted to reach out to you because you put out a tweet thread of which 90 of the people responded saying i have no idea what he's talking about i thought it was really good and i thought it would be great for you to talk about it and explain a bit about what your thought process what you're thinking through with regards to the dollar rates and other stuff great so to make that productive raw because i think we're at our best when it's push and give and take and and the rest because left my own devices again i mean i mean no one does a better pole dance than i do i mean i can i can wiggle so i don't want to just go off and do my flight of fantasy fantasy so we maybe we can we can take it in steps but first and foremost um i have received a few emails since then saying oh my god dude like gotta control your emotion you're getting angry someone sent me an email saying hey i mean at your age you've still got like you've got a good 30 years i'm like like really you're writing me like i'm gonna die i mean i'm time stamped to expire and and so i think that needs a little bit of explanation the um i was all set you know using uh you know this wonderful facility that you allow me to use to interview a hedge fund manager that i respect his name will remain anonymous his name doesn't really matter but the thing was you're going to think this is this is a kid who's probably got a team of 20 managing billions of resources and and like you do like we sit there on our little islands in the in the ocean um you know i surf i have so many things you know i you know i'm presently um an architect i'm living in a work site i'm you know i have a lot of things but i can get myself into warrior mode yeah where i have the audacity to go one-on-one with one of the world's great managers someone who makes me think and i don't 100 agree with everything he says but i i'm in a position where i can put myself into a position where i can push back on these people which is a long way of saying that arguably i'm a sociopath and arguably a lot of successful people are sociopaths i mean i know there's there's like a list of seven things and i'm for sure everyone can can read one or two and go yeah i kind of get that but when you kind of start at the first and you've ticked every single one and you're at the seventh you're like oh so i'm a sociopath okay so what so what was the bit that made you sociopathic is was it his view on the dollar is it the market's view on the dollar is it what what is it that triggered that triggered the tweet in the first place aside from being stood up at the altar like i said it's not really i don't care if the the the guy was busy you know and good luck to him you know he's managing money and with the elections it can be 24 7. i've been in that kind of that rage of the trading cloud and the point was that i had in switching over from surfing to warrior mode if you will i got clarity in my mind and i've been carrying a lot of things for some time now probably i've had an inventory of timelessness in my head for two months but hitting warrior stage suddenly you know it was the matrix and i could see it and so i i sat down and presently i have no kitchen i'm juicing and so i i got i skinned a lime and and then and some ice and some tequila i thought all right okay we're gonna have fun and it and it flowed and i love the caddens which is produced by twitter you know that that discipline like i had to take an h out of schmuck apologies but you know there's only so many characters and i think you got my drift so really so first and foremost it's that okay and then obviously the dollar has has been strong this year and the dollar mentally has been weak this year and um and like i said my tweet is kind of on its ass just now and there's somewhere around that let's say 92 or so on the dollar index and chart wise you think oh you know if we lose there you're going to be you're going to be 90 and then you're going to be knocking on kind of 85 and that ends up being a big really a big move when you consider the normal volatility that supports these these trading ranges and so my question was is that going to happen and and then that's when kind of all my kind of negative interest rates and the liking of and of course and good old look uh goldman or whatever and and his his theories and and the like and so it all kind of came supercharged in my head and i tried i guess to do a kind of a jack kerouac version of it so i guess the principal point is that the exorbitant privilege which the us is assumed to run this this ability to print money which of course has been accentuated by what i prefer to call central bank propaganda as opposed to central bank action which is to say the quantitative easing program of creating essentially surplus banking results that the banking community has very little desire to turn into credit risk or loans but they keep and indeed jay powell during the height of the the crisis when he was trying to kind of um give out a message to you know the the the good ordinary working folk of america saying hey we got your back we're doing something and he was kind of fibbing he was a bit kind of you know liar pants on fire because he was saying he said we're printing money you can kind of see it from m2 right but the money comes from the fed and then it doesn't really go anywhere it gets stuck in the banks and europe's the same i looked at by the way i looked at m2 in all the major countries around the world every single one of them velocity of money every single one of velocity of money is below one except the united states which is at 1.2 which is bad but every one of them so any dollar goes in less comes out it's unbelievable initially of course um and by initially i want to say um the sort of april may rolling data as it came in and there seemed to be a search um and and there was a search but it's this surge of fun fantastically silly behavior which is um procter and gamble can can raise like five ten billion dollars at nothing and people are desperate to engage with that kind of lending that's is meaningless and um protein gamble are incentivized to do it because there are very very very very dark moments when even they can access credit so so why not but again this landing which is not going into productive or even unproductive speculation it's just sitting there and bank vaults so we had an initial hey they're printing money hey the m2 thing looked as if annualized it's running at 25 but what do we see now and behind again behind the magician's curtain i want to say in august i had the great honour of presenting to a credit union in um in the northeast of the united states to the to the directors like i said i i tap dance um but what i didn't know was that as part of the emergency coped not precautions but kind of like state of you know state of play was that banks are not allowed to repossess and banks are not allowed to share credit records or credit history from their peer group so which is quite remarkable so um you have bankers who are who are fearful of the credit that the credit risk that exists in the economy why they why are they fearful they're fearful because largely for the last 10 years we've been in a form of depression that doesn't dare reveal itself but it's there i want to say for ordinary households the last 10 years kind of probably wouldn't be that different from the period 1934 to if we ignore john steinbach novels of the world the dust bowl you know the profound not only the economic but you know weather patterns and over-farming and the lack of understanding about nitrogen fertilizer um you know the the complete uh tragedy and that's the kind of brown grainy images we have of the great depression but 34 to 38 kind of people got on with their it was a it was drudgery if you will and that's how i've described um the last 10 years so that's it's a depression which no one talks about and that's what's making risk takers fearful of risk is why we're getting this bifurcation in credit markets in that if you have very little credit risk then you are a portion an astonishingly rich valuation there's literally no upper bound to the price that people are willing to pay for safe custody during a depression and of course it's antithesis is if you're an airline stock a retailer or whatever yeah then you might find that your share price is trading it where it was in 1982. you know this this is a market of two extremes okay so in that environment can you imagine you then take the bank you say i'm going to blindfold you okay i'm not going to give you any credit information now and i'm going to give you lots of reserves go go and lend money it's never going to happen no and you know it's a structural problem also because the banks in europe don't lend anymore the and they don't really use the bob market as much the us has stopped lending money you look at the the loan officer's survey they've stopped lending money and that's pretty much happening all around the world so as you say it is a bit of a magician's trick that they're claiming that the printing is helping everybody out it's not you look at the numbers it's basically sitting on the bank's balance sheets that's it but we have this propaganda that they're printing and it's inflaming people and and so back to this notion of this exorbitant privilege hey you know and luke gets really kind of hey and he's he's out there hey did you look you know the dollars we even had a piece um you know brent johnson forwarded the uh ken rogoff piece he dollars due to take another leg down is it really really because they're printing all this money again really and so actually i started looking at trying to deconstruct it and i find that the privilege is actually the privilege has been handed over to the other side to the mercantilist nations of essentially europe of southeast south east asia okay um and they will not permit the dollar to default okay because if we were to go to 140 you know the euro dollar rate was to go to 140. where is the european economy going in that where is your gdp assumption right yeah it close up yeah blink okay so and what and the trail path is being set by the swiss central bank if i was them i would do exactly the same thing they actually do print the fiat currency and with the fiat currency they buy dollar assets be it shares in amazon be a gold would be it treasuries they're all the same they're denominated in dollars okay and therefore it's the it's the willingness it's the ability it's the mandate of all of those global central banks to react individually but collectively to print their fiat to sell their fear to buy dollar which i believe is denying the us the opportunity to have a devaluation all the other central banks action so everybody is basically mercantilist they're all trying to sell more of their own currency and the net result is they're always buying dollars in one way shape or form so whatever the us tries to do to lower its currency you know because everyone talks about the rate differentials or growth or whatever it doesn't seem to work i mean i've noticed this for a long time the dollar still either stays here chops around or goes up but it doesn't go down exactly it's a dirty time series which doesn't do a lot and that's most likely to continue so but if i was the if i was the us i'd be like before we go into this why should the u.s want to lower their currency that i think that's the that's the key thing people need to understand and then we can go into the mechanisms and of course the the antithesis of that question is why does the rest of the world want to be mercantilist okay so and it's just a model you know the rest of the world feels and perhaps and for sure in some parts of the world there is a there is still a comparative advantage and for sure there's a comparative advantage with the remember closer to seven than say five yeah for those countries to produce things the things i looked at here is i wrote a piece in gmi over the weekend is this mercantilist kind of activity around debasing not debating but kind of lowering your your currency came out of the wto agreement in 96 because when you've equalized tariffs how do you compete price yes yeah no no absolutely and um i remembered how long have we had the fix on the hong kong dollar pick it's a long long time it's a long long time so they want to produce things the us up until trump and we'll see the direction but you know given the representation of the republican party in the elections you have to think it if something remains in the sense of you know they kind of make america better by kind of trying to have less hollowing out less less of so the fight against mercantilism but it's kind of like so just now i would say that we've actually pushed too far in favoring the americans and it was it was kind of okay because the us still had a balance sheet that it could tap into it could leverage further you know since the since richard branson bought necker island let's take it let's take it to the source uh richard branson a virgin nailed the bottom of the debt cycle which had begun with the bankruptcy of the u.s banking sector in the early 1930s and and with that unnecessary bankruptcy but you know we had central banks who were ideological zealots back then and as a result we had a bankruptcy of the banking system and the message from on high and for from all of us in society was you've got to get your act together you've got to stick stop taking these stupid risks and you got a deal average okay and the u.s economy went from let's say three times debt to gdp and when tricky dicky was buying neko island we were roughly about 1.3 times so it taken 40 years and we had d leverage to the tune of two times gdp in terms of the outstanding debt at that quantity and in that environment you know a scottish laird wants to sell his island for a million bucks and richard says a hundred thousand maybe and they they shake on 150. you know that's the opportunities that do not present themselves to us today that was 14 years ago okay so the problem with the american to this model today and the problem for the us us's willingness to accept it is that it four and a half times death to gdp there ain't a lot of desire to take on more so there's one thing hey we take your jobs but we put an extra zero on your credit card balance it's okay that kind of thing being the climax of that was 2006 okay and of course the the savage housing market decline then rolled us into this nameless depression that i'm talking about so that's kind of that takes us where we are today that is stalemate nothing's nothing's happening because they're still pursuing mercantilism they're still kind of pushing dollars like they're pushing their savings to the us and saying have fun a bit like the the fed the merchants like the fed the fed's turning to the banks and saying this one's on us guys like here's 7 trillion i'm looking that way no i'm your regulator normally i'm on your ass but i'm looking that way you're seven have fun have a party the parents are the building and and the kids like no no you know i'm doing my homework and it's the same with the americans hey look we're looking the other way we're buying treasuries they're egregiously overvalued but we don't care have the money just buy something buy anything we don't care but that's not happening so that's the inertia and that's the failure to escape to get that velocity to escape the inertia that we found ourselves in for the best part of 12 years so why does the us want the weaker currency now why is it why should it start thinking you know what if we can lower the value of the dollar it's going to solve us problems is it because the u.s needs to export its way out or does what what is it yeah that's a that's a thank you you've teed me up and i found coherency from the cbd oil growing through my my hair in a typical adult lifetime you might experience three or four recessions yeah but you could spend all of your duration on planet earth and have the great good fortune of missing a depression which is to say they're very thankfully they're very rare occurring events and i kind of try to hit upon this in my thread that the really the first business cycle depression depressions prior to let's call it 1830 a bit early 1825 or something prior to that had been a function of famine crop failure and the idiots the the sovereign leadership the kings and their their petty wars and and you know wanton uh destruction of mankind okay that's that's and as the ordinary guy you kind of periodically you took one you know um in the 1830s you're like you've lost your job your neighbors lost your job if you've got a job you've had to take a huge haircut and you don't have enough you're kind of the kids are begging on the street and you're like okay we didn't invade france of spain the last time i looked the crops were fine what gives okay and what i had gave him was that after the in financing the the uk's victory over uh napoleon and the like we had come off the gold standard and and the london central banks really you know the kids had a party and they kind of went whoa hey there's this big place called america and they started funding uh transport bonds canal bonds and and they discovered shady characters in south america and sovereigns never go bankrupt until they do and the uk did come back onto the gold standard and and of course there was a there was a cycle of exuberance which led to his inverse and so london banks were pooling in credit and they were the center and they were pulling it in from all corners of the globe and and creating this new strange thing called a business a deep business like a depression okay now and it was nasty and you know it's why we get les miserables and it was it impacted on coaches where we get angles and marks saying oh you know we it's now time to redistribute off with their heads you know that didn't come to pass partly owing again to the concept of human ingenuity but i want to say it was terminated by by finding um a looseness and policy which was sufficient in degree to kind of push people back to chat remember i'm all about psychology to change the psychology from fear and just get some curious minds going those canal pawns look kind of cheap what what was the monetary innovation my innovation was the discovery of the substantial californian gold fields and yeah at the time you were on a juice where beyond the juice that i'm not sure but you know we we kind of moved back and forth between uh silver and gold and so gold becoming more plentiful allowed banks to extend credit you know and like i said people like wow yeah no that this conditions are now they're they're sufficiently loose i kind of want to have a go and i'll keep it short in the next the second time around was characterized um by william jennings brian and his run for the united states presidency uh he ran twice uh in the 1890s he ran against the backdrop of um the second failure again london banks lending too much money and this time it was very much to to railroad bonds and again very much to shady south south american governments um and that kind of we had 20 years and that's that's the wizard of oz that's the kind of the wicked witch of the east is these banks that keeps calling in the money and it's the the poor factories which are shuttering and closing and that's what william jennings was um stan his platform was were being crucified on a cross of gold you know and the yellow brick broad and dorothy she wore in the book she wore silver slippers and i was like hey let's go let's bring silver's really plentiful let's ditch gold and let's go back to silver and let's have that monetary response remarkably he was ignored but that depression came to an end because as scotsman who cares it could be in russian he could have been whatever but a scot scottish engineer just had the breakthrough in terms of leaching with cyanide to extract gold from the south african deposits yeah and again that was the most gigantic expansion in money supply and we were back and off to the races so i want to say to you that we have had few depressions thankfully and their remedy has been a kind of out of the blue monetary i kind of who would have thought that who would have thought that discovery now i'm not suggesting we're going to discover gold on mars or moon or whatever i think it is more mundane than that i think actually that the reserve currency imposing like a 300 basis point negative charge on these surplus redundant savings in its economy would be the equivalent of in of creating klondike fever i think that's the thing that could unlock this okay and so we don't need the dollar to be weak um and and and it's not an option which is feasible or available okay but there is one knocking on the door so to speak which is um innovation in um in the fed's response to depressions and so you're the innovation and it seems to me the occam's raise it because it's pretty bloody straightforward you just go massively negative and what happens is the dollar weakens the banks turf out all the money that's sitting in their bolts saying hey we don't want this stuff let's give it to people and people who are holding dollars so we don't really want to hold this any longer because it's a bit costly i'll do something else with it is that the kind of idea here and money gets flooded back back into the system and not hoarded it it is i it but i would maintain that the dollar doesn't we can again the dollar it can't there's there's no limit we what's after a trillion who cares but you know there's no limit to the swiss banks i did a thing on instagram and i had a picture of it you know again the the marquee brown grainy image of the desperately unfortunate german citizen with a wheelbarrow of banknotes going to to buy food yeah going to buy a loaf of bread and my point is like i'm i'm going to show you something shocking this thing here this this thing is an iphone okay think of the think of the number of it's i'm sure someone will correct me that there is a limit to zeroes that in terms of currency that i could put on this phone right and i would just with the terminal so there's no limit to the monetary digital printing press response to the us yeah move towards 300 minus basis points okay and again 300 minus basis points you know the models i'm not a great believer in models but you know the old looking at inflation looking at the output gap kind of seeing where the interest rate should be kind of does typically come round about those levels you know and you if you went that way and you had minus 300 at the short end and you were minus 100 at the long ten years or seven years average maturity kind of would all start making a little bit of sense you know so really my point is more again that i i still believe that central banks have been shorn of ideology now when it's replaced they have yet to find wisdom on the other hand people like us our competitors are the idols and and pretty much the roles of swaps and pretty much most of the people watching this will be thumb downing me because they want to be me in 2009 2010 2011 2012. i was a miserable curmudgeon you know i had the foresight to see the crisis i could see the idiotic behavior of my peer group and i wanted to purge the sister i wanted to put them in prison i wanted to give them lifetime balance i i wanted to eliminate them and then and the fed thankfully said thank you um take more cbd oil come come come okay and they said because because that that road you know this people say we you you solve this by putting interest rates up never believe that argument people say well the federal abnormally lowered the rate i don't think they actually have if you there's a regression against demographics and it's basically where it should be now the i mean the interesting question is is because i say i think the fed goes negative and i think the markets take them there first but you're pushing that discussion even a bit further saying not only negative but historically massively negative in a way that is disruptive to everybody's ideology and and that's kind of like again one of my tweets god i wish i'm quoting myself which is um uh unforgivable um and and i've got a terrible memory but i was kind of saying that i feel like myself as a macro mind i've spent this century a bit like the ussr did the last century like in denial like our rules just don't so it's so basic and maybe it's just a false set of rules that we all cling to these are rules the you know the zero lower bound well guess what the bank of england went negative well they're about to go negative but uk interest rates have been negative now first time in 500 years this could never happen but it does but it does and therefore our rule book is wrong yeah and then again let's but let's kind of so take it from theoretical fanciful flights of fancy to the to the grim reality of today and again where we create imagined realities which i don't think really accord with action on the ground so interest rates are really low and like you said the fed's at zero and we've got some central banks which are actually negative funny thing is when i go to borrow okay and i borrow in euros so at first blush this is going to sound fantastic and i went whoa um i got to borrow fixed at two percent for 20 years i go wow but big father is like well the two percent they were screwing me because with market rates it should have end with when risk added on maybe i should have paid and 201 120 basis points not 200 there was 80 of canada thank you very much you know drop the soap um but worse than i is the need to amortize the loan that i so 20 years effectively i'm paying five repaying five percent of this debt outstanding each year which to say that my cash flow uh is minus seven percent two plus the five i've got to find seven percent i said i borrowed five million right i've got to find seven percent of five million and i'm i'm presently doing up like rebuilding a house i want i want to do two or three at the same time i can i can't and again where this is ridiculous and i okay i'm kind of having my cake and eating it but um because i and by that i mean i believe that 10-year treasuries are somewhere between a range of 65 basis points and 85 basis points because the u.s private sector banking community is not taking the seven trillion dollars and lending it not taking the quantitative easing money and lending it i think that explains why we're at market rates others disagree the fed is buying okay so let's take that argument if the fed's actions are actually that it's like atlas and the fed's like don't worry don't worry i i got i got your back i'm i'm i'm gonna hold these collateral values in fact i think gee i think i can push them higher yeah yeah they're going higher what's so the fed's got your back okay what's the point of insisting that you have to repay give bullet loans you know just you know in 20 years time i know that my protein same plus with the fed like atlas right my property value is going to be like 1.5 x minimum what it is today so just allow me to pay the interest component okay because the fed is doing a good if you will the central banks around the world are supporting the asset value so rather than just an asset value which makes rich people feel richer but they don't go out and consume it give it to people and okay i'm not necessarily represented but i would spend it give it to people make that holding or supporting or pushing elevating higher asset values make it click into real decisions which would allow me to employ more plumbers more electricians more carpenters more lawyers more accountants etc my argument with that is all well and good without something like a central bank digital currency that allows us to direct it in certain ways it just goes into the stock market which is not doing anybody anything if you said here hugh you can have a loan for 1 interest bullet payment 20 years has to go to property and you have to invest in the building of it okay fair enough that's a good bet if you want to take that bet but right now it doesn't happen so if the fed were to go to negative 2 just a bunch of rich people by equities and get richer how does um how does it how does it become a better mechanism then which is why i'm very interested in the digital currency route because you can change policy on different people yeah i mean i i'm still a little bit suspicious on digital just sounds trendy i mean you can just put a mandate to uh loan offices across the united states you know you and richard werner talked about this right yeah you lose your license if you don't don't play then lose your license so it can be but that's uh yeah semantics so digital or central banking kind of um you know being kind of tough and mandating this um and again that takes you to richard's point that then you can actually try and direct it to the least offensive the most reward i still think there are rewarding investments that you can do you can make today in the global economy i think it's just been written off by a general kind of nihilism or all the like but the key to this and the key to the negative rates um which we haven't discussed is you need profitable banks okay so that's why i was saying in my paper the federal reserve we talk about yield curves and inversions and the like first and foremost the central bank is the banking regulator of domestic banks the united states and as a regulator should say we're doing this and it's being passed on immediately and it's and you know what we give you i think you get deposit insurance up to about at least a hundred thousand dollars so um we're kind of going to charge for that now like if you actually have i don't know if it's 100 000 or 250 000 there's a figure out there whereby you can say hi folks if you're kind of sufficiently comfortable if you're the type that got 250 000 spare dollars sitting in your bank account earning kind of zero you know what we're going to charge you three percent okay and then the banks are going to bring down their lending rates but they're going to get i wanted to get a higher farer margin and the profitability of the banks is going to be taken and it's going to be paid for by the creditor community the credit there's two parts of the economy and you can still have a 250 basis point steep curve as well exactly exactly exactly so you can still because you need profitability because the key to this is fostering a change in psychology i want banks to be greedy not fearful does it in terms of society hates banks okay so banks were happy cheerful people who gave you loans between 2000 and 2006 regardless if you committed adultery you know if you had been in prison if you had been a serial bankrupter they're like just take the money right and we still castigated banks normally we cast together because they don't give us the money so we don't like banks let's just just deal with that the system works when banks are profitable so let's assume that we're now in this new i want to live in this world a little bit so we're going to live in this negative 300 basis point world right so i'm society general i say hugh hendry i'm going to let you lend you 5 million bucks at 10 basis points i'm got 300 basis point margin on that because i'm getting it from the central bank at negative 300. you're paying no interest and a bullet payment right so that's like the opportunity of a lifetime what happens to the pension funds and everybody else who needs cash what do they do in this situation well pencil pension funds but we've got to be i've got to be careful because i was going to launch into a tirade there um because again what i want to kind of again put out there is that we've had a cycle a 50-year cycle again kind of related to that de-leveraging and then re-leveraging yeah and it's a cycle which favors kind of the the last cycle is favored creditors over debtors so it's favored if you will saudi arabia right right random an act of you know an act of randomness that on it on its territory it had these oil results um and it has no ingenuity no no cultural ability to transform that into ways of changing the world on their own which is fine we give them a pass for that um but they they put it they go into the genius of our market economy and say hey we're creditors we've got a ton of money but few ideas about what to do with it and we then engage them with people who've got like the steve jobs of this world you know the square pegs and the right i'm going to change the world i just need i need i need bingo bingo okay now we've had an egregious over distribution to the south not to personalize saudi arabia but to the saudi arabia to the creditor and particularly the creditor sovereign nations of the world and which is to say that when we came in and we did this rent transfer or the imposition of a of a tariff to access that credit and we were overpaying we were overpaying which to say you've been over compensated for being a creditor for the last 40 50 years which is why assets are this price okay in the old model capital made all the money here right anybody with money made money anybody who needed money didn't and that's why today we well that's why that's why we had brexit that's why we had trump that's why trump is still about to be booted out but you know he got 70 million americans to vote for because of that power okay and so we're like as we live in this imagined reality of what might come to pass we're trying to find it now this 17 million people that feel disenfranchised by the last 40 50 years and we're trying to say hey listen you know i can't make a difference because all you if we sat china and and the elk saddled you with deaths amazon persuaded if you've seen that when i look in the cupboards and i see the junk i buy from amazon i mean what gets into my head but you know like we've persuaded you to take on this debt to buy this junk okay and and now you've just got to keep paying it to the man we're from the government and really actually this time we're here to help you know those monthly payments they're going to go to zero right this one this one's on us this one's for you so what we're trying to do because remember whilst the 10-year rate is at 75-80 basis points right whilst you know japan's got negative 20 basis points um etc in the real world that we live in credit is is hard to get credit card rates all-time record highs they're above where they were in 1990 when interest rates were six or seven percent so yes credit is not it's a bifurcated market perhaps can borrow all the money they want as you said procter gamble any size at any price negative interest rates somebody else the high street shop that's closing down right now zero chance so there you go so what i'm saying what i'm suggesting to you is that we give everyone the procter and gamble edge and i get that but what i can't see through in this theoretical world of the future is what a procter and gamble do or what what happens to leverage in terms of gdp we'll talk about some other impacts in a bit but what happens to to leverage with the unnecessary players taking even more leverage that may call upon uh your insight with with the digital and that may call upon the wisdom of you know the princes of the yemen with richard warren have to say um there is a market-based pricing marketplace coming together of creditor and better agents is it's a wonderful system that's rewarded us but we can still improve it these ppp loans or whatever they were why did that not work because wasn't that this really and i don't know the ins and out mechanism and neither of us live in the us but but the reality was they said small to medium sized enterprises here's as much money as you need no the problem was that the fed's mandate from the 1936 fed act or whatever um doesn't allow uh those debts to be written off like so you can walk away the fed would be on your case until you went to your grave and it was a perpetual liability that you couldn't absolve via the usual kind of bank i think someone can correct me on that but that's what i it was it was the hardest lawn to renege on so as part of your theoretical new world you need somebody to not ask for their money back at the end right what happens no one wants the money you only want the money back at the end because there's to make up for the shortfall in the perceived or the anticipated rise or stabilization of the asset value now if the central bank's there atlas holding the damn thing high no one wants the money back so then the theoretical other discussion in all of this that i'm kind of interested in as well is why not just do a 10 trillion dollar perpetual no you know a perpetual bond at two percent inflate the whole thing out do 10 trillion dollars or 20 trillion whatever the ridiculous number is and maybe all the countries around the world do it at the same time isn't that also down the same route i understand it's not directly for the person yeah that's another way of looking at it oh i mean just take the the the first the us fiscal program uh from march april of this year i mean did it really make a difference did it really move the dial what if that money instead how much was that was it three trillion dollars yeah and maybe 300 billion of it was a check to people in the post so ten percent really that's all but what if they've taken the three terminal ten trying to use your figures and you said you know what this is a buffer like we've got like to the banking sector we know you're scared we get it and you're legitimately scared because we haven't had your back and we've let this thing drift too long we've been stuck you know like there's only like two three years ago the fed was raising rates like and they've now apologized for that and the next line is to say hey stop apologizing you do something about it okay and you say like here's this big here's this additional record your equity today you've got to eat through three or ten trillion dollars right before you hit your equity again come on go and multiply what you're doing is giving free collateral to the market and then say borrow against this but it would have to be prescribed with some kind of mandate um against egregious um land speculation i think at that point you would really have to insist you back to the the model of to to fund the construction of a new house but um to buy an existing and then just to feed higher and higher asset price in terms of people passing houses between themselves seems a bad i think we can we can work out a form of regulation that would prevent that i know um i keep that company because you know i don't think there are any right answers there's ones that are less wrong and i think people live on this ideology that there is a correct answer that the central bank should do but if you and i to sit down at the federal reserve if they invite us to say right well you guys are going to run this for a few weeks and you've talked about this i mean we'd look at ourselves and go well i don't know what to do it seems a mess i can raise interest rates the world crumbles cutting trades to zero to negative i don't know maybe it blows up the pension system i'm going to give money directly maybe it creates inflation i mean there's not many good outcomes in this so it's trying to find pragmatic answers that aren't driven by ideology i think but then that's that's why you get the log jam because you you use the word pragmatic with that there's there's nothing pragmatic you know so what we forget because the distance of time has dialed um or our memory banks paul volcker was a crazy mother i mean we forget with the distance this guy it's literally like um a cowboy movie and this sheriff walks in you know kicking cocoon kicking you know the bar door the salon the two doors swing open is like hey guys you know there's going to be change around here and like here's the dude in the text and he's like and they all turn around they drink more tequila he's like no you you ain't hear me you ain't hearing me and boom you know so what what is boom like the recession your grandfather's recessions the 1970s your kind of movement in nominal gdp from peak to trough was big i mean we really got big nominal gdp contractions yeah and of course volcker came in after the big one you know the one with the initial oil price uh shock but he came in on the cusp of the second so we knew the first one was diabolically mad we were coasting and like coming the wave was coming down and we knew what that was going to bring and this guy's like i'm going to raise rates 100 basis points anyone want to play and he does it he doesn't want to start who doesn't want a saturday on a saturday can't wait until the market opens he was insane all right and why was he doing it because the banks had been had become awash with sodor wrists i keep mentioning sodium probably they'll be diced to pieces in the embassy and saying well the um the the the oil money that this the surplus creditor flow of money which effectively created the euro dollar market we haven't even discussed euro euro dollar is like this invisible offshore you dollar banking system which is like arguably two to three times even bigger than u.s banks and we just pretend it doesn't exist it's this dark web anyway all of that money is like hey well you know we're flush we're making loans to paraguay and we're making loans to argentina but we're making wants to launch to mom and pop shops or whatever you know businesses and enterprise the one thing we're not doing your banks are a hedge fund banks are the most simple hedge fund conceived ever they only have one decision do you lend to their government or do you lend to to you and i yeah and back when valkyr came in it's like well we're lending to to the public you know because it's inflation protected and vocals like you're making a big mistake and so he raised rates several times and just made the recession even more ferocious in order because he had to change psychology from greed to fear he's like oh i'll give you i'll give you a recession you're going to buy government bonds yielding 12 so we forget all of that so when you said you know why aren't they doing pragmatic practical things that's we're talking the opposite we want them to be crazy do crazy stuff well i'm not sure well pragmatic to me means independence of idea ideology i think that's what volker did right he just said i've got this problem and this is the way i'm going to solve it and what you're saying i think is the op is the same thing but the opposite way around which is well if volca went to 18 we go to negative five or negative three and is that going to change the dynamics of the economy and get us out of this long-standing depression so and it and it did you know so radical courageous a radical in the context of it's not been done before like we've not had a fed kind of push to those kind of limits um but it was necessary because we had to change the behavior of very important economic participants i think it changes the behavior of the foreign creditors who put their money in the u.s right all of these the mercantilists i think it would change them i think if you as you said regulated in some way to make sure it goes into the hands of certain people it does that the only problem is and this is where the argument will be in the comments section below is anybody who's a saver will say you hugh and the best thing i'm the biggest christmas trucker you're ever going to get for christmas right you're six if you're my mum who's 78 years old and hugh hendry decides in all his majesty to what waive his wand cut her her interest rates to i mean that they're at zero now she lives in spain and you're gonna say no mrs powell i'm gonna take five percent off you every year she's not gonna be happy and there's still quite a lot of voters don't you avoid that i'm like you know what i don't care first of all right i'm gonna get mom on the phone you can speak to her you know go and buy philip morris shares all right you know go and buy shares in the bank would okay look you know so the bank's now screwing you and they're not screwing your mother that's that all just gets just too visceral and whatever but this oil stuff is really really good you've got stocks like make the high dividend yielding stocks safe that's what you're doing okay you don't have to have you it's only convention that you have your money in the bank it's and and more than that it's in there sure so how do i call my mum up because the spanish banks did this oddly enough in 2012. they went well instead of these savings accounts we've converted them for you into preference shares and then they said oh by the way we can't pay the preference shares everybody took a massive haircut and the spanish banks kind of laughed their way well exactly they got away with it so the history of banking is um consistent and profoundly bad behavior okay they get away with it because we are too preoccupied doing interesting things with our life to phone the bank you might send one email but then it's like another email it doesn't i've got one friend who just goes straight to the chief executive of giant companies but everyone else just takes it and i guess there is a life raft whether it's gold or bitcoin or whatever you choose there are life rafts so if you've got cash and you don't want to participate in the borrowing economy so is this i guess this is the thing that's gonna be in everybody's minds there's gonna be screaming at the screen saying but this is going to be the big inflation and you're probably saying yeah and that's the point you get rid of all the debt the number one purpose of quantitative easing was higher interest rates to deal with higher inflation that you will know policies are working when actually when rates go up because we've got inflation and then we can deal with it if you will as you know i throw that out so people just got to remember that what we're trying to do you know we're scuttle butting or something we're kind of we're taking hot potatoes and trying to you know like rather than just this ideology that says no it's like that's a boring conversation let's let's consider it more like grandmothers and stuff we sent young men to their death we still do with international conflict this is real people but the baby boomers have never taken on the chin they've had it all on a silver platter and screwed it for everybody else that's why i i really okay i really don't care i i i really don't care as as long as i'm looking after you like i'm afraid i say it again somewhere between 100 and 250 000 of surplus cash reserves just sitting idly in some boring bank account you're getting no no sympathy or help from me think about it what's going on right now is these baby boomers with their cash surpluses are supporting their millennial kids what you're actually going to do is reverse the equation because the millennial kids will be able to borrow all the money no they'll have a future that doesn't exist for the others and they'll just have to help their parents with their five percent loss on their capital which is doable but it requires courage and it might weaken the dollar for sure it would weaken the dollar in terms of depending on time frames but you know any weakness in the dollar would you know i would set my watch and i would you know calibrate the uh the central banking printing of money foreign exchange intervention and should all of the central banks do this at the same time no just no no it doesn't work that way actually um it this is the the divine right of the currency at the center of the system uh that's this is why it hasn't worked and first of all they haven't really done it within you know if you go minus 20 basis points you're a buffoon you know you're just boring me yeah yeah i'm not interested like yeah you want me to be wow 20 basically go you're wisdom okay but no it's the preserve of the reserve currency of the world the us is the reserve currency of the world because of the the 25 trillion dollar liquidity of the u.s treasury debt market and on top of that the unlimited the unlimited liability the unlimited liquidity provided for by the central bank itself um so there is no liquidity risk in owning u.s treasuries and arguably i mean there is credit risk but arguably there's no no no credit risk and certainly less credit was basically other nations so um the preserve of going negative the us should be should like rather than like we discussed with wto rather than kind of going down the the foolish road of imposing trade sanctions or getting putting grit and sand in the way of trade trades good but you just got to say hey you know there's a price there's a price for everything you've got to pay us three percent to hold these treasuries we're giving everything else we're giving you liquidity you've got no credit risk we're giving you our customer or our consumer but you know it's gonna cost you three percent and and the next 50 years belongs to us we're probably going to get far and complacent on it and we'll have let's do a time dated stamp in 40 years time and we'll switch it around and we'll be paying you 10 and you'll be making all the money and what asset do you want to own in this environment in that environment where's the optionality i understand euro dollar 100 strike calls right that's a great trade because and just to explain to people euro dollar i'm talking about the interest rate futures and 100 strikers is zero percent rates because i mean they cost a couple of ticks out till december 2022 let's say and you could make 100 times your money if it goes to the negative 200 basis points sure so that's a trade right bond yields fall a lot okay there's a trade what and what else would people do i presume it's gold and borrow as much money as you can yeah i want to say it's this it's the status quo until um so if that policy so to answer that question you have to make an assumption does that policy succeed and what is success i think i suggested that success is the need to raise interest rates because the economy is like like really profoundly strong and prices really are credibly taking off that is um success so but until we pivot and we actually see evidence of that the trade is still the prevailing trade which is precious complex bitcoin um people always ask me about bitcoin um i i think i'm going to buy bitcoin futures i can't i just cannot you i can't i just can't deal with you cranks and your digital safes and guys in japan stealing my money and i always forget my password but a future he was good enough for poultry to join us and it's good enough for you hendry exercise you saw stan yeah comment as well so future's back down and it's the size you know everything that was denominated in isaac newton apples you know apple was the first trillion dollar company the treasury market is 25 apples the gold market is 10 apples and the thing about bitcoin is what is it is it's it's just a slice it's a quarter of an apple and that's kind of that's that's interesting that's yeah um but to that point so bitcoin future is big silver um treasuries euro dollars um stocks which are deemed to be riskless security you see again the magic from this thing is i have would you believe i do keep the company of entrepreneurs people can't the great thing about st box is it's a network for really rich successful folk yeah some of them are obnoxious some of them are just amazing wonderful and i've got people with businesses um commercial enterprises which will be flat or up on the year calendar year this calendar year they're paying eight percent typically to some hedge fund because the bank won't lend to them and the hedge was like wow yeah for eight percent maybe you know that's idiotic okay in my world my buddies i know they're coming to st bars but my buddies are going to lend get that money at 50 basis points or something okay and they're going to just take out all of the shitty competition and take over the world and make it an even better place that's the the world that i aspire to living in well let's see how this plays out i don't i don't know if you're gonna get your world but i still think we're going to get a negative interest rate world but i do agree that to think our way out of this because of the scarring that it's done to so many people and the issues as you pointed out somebody's gonna have to make a big change somewhere and i'm not sure you know people are thinking mmt is that a big enough change feels still a bit marginal unless unless you come to me with a 10 trillion dollar number i don't think it makes a difference but you know it has to be big as you said big and brave yeah mmt has yet to understand the psychology that you have to change it's not adding zeros it's actually um the manner in which you add the zeros it's the the front you know it's the audacity of what you're trying to do you're trying to super chief trying to bring the patient back to life you know they're sitting you know the people that we trust to take responsible risk in our communities don't want to do it that's the number one problem and so we've got to kind of boom you know resuscitate them so here's a theoretical question sorry i was i just thought about that is mmt not basically the fiscal version of hugh hendry's monetary plan if you go big enough you're directing it in certain places you say the money goes to you you and you which is what you're saying with the monetary you say i'm going to inject 10 trillion in by the federal reserve via these negative interest rates and whatever and they're doing it a different way are these things the same thing are they all part of the same answer yeah they hate us but just assume i'm gonna assume anybody watching this owns gold so they'll be happy so then we can have a proper argument about a discussion again i just got to repeat myself theoretically yes and i would be willing to embrace it if i could hear one of the leading proponents actually convince me that they understood um banking because the key to this is the provision of credit and it you know it still does have to go through the channel of banking or credit markets and so i'm not sure i'm not sure i'm not sure that it can go direct that's my point is as opposed to lending you money i could just give you money but you at the same time however you talk about you know digital bobby ditch one of the former members of the wu tang which is a famous infamous rap i should be talking about population is a very rich song um but your bobby digital notion of you know wanting to play with that yeah i just want to come back and say again the euro dollar market the thing that just gets no analysis and mmt doesn't look at it no no one looks at it right um you know because luke will come back and say well the chinese yeah they've seen you they're smart they're not going to buy your treasuries if you go -3 the chinese are leaving the building and in fact since 2016 or something they haven't been buying the treasures and my repost to that is actually the euro dollar market has not been creating dollars to chant to channel and push into the chinese leg it was doing so it did that from 2000 to kind of 2012 and then i went oh it's the europa is the europeans and japanese banks that was the problem they just clammed up and went um you're not having any of this so what i want to say is that there's a kind of there's a kind of dark web of credit creation which is many multiples greater in size than actually the us government and u.s banking sector and until we kind of actually shine a light on it work out how they think and how we can have a dialogue with them then you're still i fear that you're still looking at half measures i need to go 100 in so let's imagine we now live in a world of a central bank digital currency so now because it doesn't have to go through a bank i can give it to you and some barts and they can give it to me in the cayman islands and so we don't need a euro dollar market wow so there's a world's reserve currency that actually can control the world's money supply i don't think we've got time left really to discuss the fractional reserve implications of digital versus the traditional banking model there may well be a fractional reserve multiplication in that disintermediation that you that you described but i if there is i don't know as well as i should perhaps it's just something to think about hugh look thank you as ever to pick your brains on this i i just thought it was really interesting because just to challenge the way people think and again you're not saying this is what i think but this is a possible future and it's the world is about possible futures where the answer is going to come from because i damn well know you damn well know but doing what we're doing now is not going to change anything indeed we have we have a trade you know the euro dollar is the essence of macro it doesn't cost you a lot it has convexity you said 200 times if we got some of these more outlandish predictions of mine um and so yeah like your parents were presenting the kids with little christmas presents under the tree and we're just saying to unwrap it well let's see what the future brings but if it brings anything remotely close to what we're talking about boom you know you're going to enjoy christmas morning absolutely thank you as ever my friend great to speak to you and i'll speak to you very soon thank you very much rob thank you thank you all [Music] hey there since you got to the end i'm guessing you like the video and that's probably because we don't just turn on a camera and film we work really hard on getting the narrative flow just right and that's why many finance companies are actually now hiring realvision to make 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Channel: Hugh Hendry Official

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Keywords: Hugh Hendry, Eclectica, hedge fund, global hedge fund, macro hedge fund, hedge fund manager, hedge fund management, investor, investing, stock market, bull market, assets, stocks, gold price, dollar, fed, federal reserve, podcast, finance, finances, economy, financial news, treasury, inflation, money, European Central Bank, equities

Id: fvboOjNx3n4

Length: 66min 36sec (3996 seconds)

Published: Wed Dec 02 2020