the date of today is important date and
the reason that's important is just
yesterday at Davos Switzerland the IMF
stood up and said the world economy is
hitting into the worst economic
headwinds since World War II the worst
and that's why it could be bad news but
depending how you look at it it could be
very good news this is about its macro
environment as I've ever seen and I
think most people's read on it is
probably wrong right now I'm going to go
take you through a history lesson today
why I'm concerned yeah so why World War
II World War II is a fascinating period
because like kovid the entire world had
basically been stuck at home or been on
battlefields everyone came back there
was no supply of Commodities and goods
Global Supply chains were broken and
everybody came back and started
consuming again and guess what inflation
went up to 13 or something maybe even
higher and that period was fascinating
because interest rates went up and the
first thing that happened was the
economy went straight back into
recession and inflation went negative
because it was a massive tightening of
monetary conditions you raised the cost
of goods on people and didn't raise
their salaries enough people couldn't
get the goods they wanted exactly like
now and everything collapsed so we went
back into recession and then eventually
some better times and I'll come back
into the 1940s and 50s because I think
it's a really important parallel that
most people misunderstand the next time
we saw anything remotely like this was
1974 a lot of people tell you it's the
70s again inflation inflation well the
inflation episode we had in the late 70s
was driven by demographics that was the
Baby Boomers entering the workforce all
at the same time it was the largest
demand Shock the World had ever seen and
we had a supply shock of this oil crisis
of the Arab Oil Embargo that's not
repeating now what is actually more
similar is 197 74. 1974 was the Arab Oil
Embargo the price of oil tripled and
interest rates went up inflation shot up
and the immediate effect was the economy
went down the toilet Almost Do not pass
go the stock market fell 50 and the ism
survey which is a good Guide to the
business cycle anytime it crosses below
50 suggests the economy is getting weak
a recession comes at about 47 it hit 30
which was the lowest in all history and
it happened in a space of four months
based on exactly the same kind of setup
we've got now so you're saying that the
70s are now pretty close yes and
inflation fell in 1974 afterwards people
are still thinking inflation goes on
forever it did not and it did not in the
1940s either then the next one up is
1984. we saw an issue where global trade
there was a huge amount of trade
disputes the dollar was pretty strong
like it is now interest rates were going
up and inflation was high and everybody
was fearing looking back and saying oh
we don't want the early 80s late 70s
again the inflation inflation so volcker
was tightening rates too much and the
economy collapsed it didn't go to
recession because the FED quickly
started cutting rates but the dollar
went up a lot more and created a lot
more problems when we ended up with the
plaza record in 1985 when everybody had
to stop the dollar going up from
destroying the global economy so then
the next time we see something similar
was 2008. if you remember the oil price
was at 147 inflation was six percent the
FED had been cutting into that because
the economy was imploding
2018 exactly the same oil prices High
inflation High the FED for hiking rates
trying to tighten the balance sheet and
what happened is the economy rolled over
really quickly again okay so what's
going on here why does this phenomena
keep happening everyone extrapolates
inflation out forever what actually
happens is that consumption Falls
because we've tightened monetary
conditions so tightening muncher
conditions to Ordinary People means the
cost of your mortgage has gone up at the
fastest Pace in history over a one year
period mortgage rates have never risen
this fast so any money you've borrowed
has suddenly got much more expensive
your wages haven't kept up with a cost
of just basic services like food so
you're actually feeling poorer so you
can't consume as much and you start not
consuming other things people
overextended on housing because they
rushed into housing in 2020 and 2021 and
the rates have gone up for them also
just the rise in things like the cost of
oil has meant that you know gas prices
all of this stuff and then the rise in
the dollar which is a planetary
tightening all of these things get
together would suggest that the ism is
going back to 30 which is as it was in
1974 which is a terrifying full and it's
suggesting that if we're not careful we
could have a very sharp nasty recession
meaning kind of a negative five percent
GDP recession it might be short
depending what the FED does we'll come
on to that in a bit so we've got the
setup that we've seen many times in the
past we've got the forward-looking
indicators this monetary tightening
suggesting we've got some real pain to
come then the anecdotal evidence we're
seeing all the tech companies who were
bulletproof laying off stuff and giving
earnings warnings because everybody
can't raise prices enough so their
margins are falling and people have
overextended Amazon said we've hired too
many people and one of the biggest
employees in the United States okay this
is not good but the answer to higher
prices is higher prices and that's
what's happened and everybody's looking
around found himself saying well what's
going to break when stuff like this
happens the market goes down something's
going to break you know we're looking
what bank is it what hedge fund is it
the actual answer is it's the economy
the economy has just broken and the FED
are going to have to Pivot and that's
what the IMF is saying yesterday they're
saying and it's dead right the monetary
conditions that we've imposed on
corporates and people is the biggest
tightening in all history we've also got
China slowing down very fast because the
a lockdowns but also they've been in
recession and Europe with a war and
having to deal with this energy
transition so we've got no leg of global
growth here now the question is how bad
does this get let's talk some scenarios
let me ask when people use the word
recession that means tooth back to back
quarters of negative growth that's the
technical definition of a recession so
you and me I think it means a loss of
jobs and a loss in your net worth
because it's the falling of asset prices
that comes with a recession what's the
possibility of sliding to a depression
so depression I would suggest is a much
longer more extended period I don't
think that can happen right now now I
don't say that with certainty I never do
talking probabilities the reason being
is there's one piece of Magic the FED
balance sheet the FED balance sheet
disguises all bad things because what it
does is when they print money it lowers
the purchasing power of the dollar and
most of the central banks at the same
time do it and people always think it's
going to be inflation is what it leads
to it leads to something much more
pernicious and evil which is the
debasement of currency and what that
does how it manifests itself is all of
these scarce assets equities real estate
gold crypto go up a lot but all they're
doing is reflecting the devaluation of
the fiat currency itself so that
optically can change everything because
suddenly all of these things go up
everybody feels okay and it changes the
outcome people are still working off
generally but it's a trick and so I
think that trick gets played again
pretty soon this time I think the trick
gets played in a different way which was
the other Genie that came out of the
bottle in 2020 which the Europeans are
doing now some states in the US are
doing Japan is doing India is doing
which is direct transfer payments to
individuals when I heard you talking
about the hurt roll I thought you went
to the dark side man
mmt Ubi and all that stuff which is too
many Marxist but you're also looking
from the humanitarian side regardless of
what our political or economic views are
this is what is going to happen so we
have to judge it with that lens not how
we would like it to be but what it will
be and what the probabilities are a look
at the emptying office spaces because
people are not going back to work I mean
this is not an ordinary recession you
know the Apple says they're not going to
go back to work you look all the Office
Buildings empty and you know residential
real estate depends upon jobs you know
what I mean if you're saying recession
means a loss of jobs which Amazon's
laying off what happens to real estate
wherever they have an Amazon office this
is the ripple effect which is why I'm
saying that was one of the biggest
announcements I ever heard that the IMF
is saying that we're all faces one of
the biggest economic challenges since
World War II but one thing that you'd
mentioned talked about debasement of
currency so here's a penny it's copper
and in 1964 I was looking at the
quarters and die items same color do you
know what I mean it's the same color so
basically in 1964 dimes quarters and
half dollars became copper and that's
what you were talking about the basement
and I think we're paying the price for
it because I'm really glad you started
with history because macroeconomics is
history you have to look back in time
and every time people did this first was
the Chinese they printed paper money and
the Chinese Empire collapsed and then
when the Romans did the same thing
debase the currency the Roman Empire
collapsed we're looking at the end of
the American Empire I think it's going
to happen at a shocking speed so in 1974
we went from everything looks okay to
the worst recession since World War II
in four months I'm thinking it's going
to look similar because of the speed of
the monetary tightening the speed of the
rise of prices so I think we are going
to have a very ugly few months both
economically and for markets the
question is what comes next and that's
the key point if my base case comes into
play which is the Fed pivot they stop
raising rage they already started
suggesting maybe we'll pause in
September my guess is June will be the
last hike and after that they will say
well we're just going to see and we'll
see the economy start going down the
toilet and they will start thinking well
we're not going to do QT now either so
they're not going to start shrinking the
FED balance sheet and before you know it
we're going to be talking about rate
Cuts but we don't have many rates to cut
you know rates of nowhere so the only
outcome is they're gonna have to print
money the credit Market's already
starting to dry up that's usually an
indicator the housing Market's rolling
over printing money is this stuff here
yeah the silver coin you have a copper
coin made silver right basically it's
called debasing the currency which the
Romans and Chinese already did yeah
because don't forget the basement
currency Works in a simple way if you're
really thirsty and I have a bottle of
water you'll pay anything for it if
you're really thirsty and I've got five
bottles of water you're kind of thinking
yeah I probably need some of that water
I'll buy them all but at a lower price
if I say here's a million bottles of
water you don't want any of it because
there's too much water now it has no
scarcity so if you make too much of
something it becomes less valuable so if
DaVinci had created 50 million pieces of
art guess what they're worthless and so
it's that concept and what it does is if
something gets devalued versus something
else so we're not making more shares in
the s p actually what we're doing is
buying them back making less of them
therefore the s p goes up real estate
yes there's periods where we try and
create new real estate but generally
real estate prices go up versus if
they're balancing because it's a
relatively scarce asset same with gold
same with crypto so that's the phenomena
it depends how fast they deploy the
balance sheet because this balance sheet
magic optically changes markets and if
markets go up then household net worth
stabilizes and spending comes back
companies stop laying people off so it's
actually a bit of a magic trick it comes
down you know they're all saying the
ball goes up the stairs the bear goes
out the window the bear is about to go
out the window the question is when does
a ball start climbing again right and we
either go through a scenario like 2000
which was a typical old school recession
where Equity markets Unwound excesses
the bear Market was 18 months or so and
then the FED keep cutting rates and
eventually it stabilizes but if we look
at 2008 which was the next recession as
soon as the FED used the FED balance
sheet we pretty much stopped on its
tracks really quite quick after they did
that they cut rates first didn't really
help because the banks had seized up
then they used the balance sheet then
they did it again in 2010 12 16 and then
18 was the FED pivot of howl pivot where
they went from hiking to oh my God we
need to cut Trump yolded the guy you
said you could cut this out you're
killing my economy that's right
inflation had gone up the power like
well I need to do this but the economy
cannot take higher rates because
everybody's so in debt and everybody's
so old that is the problem so here we
are at 2022 right where employers not
going back to work so all these reads
REITs real estate investment trust they
own all these Office Buildings and then
there never has the FED I think it was a
30 trillion dollars debt now at 200
trillion off balance sheet and they keep
cutting rates and all this but but the
question is can they keep doing the same
thing given the conditions it's going to
take us back to the 1940s in a sec but
you're going to get destroyed because of
the supply chain issues because of
covert and all of this and your wages
won't keep up so we can destroy
household net worth and everything's
levered so all that borrowings against
houses and all the borrowings against
equities and all of the borrowings on
top of borrowings and you're going to
let the collateral go down and blow the
entire thing up but isn't that what
they're doing when they say they're
going to pay off the student loan debt
that's done forgiveness that's mmt right
which is coming whether we'd like it or
not what they're trying to do is reduce
the debt via Financial repression which
is you basically have inflation running
slightly higher so you have then
interest rates so what you want is to
reduce the real value of the that so if
you think back to your parents how much
they paid for a house and the mortgage
they had the mortgage seems laughable
it's because over time inflation raised
the value of the house and the debt
doesn't get raised so in the end the
debt is nothing so the way that is this
stuff here make the money less valuable
correct it makes the debt less valuable
right so it's okay if you're in debt but
if you're lending money it becomes
complicated but the point being is you
either have a fiscal stimulus which is
let's say the Republican view will have
a fiscal stimulus cut taxes and we'll
put some spending and what happens is is
that doesn't go to the people who are
the worst off it's creating this issue
of one percent versus 99 which everybody
can see and nobody knows how to solve
the issue is actually the balance sheet
because all of the expensive assets keep
going up because they keep printing
money so let's get richer but doing this
blanket fiscal stimulus is hard because
the rich get richer again so I think
people have thought well maybe we should
just try and give it directly to the
people who are most affected okay those
are the two choices or you do nothing
which is too late because there's too
much debt so you can't let the system
clear anymore the old way would have
been you let the system clear it's
all okay you just have a recession
everyone stops borrowing as much money
blah blah blah blah the world is 400 of
GDP in debt the world has never been
this in debt in all economic history
let's go back to the 1940s now and
figure out how bad it was then this was
the very similar setup the worst supply
chain issues massive inflation everybody
coming back in but what happened was the
economy collapsed then interest rates
came down and they stabilized and they
stabilized because the FED stabilized
them and inflation was running slightly
hot three percent and bond yields are
about two percent so real rates meaning
you in the property Market are going to
make a lot of money so negative real
rates become very good for assets and
what happened in the 1940s and 50s was a
massive economic boom what we actually
got was the value of the war debt
eroding because of this financial
oppression we had the value of assets
like housing the equity Market went up
900 over that period of time there was a
lot of fiscal stimulus because you had
to rebuild after the war and companies
were building Factory so if you think of
now companies are going to be rebuilding
factories in the United States or in
Europe and not in China so that's going
to add some stimulus yes the jobs are
not there it's robots in the factories
but it's still stimulus for the economy
the government will do some stimulus as
we've talked about interest rates will
remain relatively low inflation will
remain controllable but a little bit
higher than it has been and what that
sets off is a period of stability and
boom because there's so much technology
there's a lot of big things happening in
the world that could be so that would be
my rosy outcome would be that and I
think that is still my highest
probability that we kind of muddle
through this in a way that we don't
expect because it feels like the end of
the world imagine what it must have felt
like in 1948 all you can see is the end
of the world and then you get this
massive inflation you just think this is
the worst thing that could possibly
happen what actually came out of it was
something very different it was the rise
of Technology it was the rise of the us
as a big superpower it was a rise of the
rebuilding of Europe the rise of Japan
it was an incredible period the Bretton
Woods agreement where the dollar became
the reserve currency of the world and
all these really good things happened
for America it's the same moment all of
those things got built then every one of
them from the Geneva Convention to the
IMF to the World Bank to the United
Nations they all came in that period 47
right at the same time is this what
they're kind of alluding to but the
great reset is all going to change again
yeah it's the fourth turning and that's
where we are and this may be the final
event of the fourth turning it may be
just another phase of pushing this
towards it 2008 2020 and maybe now it
just keeps moving the world to the
direction that we all know it has to go
is we need to stop what we're doing and
change what we're doing I always say the
bond market is the truth the bond market
the job of bond market participants is
two things only what is the future rate
of operation and what's economic growth
now in the stock markets like earnings
and this and emotion and all that the
bond market is simply two things so they
usually get it right and this is a
structural shift in the global economy
if we're right here and you've got cash
and we're going to see this big whoosh
and it probably means that the economy
and asset prices there's certain things
it's going to set up for what we're
looking for if you want to generate
wealth this is the time to step up yeah
this is the best time macroeconomics is
through history and you know the fall of
Empires and all this I think we're
falling right now you know that's a huge
problem all Cycles go through it's
approximately the age of a human being
20 years 20 years 20 years you never
said that one also and this matures and
the whole thing changes fourth training
is always marked by weak leadership and
then we have that today but the people
that get hammered are the people
operating on yesterday's ideas we talked
about how bull markets make stupid
people look smart you know so you could
be really stupid and you put your money
on Apple and you got really rich or
Bitcoin oh my God I'm rich I'm smart and
then the bear Market makes shows you how
stupid you are and that's why what Ral
is saying is going to come quick all the
stupid people who think they're smart
are going to find out how stupid they
are and it's going to be a very
interesting time and when the crash
comes it comes so fast on you you don't
know what's going to hit I think the
most important message from today's
lesson is this the bull has been going
up the stairs for a while now it's about
to go out the window so that's what in
Davao Switzerland when the IMF says
we're going to face the biggest economic
headwinds and voila I can't believe that
what a gift