Speaker 1:
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Speaker 2:
My name is Michael Gaiad, publisher of the LeadLag Report. Joining me there is Jeff Snyder. Jeff, it's been a while since we did one of these spaces, but introduce yourself to the audience. Who are you? What's your background? How'd you get involved in interested markets? What are you doing currently?
Speaker 3:
Yeah, I'm with the Uroda University. It's basically a podcast, but also research and membership subscription service. Here we talk about the monetary system, what it is, how it's supposed to work, that kind of stuff macro money topics. That's our focus. My background is I was a portfolio manager for many years but migrated into investment research, monetary research, economics, that type of thing, basically because there wasn't a whole lot of answers, especially after 2008, about what actually went down and what actually has happened since then. So I've been focused, as an independent researcher, on explaining exactly what goes on, what the Urodollar system is and why it actually matters. And that's really where I am now. We've got a podcast on YouTube, like I said, and a research subscription website is Urodollaruniversity.
Speaker 2:
Okay, so you said your focus is on how the monetary system is supposed to work. Last I checked, safe collateral is supposed to be less volatile than that which you're leveraging against that safe collateral, and obviously what I'm talking about there is sovereign debt. I want to get your take on what's happened just more recently post-fitch downgrade, because it does seem like we're in yet another treasury bond market crash.
Speaker 3:
I don't know if I'd call it a bond market crash as much as a fluctuation. I mean, it's easy to look at these sell-offs as some monstrous thing, and you're right, there isn't supposed to be this amount of certainly daily volatility or even that much attention on government bonds. But it's understandable why there is, given what are supposed to be so many headwinds for the space for really everywhere. I mean, yesterday or last night was a perfect example in the Japanese government bond market, where they had a 20-year bond auction that was relatively relatively decently subscribed, but it tailed at the end there and it created a pretty substantial sell-off. So there is a definite bond negative mood. That is pervasive. But when you put it in the wider context, I mean the 10-year US Treasury, for example, is about where it was last October, despite the fact the Federal Reserve has done what you know 400 basis points in rate hikes. We've got, you know, a quarter trillion in quantitative tightening rolled off the fence balance sheet. Justin, us Treasuries, like you said, the Fitch downgrade. Janet Yellen is going crazy issuing a treasury debt which they're going to continue to issue all over for the rest of the quarter. It's probably the rest of the year too. So I mean there's any number of market headwinds. I actually take the opposite view here. It's amazing that yields aren't higher than they are now and actually the market move has been somewhat orderly, especially since the downgrade. I think it's because there's a number of competing narratives and competing data views on what's going on in the wider system, and it's almost binary at this point because there's people there's lots of people who are in the camp that inflation is secular, it's going to continue to come back, rates are going to have to go even higher at the short end, central bankers are going to have to continue to do what they're going to do. And then there's other people at the opposite end who say no. I mean, look at what's going on in China trade recession, the economic climate isn't all that great. Maybe there won't be a soft landing. A soft landing is a false narrative before the real hard-lanning hits. And it's understandable. There would be so much volatility given the extreme nature of both sides. And there really is no clarity as far as we can't just say that all the data screams one or the other. There's enough competing signals where you could make both cases and make them plausibly.
Speaker 2:
Which goes back to how the monetary system is supposed to work. To your point, there are unquestionably a lot of competing signals. If you're saying that you're surprised that yields are not higher, I'm going to make the assumption that that also means you're surprised that credit spreads are not wider.
Speaker 3:
Absolutely. I mean, that's another one why aren't credit spreads wider? And I think it's some of the credit spreads that are wider, the ones that we don't actually see much, we don't pay much attention to. I mean, I don't think there's any secret here that the biggest problem in the banking system and the credit system right now is commercial real estate, which is not something that we know. It's almost like residential mortgage bonds were 15 years ago. I don't want to make that direct comparison, but in terms of information asymmetry, the lack of information on what's going on in that part of the credit market system, we don't really see what some of the spreads are and some of the CNBS and CLOs that don't really trade all that much. It's an illiquid space to begin with. So what we're left with is hints and allegations and anecdotes that say CNBS spreads in some places have widened way out and most some of the stories that have come out have said that some of the bigger players that are trying to unload some of those assets can't even find a bid anywhere. So maybe that corporate bond spreads, for example, there's not a whole lot of attention paid to those, at least not yet. It's more attention is paid to the more esoteric and shadow parts of the credit market system.
Speaker 2:
Yeah, and you've probably seen the same things. I've seen my BXE filings have been increasing. Usually that's correlated to corporate credit spreads because of default risk premiums and that's not obviously showing itself just yet. What will it take for credit spreads to start acting a little bit more normal? I mean, the easy answer is well, once they are kind of in their refinancing rule over period respectively across all these different issuances, but at what point? What's going to take to cause some panic on the junk debt side?
Speaker 3:
I think it's clarity on the economy. I think once the soft landing narrative starts to go away assuming that it does, realizing that maybe the economic circ*mstances are much, much more significant than that credit the credit environment overall becomes more like CNBS, for example, becomes more illiquid and harder to roll over. Banks really start to tighten up across all of their lending products not just banks either, but risk aversion in general terms. Then people take a second look at some of the riskier corporate names. But right now I think most of the focus is elsewhere, and it's really again. If we do end up in a soft landing scenario where the economy avoids a recession entirely, then as a portfolio manager, you don't want to be missing out on what would be a rally. So there's a reluctance to sell and there's an itch to buy, and I think you see the same thing in the stock market too. The two are very much related, where, if we do hit that soft landing, you don't want to be the last one in the market because it'll be too late. And as long as the soft landing continues to be, I mean as long as the data continues to be ambiguous and we can't say one way or the other, I think the balance of perception is it's better to be in the risk, these parts of the risk markets, than it is to be out and be caught if the soft landing does happen, because then the rally it'll just be too late to, it'll miss the rally.
Speaker 2:
Do you understand that central banks are nervous at all about the speed of the move? I hear you about when you say it's maybe orally. I saw it push back on that just more recently. But hospitals are all fr? Yıl to get the plan out of the way, just the clear sign. But it's interrelated gauge and that's been interesting to understand here. At what point do you think the central banks are getting nervous about the speed with which yields rise and that the reason I'm saying that is One of the reasons I myself argued back in early October that there was about to be a stock market meltup was that if Bond yields were to have continued rising at the pace they were rising into October of last year, I jokingly said that meant mortgage rates would be like 20% in November. Right, that it would. Just it was you'd have like a super spike at the way that it was kind of behaving, which you don't want to see, obviously, right. So I think this is a question more of speed than anything else relative to level. At what point do you think you'd start to see some, some concerns?
Speaker 3:
well, I think, from the central bank perspective, that they're okay with this. I mean, I don't know how high they have in mind, but they they don't like the fact that yields have been the yield curve has been inverted. They consider that easing financial conditions, when obviously it's not reflecting the opposite. But from the central bank perspective, they will definitely tolerate higher yields, they'll definitely welcome higher yields because their focus is entirely on inflation risk, or what they see is inflation risk. And if the market start, if long-term yields start to rise, they'll welcome it. They'll say, yes, that's great. I don't think they have a line in the sand where they say a you know we can't go past this point. Or I don't believe they have a you know they don't knock it out their protractor and just and try to figure out what the angle is that they'll tolerate in how fast they get To some level. But as far as central banks are concerned, yeah, this, this is, this is not at all unwelcome. In fact, they, they would consider, surely do they consider to be Exactly what they're hoping for right, but wouldn't that, wouldn't that then have negative implications on on the health of banks?
Speaker 2:
You talk about them, regional banks on steroids, you know.
Speaker 3:
At that point I would like yeah, well, I mean the banking sector. As far as I began, from the official position, I think their position is that Everything's fine. We went through a bit of a crisis there and came out was it would seemingly no economic damage whatsoever. Everything seems to be hanging in, so there's a pain threshold from the official position. Is that much higher? I think it's a false confidence, of course, but you know, from as far as any kind of action on the part of the Federal Reserve or EDCB or anywhere else, I just don't see it, because, as far as they're concerned, they need to be more focused on inflation and as rates rise, assuming they rise further. That's exactly what they're gonna want to see, and they're gonna welcome higher rates as okay. Now we're getting our act together, we're getting financial conditions to finally tighten all the way across the curve, which is what they want to see, especially with the fact that they consider consumer prices to be really sticky and stubborn this year. So they're they're gonna welcome the move here in the bond market.
Speaker 2:
So that I didn't think there's so like a fusing signals at the start of the conversation. There's all kinds of you know A different takes on where inflation is now. So I'm looking at the thread and somebody noted that. Friendly reminder government bonds are still negative yielding if you measure inflation accurately. If you look at true flation right, it looks like from a goods perspective pretty much. Now I've undone most inflation shelter, obviously still big part of it. But Do you get a sense that inflation still pretty under reported here, that it's much higher than Then we think? And was it? In fairness, most people will always say that inflation tire than what's reported. Right, some of it need be true, some may not be, but where are we now? An inflation relative to the negative yielding part of the arguments for bonds.
Speaker 3:
Yeah, you'll never get a consensus on measuring consumer prices, which is almost the fool's there. It anyway. I mean you can might as well just average a phone book, if people remember with phone books where, yes, I mean there's it's always difficult the concept of inflation and consumer price increases, always difficult anyway, and you can always make cases. So we're really, we're really interested. Just ballpark assessments. Are we even close here? And I think most of the data and evidence suggests that we are that consumer price pressures have in, as you mentioned, michael, and goods have abated. Looking at some of the forward indicators, especially producer prices, which are heavily deflation area around much of the rest of the world, which is where production is mostly taking place or actually not taking place, there is a very good relationship long run between producer prices and consumer prices and you'll match up producer price indexes With consumer price indexes and what you'll see is producer price indexes tend to lead and if producer price indexes are already negative, that doesn't mean consumer prices will go negative, but it's it's a it's a very good indication that price pressures in the goods economy are. As you mentioned. We've round-tripped the supply shock. We're at the where they were in the terminal phase as far as services and some of the imputations like rent, I mean they're gonna take a while to come back down because rent is not a real number anyway the especially owners equivalent rent. So as far as the CPI is concerned, that'll continue to be a source of of positive numbers. Some of the other numbers you know the recent CPI Services prices, less shelter you look at that, they've been disinflationary, basically flat, for six months running. So there's not a whole lot of inflation pressures there. Ex-food, energy and shelter the core core, so-called that rate was actually negative, fractionally told, two months in a row. So it's slow, it's incremental, it's not at all at the pace people would like. It's like to see it, especially those at the Federal Reserve or the ECB. I mean the your consumer prices in Europe are far stickier than they are here and that's probably a product of the currency translation. The fact that the dollars up in the euro is down In general over the last couple years. You know the euro has rebounded this year. So even though consumer prices are sticky and that's really what central banks are focused on the more forward-looking stuff, especially production and trade numbers, suggest that we're. That's where the real weakness is coming from and that weakness is showing up in the disinflationary consumer prices, deflationary producer prices, and that's all leading us toward what wouldn't necessarily be the soft landing. So if you're looking at the case for disinflation as the the start of the deflationary recession, or at least in that window, and so I think that's what forms the the basis of the low yield camp, is that we can see there's weakness, of material weakness all around the world, including in consumer and producer prices. That would that would definitely argue against the soft landing eviction. Soft landing narrative.
Speaker 2:
Since you mentioned the euro and currency translation has released inflation, and you alluded to what happened with the Japanese bond auction. I want to give your thoughts on inflation in Japan now. There, I think, are two camps here. One is that they've been wanting inflation for the longest time, and all this is welcome. But the other part of this is, if I'd argue, if oil keeps on rising and the yen keeps on falling, that makes oil denoted yen surge even more. Wage inflation in Japan will keep up with that, and then that might force the BOJ to really Intervene aggressively, which might spur all kinds of reversals of the carry trade. And, as I call it is kind of the mouth or not the butterfly effect. As I call it is kind of the mouth or not the butterfly effect. Where are we with Japan? Because it seems like this is sort of the sleeper to focus on when it comes to inflationary pressure and the interaction of monetary policy.
Speaker 3:
Well, that was one of the biggest problems the Japanese had back in 2021. I mean, once the yen started to fall and oil prices were rising, they caught the Japanese economy in sort of a squeeze here and advice and they really have struggled to get out of it. Some of the recent statistics really point that out and emphasize it. The GDP report from just this week for the second quarter GDP was stellar. It was up at a 6% annual rate. But when you look at the internals, it was all just export accounting. Imports crashed at almost a 20% annual rate. That's not a good sign for any economy, and consumer and household spending was negative, almost a 2% annual rate in the quarter. Business investment was flat. So I think you're right Oil prices go up and the yen goes down. That only creates more negative pressures for the Japanese economy, which is actually struggling despite what the headline GDP is. But again, it just goes back to what we were saying before. If you want to pick out evidence for your particular position, you think inflation is stubborn. It's going to be a big problem in Japan. You've got any number of statistics that suggest that, whereas you look at it the other way and say, well, you know, japan just reported their trade numbers for the month of July and they were pretty bad. Exports contracted nominally for the first time in a couple of years. So Japan, in addition to all of these other problems, is going to have the global trade recession now bearing down on the economy too. So there's going to be no support from the external side, which makes Japan look a lot like China, which China is probably the dirtiest of the dirty shirts in the global economy right now. So I think what happens is the Bank of Japan, which they've come out and said repeatedly we might tweak yield curve control, but we're not going to we're nowhere near close to raising rates. So some of the volatility in the JGB market is sort of. I think it's enforcing the idea that yield curve control is the first step on the way to rate hikes, which the Bank of Japan had currently admits they don't want to do so, inferring that maybe there's more consumer price pressures ahead through oil and weaker yen. That maybe forces the Bank of Japan to do something that has absolutely nothing to do with its Japanese problems, of course, which is the same thing around the rest of the world. I mean, what are rate hikes going to do to stop oil prices? What are rate hikes going to do in a weakened economy to get the yen to go back up in the other direction? So I don't. There's not a whole lot of consistency here, because there's so much uncertainty across the board and it's really. You get into a situation where everything's almost binary. At this point it goes one way or the other and there's really not a whole lot of in between, which, going back to the original premise here, explains so much of the volatility. It's hard to put your finger on something and say, yes, this is exactly how this thing is going to play out.
Speaker 2:
No, no, no, just on that. And I from my vantage point, just going back to the point about everything's sort of conflicting signals and things are desynced, even when you're able to the stock market. It's like two different stock markets, right? Small caps this year are like the emerging markets of the last decade, right, in terms of how they're so disconnected from large caps. In my view, from a market perspective, there's only one way that resolves, because divergences tend to resolve in tail events. Now, I could be wrong on that, but that's sort of at least my more immediate concern and what I keep on screaming about as far as credit events. Now, you mentioned China, and I've made this point too, that for all we know, maybe China ends up being sort of the source of a real problem. Not a conspiracy theorist, but it is curious to me that Biden came out a few days ago and said that it's a ticking time bomb, just as suddenly the headlines are just hammering how bad China's economy is. First of all, are the headlines overblown, or is China in as bad of a shape as being made out to be?
Speaker 3:
Well, first I mean Michael, what she just said is absolutely correct, and I think that's the other side of the market Wire rates, in my opinion, not going up as high as maybe they should, and should's the wrong term. Here. I think there's a nervousness and anxiety, and a legitimate one, that you're right when the world does converge, it does converge in a tail event. We don't know exactly what the spark will be, but there's a number of sparks that we can look at. We talked about commercial real estate, which I think everybody knows is going to be a major problem. We don't know how big of a problem is, we don't know exactly how that would play out, but we can reasonably see that commercial real estate in the United States is going to be an issue here, and so that would be one reason why, despite the soft landing, despite the ambiguity in economic statistics, you would be negative on the economy, you would be negative on a whole bunch of stuff, and you would be long in safe and liquid instruments, and China is exactly the same way. But China could definitely be a global catalyst for a disorderly unwind, because Chinese are, first of all they're an incredibly important part of the global economy the biggest buyers of commodities and so whole economies in cold countries further down the supply chain are really sweating. What's going on in China right now? And no, I don't think the high lines are overstating or overplaying or hyperbolic the case in China because, first of all, look at CNY. China's yuan continues to fall. It's almost yesterday. It was almost at the lowest level since January 2008, matching last fall's, you know, $7.30 to the dollar, despite the fact that the PBOC has been trying to fix it stronger. Chinese commercial banks are in the markets seemingly every day. They don't seem to have a whole lot of impact. So the markets as far as you know, the currency market, which is really the other side of US dollar providers are looking at China and thinking, yeah, there's a whole lot of tail risk here too. And it's not hard to see why, because now you know we started out with a few developers and maybe they would miss some payments on their dollar bonds. We know what the real estate market is in China as a mess. The economy's not getting any better. And then it was some bigger firms and they were not just missing payments. Now they're defaulting, they're forcing by bond holders into into not of Hong Kong courts, into mainland courts to try to, to try to forestall payments and debt obligations and everything else. And then we got shadow providers that are starting to hear, you know, hear stories about their missing payments too, and they're, they're selling assets and they're and they're experiencing runs on short-term liquidity. So all of these sort of systemic signals that you would say, oh, what's going on here? That would make you really pay attention here they're all going off at the same time. And, unlike the United States or, say, japan, look at the Japanese economy. Those economic statistics and what we know of the Chinese economy is unambiguous the Chinese are in desperate trouble in the economy and everything else that goes on with it the financial, the financial noises, the illiquidity, systemic risks they're only going to make it worse. So, sitting back and looking at things from a very global perspective, it's easy to say, well, that's just China. Yes, it's a big economy. And if it, if it really gets bad there, what does that mean to me? The U? S labor market is absolutely booming and resilient. So what is a China blow up going to do to the U? S labor market? And I think that what the markets are saying and what we should, what people should, realize, is that the global economy and the global system is far more intricately connected. It's globally synchronized. It's it's not just hey China's problem, too bad for China. If something really does get out of control in China, it's going to be a big problem for everyone else around the world too, not just Japan and Koreans close, close trading parties. It'll be an issue pretty much everywhere.
Speaker 2:
That's not to mention that geopolitical consequences Right and and you know when, the, when the March regional bank dynamic was playing out, people were tweeting me saying this is your credit event. And I said, no, I don't think this is it. I said if there's going to be a credit event, it has to be something that the Fed can't, can't control, they can't necessarily preempt. So play it out. Let's say, you know, there's some kind of ripple effect in terms of you know, some kind of credit scenario credit crisis in China that might be slow moving but then suddenly become a bigger thing. Can we do anything in the US to isolate ourselves, or are we just going to have to go through volatility and pain?
Speaker 3:
I mean, that's where the Fed starts to invent its new tools. Right, that's what the Fed makes it do.
Speaker 2:
Well said, they invent new tools.
Speaker 3:
Yeah, that's what they're going to have to do. I mean, we can all see what's the next Fed tool. We all know it's going to be. It's going to be commercial real estate CMBS on buying purchase program, or whatever the acronym will be or the initialism will be. And so how do you isolate the rest of the global economy? How do you ring fence to Chinese economy from every board out? I just really know a way to do it, because the Japanese, for one, are intricately connected with Chinese in terms of dollar providing activity. So Japan one sense that's why the Japanese yen is. You put the two charts together over the last two and a half three years, they're the movement lockstep. So every risk for China is a risk for the Japanese yen and really the Japanese economy. Every risk on for China. Like during the reopening phase late last year and early this year, you saw China's yuan rally and of course, japanese yen did the same. So immediately that takes out Japan. So China, china's already impacted Japan and Korea and much of Asia, which the spillover is not just purely economic terms. We see it in financial terms too. Let's look at India's rupee just hit a record low after being really the Reserve Bank of India had put a floor under the rupee for what? 10 months now? And all of a sudden the rupee gets to a record low, starts to fall below. That floor In India's economy is nothing like China or Japan or anywhere else in Asia. India's economy is actually doing really well and yet they spill over. Potential fallout is reaching the Indian rupee for a variety of reasons, but suggesting that there are systemic risks here, and how do you stop those? Because it's like the 2008 crisis. It's whack-a-mole. Every time the Fed tries to do something, to vent a new program, to put out a fire over here, it just spreads and moves to someplace else that they can never identify ahead of time because they don't really know the system all that well and really frankly, nobody does. It's that esoteric and complex. It's just once these things start going downhill, it's like the proverbial snowball Once it picks up enough mass, it's just going to keep rolling, no matter what you do, what you do beyond it. That's really why, looking at it from the other perspective, from Beijing's perspective, they're entirely focused on making sure the real estate problem liquidity crisis for their developers doesn't snowball into some disorderly systemic crisis, and the question is whether or not they can be successful at that and they're willing so far to tolerate and sacrifice economic growth and economic output and expansion and potential to maintain that orderly stability, or at least try to maintain that orderly stability which is sort of like you know it's the old expression holding the wolf by the years, because the weaker the economy gets in China, the more likely we're going to have developer problems and shadow liquidity problems too. And so they're really trying to thread a very fine needle between systemic financial risks and the problems and consequences for lack of economic growth which the global trade recession is only making worse, because the Chinese were kind of hoping that we'd get some of a rebound and boost this year from the external sector, when it's been the exact opposite. So, as far as a confluence of really awful risks that right now are not necessarily risks they're actually playing out in, as you mentioned, slow motion effect, you know it's never a foregone conclusion, it's never inevitable. You can see why markets are treating China the way that they are and they're starting to. You know they're really not starting to, but they're really thinking about what happens if this really does go further. Not only will there be economic consequences as far as you know the Chinese economy, but what are the potential pathways for a financial spillover beyond just, you know, a couple of minor defaults and dollar bonds?
Speaker 2:
I keep seeing these headlines, jeff, of you know, the Japanification of China, and I keep going back to. They keep talking about China on the path of Japanification. Meanwhile, it seems like the US is on the same trajectory and path, just given debt levels. What happens if we're in this kind of, you know, multi-debted period where China just languages? I mean, I find it hard to believe that the US economy and market can just diverge if you know, china goes away of Japan.
Speaker 3:
Well, I mean this part of de-globalization. You know, I agree with you that the United States has been on the Japanification path since August 9th of 2007. So we're, you know, 16 years into it already. Whether people realize it or not, that's been the case and that's one of the reasons why interest rates have been so low for as long as they have. It has nothing to do with the second quantitative easing. It's the fact that there's low economic growth and the more we de-globalize, the more you know China has to take a step back in everything else. The worst that becomes for everyone else, which I mean, historically speaking, we go through these periods of de-globalization. De-globalization are closely tied to monetary system effects and in conditions anyway. But I mean from the Chinese perspective, they view this as we don't want to be Japan 1989. We can't, we don't have any choice here. So that's what's really informing Xi Jinping's thought on socialism with Chinese characteristics for the new era. The most important part of that term, which is now a part of the Chinese Communist Party constitution, is the new era. And the new era, according to the Chinese, is it's no longer pre-2008. We can't count on a globalized economy. That's everybody's growing and everybody's doing well. So what the Chinese are attempting to do is not go down the path that you just laid out. They realize if they don't do anything, then they are going to end up being Japan, where they're going to have lost decade after lost decade, realizing they also have terrible demographics and a lot of other negative factors to consider too. So what the Chinese have said is we need to get through this transition period from where it was before 2008 to this robust future, and they've dedicated a number of resources, political efforts, economic efforts to create a fourth industrial revolution with Chinese characteristics under socialism, of course. So they I mean in big picture terms they can see the exact same thing that you do, and they're trying desperately to avoid that fate, which I don't think they're going to have any success with, because you think about what they've done so far. They spent how many years of trying to get the real estate bubble under control and they've sacrificed how much economic output and expansion potential to do so, and what progress have they made? They're still in the same negative situation they were five, six years ago, with even less of an economy to support it, so trying to get to this magical new future where China invents all of these fourth industrial revolution technologies that nobody has any idea what they would even look like. It's not just pie in the sky, it's basically science fiction. But the reason they're doing that is because they again, michael, they see exactly what you do in absent. If they're not, if they don't do anything, then they end up being Japan, which is absolutely the worst case for the side, especially for the Chinese government. You know, stock buybacks certainly have their place. It's not like we should outlaw them. They're not necessarily the worst things in the world, but getting out of hand. I mean, it's part and parcel with the low economic growth, high liquidity fears, environment where companies, instead of investing productively, choose instead to either use their own internal profit resources to buy back their shares, which is really nothing more than a monetary redistribution, and it's redistribution in a most in a very unproductive way, because, instead of money and credit being channeled into the economy, as you're pointing out, which is what we would like to happen successful companies building upon their successful by building more of their own company and hiring people investing in the real economy, do so With stock buybacks. You're just channeling much of those proceeds into an unproductive use, which is, you know, chasing asset prices, which would be fine. If the stock market was raising funds for new startups, then it would be a productive redistribution, because then you would have profits from a successful business that gets redistributed to the stock market. That then goes to startup companies and innovations that are raising money through IPOs, and then it would just be, you know, another step in a productive chain. That's not really what happens here. Instead, what happens is stock prices go up, which kind of was sort of like a more tax, which causes other companies to do the same thing, and everybody's just throwing money at the stock market rather than the real economy becomes like a casino, it's a distraction and it's unproductive. So the issue isn't necessarily the debt, it's the inefficiency in the economic system that causes GDP to lag behind. So really, economic potential doesn't really support the amount of debt that's raised, either for productive or nonproductive uses.
Speaker 2:
Go back to China here. Is there anything at all that can get animal spirit to pick back up when it comes to China? Yeah, everyone's been waiting for a while for some kind of massive stimulus PBOC. You know looks like a surprise move, but it's not really much recently, but it just seems like they're really kind of stuck in terms of what they can do to try to revive activity in general.
Speaker 3:
Well, I mean the PBOC. That's, I think you know, going back to. One of the reasons why there's so much volatility and interest rates here is there's also this expectation that the worse it gets for China, the more the Chinese are going to have to come to their senses. Quote, unquote. They're going to have to say, okay, we want to. You know, we want to prioritize financial risk, but we really have more economic risk. Therefore, we're going to have to do what we used to do back in 2012 or 2009. We're going to announce this massive, monstrous fiscal spending program. The PBOC is going to lower registrates by you know, half a percent at a time and continue to do so until they need to. They're really going to try to put the massive Keynesian textbook back to use, and I think that's one of the things that you see in commodities here and there and short run situations where every time a bad number for Chinese economy comes out, commodities will pop and it'll be because, oh, now Beijing's going to come to its senses and start to do a bunch of stimulus. I think that's a low probability. I think the Chinese are desperately, deathly afraid of financial risks. They don't want to restart the financial bubbles, the real estate bubble. It's already as big as it is, as big as dangerous as it is and, as I said before, as little progress as they have made with it over however many years, they just don't think it's worth the risk. In choosing and prioritizing risk, they have shown tremendous patience and tremendous resolve to let the economy do what the economy is going to do, so long as it doesn't get out of control and really spiral into a real downside case. And so if that's what it takes to move Beijing into stimulus, by then it's already too late. But there is definitely a widespread I think it's pretty widespread belief that one of these days Beijing is going to wake up. You saw it when the PBOC started to fix the CNY, the central parity, stronger back at the end of June. You saw a lot of commodity prices pop iron and steel, for example Because everybody thought well, a lot of people thought that was the signal Beijing is finally waking up and coming to its senses. So maybe this was just a start before the massive fiscal spending program gets rolled out and instead the government just keeps talking about supporting the economy with no specifics, maybe some targeted bailouts here and there. It's one of those binary functions. That goes along with everything else. The worse it gets for China's economy, but maybe that means it'll get better. Down the road, which way do you pick? It's really hard to tell, but as far as I don't think there's any disagreement or ambiguity about how much trouble the Chinese economy is actually in, and I think there's even less ambiguity and disagreement about what that actually means for outside of China. There is definitely downside risks that are shared outside the country.
Speaker 2:
One area we haven't touched on is Russia, and Rubles had some pretty wild movement as of late. I know that we probably have largely isolated ourselves from financial volatility when it comes to Russia and the Rubles movement, but other countries may not have to the same extent, like China. What's going on with Russia kind of more recently here in terms of their rates, their currency, and how does any of that, if at all, impact these Asia dynamics?
Speaker 3:
I think it's probably difficult to have any good idea what's going on in Russia. They stopped reporting economic statistics for a while and now they're probably just making them up as they go. Their priorities are elsewhere. But you look at some of the other numbers from some of their trading partners. For example, chinese imports from Russia were actually down big in July, which I think accounts for a lot of the volatility in Rubles and everything else, because after Chinese are unable or unwilling to continue to support Russia in the way that they have over the last year and a half, that's big, big, big problems for the Russians. Same with India. India has been buying a ton, a ton of Russian energy oil and everything else. Up till now they've been able to get away with paying for in rupees, which has caused a bottleneck for Russian producers, because now they have a ton of rupees they can't use. There's been some pushback from Russian energy producers about not wanting to buy or not wanting to sell Russian energy to India using rupees, and their Indians are saying well, they maybe won't buy your stuff. The two biggest trading partners for Russia are suddenly balking at the terms that they had been operating under beforehand. It's a pretty worst. I mean there's no clarity on the Russian economy, there's no help from anywhere else. I think that explains the volatility, whether it's especially the Chinese side. Are the Chinese playing some kind of political game here, or is it just a reflection of the Chinese economic situation, where they just don't have the capacity to import a bunch of Russian stuff like they had been? That's an open question. I think it's more of an economic than not. But as far as Russia's position goes, yeah, I mean, they're in a really rough shape here. I think that's what the ruble is reflecting Not that there's a whole lot of volume in rubles to begin with, but it's really just as bad as things have been there. They can get worse. They can actually get a lot worse, especially if India and China start rethinking all of their relationships. I think there's a compelling argument. The reason China reopened last year and ditched to zero COVID policy was because the Yuan got down to 730. I don't think that was the only consideration, obviously, but I think that was the last straw. I don't think it was coincidence that as soon as that happened, after the PBOC tried to intervene in the currency, got commercial banks to intervene in the currency and it didn't seem to work, just like now. All of a sudden not long after 730, you started to hear rumors about the Xi Jinping and Beijing were changing their tune on pandemic restrictions. As far as how much the currency weakness plays in the thinking of authorities and what they're going to do, I think it's a huge part. It may be that central bank doesn't want to go. They've said all along they don't really want to get involved. They don't want to make the situation worse and they are keenly aware of how rate cuts would be perceived in an environment where the currency is already near its low point from last year. I agree with you there's so many things that they're trying to consider, but I think in the end, the point here is that the risks are just piled up. The negatives are just piled up all over the place. It's not really about Beijing as much as where's the financial gravity really pulling China here? Not how much or what the authorities are going to do about it, but I think it's beyond their control at this point. There's no surprise. Everybody knows that Taiwan is under threat and that's the next step for the Chinese, and it has been for a long time. If you were Beijing and you did want to invade Taiwan. The last thing you would want is a worthless currency because, as you're being isolated from the rest of the world, you've got to be able to survive and keep the lights on at home. Otherwise you have no prayer of anything. Whether or not that's something they're considering, it depends upon how strong you think their desire is to invade Taiwan and take things in that direction. We can't deny that that's something they've considered because they've openly said so. A wand translation that continues to fall against the dollar anywhere else, that's just going to make the Chinese economy even more of a problem. I wonder if taking things in the other direction that's the reason why they haven't already. Because if you're prioritizing risk, maybe that's just too much of a risk. I'm talking about terms of the economy, what you would do to the economy in a weakened state. There's no good scenario there. There's no good way to. How do you control the currency? At the same time, you're already having problems in real estate, just enormous systemic risks that you would just be setting a match to a powder keg.
Speaker 2:
Jeff, for those that want to track some of your thoughts and follow you, aside from X slash Twitter, the word you pointed to- you can follow me on YouTube.
Speaker 3:
at Urodollar University we also have the website. Urodollar University has all the information about all that stuff.
Speaker 2:
Simple as that. Everybody. Please give a follow to Jeff and stay tuned. I'm doing another space in about 10 minutes Talk about what's going on in the cannabis space. Thank you, jeff. We did this talk last minute, but you're a wealth of knowledge and hope everybody found this interesting and useful.
Speaker 3:
Thanks for having me, michael. I really enjoyed it. Cheers everybody.
