05 November 2022

Stig brings back one of our most popular and thoughtful guests, investment expert Lyn Alden. Together, they provide an update on the volatile energy markets and the changing macroeconomic landscape.

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  • Why top-line growth was more important than profits in the prior decade for US shale producers.
  • Why we have a boom and bust cycle in the oil market.
  • Lyn’s thoughts on Warren Buffett’s investments in Chevron and Occidental Petroleum.
  • What the OPEC+ cut mean for the oil market.
  • What can the west do to lower the price of oil.
  • Whether inflation can be fixed without fixing the energy markets.
  • What happens if the inflation target of 2% changes.
  • Why the FED counterintuitively is not pushing down the bond yields.
  • What Powell should do dependent on what he wants to achieve.
  • What it means that the US is exporting inflation.
  • Why the currencies of many emerging economies are appreciating and the Euro, Pound, and Yen are not.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:02] Stig Brodersen: For today’s episode. I decided to bring back Lyn Alden, one of our most thoughtful guests we ever had on our show and needs no further presentation. Today we discussed the volatile energy markets. Thoughts are more above energy, investments, inflation, and much more. But before we jump to the episode with Lyn, I wanted to share an upcoming event hosted our free daily newsletter.

[00:00:22] Stig Brodersen: We Study Markets. We are launching a stock pace competition for all to compete in, and the first place winner will receive a thousand dollars plus a year long subscription to a TIP finance tool and much more. If you’re interested, please visit theinvestorspodcast.com/stock-competition for more information.

[00:00:40] Stig Brodersen: That is the investorspodcast.com/stock-competition. For more information, the last day to submit your stock analysis will be Sunday, November 27th. And to compete, please make sure you sign up for a free newsletter. We study markets where we announce the winners. All entries can be submitted to the email newsletters@theinvestorspodcast.com.

[00:01:05] Intro: You are listening to The Investor’s Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:01:25] Stig Brodersen: Welcome to The Investor’s Podcast. I’m your host, Stig Brodersen and dear listener, We are in good company with us, we have the one and only Lyn Alden. Welcome back to the show, Lyn.

[00:01:35] Lyn Alden: Thanks for having me back. Happy to be here.

[00:01:38] Stig Brodersen: So Lyn, it’s always great having you here on the show, and I wanted to start this interview by discussing the energy market and I’ll be referencing your wonderful blog post.

[00:01:47] Stig Brodersen: I have you right here, energy, the area under the curve for the first part of the episode. So in here you’re claiming that the industry is acting more rational than before. And you also refer to the US shale producers, which unlike in the past, are more disciplined now and they only produce profitable oil and gas.

[00:02:04] Stig Brodersen: And I found this very interesting, this statement because we think and perhaps understand that a tech company think about Facebook or Google, like they might be ho to utilize networking effects and achieve super normal profits, and they can be okay with being unprofitable for some time as they’re getting there.

[00:02:22] Stig Brodersen: However, the situation seems perhaps not to be applicable to all and gas producers. So could you please paint some color around why top line growth was more important than profits in the prior decade for US shale producers?

[00:02:35] Lyn Alden: Yeah, it’s a good comparison. I would say even in the tech space that can get over it skis, right?

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[00:02:39] Lyn Alden: So the idea of tech is. You can start out unprofitable, but because you can scale exponentially, ideally your revenues will scale faster than your expenses because, it doesn’t, you know if more people are using your server, right, that’s pretty cost effective and your increase of need for staff and servers is slower than your increase of revenue can generate with those servers.

[00:02:58] Lyn Alden: And so that’s the general idea of one of those like, big type of like scaling tech startups and so that, they can manage five, 10 years of unprofitability as long as there’s a future vision towards profitability that’s realistic. I think actually what we’ve seen with a lot of these recent growth stocks is they push that too far.

[00:03:14] Lyn Alden: I mean, they went into an environment where, you’re basically selling $20 bills for $10, which of course anybody can grow when they’re doing that. If you’re being so generous with your pricing and just kind of using your stock to pay employees and so you’re, you’re kind of saving on costs there and you’re kind of just really pushing it.

[00:03:31] Lyn Alden: It shows, even tech companies, it can be irrational in terms of not having a vision towards profitability. That’s realistic. And with oil companies just, they, there was new technology, right? So there was, not new, it was combination of new technology as specifically new implementations of those technologies.

[00:03:46] Lyn Alden: So it’s not like, there was advancements in how to get that oil out combined with, just new visualizing tools and all sorts of those new refinements, that marginal difference that helps make it more profitable or at least doable, combined with an era of record, low interest rates, they brought entries to near zero, there’s rounds of qe and then you add a number of pension funds and other entities like that being willing to buy up all the debt and equity that they’re willing to issue.

[00:04:10] Lyn Alden: And then a lot of co compensation is tied to how big your company is. Not necessarily how, you know what your net bar. Or even what your total return is over say a five year period. And so there’s a lot of just problematic incentives in the sector. And the idea is it’s always, it’s gonna keep growing, it’s always gonna be demand, we’ll get profitable eventually.

[00:04:27] Lyn Alden: And of course that happened that a lot of these companies just had no clear vision towards profitability. They were overinvesting in that P period of pricing. And like any commodity markets that get overextended, they got crushed pretty hard. Both in, in, you know, the aftermath of 2014 and then, a second time kind of not their fault in 2020, they kind of washed out any of the ones that kind of staggered, to pass that, that earlier washout.

[00:04:50] Lyn Alden: And so I think we’re in a very different environment now where, one is that due to ESG concerns and just bad returns, a lot of investors just don’t wanna, just keep pouring money into that space anymore. And so those companies are forced to more self-contained. They’re saying, Okay, instead of just issuing tons of shares in debt, we’re gonna actually focus on free cash flow generation and then we’re gonna use that free cash flow to pay down debt.

[00:05:12] Lyn Alden: Buyback shares, fund new growth and do dividends. Right. So it, it’s a more self-contained type of model, which is slower growing, but it’s more profitable, less risky, and it generally results in less just oil and gas growth. And so that’s, I mean, that’s a more rational price. And until the price gets high enough that more long duration projects come online or other energy solutions materialized that are, taking that share.

[00:05:37] Stig Brodersen: I think you bring up a good point that we see so many weird things happening in the financial markets. You also mentioned comms for CEOs, like we all react to incentives and it doesn’t mean that they’re aligned with shareholders or they’re aligned with esg, but we react to our own incentives one way or the other.

[00:05:52] Stig Brodersen: And the old market is neutrally known for being volatile. And it’s important to understand that the boomer bus cycle, for example, the all price is partly due to the time lag that it takes to add. Or it could also be removing capacity to the market. An all project can be unprofitable in total cost, but can still be rational to continue due to the differences in fixed unbearable cost.

[00:06:14] Stig Brodersen: And I don’t know Lyn, if you could give an example of such a project and then how that impacts the cycles for the price of oil.

[00:06:22] Lyn Alden: Yeah, so I mean shale oil, the reason people went to it, in addition to just, new technology, new access, basically making life out of older wells. Is that it’s fast market, right?

[00:06:32] Lyn Alden: So less upfront capital cost, but then you have quicker decline rates and so it’s, you’re just getting out oil and gas quicker. Whereas if you do a gigantic offshore platform or some of those gigantic, like opec, Wells, these are things that are very capital intensive up front.

[00:06:47] Lyn Alden: But then they have these long lifetime, kind of the same thing for like oil sands, right? So super capital intensive upfront. But then once they’re in place, they have very like low decline rates. And during that environment, that kind of like easy money, new tech environment.

[00:07:01] Lyn Alden: It was all about that rapid oil to market. And the problem is that’s like the Red Queen syndrome, so running in place and you have to run twice as fast just to stay where were going. They have to run twice as fast again, just to stay. We were going. And so that’s the problem with shale. And that’s why you can’t just go from say 5 million barrels a day to 50 million barrels a day, at one up to 10, 13, 15, whatever the number they get to right now it’s something like 12 or 13.

[00:07:25] Lyn Alden: The higher you get is just like your existing base is kind of dissolving under you as you’re also trying to expand it. And so there’s limits for how much you can push it. And in this uncertain environment, there’s not a lot of incentive to go for these longer duration projects because, they’re being told by governments and investors, Hey, we’re gonna phase you out in, five years.

[00:07:43] Lyn Alden: And, I think a lot of those targets are unrealistic, but they’re being told that, and they’re also being told, we’re not gonna give you tons of, like, financing. In fact, we’re gonna give a premium to these like green bonds over here instead of yours to make their cost to capital lower.

[00:07:56] Lyn Alden: And also like, We might do windfall tax, maybe we’ll see. And then so you’re doing a long, you have like the long term spreadsheet of, okay, do I wanna put a couple billion dollars into this like, 15 year payback period project? Probably not. And so right now we’re kind of geared towards these quicker barrels of oil.

[00:08:12] Lyn Alden: But I think in order to solve some of these structural energy problems, we’re gonna need some of these longer term projects. And right now, the incentive structure doesn’t incentivize that until maybe prices get crazy or there’s more kind of a future clarity around, maybe average pricing or that the fact that they know it’ll be in demand 10 years from now.

[00:08:30] Stig Brodersen: Yeah, like the old market is just so fascinating. And we might have a few decades back if we did the same interview back whenever, no one knew what podcasting was, we might have talked about peak oil or who knows, Like the narrative just changes so fast whenever it becomes oil. And I also think it’s important for people to understand that right now the focus is on, we shouldn’t have oil.

[00:08:49] Stig Brodersen: And I don’t want to go into the whole climate discussion necessarily, but there are plenty of oil. But it’s also important to understand that the marginal cost of that oil is just very different depending where you’re on the world. And so you can put a lot online, it just takes a lot of time. And it also requires different levels of price of oil before it makes sense.

[00:09:07] Stig Brodersen: And then you have the other effect, which is whenever the oil price is expensive enough, you have this other incentive that now renewables, it makes even more sense to do r and d in that field. Because now the opportunity cost is different than whenever, like a barrel oil was a 40 bucks. If it goes $200, like we have different incentives.

[00:09:23] Stig Brodersen: So you have this volatile environment for those reasons and so many others, I should say.

[00:09:29] Lyn Alden: Yeah. I mean, in a prior era if you saw oil say double, you’d be like, Okay, drill, baby, drill let’s, let’s get some more outta the ground. And now they’re like no, like we don’t know if it’s gonna stay here and we don’t know what the future clarity is.

[00:09:40] Lyn Alden: And so that it’s basically a different environment. It’s a more bearish, cautious, defensive type of sentiment. I mean that’s long term good for price. And that’s part of why commodity cycles are so boom bust is because of that delay between the price signal that tells you bring more oil online.

[00:09:56] Lyn Alden: And then as especially outside of shale, the number of years it takes you to actually bring that. And so usually those bear markers are characterized by oversupply that was financed during that prior boom. And then bull markets are characterized by the fact that, that spare capacity is eventually being worked out either due to ongoing demand growth or just gradual decline rates and lack of sufficient new investment cause of the bad pricing.

[00:10:18] Lyn Alden: And that price starts to go up, if you don’t respond to it right away. I mean it, even if you do it just it takes years for that new supply to come online. And in the meantime, just demand is really pressuring the existing supply. And that’s kind of the story of commodities in general and that’s why they tend to have these roughly 15 year cycles.

[00:10:34] Lyn Alden: I mean, it varies a little bit, but it’s, in some ways it’s like clockwork because it’s kind of just the overall investment cycle of what plays out. And then you could do an overlay of fiscal monetary stimulus that kind of serves as some of the transition points of, kind of economic acceleration or deceleration on top of that commodity overlay.

[00:10:50] Lyn Alden: And you get a pretty repeated cycle over the past century or so.

[00:10:55] Stig Brodersen: Yeah and going back to the point about reacting to incentives and to your point, sitting in Europe, I mean, don’t even get mis out. All the problems we have in Europe with energy and we have all the incentives that we don’t want nuclear, we don’t want oil, we don’t want gas, we only want renewables.

[00:11:10] Stig Brodersen: And we previously talked here on the show why we can’t just use renewables. Not short term not even medium term. There are so many things that we can always go into later that would required for that to happen and new technologies haven’t been invented yet. So we have these different quotas we need to fill and we can say then if we import gas for another country, that we can still fill all this quotas because that quote unquote pollution happens in another place.

[00:11:33] Stig Brodersen: cause even though it’s natural gas, it’s still fossil fuel. So far that project or here in Europe, like the backup has always been Russia. Here we are, . So this is not my plot for doing a lot of coal law. That’s not what I’m saying. It’s just like you have to choose and there are choices and consequences regardless of with path you’re going to take.

[00:11:52] Stig Brodersen: But Lyn, it seems like the trendline of the price of oil is going higher and higher. And you point out that the US broad mining supply increased 4% since the start of 2020. So you have a new research used gold as a measuring stick to normalize the price level. What do you find and what are the implications for businesses and households that has energy as an expense?

[00:12:13] Lyn Alden: If you compare oil to gold historically, it’s not that expensive in the grand’s scheme of things it’s roughly around average. Basically at that point, you’re just ignoring the fiat denominator that, everybody’s seen those doom charts of like, the dollar losing 99% of its value over XYZ time period.

[00:12:27] Lyn Alden: You. Things like that. So you ignore that, gradually debating denominator and you just compare two commodities. And so oil’s roughly fairly priced in terms of gold and even in terms of dollars, oil was it spiked up to like 140, a decade and a half ago. And even from 2007 all the way to 2014, it was like an average price.

[00:12:45] Lyn Alden: It was equal or higher than it is now. It had valleys during the global financial crisis. It had crazy peaks over a hundred. And it eventually fell for Cliff after it got a supply. Glu from that she, we talked about. But really at the current time, it’s not that expensive. Now your European gas is, that’s horrifyingly expensive.

[00:13:00] Lyn Alden: And so there are, and coal had a huge gigantic spike in price. So there are types of energy that are expensive. The oil market has not yet reached that point. I think it’s, the years ahead it’s probably going higher. And to your prior point, it’s, I think there’s a lot of issues around managing to expectations rather than managing to outcomes, which is, trying to obfuscate, get anything dirty off the balance sheet rather than making it not exist. You just like, it’s not our, you don’t want it on our balance sheet because we have a bureaucratic quota to meet. And so there’s, there was an example of European, like they were chopping down old growth forests in Canada and then shipping those wood pellets.

[00:13:37] Lyn Alden: And that’s like a irreplaceable deep carbon sink. Biodiversity naturally occurring. It’s not one of those like, human planted forests that we just keep turning ground. It’s like old growth and we’re shipping those wood pellets to burn over in Europe, and that’s counted as green. And that’s about one of the least green things I can think of.

[00:13:53] Lyn Alden: And that’s an example of managing to optics. Whereas managing to outcomes is like, more of an engineering mindset. How can we make this grid stable? How can make the air clean? How can we, balance these different optimization goals and not just push it on to some other balance cheater or put outta.

[00:14:08] Lyn Alden: And the problem is that in if an en, if a place does not have affordable energy, it becomes uncompetitive. In Europe you guys have had like some facilities shutting down, fertilizer plants, aluminum plants and things like that because they’re just no longer competitive at those electricity prices.

[00:14:23] Lyn Alden: And so that can help put a cap on electricity prices, but also puts a cap on economic growth and likely triggers recessionary conditions. So an environment that can’t get those cheap energy prices quickly becomes uncompetitive in the global market. And Europe has been a strong manufacturer, so that’s important to manage properly.

[00:14:40] Lyn Alden: Some countries that are more service oriented can get away with higher energy prices, but if you’re manufacturing base it’s a little bit more cute. And then of course any consumer, if they have to spend more money on their energy bill, especially they’re spending more on energy and then that’s revenue for another country cause you’re not producing it locally.

[00:14:56] Lyn Alden: That’s less money you can spend on local goods and services. And so that’s bad, the economy. And so that’s the environment that many countries are in. So right now the dollar’s pretty strong relative to other currencies. So actual oil’s pretty highly priced in Euro terms or pound or yen.

[00:15:12] Lyn Alden: And a lot of frontier markets, not necessarily some of the major emerging markets, they’ve actually held up better. But compared to a lot of currencies, oil’s very highly priced and it is putting a lot of pressure. And then it’s, like I said, especially the natural gas, especially electricity prices, the coal.

[00:15:26] Lyn Alden: And so it’s a matter of competitors and displacement of more discretionary purchases.

[00:15:31] Stig Brodersen: We follow Warren Buffet and his investments quite closely here on the show. And Buffet recently built a 25 billion position in Chevron, equivalent to a 8% ish ownership. And almost a 30% stake in accidental. Buffet also have a lot of warrants there.

[00:15:48] Stig Brodersen: So that’s why I came up with that number. If you only look at common stock, it’s 20 ish. What are your thoughts on the two stocks at the current market price?

[00:15:56] Lyn Alden: So I, long term, I bullish on them. Chevron is one of the more expensive ones, but it’s also one of the higher quality safe liquid ones. And so I, my approach has been more kind of geographic diversification and more different oil types.

[00:16:09] Lyn Alden: So I have, I have some of like that kind of company. I also have some of the Canadian companies, I think that there are other ones around the world. I’ve also been liking some of the pipelines. He also bought, they bought a pipeline from a company, right? So it’s about energy producers and infrastructure.

[00:16:24] Lyn Alden: I think like any good value investor and he’s of course, legendary for it. He knows what’s cheap and he knows what underinvested in and is kind of an anti bubble in many ways. And so I think he, he’s been smart to get into the energy space and obviously with his size of his book, he’s gonna go for the big liquid, longer duration type of projects.

[00:16:44] Lyn Alden: And then also, I mean, he, a couple years ago he did those Japanese trading companies, so he put a few billion dollars into those. And those are, in many ways, they’re commodity oriented. Hard asset, And some of ’em have energy exposure. So, and if you kind of tally up his overall kind of commodity energy, trans, even the infrastructure for moving it like pipeline he’s made a pretty big bet on energy and I think that’s smart because, he’s obviously, he’s got that Apple position, it’s very tech oriented.

[00:17:11] Lyn Alden: It’s got the banks. And so, I think he wanted to add to the real asset side of his book and specifically in areas that are underinvested in. So it’s kind, especially when he started doing them, it was less, it’s a little bit more contrarian than it was now. And a lot of, sometimes he gets criticized for not being super early.

[00:17:27] Lyn Alden: Like when he bought Apple, people were like, Apple really? It’s one of the biggest companies that’s already done great. And of course it did amazing after that. So, when he started getting into those oil companies, they already did pretty well. He didn’t like buy them at the bottom in like March 20.

[00:17:40] Lyn Alden: People were like, you isn’t that kind of over? And I think we’re in the beginning of like a five, 10 year story here for some of these companies and just this sector in general. And I think he sees that and that he, he’s setting up Berkshire to, be well positioned for that.

[00:17:53] Stig Brodersen: Chevron isn’t priced cheaply as you said. There’s also a limited number even for Buffet , or especially for buffet of companies you can invest in, if you’re sitting $104 billion of cash, which most of us don’t, cause there are more exciting engine companies out there for sure. But, if the mob cab is a billion dollars, it’s just not going to move the needle.

[00:18:12] Stig Brodersen: I wanted to talk about OPEC+. It’s been making headlines here recently. OPEC+ is a castle of all producing countries, including Russia, Saudi Arabia, two of the biggest, and they’re recently cut productions by 2 million barrels per day. For comparison, they produce 40 million barrels daily. And I just wanted to give you some approximate numbers for everyone to follow.

[00:18:31] Stig Brodersen: So the total oil market is around a hundred million barrels. US is just short of 20 million barrels per day. Just so like whenever we are like throwing out these numbers, there is something to compare to anyways, what explicitly not set. It seems like the members want a floor under the price of all between called a hundred to like 80 to a hundred compared to say 70 to 80 per barrel before covid.

[00:18:55] Stig Brodersen: What can the Western world do to lower the price of oil and do we even buy the premise of my question?

[00:19:02] Lyn Alden: So I would’ve reframed the question a little. So when OPEC cut, when they did that 2 million cut, it’s actually technically not a production cut. It’s a cut for the ceiling for how much they can produce.

[00:19:13] Lyn Alden: And what’s interesting is they were already deeply under, they’re already missing and underperforming that ceiling. And if you go back to opec, historically, it’s actually been a problem the other way around. Like they set a ceiling and then they’re, countries are kind of going over it trying to, know, sell a little extra around the margins, kind of cheating a little bit.

[00:19:28] Lyn Alden: And so it’s actually a matter of enforcing not going above it. Whereas in this environment, there’s been the opposite where, the majority of OPEC countries or a bunch of OPEC countries are failing to even meet their ceiling. And there’s been good research by a number of firms that specialize in energy.

[00:19:41] Lyn Alden: Kind of all out more than I do. And they’ve done like the detailed work on analyzing some of these countries and they’ve argued that they’re, a lot of these are near capacity that you know that with the current level of CapEx and some, sometimes in some cases just the amount of reserves they have and just overall kind of out maximum output, they can do that.

[00:19:59] Lyn Alden: They’re kind of tapped out, and it’s a little bit around the margins maybe, but they don’t have this gigantic swing production that many people think they do, which is different than history. And then in some, they might have to trim the production ceiling just to, if you keep failing to meet your production targets, eventually countries realize you don’t have what you say you have.

[00:20:17] Lyn Alden: And so this is, I think one way of managing the optics is also the question. cause we’re talking about OPEC+, which includes Russia due to the war, the western oil companies, they’ve had to pull out, they had capital and equipment and expertise that was part of Russia’s. And so the question is talked about oil declines.

[00:20:34] Lyn Alden: What happens in a year, two years, three years, if they can’t recoup that level of investment to keep that production as high or higher than it is now, you could see a mild fall off in Russian production, for example. And so I think it’s actually more a matter of opic not fully having the ability to keep amping it up.

[00:20:52] Lyn Alden: And then there’s also a matter of geo, geopolitical alliances, deteriorating conditions between US and Saudi relations. And so essentially what that is saying though is that there is a floor there. They’re willing to defend that floor, but also that they might, know, they might not just have a lot of spare capacity.

[00:21:07] Lyn Alden: And there are ways, North America and Europe, do you have oil and gas reserves that you can tap into? I know in Europe they run into some earthquake. So, some of these things and there sometimes there’s environmental groups that say, we don’t wanna tap into this. In the United States, Biden has issued an order of magnitude, fewer drilling permits for federal lands within the first 19 months of his administration compared to any post World War II administration.

[00:21:31] Lyn Alden: And that’s part of his campaign pro. He didn’t want drilling on federal lands. That was prior to an acute energy crisis. And so now you have that dichotomy between, I, you made a promise, but then you wanna get inflation under. There’s that, there’s also a matter of, there’s only so much refining and transportation capacity, right?

[00:21:48] Lyn Alden: So in the United States, we have pretty cheap natural gas. The question is, why can’t we just send that all over to Europe? And of course the problem is you need LNG infrastructure, which is expensive and time consuming to build. And then even if we get it there, then you need import LNG infrastructure.

[00:22:02] Lyn Alden: And then you need to like have then the transportation to get that from the, the coast to the points where you need it. And so it’s a matter of that type of infrastructure. It’s a matter of refining. So you can have all the oil you want, but if you only have so much diesel production capacity, you can have a diesel shortage, even if oil’s cheap, right?

[00:22:18] Lyn Alden: So there’s multiple parts, there’s multiple bottlenecks along the path to get right. So one thing that, North American or Europe, like Western countries can do. One is they could expand their exploration and production around the margins. They also can invest in. Infrastructure, transportation, refining, things like that.

[00:22:35] Lyn Alden: In the United States, we’ve not added a new refinery in like 50 years. We’ve expanded existing refineries, and that’s because, they’re not the most environmentally friendly sites. And there’s always opposition. Not in my backyard, no more refineries. And it’s like, well, there’s a, there is a trade off for that.

[00:22:52] Lyn Alden: Either you have to import more of that product. You’re gonna have shortages and high prices of that product if demand does not fall off with your capped or slow growing supply. And so there, there are investments that can be done. And I think it’s one of those things where when the price signals emerge immediately, maybe there’s, there’s the idea that it’s transitory or, you can blame someone.

[00:23:10] Lyn Alden: But if it goes on month after month, quarter after quarter year, eventually that starts to change how people vote. It changes how politicians draw the numbers. They wanna stay in power. That changes how companies will choose to invest longer term capital. And they say, Okay, this shortage is here to stay maybe a little bit more aggressive here now.

[00:23:29] Lyn Alden: And so, price eventually can solve a lot of things and it just takes time and it, it takes working through some of the headwinds that are present at the current time.

[00:23:38] Stig Brodersen: Yeah. And I, I don’t want this into you too much to come across as a lot of complaining about the energy markets in Europe, even though it’s probably too late.

[00:23:46] Stig Brodersen: But it just seems like there were no, no plan B . There’s so much of that infrastructure that isn’t, it just isn’t bill out and something that’s just always under invested is the power grid. Like it’s so it doesn’t sell well like to voters. And if you say, Oh let’s just have a better power grid, cause what does that mean?

[00:24:03] Stig Brodersen: Like I can still chart my iPhone, I can still, I have lights in my home and like, but that’s just not how it works. And so, so what happens is like the power grid is just a mess and they’re a mess for so many reasons. Like we like to think, I don’t know if I can come up with the best example of, whenever we cook too much food and kind of feel like, oh my God, it would be so great if someone could like take this food so I don’t have to throw it out.

[00:24:24] Stig Brodersen: Sort of like almost the same analogy I wanna say, but in energy, cause we have so much energy that’s being produced and we have so much to go to. And one of the reasons there are many reasons why a lot it goes to waste is that the power grid just can’t handle it. And it takes a lot of time to build out. So it’s not like, Oh, there’s a war now in Ukraine and like, let’s just build out the power grid.

[00:24:42] Stig Brodersen: Like no, it takes a lot of time and for power grids to be very efficient. Well, it’s slightly different in the states, even though I know you also have issues, but your power grid. But like that’s one country. It’s really difficult in Europe because something like a power grid’s just so crucial to your infrastructure.

[00:24:55] Stig Brodersen: So whenever you’re building things together, there’s just so many different conflicts you need to hash out. And also to your point before, not a lot of people want to have upgraded the power grid in their backyard. Like, no, we want better power grid. So we’re not depending on Russia, just not where I live, but I still want the benefits.

[00:25:10] Stig Brodersen: And that’s just the nature of how we are as people. I guess.

[00:25:14] Lyn Alden: Yeah, there’s been both in the United States and in Europe, there’s a problem with construction in general. It’s just, there’s a lot of headwinds for doing it. And like you point out, there’s not a lot of incentive to, run on a campaign of stronger grids unless you’re experiencing like rolling blackouts, right?

[00:25:28] Lyn Alden: So once the problem has to get severe before it becomes a voter issue, and at that point it takes years to fix, right? So that’s just how that works. And like the funny stat that we have is, the United States, it took like a year to build the Empire State Building in the thirties. We can’t build a skyscraper in a year.

[00:25:43] Lyn Alden: Now we can, we can barely build one in five years. If you try to build like high speed rail, good luck, give it a decade and you’ll still have like the permitting being done. It’s just a lot of these, a lot of countries are now, it’s very challenging to build these infrastructure project.

[00:25:57] Lyn Alden: And that includes, modernizing the grid, right? So, a lot of these goals, they wanna, electrify things more. Right? Now you can call it almost decentralized energy. So you have, let’s say, my house has electrical power, it also has a natural gas line.

[00:26:10] Lyn Alden: And then also my car goes to a, I get gasoline, which is a whole nother distribution point, right? So all those, there’s three different energy distribution points that are basically going to my home and my consumption. And the idea is we, if we wanna fold that all into just electricity, right? So instead of doing, using natural gas for my heating or my stove, a lot of communities are saying only electric now.

[00:26:31] Lyn Alden: So that’s, that gets forwarded into the electric power. And then they say, Okay, now we wanna do EVs only electric vehicles. And so that whole like gasoline, transport infrastructure that gets forwarded into the grid, right? And so then suddenly I, instead of three different channels of energy, I’m relying on one channel of energy that better be a super robust.

[00:26:51] Lyn Alden: Type of energy or energy, transportation, electricity, because if it’s not, if it’s not ready for that or if it goes down, everything goes down instead of having three different types of energy. And so that’s, I think, the challenge with this long term plan of electrification and also just the ability, even outside of energies, the ability for, kind of wealthy developed countries that are already, they already have a lot of infrastructure to build and replace that existing infrastructure.

[00:27:16] Lyn Alden: It’s just a very costly, very bureaucratic, very challenging thing to do for a variety of reasons.

[00:27:22] Stig Brodersen: And just one, one last comment on that. We, we can build that grid above the ground, but people just don’t want that. It doesn’t look nice. It’s a cheaper option because if you dig it into the ground, which you can also do, it’s just so expensive because you have this, it radiates a lot of heat, so it.

[00:27:36] Stig Brodersen: It’s just a very expensive thing to do and then you have the incentive like with the different countries. So let give you like one example like France, they’ve been providing us all this wonderful electricity and they’re run on nuclear. And so we have this thing where a lot of countries serve, for example, Germany, like the green party do not want nuclear.

[00:27:52] Stig Brodersen: And I’m not want to go in like ProCon, I’m just saying that if you don’t want that, it’s completely fine. Then you just need to use the fossil fuel. Because right now the renewables can’t just, they’re just not stable enough to do it. And even in Germany they have three different grids that probably make this way too nerdy, but have different grids and they’re not connected and that’s enough room on the cable.

[00:28:12] Stig Brodersen: They just can’t get that electricity. So you have so much is electricity that go to waste for so many reasons. Anyways, it leads me to another question here, Lyn. Can we fix inflation before we fix the energy markets?

[00:28:27] Lyn Alden: I think not persistantly. Now if you cause a deep enough recession and suppress demand enough, if enough businesses shut down due to high energy costs, if you create enough unemployment to suppress wage increases, then you can cure inflation.

[00:28:43] Lyn Alden: But it’s like cutting off your leg to fix the infection, right? It’s like that’s not what the patient asked for. What people really kind of think mean when they say that. Or like, I think that what they should mean is how can you get back to a period of disinflationary growth? And I think that’s only possible once you fix the energy situation.

[00:28:59] Lyn Alden: And even then there’s some pressures. There’s, we had a multi-decade trend of globalization towards places like China, and that’s stalling out, or in some cases, reversing, just due to one is demographics. And we’ve kinda already filled that bucket now. And also there’s of course geopolitical tensions and reasons and things like, So I think the short inch is, I’ve been describing like holding a beach pole underwater.

[00:29:19] Lyn Alden: You can, you can temporarily hold it down. You can drain the strategic petroleum reserve. You can, China’s doing recurring lockdowns, which which is actually suppressing quite a bit of fuel demand. You can do, you can tight monetary policies so much that no one’s building homes and see prices can get control and shut down fertilizer and in metals companies and you can kind of press that down by having demand kind of fall to meet, meet supply.

[00:29:42] Lyn Alden: The problem is then you start to get recession, you start to get unrest and if you then try to stimulate you out of that, those shortages are still there structurally if you have not taken that time to increase supply. And another challenging thing is that all these rate hike increases admirable as they are, they increase the cost of capital for energy companies.

[00:29:59] Lyn Alden: And so the hurdle rate for them choosing to do a new project is even higher now. And so it’s actually, it’s suppressing demand but it’s also pressing in some cases, supply arguably. And so, We’re in an environment where until they, until we grind through this, until we actually fix the energy situation, I don’t think you’re gonna get disinflationary growth.

[00:30:17] Lyn Alden: It’s kind of bouncing between, either you’re gonna get inflation or you’re gonna get recessionary like conditions with, maybe lower inflation, but nobody wants that either.

[00:30:26] Stig Brodersen: Lyn the period we are in it’s often in the financial media compared with the 1970s, early 1980s giving how central banks are raising rates and fighting inflation.

[00:30:37] Stig Brodersen: Now, the fight wasn’t equally distributed if we were looking across the globe from 1978 to 1984, Britain, Germany, and Japan cut the buffet budget deficits while hiking rates in Canada. And friends did the same thing, though, not to the same extent. The US was the exception of the major economies because vocal war hiking rates, but there were cutting taxes during the Reagan administration.

[00:30:59] Stig Brodersen: And many economists today argue that while Paul volar got the credit, the inflation environment didn’t structurally change before the monetary and fiscal policy worked in tandem. Do you agree with that assessment? And I guess depending on your answer, how does that translate into today’s environment In Western Europe and US where we are hiking rates, but are we also running huge deficits?

[00:31:21] Lyn Alden: Yeah, I mostly agree. Also, the inflation didn’t really resolve itself in the seventies until they fixed the energy situation. Going back to the prior question, right, So you had multiple energy shocks in the seventies and by the eighties those were largely sorted out. And so the combination of tight monetary policy and then, the energy situation resolved, you know that helped, that went a long way.

[00:31:40] Lyn Alden: It wasn’t just vulgar. And then you have, know, the fiscal situation’s interesting because so Reagan did boost the deficits a lot, but it’s like the deficit, that’s a percentage of GDP we have now in the US are bigger than most periods back then. So even the, it’s not just direction that matters, it’s also magnitude.

[00:31:56] Lyn Alden: And so that’s actually why I’ve used the 1940s comparison where, in the seventies, if you look at, so broad money supply was growing pretty quickly and money supply most these creative either bank lending or highs fiscal deficits. And in the seventies, the majority of the money supply growth was coming from bank lending.

[00:32:14] Lyn Alden: That was a kind of a peak demographics situation. Baby boomers were entering early adulthood, consuming, buying houses, getting jobs. And so that was a, a demand driven bank, lending driven type of inflation environment. And then we added fuel onto the fire with like, wars, guns, and butter programs, right?

[00:32:30] Lyn Alden: So that we did add some deficits to that, but that actually was a minority monetary creation direction. Whereas like in the 1940s you also had insane money supply. But it wasn’t cause of bank lending. It was because of massive fiscal deficits to fight the war. And most of fighting the war means building facilities, hiring people, trying to make like gun chips, right?

[00:32:51] Lyn Alden: So, or like supply chains and things like that. So it’s actually, it’s a type of fiscal stimulus, even though the outcome is in many cases wasted. But when they come back, a lot of that could be repurposed domestically to make cars and to make other industrial things. And. In that environment, that was a very inflation environment regardless to what the central banks wanted to do.

[00:33:09] Lyn Alden: And so I think the issue now is that we’re in more of a 1940s environment where, the past two, three years, most of the money’s play growth has come from monetized fiscal deficits to deal with some of these shocks that are happening and to deal with the fact that the system so levered that they’d rather print and let kind of defaults happen in a, kind of a fragile economy.

[00:33:26] Lyn Alden: Now if you look at, if you zoom in on the current time because of the monetary tightening, money supply growth is not growing very quickly in the US anymore. It’s been rather flat. And so that’s part of why we’re getting this kind of contraction in a number of, sectors and things like that.

[00:33:39] Lyn Alden: But the longer term story, I think, for this decade is that the money supply growth is coming from the fiscal side. And so as long as that’s unaddressed and as long as the energy situation’s unaddressed, mon money tightening can only do so much. It can hold the beach ball under the water for periods of time.

[00:33:55] Lyn Alden: But all that upward pressure on the beach ball is from those other two forces. And I’d even go further to say even the fiscal budget, it’s very hard for them to solve at this point because a lot of it is demographics, entitlement driven type of spending. A lot of it’s locked in. And then if they cut, in many cases, like the GDP growth figures we look at, that includes those deficits.

[00:34:15] Lyn Alden: So when you trim the deficits, in many cases you trim the g p growth. So if you’re trying to optimize for like debt of gdp, basically austerity works in terms of preventing you from accumulating debt. But once you’re over, hundred percent sovereign debt of GDP austerity usually is unable to push it back down.

[00:34:31] Lyn Alden: You’re kind of already past that event horizon. And so I think that’s kind of the environment we’re in the 2020s where this is gonna be a persistently inflationary force. But you know, perhaps with periods of disinflationary, fight back, hold the beach ball into the water type of environment that I think we’re in now.

[00:34:47] Stig Brodersen: And there seems to be some rumors that we don’t need to perhaps hold the baseball too long under the water, at least. There’ve been some rumors around that the inflation target might be abandoned of 2%. There seems to be at least some that suggests a three or 4% target rate. This is not like an official announcement for the, from the Fed or ecb, anything like that.

[00:35:09] Stig Brodersen: It’s just some economists that had some fun about exploring that, but some people have take noticed and there would be different implications if that inflation target would be changed. Of course, it would inflate some of the, uh, away some of the long-term public debt. It would also lead to a redistribution from creditor to a debtor, and it probably also lower trust in central banks.

[00:35:33] Stig Brodersen: Now, if we. If you were just to me, Lyn here and say, this plays out that we are gonna change this inflation target for central banks in the Western world. What are the implications for us as investors and citizens if inflation structurally moves higher or the target moves higher?

[00:35:51] Lyn Alden: Yes, that’s a good question. I mean, briefly going back to the why they would go that, so Voker for example, under his watch when he did his big tightening federal debt, the GP was 30%. And so, Powell’s dealing with 130%. So he is trying to do the Voker playbook, but he is, he’s up against forces that even Voker didn’t have to deal with.

[00:36:09] Lyn Alden: And so let’s say we fast forward and they’re unable to tighten at least in such a way that they got back, they get back to disinflationary growth. They keep choosing between either recession or inflation. They can’t manage to get disinflationary growth because of the structural force we talked about.

[00:36:23] Lyn Alden: If they then resort to higher average inflation targeting, I think that causes a number of issues. One that’s kind of like partially letting go of the beach ball a little bit, right? So I think some of the more value oriented, hard asset type of things do well, right? So that could be cash flow producing things like energy producers and pipelines and chemical companies and refin like, these kind of like harder asset under invested areas.

[00:36:44] Lyn Alden: It can also mean like hard monies like gold or Bitcoin catch a bid as you kind of have a recurrence of currency to basement. I had perceptions around, forward strength of the fee currency and people that want altern. One thing that’s challenging is, going back to the forties and thereafter when they did that financial oppression playbook of, hold rates, basically let inflation run hot compared to interest rates.

[00:37:04] Lyn Alden: Eventually people won out. And so, like there was that IMF paper by Reinhardt, Carmen Reinhart, and it was like, I think she phrased it like, you need to captive audience, right? If you’re gonna inflate the debt away, you gotta keep people in the debt, And if your money’s gonna lose value, how do you keep people in the money?

[00:37:19] Lyn Alden: And, to a less extent, this happens in emerging markets all the time. How do you keep people in the local currency? They all want dollars, right? They all want gold or dollars other assets or stable coins or Bitcoin, whatever the case may be. They want whatever it is. They don’t want the Argentine pace though, that’s for sure.

[00:37:32] Lyn Alden: And so the problem is then you generally, you turn to capital controls, right? So the United States, for example, they ban gold for 40 years. You can go to, you could go to jail for 10 years for owning a benign yellow. And that’s be, I mean, that’s what they turned to. Right? And so you also had, just, back then there was just obviously worse technology, so you had less information traveling around.

[00:37:51] Lyn Alden: You had, it was harder to move money around. And the question is, what happens when you run a financial repression playbook in the modern environment of, social media, easier ways to move money? I think that’s a new experiment we’re gonna encounter. And I don’t think anyone can fully tell you how it’s gonna work out.

[00:38:08] Lyn Alden: I think generally you, it money tries to move towards what is not being debased, which I think would again, be a variety of scarce assets. Some cash flow producing, some like more monetary. But it’s, it’s whatever is perceived as outside of that captive audience, kind of de basing.

[00:38:25] Lyn Alden: Yeah, and

[00:38:26] Stig Brodersen: I think that Lyn if you read about capital controls it looks good on, on paper, but in fact it’s really difficult to enforce and you just almost seem to have this shadow economy going on. You saw like whenever capital, uh, control was applied in Southeast Asia, whenever they try to restrict capital taking out of the country in the late nineties, how they just crashed the economy.

[00:38:49] Stig Brodersen: It’s just very difficult to do in practice. And like you mentioned before, in today’s world, it’s probably even more difficult that it’s ever been before. Transitioning into the next topic until recently, you would think that when the Fed we’re buying treasuries, it pushes down yield, but that’s actually not the case.

[00:39:08] Stig Brodersen: Could you please elaborate on this? What seems to be a very counterintuitive relationship?

[00:39:14] Lyn Alden: So the prior decade, QE was intended in part. To suppress yields, right? That it, it was one of the tools that they were using, but when actually people crunch the numbers, they found that, uh, at the time of purchases, that was not the case.

[00:39:27] Lyn Alden: That you’d actually have an environment of yields going up. And the way I like the structure, it, I, the way I frame it at least is there’s a difference between long term and short term, right? So the short term is that, when they’re not buying, financial conditions are tighter, economy’s slowing.

[00:39:42] Lyn Alden: Financial markets are tighter, and a lot of risk assets are not doing great. And people buy bonds. When the central bank starts buying, it reifies the market, it eases financial conditions. You see, they get an uptick in risk assets. People buy those and they sell the bonds. So, the fed’s buying, central banks are buying the, for the private sector is selling.

[00:40:03] Lyn Alden: They’re saying, Okay, sold. And so in the near term, it actually has the counterintuitive opposite effect. People wouldn’t expect it if the biggest buyer buys a product, the price goes down, yield to go up. You would not expect that, but that’s how it works. But if you zoom out, the question is, let’s say the Fed wanted to sell $2 trillion in treasuries that decade, could they have done it without destroying the price?

[00:40:23] Lyn Alden: I would argue many would argue no. That they basically, that even though the moment they buy it, it’s actually go, not the price. Actually, you’d expect that the cumulative effect of taking that excess supply off the market was important for holding down yields. And now that we’re seeing more inflationary pressures and we have debt at higher levels relative to gdp and there’s just supply glut of those bond issuances, a lot of people were insisting that, once the central banks try to tighten, that’s not bad for yields, but if you were actually doing supply demand analysis of who’s gonna, who’s gonna buy?

[00:40:55] Lyn Alden: It’s so much of it, who’s gonna buy it? Right now we’re an environment where, Yields are going up as the central bank. Central banks have in many cases pulled back their purchases. And so that, that’s more in line with intuition. And I think that’s more in line with the fact that we have an inflation environment and we have more acute oversupply.

[00:41:13] Lyn Alden: And actually that relationship started breaking down in March, 2020 because, during the covid crash, first it expect, it went how you’d expect, which is people sold stocks and they bought bonds, right? They’re like, Okay, we don’t know what’s gonna happen. Let’s get into treasuries. And then it got so bad and the dollar spiked because all these cash flows were on the world, were drying up, but they still have dollar dominated debt to service.

[00:41:33] Lyn Alden: So there’s a scramble for dollars and safe haven status. So everybody’s always agree, like for dollars. And then the problem is that countries with dollar diamond debt, they have to sell assets. To get dollars to service the debt. So what do they sell? They sell treasuries. And so basically people bought treasuries, they sold stocks until it crashed so hard and got so illiquid, and the dollar spiked so much that they forced sold treasuries and it broke the treasury market.

[00:41:57] Lyn Alden: They’re off their own treasury market went totally illiquid. It was like no bid. And you actually started to get yield spiking from a very low level. But at the worst point in that selloff, which is when you think there’d be maximum demand for treasuries. And that’s, again, it’s just this, it’s a mechanical supply demand problem at that point.

[00:42:12] Lyn Alden: And so that’s when the Federal Reserve had to come in and buy a trillion dollars of treasuries in three weeks. Uh, they hammered down that little spike and they fixed the liquidity situation. That was kinda the first sign of a trend change. That this is not the 2010s situation. This is more a sovereign debt crisis situation.

[00:42:28] Lyn Alden: It’s different. And that’s really materialized here in, in 2022, which is, we’ve gotten past, I think that Disinflationary, commodity oversupply, psych. That, was I’ve used the analog of the 1930s compared to the 2010s just without the dust bowl and with better technology.

[00:42:42] Lyn Alden: So it’s more fun, but it’s still kind of this static de-leveraging period. And now we’re in the 2020s, which is unfortunately more like the 1940s, which is massive fiscal spending, rising geopolitical tensions, outright war in some cases. Unfortunately analogy got more literal than when I originally made that analogy.

[00:43:00] Lyn Alden: And you know that’s more inflation environment and that’s an environment where stocks and bonds could go down together. If the central banks are not monetizing that debt, it, cause they have trouble placing that debt. So right now you have, as long as the dollar is strong for I sectors not buying treasuries.

[00:43:15] Lyn Alden: In fact they’re trimming their treasuries to defend their own currency. It’s not that their opinion is that treasuries are, overvalued. It’s just a mechanical outcome. It’s like, Hey, we wanna defend the yen. We’re gonna not buy treasuries, we’re gonna trim some treasuries. That’s how it is.

[00:43:27] Lyn Alden: Then you have feds not. They’re letting when treasuries mature off the balance sheet and you have SLR regulations, meaning that commercial banks can only buy so many treasuries. So if the three biggest balance sheets are net flat to down and there’s still issuance, then all these, like smaller balance sheets have to absorb them somehow.

[00:43:44] Lyn Alden: And that’s how you get disorderly liquid conditions with higher yields and lower prices. And so I think that, I think that 2020s is marked by sovereign debt problems and currency problems. Not necessarily the prior one was all, it blew up in the banking sector and a private leverage sector, whereas now I think it’s more sovereign debt currencies and then the, that en that underlying energy input.

[00:44:07] Lyn Alden: Cause you can’t print energy.

[00:44:09] Stig Brodersen: Yeah, it is so interesting that you make this comparison to the 1940s and not like everyone else would say, Well, high inflation. Well, we had that in the seventies and the early eighties, and so I really like that you’re such a student of history. Then the world is no short of pundits who want to give power advice, and I’m definitely guilty as charged.

[00:44:28] Stig Brodersen: Generally, whenever we talk about the call optimal monetary policy, I want to use the analogy that is, it’s as wrong as whenever a person would ask you perhaps, what should I invest in? Because the answer’s really it depends on what’s your goal. So if I’m truing the table here and of course also pawning out the irony that I’m now asking you to give power friendly advice I would change that question by asking, depending on what Paul wants to optimize for, what should he do with monetary policy.

[00:45:02] Lyn Alden: It’s a good set of questions and I feel like I have different answers depending on timeframes or how fundamental I am in my thinking, which is, my, my kind of bedrock answer is that I, so I’m not a fan of price controls, and that includes the price of money, right? So I actually kind of contest the whole notion of the way modern central banking works.

[00:45:21] Lyn Alden: I, United States is a country of 330 million people. Do I think that, that there’s one interest rate that is suitable for the entire country, is the interest rate for rural Alabama the same, rate as New York? And, is should this be set by a small committee of elders?

[00:45:36] Lyn Alden: Right? So I would say no. Right? So I kind of just, in some cases, throwout the model, but that is the model we live in. That’s the model that we operate in. So then the question becomes, what do you do with that model? So I think if Paul’s trying to optimize for inflation, which he’s actually kind of legally mandated to do, right?

[00:45:52] Lyn Alden: He’s got really three mandates. One is, low unemployment, which he’s got officially the way they. Then it’s stable pricing, which they define as 2% average inflation. They’re currently way above target, the way they measure it. So he is gotta get that down man in terms of mandates. And then they have the kind of the third shadow mandate of financial stability.

[00:46:10] Lyn Alden: So the treasury market blows up, they have no choice but to go in and fix that before it melts down. Right? So he’s got a clear mandate, which is increase unemployment and decrease inflation. So I think, using the limited tools he has, he’s kind of forced to do what he’s supposed to do.

[00:46:26] Lyn Alden: So I’m not really sure what I would do different if I was p because I think it’s almost an unsolvable problem. It’s like, how do you advise to solve an unsolvable problem or kind of a bad algorithm for what you’re supposed to do. So in, in general, I think in this environment, only solving for inflation is the wrong problem.

[00:46:43] Lyn Alden: And instead it’s how to get disinflationary. , which is mostly not a central bank question, it’s mostly a private sector and fiscal policy question. It’s mostly how do you get more energy supply? How do you get more infrastructure? Right? That kind of thing. And that’s not something Powell has any control over.

[00:46:59] Lyn Alden: He’s even said, we have no control over food and energy prices. So that might be even a hint at average inflation targeting if they, if they just can’t get the energy situation under control and they’re like, Well, we killed rents at least. So, that’s as the best we could do. Right?

[00:47:12] Lyn Alden: So I think there’s only so much any central banker can do. It’s, its the Kohisayhi Maru for people that, that, know Star Trek, right. The unsolvable situation. And so I think that’s kind of what they’re in. And the only way around that is probably eventually to change some of the mandates or to redefine how you interpret the mandates, which can include things like just different levels of inflation target.

[00:47:32] Lyn Alden: And I think, but the longer term story is I would like to see better technology so that there’s not like, a committee of like, a handful of elders setting an interest rate for 330 million people in kind of a manual process. I mean, you see things like, they do interviews, they’re like, Well, we’re gonna pencil some interest rate hikes in, and we’re gonna, It’s like, that’s how we’re running.

[00:47:49] Lyn Alden: It’s, we’re in the 21st century and we’re penciling interest rates, that we’re penciling in basically price controls for the price that sets all other prices. And so, it’s different answers for different timeframes, I guess. But I feel bad foral, I don’t know what I would do differently.

[00:48:04] Stig Brodersen: No. Like there, there are choices and consequences and he’s just trapped between a rock and hard place. Someone will get mad at him regardless of what you do. That’s, Sure. And before Lyn, you said 330 million people. I am almost inclined to say 8 billion because we hear that.

[00:48:20] Lyn Alden: Yeah, that’s true actually. Yeah.

[00:48:21] Stig Brodersen: I mean, yeah, because we hear that the US is exporting inflation given the continuous interest rate hikes. Could you please help us understand what does it mean whenever we hear that US is exporting inflation? And what is the implication of the US monetary policy to the world?

[00:48:39] Lyn Alden: So most commodities are price in dollars.

[00:48:40] Lyn Alden: So the dollar strengthening compared to most currencies, that’s making them harder to afford in their local currencies. In addition, most global financing happens in dollars, right? So if an entity in Europe wants to finance some Latin American debt, either government debt or corporate debt, there’s a good chance it’ll be in dollars.

[00:48:59] Lyn Alden: Now, there’s some in Euros, but it’s a distant second compared to dollars. And so when Powell or any, anyone at the Fed, when they tighten monetary policy, they’re basically hardening the dollar and then they’re hardening everyone’s liabilities, right? So in addition, like as you point out correctly, in addition to affecting 330 million Americans, you have like, an entity over in Turkey or Sri Lanka or Brazil or just China, country XYZ.

[00:49:24] Lyn Alden: They’re getting squeezed due to a decision by a council and another country because they’ve, for network effects, for global, he hegemony reasons for all sorts of historical reasons. And then, and also just the fact that they haven’t found a better alternative. They’re using, another country’s money and assets as their money or their reserve asset or their debt financing and that they get squeezed by that.

[00:49:47] Lyn Alden: They’re subject, they’re basically subject to that foreign power. And so when the dollar strengthens, it can help us get inflation under control, but it’s actually making it worse for the periphery. That’s kind of how this whole system’s been designed, which is to push volatility to the periphery.

[00:50:01] Lyn Alden: Right? So the core is the US secondary ring is like all the other, leading developed countries. And then the periphery is like, especially the front, the emerging market and frontier countries. We just, we push volatility to, to. Which is, many would say unjust, but that’s how systems designed and that can work as long as the treasure market is functioning because the feedback loop, one thing that has happened over time, for example, in 1980s when Voker tightened, it broke Latin America.

[00:50:27] Lyn Alden: It just, it basically calls all this, all these debt and currency crisis down there. Those big is big contributing factor to that. Whereas now a lot of those countries have more reserves than they had back then. And then another example, actually, a stronger example is late nineties, strong dollar broke Southeast Asia.

[00:50:42] Lyn Alden: It broke their situation. Now, especially Southeast Asia has very strong reserves. They’ve learned their lesson and they’ve accumulated a lot of reserves during good times. And so when the dollar strengthens, they have a lot of reserves that they can use to defend their currency and sell. And then the question becomes who breaked first?

[00:51:00] Lyn Alden: Is it the whole world or is the treasury. And the answer’s a little, I think a little bit of both, because the periphery, unfortunately, still breaks first, poorest countries the frontier markets, they just don’t have the reserve. They have the debts. They have, just weak pricing for the import commodities they need.

[00:51:16] Lyn Alden: So they unfortunately break first, but then it becomes a question of major emerging markets, kind of versus the us. So, it’s like, the question is like, can Japan and China sell more treasuries than the US private sector can buy? Right. And so each of these have like a trillion dollars of treasuries, give or take.

[00:51:35] Lyn Alden: And then you add Switzerland, it’s another developed country. But then you go into emerging markets and Taiwan’s got a ton of US assets. Brazil has decent amount of US assets, and they also have commodity exports. And so it becomes, It is like a global kind of, that, that type of knot, I forget the name of it, it’s all tied up together and it, how do you unfold that knot?

[00:51:54] Lyn Alden: And I I think the thing to watch is the treasure market because there are feedback loops here is not, that goes back to the apostle question. Powell can’t, he doesn’t have complete control over what he does because, he’s got limitations like the treasury market and things like that, that he’s got to deal with.

[00:52:09] Lyn Alden: And so it, it becomes how far can he push it? How many kind of twists or tools can he do in his shop to keep the treasure market functioning while he’s trying to tighten elsewhere. And so, yeah, basically live in a system where we do our best to push a volatility to the poorest of the world, the per.

[00:52:26] Stig Brodersen: If we look at emerging markets, they’re definitely in a world of pain in so many ways. But to your point before, it is interesting that they have stronger reserves. They’ll learn a lot from what happened in the nineties. And one of the things that they also learned was to have less debt and denominated in dollars, which just gets so much more expensive, uh, whenever the dollar gets expensive.

[00:52:44] Stig Brodersen: And because of high rates, because I was still surprised knowing that to learn that many merchant currencies, including the currencies of Brazil, Mexican, Peru, have performed better than the US all over the past or 12 months or at least this year, and much better than a traditional seen strong occurrences like Euro pound at the yen.

[00:53:06] Stig Brodersen: Of course, we could also like point to currencies like the Turkish liver and say, Well, it doesn’t go for all emerging markets. But I still want to out the irony that many emerging markets are forced to be more hawker when times get tough than the more developed economies. Why is that?

[00:53:23] Lyn Alden: Because historically they have the weaker currencies.

[00:53:26] Lyn Alden: They’re the ones that are more prone to currency crisis. And so they have to be hawkish. And that means, the US gets the luxury usually of easing into a recession and tightening into a stronger economy. Whereas a lot of emerging markets have to tighten into a weak economy just to defend from a currency crisis because the, the fed’s tightening, right?

[00:53:43] Lyn Alden: So, so they have the defending into the fact that the rich people of the world are trying to push volatility to them, and they have to use their reserves and also tightness to try their best to defend against that. And over time, some emerging markets have matured. They’ve entered the higher level of emerging markets, and so they build up more reserves and they have more resilience.

[00:54:02] Lyn Alden: So when people just say, quote, emerging markets as though it’s one group, it’s actually very different groups. And so ironically, why a lot of the bigger emerging markets are holding a better than the developed country currencies this year. Because right now it’s, a lot of them have decent reserves and they’ve been pretty hawkish.

[00:54:18] Lyn Alden: And so the areas of weakness are countries that have either a combination of energy inputs that are now higher priced. So they worsen their current account bounce and they have so much debt that they can’t raise in rates properly. So that includes like Japan, that includes, parts of Europe.

[00:54:36] Lyn Alden: And so those are the ones you’re seeing a lot of crises in. Whereas Brazil, they front ran the Fed, they jacked up interest rates super high. They also have a decent commodity situation, obviously. And so, they’re not being as punished as, some of these western sovereigns or these developed XUS solvents.

[00:54:53] Lyn Alden: And then, but you still have, Turkey, they have a lot of dollar damage debt. They don’t have a lot of reserves and then they have kind of unusual beliefs about interest rates. So, they have super high inflation and they don’t want to. Tighten the industry rates. And so, until you kind of fix the energy situation, the fiscal situation and positive rates, it’s hard for that currency to, to fully stabilize.

[00:55:14] Lyn Alden: And so it becomes a very country by country specific issue rather than, developed markets versus emerging markets. Cause even among developed countries, there are some that are, they have a ton of reserves, maybe they’re energy sufficient, right? And so they’re doing okay.

[00:55:27] Lyn Alden: And so it becomes more about the energy and the debt.

[00:55:31] Stig Brodersen: Well said Lyn, before we end this interview and I definitely wanna give you a hand off too, is there anything you feel that we haven’t covered in this interview?

[00:55:39] Lyn Alden: I think we covered quite a bit. I think it’s just it’s about, going forward it’s obviously gonna be volatile in a lot of ways.

[00:55:45] Lyn Alden: And I think it’s just important to folks on the fundamentals. Disinflationary growth. Generally comes when your necessary input costs are cheap and abundant, which is things like commodities and basic labor. And there’s, there’s freedom to innovate and grow and increase productivity, right?

[00:56:01] Lyn Alden: So when people had to farm by hand, then they got tools, then they got tractors, and then maybe get self-driving tractors, right? You keep you’ve keep increasing the productivity of a per farmer basis to feed the rest of the world. And that, that applies industry after industry.

[00:56:15] Lyn Alden: And when you go through, the long arc of history is especially once we discovered like, hydrocarbons and these denture energy sources, it’s been this upward trend of more and more productivity. But there are periods of setback. There are, wars for example are very mal-investment.

[00:56:29] Lyn Alden: They’re inflationary. Same thing with like, if there’s things that prevent productivity from increasing things that prevent business from functioning, that can suppress productivity, then if you have underinvestment. in those input costs. Those like raw commodities, that’s inflationary, that’s, it’s bad for productivity.

[00:56:44] Lyn Alden: It’s more expensive to afford basic things that we were affording cheaply before. And so I think investors would do well to think of it like that, which is just it’s very simple. It’s what are the input costs? What is the productivity like? Are we more or less product productive and efficient than we were, four years ago?

[00:56:59] Lyn Alden: And so it’s no wonder that we’re having this type of inflation. And then you overlay that, of course, with the money supply growth and the flexible ledgers that we use to try to deal with this. And so I think that’s the environment that we’re navigating, which is, we’re dealing with currency to basement, but then we’re also dealing with real world physical limits on productivity and input CapEx, that a lot of those are solvable, but they take time.

[00:57:22] Stig Brodersen: That’s so well said. It’s not too long ago. It probably was, it was just a few days ago. I said to my wife before we’re going to bed, not to put her to sleep, but I did tell her that, in 10 years people would be reading about now, like, with all the things going to happen, the financial history books are being rewritten right now.

[00:57:40] Stig Brodersen: Thank you. As always it’s always so much fun having you on the show. I’m sure the audience will like to connect with you where can they learn more about you and please also give a plug for your wonderful blog.

[00:57:50] Lyn Alden: I appreciate that. So yeah can find my work at lynalden.com. I’m also on Twitter @ LynAldenContact and so I’ve variety of free material and content that people can explore.

[00:58:00] Stig Brodersen: Fantastic. Lyn, thank you so much for taking time out of your busy schedule to speak with us here today.

[00:58:05] Lyn Alden: Yep. Thanks for having me.

[00:58:07] Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com.

[00:58:23] Outro: This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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