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yeah I think I said it was the most radical monetary policy relative to the circumstances in history um look I I made a New Year's resolution that year not to be on TV but when I saw what was going on I couldn't control myself I haven't been on TV since apparently this isn't on TV that's a good thing but I was just um incredibly frustrated with what to me looked like a Fed that was just taking unbelievable risks for what the story of the time was inflation was 1-7 and we were buying 120 billion bonds a month this was post-vaccine successful vaccine um because inflation was one seven instead of two so we're taking this massive Gamble um where you threatened 40 Years of credibility with inflation and you're blowing up the wildest raging asset bubble I've ever seen and I knew that the worst second economies happened post-asset bubbles the 30s here Post 89 in Japan after the housing bubble blew up here so um that's what I went on um if you remember the FED did 2 trillion in QE after vaccine confirmation and after the time I went on you had the strongest momentum in employment in history on a rate of change basis at the same time their their partner in crime the administration was doing more fiscal stimulus again post-vaccine after it was clear emergency measures weren't needed than we did in the entire great financial crisis I'm not talking about before the vaccine I'm talking about after look it turned out I was right I've been wrong plenty of times in my life um the Fed was wrong they made a big mistake it's not so much that they were wrong I've been wrong a lot it's the risk reward bet they meet there's some news this morning in England 30 years ago we shorted the pound in the quantum fund I didn't know whether the pound was going to devalue what I did know was if they didn't devalue in the next six months my fund was going to lose 50 basis points if they did devalue I was going to make 2 000 basis points so it was a 40 to 1 one-way risk reward bet if you look at what the FED did the radical gamble they took to get inflation up 30 basis points from one seven to two it's to me sort of a risk reward bet you bit one to lose you bet one to lose 40.
and they lost and who really lost poor people in the United States ravaged by inflation the middle class and my guess is the US economy for years to come because of the extent of the asset bubble in time and duration and breadth that went on so they have that dual mandate so you think that in the back of of Jay Pal's mind he was like I got 30 basis points to go to get where I want to go or or was he just saying I don't see a problem yet I want full employment so I'm just gonna I'm gonna let let it ride at that point because the problem I have is that there's two there's inflation and there's asset inflation was it not clear at that point that even if you weren't at two percent there was asset inflation everywhere now how does a guy that's running the FED not why is that not on his radar screen because it's not part of their mandate in their opinion and I don't think they looked at it as a risk and to be fair to him we'd had 20 years of disinflation people tend to live in the past and he had plenty of company including on your network um so the other thing I'll say is I've been wrong a lot in my career and when I do I correct my mistake what was particularly mind-boggling to me two to three months later inflation takes off it's no longer a theory it's actually happening we come up with this ridiculous theory of transitory I mean so we have 5 trillion in fiscal stimulus we have 5 trillion in QE Janet Yellen is running down the TGA account so that's another trillion in stimulus and if you remember the monetary framework in the fall of 2020 they were no longer going to forecast they were going to be data dependent and wait till they see the whites of inflation's eyes so guess what they saw the whites of their eyes and what did they do they forecast that it was going to be transitory when you make a mistake you got to admit you're wrong and move on that nine or ten months that they just sat there and bought 120 billion in bonds I think the repercussions of that are going to be with us for a long long time so the go into whether you really whether they partners in crime with with fiscal spending as well and is that what caused I mean inflation is everywhere and we know about Putin price hike and we know about supply chain issues following the reopening but is it really the growth in in the money supply and the deficit that is the root cause of what we're seeing right now that's what that's what lit the match absolutely I mean come on and when I'm on TV I wouldn't consider this one of my better calls you've got massive fiscal stimulus you have massive monetary stimulus and the thing is already starting to percolate and of course it's what caused it what I will say there's a lot of people out there saying well Putin caused it Putin did extend it all right but can I remind everybody that when Putin invaded the CPI was seven percent year to year before he invaded and this all this crazy stuff we did was to get inflation one from one seven to two and we were already at seven but yeah once once you light the match and we found this out in the 70s inflation rotates that summer everybody kept talking about used car prices are going to come down this can come down that's not the way it works and by the way there are a lot of disinflationary things happening now in the good sectors but so the UK unions okay do you think they're going to come in in the spring and they're going to negotiate and they're going to say oh well the five-year five-year forward is 2.3 so yeah I'll take a 2.3 race right no it's like the real world Brokers they just got 24 over three years when you lose that much purchasing power so then the wage negotiations it seeps in there then of course there's customers of companies that have to raise their wages and the thing Spirals and that's what we're dealing with and that's the position the feds got themselves in with basically a boom bus policy but yeah they were not alone the fiscal stimulus was a huge part of this but to be fair they enabled it the government can't spend five trillion dollars if they don't print it yeah the the move today from from the bank of England the last I looked I haven't looked in this market you gotta look every two minutes but it was being received positively which I thought was pretty shocking I guess it was the notion that if they blink maybe we blink sooner than people thought I would have thought this is one of those you know you mentioned 30 years ago this is one of those things where they put a drop in the ocean trying to stop this thing from happening you know it's not going to work probably and it almost indicates maybe there are some underlying dislocations because rates have gone up so fast we need to worry about what happened in England today and are you surprised that I think it's a microcosm of everything we're talking about we've had 30 trillion of QE globally over the last 10 years when you have free money and you have Bond buying for that period of time it creates bad behavior okay so the Pension funds and uh the insurance companies are buying bonds repoing taking the repo money Levering that up with with equities and all kinds of stuff to try and enhance their returns and then and by the way doing so when guilts are yielding we're yielding what two eight at inflation is 10 or 15.
that doesn't happen if you don't have the environment created the last 10 years so you're the bank of England and you've got this situation on your hands now which is quite serious because I think 30 percent of mortgages there are or at least 30 are heading toward being variable rate what do you do well what you don't do is go and take taxpayer money and buy bonds at four percent when your inflation rate is over 10 you don't cure inflation with an inflationary act and buying bonds you know seven eight nine points under the inflation rate of course the markets are cheering it because you know they get a Band-Aid everybody's blinking but this is creating long-term problems down the road that 30 trillion has created all sorts of stuff that's probably under the hood I used this term a week ago I didn't even know about this thing happening and you're going to see more of it because that's what happens during asset bubbles Behavior changes recently you talked about the potential for a 69 1969 to 1982 potentially type situation for the next 10 years here in terms of the indexes being at the same level a decade from now yeah I I will say this the its conventional wisdom which I agree with that sucks go up over the long term okay the problem is we've become a little complacent about what does long term mean if you bought the Dow in 1929 you got back to even in 1954.
as you just pointed out the Dow was in 1966 where it was in 1982. when I look back at the secular bull market started in 82. let's just take a trip down memory lane we had a president who said government was the problem not the solution we had a guy who fired all the air traffic controllers in the country when they wanted a big raise we now have a president who is a union man who says he's trying to beat inflation who cheers at 24 over three year reward to the railroad unions we have a president who thinks government is the solution not the problem maybe more importantly or I'd say in terms of what we're talking about if you look at valuations back then the s p was 50 percent um I'm sorry the stock market was 50 percent of GDP it's now 150 down from 225.
that's because five years yielded 15 when I started Duquesne so real rates were high that's why we were at eight times depressed earnings we're now what 18 19 times inflated earnings that I have a very strong feeling are going to be down next year then you have the secular forces you were right on the initial ramp of globalization a fantastic thing Building Supply chains around the world increases efficiency causes disinflation that was that's been a trend for 20 or 30 years going the other way now we're disentangling all that that's going to be inflationary and then finally and we've already kind of alluded to it the last 10 years the bull market you put it all in hyperdrive with 30 trillion of QE and zero rates now the consequences of that are born and all those factors that cause that bull market they're not only stopping they're reversing every one of them we're going from QE to QT unless you live in England this week they're really unfolding so when I put all that together the one thing I I bristle a little about when I hear people on your on on your network as they say well I'm bearish but I'm bullish for the long term look you can have a period of 15 20 years 10 years where the market doesn't go anywhere that doesn't mean you can't make money you could have made money plenty of money in the 70s at various times we had two sixty percent rallies I'm not saying you know go get another job and you can't do stocks I'm just saying we've had a hurricane behind us for 30 or 40 years and it's reversing and I wouldn't be surprised in fact it's my central forecast the Dow won't be much higher in 10 years than it is today there was a time you went to college campuses and you talked about an equity and debt I think in this case it wasn't necessarily fed induced but it was entitlement indust and it could come this was 10 years ago and I think you said sometime between you know you said 2020 and 2035.
yeah so it's 2000 is it 2022 is it happening we are we are in deep trouble so everything I said at those colleges is worse in terms of the metrics except for one thing and what I miscalculated was I didn't calculate zero rates I used four percent rates but the only thing Donald Trump and Hillary Clinton agreed on in 2016 was don't cut Social Security don't cut entitlements so nothing was done Joe Biden has excruciated risk Scott because he dared mentioned maybe we we shouldn't be increasing senior Pace but if you look at at the reversal I just talked about and you use the CBO estimate which is rates at 3.8 percent which I think frankly is pretty optimistic um given all the things we've talked about um by 2027 the interest expense alone on the debt eats all Health Care spending by 2047 it eats all discretionary spending so we're now getting into fiscal dominance by the way by 49 it eats also security we're getting to the point now where the interest expense on the debt is so high that it's going to eat up our ability to basically service the Next Generation I'm not even sure about the current one okay um I brought some cyanide if you'd like one no no no I'm thinking about that and I'm thinking maybe we'll be okay but uh but because we'll be dead yeah that's what I mean um but I worry about okay let's bring it back to how hard okay is it gonna be oh it's gonna be a landing is it going to be a nice smooth like three-point Landing is it going to be a little bumpy or is it going to be you know one that you hope to walk away from right now well I don't walk away I don't know let me just say this our I will be stunned if we don't have a recession in 23 don't know the timing but certainly by the end of 23 I will not be surprised if it's not larger than the so-called average Garden variety and I don't rule out not my forecast but I don't rule out something really bad why because if you look at the liquidity situation that has driven this um we're going to go from all this QE to QT we're following an asset bubble we've been doing all this running down on the SBR which is now that's the Strategic petroleum Reserve it's now below 84 levels even though obviously oil consumption is much higher um we've had a bunch of myopic policies that have actually delayed the liquidity shrinkage QT has been almost entirely offset by Janet Yellen running down the treasury savings account by the way pretty amazing policy she could have sold 10 years for under one percent during this time and said she runs down the treasury savings account so all that has mass the liquidity shrinkage but it really comes into full gear and she can continue this for a while we can do the SBR for a while stimulative stuff but by the first quarter of 23
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