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the crisis will be so severe that it'll outweigh the risk of inflation one of the things that we have to read that all of that money somehow needs to get destroyed in some way shape or form at seems very anxious about the future of our economic state but the deeper question is what's causing it behind the scenes shamath would you have paused and waited to see another card and then watched the hand developed or do you think they're doing the right thing by raising or should they have cut I think they did the worst thing possible which is they took the middle path if you think about what the Fed has the ability to do they obviously have the ability to raise and lower interest rates but what we don't talk about is they have a balance sheet that can absorb assets for the last 10 or 15 years we've had a phenomenon called quantitative easing and for folks that have don't understand what that means that is essentially the Federal Reserve buying assets out of the market and giving people money for it so that that people can then go and buy other things with that money it's very interesting what the FED is capable of so let's have a look at what the consequences are of those actions so if you think about taking 30 trillion dollars out of the global economy you know you're talking about almost you know I think it's 85 trillion is the world GDP so like you know it's it's it's almost half of an entire Year's worth of global GDP it's going to take three years probably of the slow meticulous you know running off of money you know not reintroducing new money so it seems like we're at the beginning of the beginning of something that's going to be long and drawn out kamath suggests that we can make more money and give it to people and businesses who need it this can create more jobs and make things better for everybody his ideas are different from what people usually do but they could be very helpful so if you look at those tools and you sort of play a game Tree on what the FED could have done I think that you have two choices one is you massively let inflation run amok where you have no tools to fix or you have massive illiquidity in the financial system but you actually do have tools to fix that which is through some combination of quantitative easing and tightening depending on how much liquidity you want in the system highlights the importance of proactive policies such as interest rate cuts and quantitative easing and stresses the need for government intervention to support struggling businesses and households so I think actually I disagree with Saks I think they should have done the opposite they should have raised 50 bips it would have created a little bit more chaos in the short term but it would have set us up to understand what was fundamentally broken and still give the Federal Reserve the ability to use their balance sheet and use liquidity in the future to solve the problem they took the worst option the thing that you have to do before you talk about what is happening now I think it's probably useful to go back and you have to really start at the end of the great financial crisis and the reason is there was a bunch of people coming out of the GFC who confused what the U.S government and some European governments were doing at the time there was the risk of a huge financial Contagion and so the U.S stepped in and the Federal Reserve started to use their balance sheet to buy toxic assets right and the ECB did that and I think Japan did that as well anyway a bunch of governments did it and then there was this body of pseudoscientists typic economists who coined this thing called modern monetary Theory which basically said hey you can keep printing money and introducing it into the economy to smooth things out and to actually drive long-term growth and it turns out that a bunch of government officials fell for it and if you fast forward to 2022 so 14 years later you know governments around the world had printed something to the tune of about 30 35 odd trillion dollars of money into the economy that should have never been there so the thing to remember is like we have not necessarily just been obfuscating true Supply demand in the last six or eight months when we've been talking about a recession or inflation we've been actually doing it since 2008 it's just that it's been building up in the system so one of the things that we have to realize is that all of that money somehow needs to get destroyed in some way shape or form if the true economic equilibrium is meant to be found what is true Supply what is true demand in the absence of government sloshing money around trying to prop up things that should not be propped up or buying votes or all the grifts that these folks have engaged in in the last you know decade and a half have to get undone so that's the backdrop so if you think about taking 30 trillion dollars out of the global economy you know you're talking about almost you know I think it's 85 trillion is the world GDP so like you know it's it's it's almost half of an entire Year's worth of global GDP it's gonna take three years probably of the slow meticulous you know running off of money you know not reintroducing new money so it seems like we're at the beginning of the beginning of something that's going to be long and drawn out I think they did the worst thing possible which is they took the middle path if you think about what the Fed has the ability to do they obviously have the ability to raise and lower interest rates but what we don't talk about is they have a balance sheet that can absorb assets for the last 10 or 15 years we've had a phenomenon called quantitative easing and for folks that have don't understand what that means that is essentially the Federal Reserve buying assets out of the market and giving people money for it so that that people can then go and buy other things with that money last June they started what's called quantitative tightening which is essentially reversing that policy and restricting the liquidity in the system so I think actually I disagree with sax I think they should have done the opposite they should have raised 50 bips it would have created a little bit more chaos in the short term but it would have set us up to understand what was fundamentally broken and still give the Federal Reserve the ability to use their balance sheet and use liquidity in the future to solve the problem they took the worst option which is neither did they cut nor did they raise enough and so this problem that sax represents actually is the fundamental problem now which is you won't have enough Clarity and signal to really know whether this 25 basis point enough look I've maintained now for nine months that rates are going to be long higher than we like and longer than we want and so I think it's high time that we acknowledge that we have a sticky inflation problem who's back we have to break we've known since Volker era what we need to do to do that which is you need to get interest rates to be greater than terminal inflation which means that if five percent fed funds rate is insufficient so we're gonna need to see a print of five and a half 5.75 percent and that's when you're going to have enough contraction and then the FED can come back with liquidity but if they don't take these steps we're going to be in this very choppy neither here neither their situation and I think that is what causes the real damage because it's the corrosive effects of uncertainty and what that does to lending to risk taking and that I think is really bad for the economy you also have this complicated issue already where it's really like the first time in a long long long time where debt holders actually got wiped out in the Credit Suisse debacle before the equity holders did and that's created all kinds of Ripple effects so this credit bubble is here and it's being manifested right now in these very sophisticated parts of the market and that's separate from whether we're in a recession or not that's just the bear Market that we're in right and so you have to look at asset prices today as a microcosm of a much larger Trend that has to be about fake money pushing asset prices up and now taking all that fake money out and finding out what the real price of something is and I just don't think that takes six months so for all the people that were you know fingers crossed hoping that this would be the end of it fed raises 75 we're done with this they're going to raise 75 more I just think that's not how it's probably going to be it's going to take you know 24 36 months that may mean the bottom doesn't happen for another 18 months so I think it's a we're in for a lot of choppy um Market action I don't know if you guys saw but there was an article today Janet Yellen is traveling around basically convincing folks to uh not include Russian oil from a bunch of import bans so that these Russian oil tankers can be insured why so that they can sell this oil to places like China and India we push for all these sanctions Europe gets on board and says we're going to do it and we're going to take the lumps and then we go around Europe and basically say well we kind of want to fight this proxy war but at the same time we want to try to fix inflation and we didn't mean to cause this and it's completely disorganized what's happening there was an article I think it was in the New York Times that really walk through how CPI is calculated and it's a bunch of people that work for the government that walk around with iPads building relationships with local businesses and all these random places all around the country and asking them to you know chit chat for 15 minutes and do these surveys now you would have thought that in 2023 or 2022 what the government would have said to you know Visa Mastercard American Express all the payment rails the banks and stripe is send me a feed in the following structured way so that I can actually have an absolute precise sense of inflation because inflation really only occurs when a good or a service trades hands for money right and you calculate what did that thing trade at the day before and what does it trade for today so you could get an absolute precise sense of it if you read this article your takeaway will be oh my God this is very rickety and it drives an enormous Hammer that we use to try to manage the economy that's the first thing I think you need to buckle your seat belt because the next three four five months of CPI will probably be very very bad seven eight nine percent why there are a handful of components that have gotten completely run away number one the biggest one is rent and so rent works on a three-month lag we're going to reintroduce what the true owner's equivalent rent is into CPI so we can already forecast that CPI going up oil is at 105 bucks a barrel Russia is basically trying to break the back of Europe by now messing with their Nat gas supplies the German energy Minister yesterday said that if that happens it could be a contagion equivalent to Lehman Brothers with respect to energy when you play all of these things out what you have is unfortunately rampant runaway costs that really have no mechanism to get back and check in the absence of some real governmental changes or policy on this Ukraine Russia War you know how we intend to sort of uh work or cooperate or fight with China all of these things have to get solved so in the absence of that prices are going to continue to go up and so what does the FED do how does it throw away what little credibility it has left when there's eight and nine percent inflation prints and saying we think we're done for right now you can't do that so they will over correct because there is just going to be so much pressure for them to act all roads I think lead to lower Equity prices and I think what David said astutely is we've seen the first wave but now it has to touch all these other areas for example we have gotten totally drunk on debt as a country one of the most obvious places where we've been serving alcohol far too late into the night isn't the financing of all these private Equity leverage buyouts these are sketchy companies that are sort of like you know teetering on insolvency at times where private Equity comes in levers up the balance sheet with debt they price it right to the edge of what's legally allowed or what's financible and then they go do it but that's all assuming the economy continues to grow and so if all of a sudden you have some recessionary forces or prices go up and earnings don't you'll have you know a contagion in the debt markets you could have a contagion in the commodity market so we're dealing with some really um tough boundary conditions I mean real estate most of most Americans have most of their net worth tied up in real estate and if we see a 30 30 correction in real estate it can be a real problem particularly with Rising interest rates if you have a country that has existed in some way shape or form you know the the borders could be blurry but roughly for hundreds and hundreds of years and in some cases thousands of years where internally the population of that country views themselves you know in a great way they they don't feel like their country is a meaningless nothing country any attempt to economically humiliate such a country tends to have failed in the past and will continue to fill and there tends to be other countries who view it as one of these things where well if them then why not us and then they sort of you know in a backhanded way support everybody so we end up in this odd situation where we are picking fights we cannot win and and the consequences for us are economically really damaging and then the consequences for everybody else to stay on the sidelines is like economic Prosperity that doesn't make any sense thank you
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