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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's a bunch of people coming out of the GFC who confused what the U.S government and some European governments were doing at 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 and the ECB did that and I think Japan did that as well anyways a bunch of governments did it and then there was this body of pseudo-scientific 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 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 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 I think it's 85 trillion is the world GDP so like you know 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 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 a has 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 Market action we may not be negotiating against Russia but we're enabling them to print enormous surpluses meaning I don't know if you guys saw but there was an article today Janet Yellen is traveling around basically convincing folks to not include Russian oil from a bunch of import bands so that these Russian oil tankers can be insured why so that they can sell this oil to places like China and India Etc herbals on a five-year High 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 okay look here's the thing I think we have to also be sensitive to the fact that the FED operates on a certain class of data and that data in the 21st century is pretty pathetic there was an article I think it was in the New York Times that really walked 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 in 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 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 is it trade for today so you could get an absolute precise sense of it instead we do this random sampling thing 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 seatbelt 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 owners equivalent rent is into the CPI so we can already forecast that CPI going up 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 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 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's just going to be so much pressure for them to act all roads I think lead to lower Equity prices 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 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 financiable 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 a contagion in the debt markets you could have a contagion in the commodity market so we're dealing with some really tough boundary conditions I do think that we can know these things without sampling in such a porous way and now you know we're going to look we've had a system of over correcting and under correcting for years the problem is the stakes get higher and higher as the economy grows and becomes more complicated and we have more leverage I also want to tell you guys a quick Story one of the most interesting canaries in the coal mine of all of this was two days ago and what happened to Facebook and this sort of ties a lot of this stuff together in terms of economics inflation asset prices equities everybody was saying oh gosh the Market's going to rip on the open and then on Tuesday the market you know the s p was up like 250 basis points 2.5 and the NASDAQ was also up call it maybe 300 basis points roughly but Facebook was down like 400 points right so it's a big spread and why is that and I was like this makes no sense to me what is going on with this price actually and everything was up Apple was up Google was up and so I called around and you know I was like why is this happening and this is the best explanation I got when you look at who the incremental buyer is in the stock market it tends to give you a sense of whether prices can go up or will continue to go down and the forest informed buyer tends to be retail and the most informed buyer tends to be these very large institutional hedge funds right so there's a spectrum and Facebook is an example of big Tech that is poorly owned by retail so it's mostly owned by smart money and the case that smart money makes for owning Facebook is that it's got an extremely cheap price to earnings ratio so you must own it and what they said was that looking at the Tea Leaves of consumer demand what they actually re-underwrote was that actually it's not that the price to earnings was cheap it's at the e in PE was just wrong and if they pass through all of these increases in inflation and you know their earnings expectations into Facebook it's actually more like fair value at a lower price that's why they sold it so much on a day where the market was up now why is that important well eventually you're going to touch all these other stocks as well that are going to go through earnings revisions in this recession this is where I think Wall Street has done a very poor job on behalf of retail if you look at the average estimates of earnings you will be shocked to hear that Wall Street actually has this year being record earnings next year earnings continuing to go up how is that even possible how do you see earnings continue to go up into these prints like this when you cannot pass through 80 90 increases in energy and cogs and whatnot you have to sell fewer things because there'll be fewer people with jobs to buy things I think wall Street's wrong and I think that earnings are going to go down this year and will definitely go down in 23 and so I think what probably happens is the entire world of equities needs to get repriced at a lower price and in that it's going to put enormous pressure on these cash burning non-profitable tech companies part of the government acknowledges that you have to really ring fence and protect consumers if you look at the Securities laws they're meant to protect them at all costs but the reason is because sometimes you want people to make good decisions and if you give them a bunch of Firepower they're just going to spend it and what we really did was we gave folks just a ton of money and what did they do they acted rationally they spent it now we have to take it all back I don't think that's going to be as easy or as simple as people think it's stunning that you know the reason the stock market went up dollar for dollar was actually tied to the growth in the M2 money supply the correlation was 0.92 so for every dollar that the FED printed the stock market went up by 92 cents so it stands to reason that if the FED is going to take three to five trillion dollars of value out then we have to rewrite the equity markets by three to five trillion dollars at a minimum and then you have to rewrite and re-baseline for earnings and so that's probably another 20 or 30.
you're assuming that all of a sudden like demand is stable but it's not necessarily stable in a demand contraction yes people get fired but then also new job openings change there's fewer of them they're more specific again we're at the beginning of the beginning for all of us that lived through 2000 this was four years of sheer hell and a grind now we have 30 trillion dollars that we have to work through the economy a recession we have to overcome a war we need to end and people all of a sudden assume that two or three rate hikes and five or six months of headlines are enough and on the margin maybe they're right but from my perspective you know it's an observation that we're at the beginning of something that just fundamentally has to take some amount of time to work its way through the system and so I don't understand why anybody a would give up their liquidity in this moment right now why would you why would I give up 100 million dollars of cash in my bank account I would not do that the people in Russia are suffering during this the people in the Ukraine are being murdered I mean how does it end a problem is that Biden engaged the United States in a proxy war without our real explicit discussion number one and then number two is then we pulled and we pressured Europe to really draw a hard line but the now are kind of working around it so that the countries that suffer the most are Europe now I think you starting to see the tea leaves though last week there was a group of European leaders I think it was macron draghi and one other person who went to Ukraine and if I had to bet I think the message was we need to find an organized de taunt here because there is according to Europe a lehman-like situation in terms of economic contagion that could manifest over the next months so I think that the end game is probably some organ organized negotiated detaunt and ceasefire I don't think anybody will be happy with it but I think by and large Russia is and has won you know meaning they've won economically they're selling oil like it's not going out of style it's just not selling it to Europe and to America you know they're selling it to China they're selling it in Africa they're selling it we engage in economic sanctions and I was the first one to say hey this could really work and this could be a road map for how to do it and it turned out this is the road map for how not to do it you can't on the front door say here are these sanctions and then walk around the back door and basically open the door for them these sanctions were so porous as to be like swiss cheese we focused on virtue signaling acts confiscating a plane or a boat or a house but we didn't focus on the structural things we needed to actually make the Mandate that we believe to be just to come to life and so Russia's completely worked around it their economy effectively is thriving so what have we gained because the exact opposite of what we tried to do Russia just current account Surplus more than tripled in the first four months of the year prices and gas Imports and imports plunged under the weight of sanctions well you know if you're Putin and you're looking at this you're like wow maybe I should be under sanctions more often you know what country should I invade next so not only did our sanctions package not work and not only is the treasury flailing around now trying to find even more back doors we actually opened a very dangerous precedent which is now we allowed oil to settle in currencies that are not just the United States dollar and now Russia and China are trading and settling in CNY that's not good for us this is not how you preserve the reserve currency of America if you have a country that has existed in some way shape or form you know 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 don't feel like their country is a meaningless nothing country any attempt to economically humiliate that such a country tends to have failed in the past and will continue to film 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 in a backhanded way support everybody so we end up in this odd situation where we are picking fights we cannot win and the consequences for us are economically really damaging and the consequences for everybody else to stay on the sidelines is like economic Prosperity that doesn't make any sense
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