MacroVoices #379 Bill Blain: Inflation, Central Banks, BRICS, Geopolitics, Alternative Assets & more

MacroVoices Podcast Summary

Episode 379: Bill Blaine on Inflation, Central Banks, and BRICS Alliance

• MacroVoices is a free weekly financial podcast targeting professional finance, high net worth individuals, family offices, and other sophisticated investors.
• The podcast features interviews with the brightest minds in the world of finance and macroeconomics.
• Episode 379 was produced on June 8th, 2023 and featured Bill Blaine as the guest interviewee.
• The episode discussed whether inflation is transitory, sticky or secular, the outlook for yields and equity markets, artificial intelligence, precious metals, and more.

Macro Scoreboard

• Patrick Soresna provided a macro scoreboard week over week as of the close of Wednesday, June 7th, 2023.
• The US Dollar Index was down 12 basis points to 10410 while the July WTI crude oil contract was up 652 basis points closing at $72.53.
• Copper was up 302 bases points at $375 while uranium was up 357 bases points to $56.55.
• The US 10-year treasury yield was up by13 bases points at 380 points.

Inflation and Central Banks

• The narrative surrounding inflation has changed from central banks promising control to wage and supply chain pressures causing a different inflation landscape.
• The post-COVID economy is very different, which the central banks couldn't have predicted.
• Geopolitics and trade are changing global trade, but not in the way of geopolitical conflict.
• China's mass production and becoming the cheapest to deliver economy exported deflation across the globe for 15-20 years, keeping inflation low in Europe, UK, and US.
• Ultra-low interest rates and policies designed to keep them low caused hidden financial asset inflation in stock and bond markets.
• The energy shock triggered by Ukraine brought inflation to the fore within economies.
• Different effects of inflation are seen in every economy.
• The US is coping better with inflation due to its larger internalized economy.
• Europe is surprisingly coping well and getting its act together.
• The UK has 20% food inflation and no sign of prices decreasing, causing investors to cope with the consequences.
• Inflation is here to stay, creating uncertainty in markets and making bonds less appealing.
• Real wages are playing catch up, leading to less spending and lower corporate profits.
• There is no sign of going back to low inflation drivers from the past due to changes in global supply chains and China's shift towards domestic consumption.
• Central banks may not go back to absurdly low interest rates as it causes distortions in the market.
• The marketplace may be ignoring the implications of inflation on smaller countries in the BRICS alliance.

BRICS Alliance

• BRICS countries represent more than half of the human beings on the planet and are trying to assert a new currency system to compete with the US dollar as the world's global reserve currency.
• China is the dominant power within BRICS and has been trying to create its own financial and market ecosystem for decades, including through the Belt and Road project.
• BRICS has become an actual organization with its own investment bank in Shanghai, and they are discussing whether they should have their own equivalent of the IMF and currency to compete with the dollar.
• Brazil is a major part of the global economy, but de-dollarizing would cause significant damage to their economy. India is growing faster than China but is not aligned with them.
• Russia and China have a common interest in cheap Russian oil, but they are not aligned and have been fighting on the borders of the Hindu cache.
• China is interested in engaging with Russia for its raw materials and resources, but is also watching how Russia has been performing in Ukraine.
• The BRICS alliance is not expected to become a significant force overnight, but it provides an opportunity for previously non-aligned countries to align.
• The nations of the West are more aligned with each other's goals than the oil-producing nations of the Middle East and Russia.
• The concept of virtuous sovereignty was created during British politics last summer.

Virtuous Sovereignty

• Liz Truss became the UK's leader for 49 days and caused a collapse in the Giltz market with her untested budget.
• The collapse of political competency led to a tumble in gilts, the end of the sustainable bond market, and a crash in sterling.
• A stable currency, sustainable bond market, and competent politics create virtuous sovereignty that leads to economic success.
• The US avoided political incompetency with a non-partisan agreement on the debt ceiling crisis.
• BRICS countries lack stable currencies and deep liquid bond markets necessary for reserve assets.
• Achieving virtuous sovereignty requires smart politicians and stable markets.

Global Trade and Economic Growth

• In the 1740s, Britain conquered India during a period of civil war and friction between Muslim overlords and Hindu populations.
• At that time, India's GDP was many times that of the UK and Europe.
• China also had a high GDP in the 1600s but suffered from political incompetency and monetary collapse leading to civil disorder.
• If economies recover and grow as part of a global trade organization with free and easy global trade, efficient nations with cheaper production costs will outperform others.
• China is well organized and could emerge as a strong nation if geopolitical tensions with the US are resolved.
• However, China's demographics were compromised by single-child policies which will leave them struggling.
• India is chaotic but fascinating. It may struggle to organize itself without compromising its internal politics or ongoing religious problems.

Artificial Intelligence (AI)

• AI is currently a topic of interest in global financial markets, but there is a lot of bubble going on due to overpriced stocks already up to moon.
• AI companies can be successful with a small team due to the stage where programs are writing themselves.
• The middle-class professional job market will see a massive change due to AI.
• It is difficult for even powerful AI to predict the future path of markets.
• Portfolio construction should be defensive and preserve capital while also providing some return.
• Interest rates are expected to continue rising until central bankers have it under control, which poses risks for a soft landing and corporate impact.

Alternative Assets

• The focus is on alternative assets, which can be private, unlisted, and off the wall.
• Aviation finance is a fantastic opportunity due to the economy and airline industry's analysis.
• Alternative debt strategy seeks well-mitigated risks with regular income production.
• Second-hand aircraft value has started to rise due to Boeing and Airbus' inability to deliver new aircraft as efficiently as they should be.
• Investment package based on rentals of mid-life aircraft will produce double-digit returns with comparatively low risk.
• Equities are too uncertain, and bond markets are flat-lined; alternative sources of income are necessary.
• Gold is a genuine store of value but has limited utility. Copper is essential for electric power generation, making it a game to play in global recovery.
• Lithium may face backlash against electric vehicles due to inherent difficulties.

Energy Markets

• Backlash against electric vehicles is developing due to the inherent difficulties they create.
• Lithium is a scarce resource, but people are able to produce it and put batteries together, making it a good trade.
• Energy prices have come back down quickly due to the ability to build new energy chains, as seen in Germany's ability to start importing gas within six months.

Morning Porridge Letter and Apple's Vision Pro

• The writer of the morning porridge letter covers various topics beyond inflation and central banks, including virtual reality headsets like Apple's Vision Pro.
• The Vision Pro is marketed as a game-changing product that will change perception, but may lead to information overload with constant data in front of one's eyes.
• Tim Cook's introduction of the Vision Pro is one of his first big projects and may bring innovation back to Apple.
• Apple stores are becoming outdated and lacking innovation.
• The new Vision Pro product may not be successful due to its attached battery pack.
• There are questions about what Apple is adding to the market beyond their successful iPhones.

EIA Report and OPEC

• The EIA reports a drawdown of 451,000 barrels of crude oil, but with additional factors considered it was actually 2.3 million barrels.
• US production has increased to 12.4 million barrels per day, a post-COVID high.
• OPEC+ announced they will hold their cuts and Saudi Arabia will cut an additional 1 million barrels per day.
• It is unclear if the cuts will be extended beyond July.
• The United Arab Emirates received a bigger allocation, which may have settled tensions within OPEC.
• The tactic of trying to fake out traders with mixed signals is not helpful.
• Blaming speculators for market volatility is not accurate or helpful.
• The market is more concerned about demand than support, as seen by the rapid retracement of the OPEC POP.
• Crude oil remains below the fair market level of $75 and the downtrend of lower highs and lows remains intact.

Equity Markets and Gold

• Equities are predicted to rally to 4309 on the S&P, with a recent test at 4306.
• The bear market rally may continue higher if it goes past the 61.8% FIB level.
• Watching whether the market breaks out a bull or rejects back down below the key resistance level at 4309 on the S&P futures chart will be important for the next leg.
• There has been a rotation back into small caps and broader parts of the market, with a little bit of rotation out of NASDAQ.
• The New York Stock Exchange percentage of stocks above their 50-day moving average has almost doubled in just a week, which is an interesting observation as it hasn't happened for many months.
• The US Dollar Index trade range will remain dominant going into summer until there's some sort of risk-off impulse that could potentially drive a short-term advance out of this trade range to the upside.
• Key resistance level to watch for an indication of where the next leg will come is at 105.5 for US Dollar Index.
• Gold tested all-time highs, came back down to test key support at 1948, had a nice rally off that level up to test short-term moving averages getting almost back to 2000, and now is back down to retest support at 1948.
• Gold could experience a quick ride down if support breaks at 1948, potentially dropping another $100.
• Failed rally attempts have been seen on the gold chart during a period where the US dollar has stalled.
• The bulls need to beat the 2000 to 2025 area for gold to take another stab at the highs or potentially reach all-time new highs.
• Sitting below the 2000 level increases the likelihood of consolidation at a midpoint and one more quick washout to the downside.
• Gold is viewed overall as very bullish, and a dip towards 1800 would be viewed as a compelling buy on dip opportunity.
• The short term is being watched to see if the 2000 level continues to reject all gold advances and whether there's one more leg coming.

Research Roundup

• Research Roundup includes this week's interview transcript, discussed chart deck, and links to interesting articles.

Disclaimer

• Listeners can email questions to mailbag@macrovoices.com for the mailbag segment.
• MacroVoices is for informational and entertainment purposes only, not investment advice.
• Consult a licensed investment professional before making investment decisions.
• Views and opinions expressed on MacroVoices are those of the participants, not necessarily the hosts or sponsors.
• MacroVoices, its producers, sponsors, and hosts are not liable for losses resulting from investment decisions based on information presented on the show.