The story behind the interview:
Deflation is the real enemy to fear. Thanks to an aging demographic and soaring debt, it is almost inevitable. In addition, stocks and real estate are greatly overvalued. What's the answer? Kirk and Brian discuss all the above and more.
For those who prefer to read, my full interview notes are copied below.
Note: Views expressed in interviews and notes are those of interview guests and may or may not reflect those of the author.
Link to Kirk Spano's original article:
Kirk continues to project a slow growth forever economy largely driven by aging demographics of the US, China, Europe, and Japan. People are getting older and slowing spending. In addition, providing healthcare is more expensive. This is a major deflationary force with no quick, easy fix. This will be a downward pressure on the global economy that will last for 20-30 years.
In addition, we have the deflationary forces of debt: Debt prevents investing because debt must be serviced before one can invest more money.
Technology is not necessarily deflationary but disinflationary.
Deflation is the real enemy, not inflation.
Trade war with China is a big deal but Fed tightening is a much bigger deal. It’s hurting the market and will hurt the economy. Powell is not an economist and does not understand the global economy. They are discounting all the complex variables involved.
A fiat currency is a representation of the value of the underlying economy. Global trade is done in dollars because of global deals that have been done to make it that way. The dollar will still be the reserve currency even after the petrodollar goes away in a few years because we are still the best, most diversified economy in the world. No one can hold a candle to the US.
Austrian economists believe that business cycles clean themselves out, they are right about that but wrong that people will accept the recession or depression that is required.
Keynesian economists believe that intervention is needed to avoid depression/recession.
Our problem is that when things are good, we are supposed to save money and pay off the debt you accrued when times are bad.
The Fed is pulling money off their balance sheet and this is wrong, but Powell believes this should be done.
In theory, Austrians are right, but people don’t want a depression and won’t accept it.
The Fed balance sheet is the perfect candidate for helicopter money. Unfortunately, the Fed is rolling off $50B a month in assets.
CORRECTION: Kirk thought that the Fed was going to increase the amount of money coming off the balance sheet again in January, apparently not. They have reached the maximums of $50B per month now. Please see the Fed document regarding quantitative tightening: FOMC issues addendum to the Policy Normalization Principles and Plans
Corporate buybacks are around $800B this year (these have been propping up the markets). The Chinese are done buying US equities and real estate, etc., their investment in the US has fallen ~90%.
During QE, the Fed rolled up $4T in debt. As bonds come due, the Fed is not issuing new bonds. In QE, this money found its way into equities.
Real Estate is as overvalued today in relation to income as it was in 2007. The stock market is overvalued by every noteworthy metric.
Next year the ECB is planning to take money out. Fortunately, the BOJ is not planning to do so. The Fed does not need more QE but needs to not unwind their balance sheet.
Demographics matter and demographics are destiny
Helicopter money is inevitable. Who gets the money is a big deal. QE went to banks, perhaps next time there will be a big infrastructure project?
Institutions have been net sellers of stocks because pensions are securities to fund retirement, etc.
The solution is the Fed needs to leave rates alone and stop shrinking the balance sheet and we need China to come back as a marginal buyer.
Capitalism works when we recycle money, it fails when we hoard and spend into debt.
- Deflation and Fed activity will have a great impact on the stock market, real estate, global currencies, gold, and cryptocurrency.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.