In this week’s episode, Jeff talks with StoneX’s Global Macro Strategist, Vincent Deluard @VincentDeluard, who authors weekly research reports on global macro trends, asset flows, European capital markets, and quantitative topics. We catch him literally right after the Fed hikes 75bps, and learn quickly that Lagarde was an accomplished synchronized swimmer and that having a French accent sure helps selling “French” wine in China. But what about that Fed hike? Are we saved? Are we doomed? Who’s got the cleanest dirty shirt in the global economy this time around?
In this fun chat, Vincent talks about inflation, deflation, stagflation, and even some greenflation….but don’t insult him by saying he’s an economist. He’s a researcher, making calls and taking stands. We dig into his early inflation call, what different Inflation hedges look like, his unhappiness with Silver, commodity supercycles, the ticking corporate debt timebomb, a potential short squeez to end all short squeezes in the Japanese Yen, and so much more! Vincent also gives us a hot take…that the real pain yet to come?! Yikes..except he does it all with a smile and charm. SEND IT!
Check out the complete Transcript from this week’s podcast below:
It’s Not a Fed Put, it’s a Fed Short Call! And more inflation thoughts with StoneX’s Vincent Deluard
Jeff Malec 00:07
Welcome to the Derivative by RCM Alternatives where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Happy Flag Day week everyone. Flag Bay was in here this week Sunday I think not sure when. But we’ve got some banner guests coming up on the pod See what I did there, headlined by Nancy Davis. We talked a bit about tips on this pod and I literally know next to nothing about them so excited to hear Nancy do her stuff and join us on the show. Onto this episode, which was as much fun as I’ve had with a Frenchman since well, it’s a story for another time. We’re talking with stone X’s global macro strategist Vincent deadly Warren. Covering inflation, deflation stagflation green inflation, I should have brought up, shrink flexion and hit for the cycle. We get into the Swiss milkshake JGBs global demographics when nothing gets done in 2022 and recorded right after the Fed hike 75 pips it was a bit of fun to hear his first thoughts live. It’s a good one, send it This episode is brought to you by RCMs China group. We talked a bit about China in this pod. And you know who’s been on the ground in China for years figuring out their derivatives markets are since China group which has Chinese investors looking for and funding Western trading talent. To learn more visit our cmos.com/china And now back to the show. All right, so we’re here with Vincent Deluard. did I pronounce that correctly?
Vincent Deluard 01:44
You pronounce it well enough. I’ve been here for 15 years. So I’ve heard a lot worse.
Jeff Malec 01:49
Well enough. And where your French originally?
Vincent Deluard 01:53
Yes, I’m French. I’m from Burgundy. Us About 16 years ago.
Jeff Malec 01:59
All right. Are you big Tour de France man.
Vincent Deluard 02:01
I was when I was a kid. I I mean, I have, you know, the whole doping stuff. I mean, it’s been a it’s been a bad few years. But when I was a kid, and I did not perceive any of that, I just saw the guys on the bikes and, and the landscape. I mean, it is it is one of the greatest races in the world.
Jeff Malec 02:17
Would you go watch?
Vincent Deluard 02:19
yeah, I mean, it didn’t go through my hometown a lot because it’s not really the mountain. So I will go in the opposite of Piran is like the, you know, the bigger calls like you know, when they have to like climb up. I mean, it’s very, very spectacular. And I like the atmosphere, as well. It’s a very popular feast.
Jeff Malec 02:38
Yeah, become addicted somehow here in America. So I spent coming up here in July, I’ll spend most of my July watching hours and hours of the television till two in the morning. Right now just record it and fast forward through it and catch the scenery. So it’s on my bucket list to go actually check out a racer,
Vincent Deluard 02:57
I think you you should make a trip out of it. It’s an experience, you know, being being on the spot.
Jeff Malec 03:05
And speaking of Burgundy, so some nice wines from there. I heard so yeah, that’s the rumor. And then I think you have a little bit of experience with doing some stuff in wines. What’s your wine link backstory?
Vincent Deluard 03:20
Well, really the my main qualification for this is that I look pretty French. And I talk pretty French especially 20 years ago, when I happened to be in China, I was doing the English teaching gig back then that was a big thing. It was just opening up. And then because of the way I sound, I was approached by someone who was supposedly selling French wine, do hotels and restaurant now. I only suspect that it was not really like kind of prove that. But I think I was hired mostly to look French and go to dinners in weird second tier cities in China. You know, that’s about 20 years ago that was just after the SARS pandemic so at the time like this was really different country and and my job was mostly to to get a glass of wine. Look at it in the sky. Make some absolutely absurd comment like oh, we taste of mushroom and butterflies and you know coconut and pineapple and then taste it in the most noisy way possible. And then all the guests would do at this time. You know, this one was just starting in China. So just get on Bing and just drink the whole thing in one shot. So that
Jeff Malec 04:41
you take you must have pasted it. So did it taste legit. Are you not so much?
Vincent Deluard 04:45
Well, after a few glasses. Great.
Jeff Malec 04:53
So maybe it just had been some somewhere around France? Yeah, I
Vincent Deluard 04:58
would think so. It was actually probably Moldova based on the people that I’ve seen around. And it’s a small country in Eastern Europe, which is probably next on Putin’s list. But they do produce wine, I think by the cheapest space, you can buy grapes, and then put them in a bottle with a French label on it, which I suspect what was going on.
Jeff Malec 05:17
And then did you speak Mandarin and you speak Chinese at a time?
Vincent Deluard 05:20
Very, very poorly. But it was a great source of amusement for my guests.
Jeff Malec 05:27
They like say something about wine and in Mandarin. Awesome. And so then you made it from there back to France or straight to us.
Vincent Deluard 05:36
Yeah, eventually back to France. And then I was fortunate enough, my school had a dual degree with Columbia University. So I got into that brought me to the US in Oh, six or seven. This was, you know, preweighed. So if you could open up an Excel spreadsheet, you could call yourself a hedge fund analyst. We wish I could do any I’ve been doing research ever since. And, yeah, it’s, you know, funny how the ways that life takes,
Jeff Malec 06:05
right. And so now, where are you located around California?
Vincent Deluard 06:08
Jeff Malec 06:10
Oakland. All right. So you’re rooting for the Warriors? Is that game tonight? When’s the last game? You know, you game six.
Vincent Deluard 06:17
I am more interested in the Tour de France than than the NBA basketball.
Jeff Malec 06:20
Okay. So we happen to be recording right here at 1pm. Central, which is right about exactly when the Fed just announced. So let’s do a little live fed report takedown, if you don’t mind for a quick second. What did they do? They were talking 50. I
Vincent Deluard 06:41
can’t buy 50 surprising the market? Fine. So I think he said would you fly it up these points? That’s, you know, pretty much pricing of 100 certainty. Yeah. And rates at Wow. 3.8? I think that’s a little higher than then people expected.
Jeff Malec 07:06
3.8, is there,
Vincent Deluard 07:07
a need for the terminal rate is what I see on the Bloomberg seems to be high. I mean, for me, it’s pretty low. But I think where the market was going to be pretty high. Let’s see how the market reacted. 10 years up to your two year was down and then shot up stabilizing? Yeah, looks like you know, not too much drama, which is probably what they were aiming for this point is, you know, no news is good news.
Jeff Malec 07:38
Yeah, some people are crying for just do 150 Get it over with? What’s your thoughts on the whole get it over with phenomenon?
Vincent Deluard 07:46
Well, I mean, I get the idea. I think the logic behind it is, you know, if you are, if you have very few cord injuries in Uganda, you might as well just shoot them all at once the beginning to make a big impression. I think that’s the idea. Now, of course, the problem is that after that, what do you do? I think that phenomenal problems, the 30s. You know, they can I mean, they missed it, they missed it, that there is no other way to say I mean, I and I’m not talking about like the pandemic stuff, that was fine, buying high yield bond or whatever, you had to do what you had to do back then. But, you know, up until last month, for God’s sake, they were buying mortgage backed securities with the kind of inflation we had the transitory stuff. So, you know, they, they missed it by about 12 months now. And they have to make it back. And there’s probably only so much we can hike without seriously breaking things. I think we are in the process where they start to break things. So yeah, there’s probably only a couple rate hikes they have left. So yeah, why not? You know, maybe front load everything, try to shove the market into submission, try to restore restores inflation expectations, probably isn’t the best strategy. I don’t think it’s going to work at the end of the day, I don’t think anything that they can do will work. I think inflation is secular is structural. It’s mostly a supply shock. But probably frontloading is the logical reaction to having been so late for so long
Jeff Malec 09:18
with but that didn’t do it. So we’ll see what happens. So speaking of those inflation thoughts, so you were kind of early on your inflation call versus other economists which call yourself an economist or just a researcher. I don’t know if that’s a bad word for you, economists. Yeah,
Vincent Deluard 09:41
I would prefer researcher I mean, economist economists doesn’t have any finish, right? Anybody can be an economist. That’s probably the only science or can I use science with air quotes? I don’t know if it’s recorded. Where really anyone can just show up and make a forecast and cool themselves on economy. So no, I didn’t had the audacity to call myself an economist. What I did and I liked that you said that I was earlier another word for early in my case would have been wrong. Because I was so early that so I actually started worrying about my first report inflation was, I don’t even remember Bloomberg Businessweek. In the in the summer of 2019, had a cover call the death of inflation. There was a little dinosaur and fairly dinosaur on the cover, which I thought oh my god, this is the echo of the death of equities that they published
Jeff Malec 10:30
in in 99. Magazine indicator, boom, correct.
Vincent Deluard 10:34
Right. So I went through this whole spiel of like reporting, no, it’s different inflation is not that we have always case demographic, technological, for secular inflation, and I was even pre COVID Right, and I remember my 2020 outfit was called only one forecast reflation, and then boom, COVID hits, everything shuts down, you know, all prices go negative 10, your yield goes to 50 bibs, inflation expectation goes super negative. And in April 2020, I remember looking at this and thinking, you know, this is crazy, like we are constraining supply like crazy, there’s no way we can keep everybody locked down without giving them money. So we’re going to have to like push a lot of money, this is going to accelerate so many things, you know, MMT digital transformation work from home, this is going to be the biggest inflationary shock in a generation. So I published a report in April 2020 equaled a crazy but logical call for stagflation. And I still think to this day, this is probably the best report, best title I’ve ever done. And of course, as time passed, you know, we had you know, inflation slowly accelerated reach 2%, and a little bit over it, it was called transitory back then, then it fell into the 2021, which seemed to validate the, you know, five days of deflation demographic that all of that stuff, disruption, but then came back. And I think, at this point, I, I don’t have the burden of proof like, you know, I think that the people who argue for deflation or even disinflation, are the ones who need to explain, I think that the base case should be that, you know, he’s going to be stagflation, and it’s gonna last, I think longer than people think I still think that transitory narrative is not that it’s still in the market to just kind of extended the definition of what transitory means in terms of magnitude and length. But we still have this framework that it cannot happen here.
Jeff Malec 12:27
Yeah, I think you see that with stock market prices in particular, right of like the markets down 20% Inflation is going to be debt, like this is going to snap back so far, inflation is going to fall off a cliff. And like, I’m not sure you will quite understand what it what it means in that same time you I’m paying 649 A gallon here in Chicago for gets so
Vincent Deluard 12:47
deep, man, I’m at seven.
Jeff Malec 12:50
I know at Costco when Costco goes over six bucks here in Chicago, that’s going to be that’s going to open some eyes. So, I’m interested in your take. So secular inflation versus stagflation. Just give us a little definitions there of how those different
Vincent Deluard 13:06
right so, but by secular inflation, I mean, I think the inflation cycle is probably one of the longest, you know, you have your, your commodity cycles are quite true equity cycle, around 10 years, and you know, and then Bombay inflation move very, very slowly, right. So, basically, you can think of, you know, their four year cycle really of these inflation since, you know, the Volcker fair to 1981, you know, all the way down to 21. This is this is what I’m in secular disinflation, I think we have something like that the other way, downward, like the prior 40 years with, you know, between World War Two, the Korean War, the Vietnamese War, you had like secular rising inflation, I think that’s where we are, because of demography, because of really mostly, I would say, demography, but also geopolitics. Even technology, we think we can talk about this well, so that’s the four year picture. And then you combine that 44 year with think of like, yeah, like rising. I mean, in the sense that inflation will be a problem for a very long time, like the same way that certainly outside of the US unemployment was the problem for, you know, pretty much since the end of the oil shocks within Europe, since you know, 1971, the biggest problem was not enough demand, unemployment rate. That was a problem for most of the US was a little bit better. But you know, that was a reflection of the deflationary mindset. We moved to where unemployment is no longer a problem, inflation becomes a problem and it will stay there. And of course, it won’t be a straight line. It won’t be at 8.5% all the time. You know, there will be ebbs and flows. But in general, I don’t think we’ll see a sustained period where we don’t have to worry about inflation the way it was, you know, in the in the 90s in 2016 Sundance that That era is behind us. So that’s deflation part. Now, as far as the stock goes, I’m actually relatively bullish on the economy compared to consent, which consensus is so bearish that, you know, Dag studies bullish, right, because everybody expects a recession, right. But obviously, we are coming at, uh, you know, the economy will have to slow because of the amount of tightening we’re doing because of the strength of the dollar. Because also the the, the, the difference in the fiscal imbalance, right, we had so much stimulus that, you know, just removing that is going to slow the economy. So, in the short term, you know, Stagflation is logical now, over time, I would think it could actually be a high growth period, you know, you look at the 70s. I mean, it was not that bad. I mean, there were two recessions in the middle. But overall, you know, I think real GDP growth in the 70s was much higher than it is now. So, it doesn’t have to be, I think we’re just entering a new era of, you know, the main difference is going to be inflation, and then distribution versus concentration of wealth.
Jeff Malec 16:05
And so some of this is tying in with your thread, I read a little while back on saying nothing works in 2022. And so some of these underlying themes there, which talk a little bit about what some of those underlying themes are there that you’re saying that can persist. Yeah. So
Vincent Deluard 16:23
basically, going back on inflation, I think that the main driver is demography. And this is something that people get mixed up all the time. You know, we have the Oh, the Japan I hate that word. Whatever it is sample of one. Okay. Aging is the is deflationary. Why? Because Japan? Well, I mean, my view is that aging is yes, maybe it’s deflationary. At first. When you have a lot of high income empty nesters that can save you know, when when you biggest we boomers are 50 to 60s, deflationary but you boom, when you boomers become 65 to 75, it becomes massively inflationary because you have a lot more net consumers, and you have fewer workers. And I think that’s the problem we have in the US all around the world, it’s even worse than stationaries catastrophe in Europe. So you have this kind of squeeze on labor. Too few people weren’t too many people in retirement or disable too few people working. And then you had the same time, we have a squeeze on capital as we removed the central bank liquidity. So if you think of your production function as a function of capital and labor, both things gets gets squeezed, the only thing that can save you is productivity, which you know, in standard economics is a residual, you don’t explain. So if you want to make a case for deflation, you have a make to make a case that productivity is going to spike. And indeed, I’ve seen a lot of that and, you know, people like to make fun of Kathy woods, and a lot of it I do think she has the most interesting argument for for deflation, if you want to make a case that percent are gonna go up, you have to go you know, all over the the exponential age and, and argue that, you know, our COVID is a positive productivity shock. So that’s, that’s where disagreed in that. Fred, you mentioned, I think that’s a joke. I mean, you just go outside your window. COVID is not a productivity positive event. I mean, we are, you know, making, you know, people take their temperature and stick stuff up their nose and restricting travel and creating a whole class of consultants in COVID protocol, closing the Chinese economy creating, you know, stop and go patterns. And nothing works in Korea, Korea to like, you know, and you can see that again, I was in France bass to leak, you know, I mean, waiters even worse than usual. There was a book
Jeff Malec 18:36
that says something for a French waiter. notoriously bad.
Vincent Deluard 18:40
Yes. But it is not just that it’s Yeah, you don’t have enough people to work. The people who who are working are burned out. The level of anger, rage, you can feel it everywhere in the US, of course, the political stuff, but even in Europe, and all that, to me, makes the economy kind of stickier and does not work as well. I mean, I think we look back to 2019 as some sort of a golden age, even though it didn’t feel like that back then.
Jeff Malec 19:08
Right. People seem to miss that connection right there. Same thing you’re out there. You’re with friends and they’re complaining like oh, well, they can’t get help. That’s why the food is taking so long. And these are first world problems to be sure. But right now we’re like, yeah, we can’t get a car. I ordered a refrigerator it took all this time to get there. But then they’re like, Why? Why is gas so hot? So they seem to be disconnected in people’s minds. And you’re saying even economists and other researchers minds, and papers and so many back to Japan because you hate that word I want to hammer what why was that different? Why is their demographics deflationary for them like famously So, or infamously? So right.
Vincent Deluard 19:48
So first of all, I think that the magnitude of the bubble in Japan was versus something else, right. And you remember in 89, that two pools either the Imperial Palace was worth more than all the real estate in California. So yeah, What you had to observe, right? I mean, the MSCI Japan was like half of the world’s market cap and tiny island with you know, I mean, yeah, now I feel the US is overvalued, but at least the US, Japan. So it was much bigger bubble to start with. So you had to deflate that for a lot longer than the other thing that I was specific about Japan is it’s, you know, it’s next to China, and South Korea and all of Asia. And in the 90s, what happened is the biggest macroeconomic shock in the world and the great doubling rights, suddenly, you had, you know, basically the Asian continent was kind of shut off the global supply chain should have the global economy by Communism comes in with massively undervalued currencies, in the case of China. And then, throughout East Asia after the financial crisis, rather, the dyebath, the Korean one, everybody comes in with like, depreciate the currency by 80%, as it’s very young, productive workforces that come into it, usually facial in shock. And Japan was really like, clearly on the edge of that. And a lot of the manufacturing capacity moved overseas. So this where this is where the deflationary shock came in, you had to work off that bubble, and then you had to the impact of the entry of China, to WTO. And then you have all the cultural peculiarities about Japan, it’s a massive net saving country, the corporate sector wants to save the household sector wants to save all that is very, very different from the US massive creditor country. So I think we are trying to extrapolate from a sample of one. And in general, that’s I’m not an economist, but I’ve heard something about, you know, sample size,
Jeff Malec 21:38
right. But that’s even it feels that’s the global case now, right? So that they may have been just the poster child of like, cheaper labor, and globalization. And now if we’re moving away from those two themes, you know, they moved away from it 30 years ago, and now maybe we’re seeing that in the rest of the world today. Two other items I liked in that conclusions of that where there’s no fed put. So talk a little bit about that. They’re out of bullets. What’s your theory on? There’s no fed put anymore? Yeah,
Vincent Deluard 22:13
I actually think of it more as a Fed call a Fed short goal. I think the market is obsessed about like the Fed put because this is what we’ve been bred with, right. I mean, Allison’s LTCM. Every time the market, you know, drops enough for the big enough tantrum, you know, that comes in and saves the day. So, you know, now we don’t 20% I mean, I see all these parallels to 2018. Right? Oh, look, you know, Powell back then he was also talking a big game, but eventually, you know, we can will the fed into submission, right? The repo market freezes. When did it last time, maybe here, it’s, I don’t know what’s going to do it, the NASDAQ blowing up or crypto. But there’s still this hole that the Fed will will come and save the day. I’m not sure because at this point, inflation is a political problem. And the Fed is a political entity at the end of the day. And yeah, inflation is more painful at this point than the closing price of the NASDAQ. I mean, the closing price of the NASDAQ is very relevant to people like us. But for most people, that’s just the number out there, I mean, really doesn’t register, even what matters is the price of gas, this is what’s going to make or break election and elections are what’s going to make or break the Fed. And the Fed has been late on this. So they have to double down by, you know, being extra cautious to make up for the mistake they made in the past. So I really don’t think there is a fed and I you still see that in the Eurodollar curve. I mean, if you see those, it’s kind of like March 2023, this expectation that the feds going to stop caring. I think this is kind of crazy, crazy talk at this point. What I would think though, is that we have a short call. And by that I mean that if and when the market does stabilize, or even go back up, then you can know that the Fed will just go back in and just like squeezing another 75 basis points. So that’s the more likely outcome if, if things do get better, I think that the Fed will be very happy to jump in and throw in more tightening, but I’m not sure that they have the capacity to cut or do anything to ease things. If markets get worse and influence Antrim.
Jeff Malec 24:16
I thought you’re gonna go with they’re not there’s not a Fed, long fed put on equities there’s a short fed call on energies.
Vincent Deluard 24:26
Yeah, that too. Yeah.
Jeff Malec 24:28
I like that. Because even like you said, that’s the thing people care about. Yeah. What what and as you mentioned, what are your thoughts on I agree with you even in our space, I feel like people aren’t talking about the NASDAQ bloodbath enough, right? Do you look at those aren’t list of Ark stocks down 60 to 90%. Like it feels if you look through some of those names like tooth out, you know, the.com bust, but not nearly as much press not nearly as much pain. So I don’t I don’t know what I put that to what do you think is the Reason for that. Just there wasn’t enough. Those were all speculative bets to begin with.
Vincent Deluard 25:04
Yeah, also, I mean, the the feeling bubble was was so much bigger, right that you know, something? I mean, still, even if you look at the market as a whole, I mean, you know, we still up quite a bit from from two years ago. I mean, you should fall asleep. Yeah, whatever. 2018 you just wake up, you open your, your brokerage team and Ali had a pretty good five years. So I think there’s maybe more, more tolerance for that. And also I, I feel, you know, we are just starting to see the stuff that hurts, which is layoffs, basically, you know, tech companies, but so far, it’s been the small stuff like the binance. And the crypto stuff, you know, announcing, like 20% layoffs. But I think when you start seeing maybe Apple and Microsoft and Google starting, you know, announcing, like, maybe even Amazon, like mass layoffs, that could potentially affect, you know, hundreds of 1000s of people. And keep in mind, and they can, by the way, I mean, there’s just so many product managers at Facebook, what do they do? What’s the product manager? I feel that’s the next thing that’s going to happen. It’s just gonna be like, an all these massive hiring and happening that push wages like crazy in the valley, this, this is going to read out and then maybe it’s going to feel more real. At this point, still theoretical, I think,
Jeff Malec 26:21
what’s your marker for when that starts to happen? Like Bay Area, real estate starts to tick down? Yeah, we’re just literally like Microsoft announces 8% of the workforce is getting laid off.
Vincent Deluard 26:34
Yeah, I think that I mean, on the real estate of me, you know, the issue we got to have is so much of the bubble was due to stock based comp, right? I mean, if you if you are, and that greatly bothers me, by the way that because, you know, friends of mine, who credited the same time as me and wanting to tag and I used to make more money than when I started. And now he’s just like, destroying me because they getting the I mean, again, 50% of their of a comp in stocks. Yes. Yeah. Straight up. So I mean, most people like late 30s, you know, that they’re multimillionaires, just by having a job, you know, not even starting as, you know, setting it up having a job. So my point is really, that was the fuel that was a Kryptonite of the everything bull market in the Bay Area was was done based comp. And it was is great for companies because it cost them nothing, right? They can, they can, they can print dollars, but they can print their stock
Jeff Malec 27:29
on the back of the pensions and the institutions buying up the stock for ARS
Vincent Deluard 27:33
Bertha Yeah, this demand also from index funds, and, you know, so it was fantastic. And then, uh, you know, if you can outsource, because for big tech, your only expense really is labor, right? I mean, a couple of servers. But that’s it. Right? So if you can outsource 50% of your payroll to the stock market? Yeah. Your free cash flow, Mark, you know, we’re free cash flow machine. Yeah, of course, you can great free cash flow, because you pay your employee in stock. So I think that’s, that’s gonna be the process as as the value of the stock rents is revised down people who think they were making half a million a year, realize it, no, they’re just making 252 quite comfortable. But you know, there is a place to live, and then that’s how it feeds into the recent.
Jeff Malec 28:14
It’s almost the perfect perpetual machine, right, then they’d get that income, put it back in index funds, that would put it back into
Vincent Deluard 28:21
Yeah, we invented the perpetual motion machine, we did
Jeff Malec 28:24
the Eisah some good Twitter action the other day, the it’s like maybe paying a software engineer $400,000 a year for free app wasn’t a great idea. Like maybe that’s the cash flow problem.
Vincent Deluard 28:37
Yeah, and I would argue that fits into the inflation problem, also, in the sense that, and I call it the millennial lifestyle subsidy, right or YouTuber, you know, it costs like, you know, 10 bucks across the city, or you can pay some poor guy to get across the city on a bike under the rain to bring your sandwich for to daughter, or the stupid little scooters. All of that was lost making and all that, you know, the idea was the whole unit economy trade, I’m, I’m selling $1 for 95 cents, and I’m making up on volume, which of course, never made sense. But the point is, you know, we’ve done that for 10 years, and that effectively kept the lid on prices, like, you know, real captive to compete to Uber. So, Uber subsidize, you know, drivers, then they have to drop the price or hotels have to compete with Airbnb. So there was a hidden subsidy in the market from this kind of insanity. And I think it’s, it’s being removed now. So the first step I think, as we remove the Punchbowl is actually going to be inflationary, because you have to remove all this uneconomical production that we have subsidized for decades.
Jeff Malec 29:45
And you have heard it argue, right, that subsidy was on the back of that guy who’s biking the sandwich across, right he’s using his bike he’s using his time. Right? And what’s he really making on that are on the Uber drivers I’ve been a lot of studies that right? That’s not such great career, and you’re really making way less than you think.
Vincent Deluard 30:04
Yeah, no, I spent, I spent some time in, you know, poor developing countries say that. And it strikes me that, you know, when I come back to like Silicon Valley, I’m like, Wow, these guys have reinvented the cool, you know, it’s like, so much of the innovation in the productivity enhancing stuff. I mean, you go to Kolkata, or, you know, or Bangalore, or actually think it was quite wealthy? Or, you know, Legos, yeah, there, you know, you have a guy, you know, fixes your sandwich, and you have a guy who drives your kid to school and you have another guy who’s, you know, who cleans your pool. I mean, in a way, we’ve kind of reinvented this gray economy of, you know, massively underpaid people serving wealthy people, we just put an app in between and call that productivity enhancing.
Jeff Malec 30:55
And one, that was one of your themes, right, that that wealth concentration is going to turn back to wealth distribution?
Vincent Deluard 31:02
Yeah, I would think so. I mean, I, I mean, I, I mean, personally, would not necessarily be my interest. But I think, from any social political perspective, I mean, we stretch this, you know, so far, I mean, if you look at the ratio of vulnerable Lee, the minimum wage for the s&p 500 index, I mean, you look that over the past four years, like, well, this cannot, this cannot possibly last, I think we we start to have like consequences like, like, like populism, like, like, you know, riots that that really threaten social fabric, and I think we’re getting there before COVID and COVID kind of sped up that increased as with many things, you know, it was unraveling under the surface COVID Just made it obvious.
Jeff Malec 31:45
And then does all this fat and inflation thwart that, though, right, like, hey, the workers started making more money, it causes all this inflation, the Fed hammers it down. Or, or they reached a new minimum level, and they’re not going to come back off that.
Vincent Deluard 32:00
But I think at least, you know, so far, the wages are growing faster at the bottom, which I think is very, very positive, right. I mean, it’s growing faster for uneducated. It’s work for a nonwhite for hourly workers, for young workers. So that wage gap that used to be always in the favor of, you know, those who are doing well has inverted because the squeeze is on low qualified labor at this point. So I think nominal wages, you know, they’re not keeping up with inflation, but almost, and then what’s really happening with the Fed highest the value of assets being written down, and that’s what you need. Or if you think about inequalities, inequality is really about, you know, is really about who owns what, so issue issues, you write down the value of assets, that means that access to property, buying stocks is a lot easier than it used to be, you know, in the 70s, you will hear these stories where you know, you take a summer job to pay for college or you know, pay back your mortgage in three years like, but this is the stuff that’s required to kind of rebuild a thriving middle class. And I think in order to do that, you need to write down the value assets. And that’s, it’s painful for us, as I said, owners, but that’s what we’re witnessing right now.
Jeff Malec 33:13
I have my doubts that that’s gonna happen anytime soon. anecdotal, but we were at a lake up in Wisconsin, the realtor guy is telling us like, it’s nice that he’s like $4 million houses I have a list of 120 people are like is there’s nothing for sale on the lake. As soon as one comes, give me a call for 5 million and up, he has a list of 40 people. And he has a list of 20 people he says Call me no matter the price. Yeah. Right. So I feel like there’s so much money waiting to pounce and buy up values, that I don’t know if we’ll ever get there unless it massively painful, however, some
Vincent Deluard 33:47
of where you’re at, that’s what it’s going to be a very long and slow process. And I think that’s why the market is wrong thing is going to be over so quickly. Because basically, we’re trying to address inflation with a wealth effect. And the wealth effect is a very crappy tool when it comes to controlling the price level. And we saw that in the way on the on the way up, right? I mean, when when Bernanke started with with QE, and then started talking about the wealth effect, I mean, he didn’t work for 10 years for 10 years of service, like pumping, pumping asset prices. And then, in fact, you know, prices did not respond. But I think the same way now that they’re trying to take the liquidity out, hoping that you know, asset prices will fall and then that will eventually trigger the CPI. That’s a multi year process. I mean, the market is expecting this to be over in three months, it’s not over especially given how, as you point out huge the bubble is and how much liquidity the series in the system.
Jeff Malec 34:45
So speaking of that, let’s talk a little bit of what someone would use for an inflation hedge. We’re not just here to talk about this, right? Like, people thought crypto is going to be in famously a bad call, but people thought crypto would do it people Well fat tips would do it. I’m gonna have Nancy Davis on I think next week talking everything tips, but my guess is people have been super disappointed with tips performance. Even though you could argue no as expected, the bond piece went down. Trend has worked energy companies of our commodities have worked gold not hasn’t worked. So what are your thoughts on what people can? What inflation hedges are out there and what they why they perform the way they have?
Vincent Deluard 35:27
Well, yeah, I’m gonna rebound on tips, because I think that is probably one of the most in underappreciated signal in the past month or so is tip seal as have flipped positive, you know, because of that duration effect. Right. But like, I’m the tentative to getting 70 basis, point positive, positive real yield for the first time since COVID. I think that is important. And yeah, I mean, I was bearish on. I didn’t think tips were a good hedge because of that duration component. But I think now that you can get them at a positive real yield, it’s probably the first time in the cycle that okay, I think they have a, they have a place in the portfolio. The goal has been, I think, I’ve liked gold and precious metals. Silver’s disappointing me more than anything in the world.
Jeff Malec 36:19
That’s quite a statement.
Vincent Deluard 36:21
You know, I’ve been wrong with that. Although, I mean, gold is, you know, the thing is, gold is never it’s not a perfect anything, right? That’s, that’s both the beauty and the downfall of gold, right, that people tell you gold is a hedge against political chaos. It’s a hedge against inflation. So it’s a bit murky, it is all these things, and none of them at the same time. So I still think over the long term gold is their goal at a big, big rally in 2020 1920 20. You know, taking a breather there, you know, when you have days, like what we had last week, I mean, everything’s going to set off at the same time, including the things that should not set off like gold, but I will still think eventually, you’re going to make it back up on precious metals, just thing it’s a matter of like setting the right expectation. And that sounds like I feel a crypto bubble has really polluted our minds. I mean, I hear people like I need to double my money in the next three months, you know, what should I do? I’ll go to Vegas, you know, if you look at the you know, free four year goal has had very good returns, especially in non dollar return I mean, gold is at an all time high, Euro Yen and so forth. So not throwing the towel on gold yet.
Jeff Malec 37:33
So is that really the real yield differential at play there? Right, like for those are massively negatively negative real yields. So gold outperforms them versus
Vincent Deluard 37:44
the dollar has been incredibly strong and gold is you know, for us gold is priced in dollars right so that’s so you really want to think of gold we think of two trades long gold on dollar. Right. But if you so that the gold poor hasn’t really done it, but I mean, that for, for Europeans? So no, I think the really the best inflation hedge has been in will probably keep being energy. Because that is really the wrecking ball at this point. You know, on days when everything’s down energy has the you know, energy has to do has been the only thing that’s gone up because energy is the driver of short term inflation or short term disinflation. So I think that argues for an allocation to energy and commodities, not necessarily based on the fundamental view, but on almost a risk management, and are like, we came from a world of deflation was the biggest risk. So you you held long term treasuries, as as, you know, portfolio diversified, it seems to me that energy and commodities are going to do that, in the next decade.
Jeff Malec 38:45
Few things are so just plain old buy and hold commodities or some sort of trend approach.
Vincent Deluard 38:51
While trend works really well, as you know, in, you know, in a in a stagflation environment, you look at the 70s. This is where the best, you know, CTAs are really finally, you know, and you look at this year, I mean, you had amazing returns, in, you know, CTAs and systematic trend following strategies, you know, some funds are up like 5070 80%. So, this is the time for these strategies to shine, of course, you need to be an institutional investor in most of these funds. So, you know, a way to somewhat replicate that is either, you know, you own the thing of what’s kind of always kind of hard to store at your house, or, you own the companies are produced that.
Jeff Malec 39:40
Yeah, I was trying to find this post of like, commodity companies aren’t commodities, right, because then you get all the debt and the leverage and the management mistakes and all the issues.
Vincent Deluard 39:50
Correct, but I would think that this, you know, there’s always a risk, but I think, at this point in the cycle, it’s less of a reason before and because we come out of tactical blowback. A market, I get typically energy companies or gold miners, they’re you know, they have $1 in their pocket, they spend 10, they acquire and then then they buy another, they buy the other guy who has this. It’s very undisciplined, unstructured industry with a lot of capital destruction. And I’m sorry, I’ve seen a lot of that, especially shale that, you know, the past decade. But again, it’s been so hard for them. And then on top of that, you had the ESG stuff, you know, the drying capital from them that if anything, for very rarely, but like you haven’t much more disciplined, much more return to shareholders, which is probably not economically good. I mean, at this point, these guys, you’ve just been like keeping the money and just invest in increasing production. But it’s not happening because for 15 years, they’ve been bleeding. So and yeah, the dividend yield is pretty high, I think energy as a highest dividend yield of any s&p 500 sector, which I think has ever happened before.
Jeff Malec 40:54
Yeah, and I think that’s a big hangover from 2014. Right? When energies and then the banks were just like, No, right? I’m not, I’m not giving you any more leverage, I’m not giving you any more money. make do with what you have. So for sure, some better but but and that’s moving towards this secular theme, right of like, metals, miners, energy coming, everyone hasn’t put the money back into the infrastructure back into getting the resources out of the ground and paying for it.
Vincent Deluard 41:23
Yeah, and there’s a timing aspect to this, right. And it’s, it’s the time to invest was five years ago. So and then again, that comes down, going back to these inflation expectation, and then, you know, steal that transitory narrative that, you know, it’s going to be data by March 2023. I mean, the problem is that we haven’t invested for 15 years, I mean, how in five months, especially because we’re still not not seeing that pick up in capex at this point. I mean, all I hear about is you know, it’s criminal that these guys are making money and when the tax that money that’s you know, it’s not really a steal I don’t think there’s a lot of appetite for funding kind of conventional energy long, long, long lifeline projects like you know, it deep sea offshore drilling or stuff like that. It’s it’s so it’s,
Jeff Malec 42:19
I’ve long said that it’s massively deflationary, right, we used to drill down gets well, now you can drill down drill sideways, 500 feet get to these pockets, like the technology growth, there has been perhaps overshadowing the lack of building new infrastructure? Indeed, yeah, yeah. Well, two things there. So one, okay, if energy’s so high right now, is to that timing aspect. Is it too late? You’re saying no, this could go on for another five years? 10 years?
Vincent Deluard 42:45
Yeah, I would think so. I mean, you don’t get no energy or just share the s&p 500. I mean, it’s still probably less than apple at this point, or at least it was a month ago, probably around, you know, four or 5%. I think the last time where there were, you know, was probably in 2000. When, you know, all prices were a fraction of what they are today. And all probably, you know, energy profits are a fraction of what they were today. So, again, I think it’s a slow moving cycle and show we finally, I like this expression, you know, the easy money has been made. Any easy money.
Jeff Malec 43:22
Right? That was the definition of not easy. My right if you were invested in Exxon Mobil, like people were throwing coal at you. Coal is probably a bad example. People are throwing rotten fruit at you. Right? You had a political problem. You had a philosophical problem, and you had a performance problem. They were just in the dumps for years there. Yeah, so I totally agree. Not not easy money. So you mentioned cycles. Do you think we’re What is your thought on commodities overall, we in a commodity supercycle? What does that word even mean?
Vincent Deluard 43:52
Yeah, I’m not a commodity now. So I’d be I think you’d have to be a little more more granular, depending on you know, which commodities and so forth. Now, in general, what I’m convinced of is that we are in inflation era, and in inflationary era, commodities are valuable. In general, I, you know, I would think that, you know, it’s a bad idea to learn commodities because, you know, commodities do not pay a dividend, they don’t pay a coupon. And generally, humans are smart. So when you’re long commodities, you’re smart, you you, you short, human intelligence, which is a pretty bad idea, you know, we’ll always figure out, you know, new ways to produce more with less. And
Jeff Malec 44:34
the worst part of it, dwarf wheat is the couldn’t figure the wheat got so heavy would fall and kill itself. So like, genetically modified it to, like have 10 times the yield on the same stock.
Vincent Deluard 44:46
Yeah, exactly. That’s, that’s a great example. So, but I think there is any there they are. An exception to this kind of rule of thumb is is when you have what we have a period of structural underinvestment. For, you know, many, many, many years, and yeah, you get you get a squeezed like, you know, if you look at the oil market is now balanced, I mean, you remove Russia, there’s just not enough oil to for the demand I mean all you have to destroy tremendous amount of demand to good but to get back to balance and you can do the same the probably the same analysis for a lot of commodities. So there’s that scarcity return, which is usually means it can spike out because everybody needs it and you can find it. That’s one source one reason to own it. And then the other reason is, is the diversification aspect, right? In a in a deflationary environment, your stocks and bonds have a negative correlation, right? So you can have one or the other that goes away from inflation. And I would argue that commodities claim that mental so if you think in terms of multiple field theory, you’re efficient frontier, which had probably zero allocation to commodities, and anytime in the past 20 years, now, you can improve your risk adjusted return, even though I would argue commodities are negative expected return asset, because, right, but you can add an asset with a negative expected return and improve your risk adjusted return, because so diversifying so I think, and that would also argue for a greater allocation to the sector, from institutional investors, central banks, even retail investors ETFs. And so for which we, you know, kind of get that talk of supercycle, whether it means something about
Jeff Malec 46:24
the upbringing, green inflation here. So right there, you could argue even with Russia in the picture, even if their energy is there, we’re going to need so much energy to pivot to this new green economy over the next 20 years that we’re going to use every single bit of fossil fuels to get there, right. Like the amount of metal that needs to be mined, the amount of equipment that needs to be built the amount of the factories that need to be built to do that, it’s going to use up all that traditional energy sources. What were your thoughts there?
Vincent Deluard 46:57
I think that that’s been a mistake, right? I mean, because yes. And I, I mean, I’m not anti ESP or whatever. I mean, I’ve been critical on it. But I, I theoretically agree with the goals. I mean, obviously, we want to move to like renewable sources, we don’t want to like dig holes and pull the atmosphere to do that. But the right way to do that is to finance the transition, you’re gonna actually need more conventional energy. And that was the mistake that, I mean, I talk about Germany, and I give hinda. I mean, that was, that was pathetic. I mean, fine, you want to do this, but don’t close your nuclear nuclear plants at the same time, I mean, or, or you end up depending solely on Russian gas and getting an insane amount of leverage through bad actor. And and that’s the politicians really miss they thought it would just, you know, go from, you know, point A to point C and skip on B altogether, and that that’s what we’re realizing harder today.
Jeff Malec 47:50
And being European France has still a lot of nuclear, right.
Vincent Deluard 47:56
Yeah, but we messed up there quite a bit. So it’s very unfortunate. So this is this has been a, you know, long standing French policy since read and before before the goal basically realized, you know, don’t get wrapped the oil embargo, that, you know, we had, we have no oil and we dependent on foreigners, so we had to develop our own internal sources. Well, there is no hole in the ground, but we could take your chip uranium from from Sahara. And so we built a very strong nuclear industry in the 70s 80s. You know, at one point ADF interested funds with the largest utilities in the world, at about 85%, of electricity in France was generated by nuclear, and it was significantly cheaper than the rest of Europe. However, we haven’t maintained this very well. So now we get into this crisis, where I can’t remember the exact number, but I think at least 10 nuclear reactors are shut down. So at the time, when we need the most, we don’t really have it now, we’re still in a much better position than, say, Germany, which carried all together and buying nuclear power from France or coal fired from from Poland. We kept some of it, but again, and again, with the problem of nuclear is a very slow investment cycle, right. I mean, it’s like, especially the new second generation ers, you know, I mean, it takes 10 years to build. So kind of paying the price of past mistakes here.
Jeff Malec 49:24
But what and it’s just curious to me if that differs from America to Europe, but doesn’t seem like it if Germany Shut up, like its nuclear has gotten lumped in with traditional energy sources, right. It’s gotten lumped in with fossil fuels when it’s
Vincent Deluard 49:38
a big deal at the COP. What’s the big climate thing that the Glasgow conference? Yeah, the French are really lobbying to include nuclear into the definition of renewable energy, you know, if you take a Climate Change View, I mean, nuclear comes with other risks, but if you go redistributive You know, life on life on earth will and this the temperature rises by more than two degrees Celsius. Nuclear an obvious answer to this problem?
Jeff Malec 50:09
Yeah, I think it’s people’s emotional, right. You’re more scared of dying in a fiery flash when the nuclear plant reactor breaks then dying slowly over 40 years?
Vincent Deluard 50:20
Yeah, yeah. All right.
Jeff Malec 50:27
So switching gears a little bit. corporate debt, I had Chris Cole was on the pod beginning of the year saying this is the next big shoe to drop. You posted some interesting data recently. What are you seeing there in terms of the issues in the corporate debt world and where rates are at?
Vincent Deluard 50:44
Well, I think it all comes down to bankruptcy suppression, right. And basically, you look at a chart of bankruptcies in the past, you know, 10 years just go straight down, there’s almost no bankruptcy anymore. You know, what happens? Is it possible that for? Since the Romans, you know, that this prison living company would fail, like, What Why is nobody failing anymore? What does that mean? Well, that means that, you know, does that mean that everybody is smarter and making profits? Of course, not
Jeff Malec 51:12
using QuickBooks better or something?
Vincent Deluard 51:16
No, it just means that companies that would have always gone under been able to, to survive, because they’ve been able to borrow money at cheap rates, because there was so much liquidity. So once again, the Russell 2000 index, so us small caps, I was looking for companies were overriding OBrien cash flow. So the most generous metric he could find guff is not enough to cover just the interest expense. I’m not even talking about the tax or the depreciation or whatever, just like, can you just pay your interest bill. And then I also look for companies, on addition to that, who had less than 12 months of interest expense cash on hand. So that if the market is shut down for them, you know, after after a year, they gone, that’s more than 20% of the Russell 2000. And I run the number as of q1. So the trailing 12 on interest expense is based on a junk bond yield of about 4.5%. It’s closer to nine. So that 20% is probably closer to 40%. So
Jeff Malec 52:23
in your projection, this is taking their actual cash on the book and actual rates, even a different rate than what is today. Yeah, so
Vincent Deluard 52:31
there might be a lag here again, because you know that if you’re smart, you’re the duration of your liabilities, not a year, right. So you know, they’re not going to start paying 8.5 for some liabilities right away. Because they still have the the old debt, right. So I think for junk bond index, maybe duration is on five, six years. So you only need to rollover the 20% of your debt every year. So it’s gonna take five years to to pass the entire yield shock, but it will come. And I think that’s the thing Chris calls, right? I mean, the obvious Big Short at the beginning was the kind of speculative profit less that we’re really good, really good valuation, some of them no sales, right. So it’s horrible, bubbly stuff, like.com style stuff. That was the story that started. Yeah, February 2021. You know, he’s been, he’s been getting hammered before for two years. Now, most of these names that are my 90%, because the next route is going to be a school that is the zombie companies, right companies that, you know, they have no economic purpose, but survive only because of the availability of cheap credit that’s being pulled away.
Jeff Malec 53:39
But so if a lot of those have already been marked down so much inside the rustle inside the NASDAQ, does that have a lasting effect for market participants at the index level?
Vincent Deluard 53:48
Yeah, that’s a good point. Well, I mean, it’s, if you think in terms of market value, like, I thought I call it the toxic blob. You know, it’s like that. And actually, I think there are two of them, there’s one now and then there’s going to be the zombies. The toxic blob is the, you know, basically COVID darlings, the stupid companies, you know, trading for, like 100 times sale with whatever. So these guys are getting, you’re right, they’re getting written down very, very fast. Now, the problem is simple. You also have new entrants in that blog. So you have these two forces. And last time I checked, actually, the size of the blog was was increasing. Because you have more and more competition, fortunately, who made this definition of having, you know, very, very low or negative earnings and in the variation is not improving, right? I mean, if you think about the companies that had no sale like what’s, what’s the multiple on this like? He dropped by 80% until infinity multiple. So that’s kind of the problem with with real bubbles in the sense of where you’re not really financing a, an asset that produces anything is you grind them down, but it’s not getting cheaper.
Jeff Malec 54:59
But it’s Almost like the toxic blob isn’t all that toxic like it has an infected these other better companies. Right? That’s the spin the surprise to me of this has been this orderly sell off everyone’s calling and interest stair stepped down. So yeah, why why do you think that is?
Vincent Deluard 55:17
I think because the economy’s doing really well. But better than people getting credit for I think people are you know, like worrying about a recession like the reality is the economy’s you know, is booming has been slowing down. But he was worrying so fast that, you know, every company that was not in that toxic blob, yeah, costs are rising and whatever. But the top line is growing so fast has been growing so fast that you know, things have been okay, like, you’ll get index level earnings. We’ll see at Valley earnings growth last last quarter. We had, you know, really strong earnings growth in them in the past two years. So I think it will come. It’s probably coming. I think for q3 q4 would be my guess, when we have this high earnings expectation when we’ll finally feel the effect of a slowdown, and I’m not calling for recession, I’m just saying slowdown. And then there’s the contagion. Maybe it happens for the credit markets, maybe it happens through some, you know, some very large investor blowing up. And, you know, who knows, and another way it could happen in tech is, you know, I feel that a lot of that spending on stupid unicorns and companies, you will be small ended up, you know, being buying AdWords on Google, placing ads on Facebook, renting server space on AWS. So I think somewhere I read I I think it’s a Chamath quote, so I should go with I think Chairman said that 50% of every dollar raised in VC funding ended up in the fang. I mean, I don’t know how he came up with the number. But
Jeff Malec 56:55
it makes sense everything you just said, Yes. ad spending the server’s spin. Right. Now, where does that where do they refill that money? I’ve always wanted to do a blog post on that of like, you know, when you’re on most of these websites, and you see this complete junk at the bottom of the page of like, right, just li