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The Artisan Podcast: How Low Will Bond Yields Go In 2024?



How Low Will Bond Yields Go In 2024?


Exploring the topic of, “2024 OUTLOOK: How Low Will Bond Yields Go?” with Alpine Macro Strategist, David Abramson, along with Joseph Abramson, Northland’s Co-CIO,


Major issues to be discussed on this podcast include: 

• U.S. rate outlook.

• Economy: can a recession be avoided?

• Is the U.S. in a debt trap?

• How far will the AI mania go?

• Where will the consensus be wrong in 2024?


David Abramson is the Chief U.S. Strategist and Director of Research at Alpine Macro and teaches MBA at McGill University. Previously he was a Macro Strategist at BCA Research for over 20 years.


Make sure to check Northland Wealth’s YouTube Channel for more episodes.


Transcript

SPEAKERS: Joseph Abramson, David Abramson



Joseph Abramson 0:10

Welcome to the artisan podcast where we share insights from the world's leading investors and strategists. Today we have one of the world's top macro strategist who just happens to be my brother, David Abramson, the US strategist and director of research at Alpine macro. Enjoy. So in the age of AI, I have to ask the question that I asked all of our guests, are you a robot? Well, you're my brother. But are you?


David Abramson 0:44

I don't think there's any way to tell just yet. Let's see, after the end of this interview, let's get the skip the listeners to vote.


Joseph Abramson 0:52

Well, if you are a robot, you're a pretty insightful one. Let's get down to brass tacks. Tell us Dave, how low R Us rates gonna go in 2024.


David Abramson 1:06

So 2024, I think is going to be the year where we spent much of this year I don't know about the listeners. But most of the people out there analysts like myself waiting for the US economy to slow. And I think 2024 is the year where that slowdown actually happens. And so we can talk about which of the two typical slowdowns comes out, both of which are ultimately mild. One type of slowdown is where the Fed watches it happen. And it really looks like it's getting out of control for a short period of time. But then it's okay. It's not a meltdown in the economy or a 2008 global financial crisis.


And then you get a you get a V shape in markets and interest rates going down quite sharply. That's the answer your question. The other, which I think is more likely is we get the economic slowdown that most people expected this year, that did not happen. And we can talk about why we get that next year. And in that case, people forget that any kind of a recession, even it's from very low level of interest or of unemployment rate, you get the Fed cutting interest rates. And I think that's what they're looking at next year. And so I don't want to put an artificial number on it. But I think it's a relatively safe bet that 10 year bond yields will get down to 3%. If it's more of that V shaped scenario, then of course, they go much lower. Right?


Joseph Abramson 2:39

I mean, of course, the Fed is policymaker, so they can make up their own mind. And like all humans, they can make mistakes. So but bond yields are reflective of market conditions. And you think if there was a mistake, they would sniff through it. So in your sense, why do you think we get to the low threes?


David Abramson 3:06

So one of the really key things about the underlying level of interest rates is not just what's going on in the US, but what's going on in the rest of the world. The rest of the world is having influence on real interest rates, and expected inflation both. It hasn't had a huge impact so far, because the US economy has been so dominant and so strong, no matter what so the real key answer to your question, I think, is will the rest of the world stay weak? Will Chinese growth continue to disappoint? Will Europe stages very weak, I don't mean, it's just getting worse and worse and worse and worse, then, of course, everyone knows what happens. I mean, just having an extended period of malaise, a slow burn, we would call it. So that's point number one. Now the big shift, if that's the case, because it won't be a huge change in the underlying backdrop of China or Europe, if that's the case, the US is really where you're getting the big shift. And so the key thing here is that if fiscal policy is shifting, and that's the change in fiscal policy now, whether the budget deficit stays big, it's the change in the deficit, and whether the current level of monetary policy settings is restricted. If it's restrictive, then it gets worse and worse and worse for the economy. It's completely different between monetary and fiscal policy in terms of the lag. So this kind of differential lag between monetary and fiscal policy and what happens in the rest of the world. That's what's going to drive whether growth is below expectations or not.


Joseph Abramson 4:48

So I mean, what are your thoughts on on fiscal? You know, there hasn't really been any any fiscal restraint You know, for decades and part of that was a reflection of the fact that policymakers had finally bought into the fact that we live in a world that was very deflationary. And certainly when we had the financial crisis in 2007, eight, the world was very deflationary if, if they didn't act, you know, we could have gone back to the Stone age's.


But then, during pandemic, we saw three times as much monetary stimulus and fiscal stimulus as we did in 2007. And to 2008. And certainly, you know, you could argue that things didn't look as bad at that time. And then, even once, we'd started to have expansion, we got even more fiscal stimulus, and we had fiscal stimulus during the expansion of Trump. So if fiscal stimulus had become counter cyclical, and procyclical. So what's it gonna take to stop the spending machine?


David Abramson 6:09

Right? So it's very important to, to think of what's your time horizon. So if your time horizon as an investor is the next six or 12 months, is totally different than a pension fund or family office, that's five or 10 years out, if it's the next six to 12 months, it's a change in fiscal policy. And it's going to be very difficult for fiscal policy to be stimulated over the next year, because it was already so stimulative this year, and because the interest payments are going up so rapidly, and that's not a stimulus.


That's what they're just shooting up like crazy right now. And so, the change in the cyclically adjusted budget deficit, which became very stimulative in the second half of this year, it's extremely rare for that to happen. When the economy is not in recession, the primary deficit widened substantially, it almost never happens outside of recession, it did happen the last few quarters, and it gave a nice boost to the economy. But now it's the change in that. So you need to have the deficit getting wider and wider and wider, every quarter to have a stimulus probably, it's actually going to actually going to shrink, or if it expands, is because the economy is slowing. So that's point number one. Point number two is you mentioned this, I don't even know if I call it fiscal irresponsibility. But over the last, certainly since 2008. But you go back maybe 25 years, this idea that when the economy weakens, the fiscal policymakers can be in quote, irresponsible without any punishment whatsoever, because private sector savings is going up very sharply. In the world that we've seen in the last 2025 years, people get scared, they start saving business get scared, they start saving. And if you don't get a lot of stimulus on the fiscal side, the economy really starts to crater. And that's the issue. You know, Japan is the classic example there. Something changed.


So number two is that whereas before bond yields and fiscal policy when fiscal policy was easy, because the economy was in trouble, bond yields would fall. That's what happened in the first year of the pandemic, for example. And it kind of lulled policymakers into thinking okay, this is just completely normal, this is always going to happen. And as you said, Joe, so that, you know, when the economy's okay, we can stimulate when the economy's weak, we can stimulate even more, we just keep stimulating. And so there is a huge question right now, as to whether the private sector is just going to be really scared, and always trying to save, which, of course, is certainly been the case since 2008. And if it's not the case, not really an issue for the next year. But if you go to that further out time horizon, I mentioned between over the next five to 10 years, and you have this constant desire, on the part of governments to finance the green transition, finance, increased military spending in a very uncertain world, finance, increased infrastructure, which in the US is really, really bad. All of those things trying to do it at once. It starts to feel like the 1960s when the government really blew out its budget deficit to pay for the Vietnam War, and to increase the social welfare state under Lyndon Lyndon B. Johnson. And that's where you run into that big debt trap and the debt trap starts to the debt arithmetic. For those of you listening, that are familiar with the debt arithmetic problem. It's when the interest rate gets higher than the underlying growth rate of the economy, you can run into really big problems.


Joseph Abramson 10:03

Well, I mean, couldn't you argue that right now the US is in a debt trap, I mean, by a traditional definition, that is over 100% of GDP. And at least from a forward looking sense, in terms of, you know, Alpine forecasts, interest rates above the growth rate at present


David Abramson 10:27

in real interest rates are probably below the growth rate or equal. It depends, of course, in the last quarter, the US economy grew almost 5%. But let's just say the underlying growth has been maybe two or 3%. And the 10 year tips yield is just over 2%. So, but that's not really the question. The question is, if over the next five years, the real interest rate, the long term Real Tips yield, for example, or what the government pays to borrow, in quotes, risk three, versus the underlying average growth rate, not in any given year or quarter. But if it's persistently above, and they don't shrink the primary primary deficit, that's when you have to really start to worry about an ugly situation. So right now, it's not particularly brutal, because they got the spending plans. But also the underlying economy is showing a lot of vigor, okay, the real interest rate is up higher. But if the economy starts to weaken, and that real interest rate does not come down, that'll be your first warning.


So we do not expect definitely don't expect that next year. But maybe over the next three to five years. That's exactly what will happen. The bond vigilantes will come out and say, I don't care if the economy is weakening, which usually pushes down real interest rates. I don't trust these guys, this is starting to smell like Argentina, or Latin America of the 1980s. I don't want to hold those bonds. That's what to watch for. No, that's


Joseph Abramson 12:05

certainly, it certainly makes a lot of sense. So you think structurally, we're not on the path towards crisis? I mean, will it take a crisis for policymakers to change their mind, because if if we're not in that situation, then it's really beneficial to a politician to spend, because you get the immediate benefit. Whereas the costs are more long term, and you have to follow an electoral cycle. So will it take a crisis? To change things, which could be a financial crisis, where the bond vigilantes basically say, we're not going to finance this anymore? And then the numbers don't make sense? Or will they just one day, Wake up and smell the coffee? What are your thoughts there?


David Abramson 13:02

So I think the scenario that you want to look for is a crisis. But there are lots of possible drivers of that crisis. So you mentioned one, where the government says, we're just gonna keep on spending, like we have too many priorities. We have to subsidize on shoring, we have all the green transition, the adjustment to do with the military, the new, more scary world, there's all kinds of places where we need to be supplying weapons, or else there'll be instability in a growing number of regions of the world. That's one possibility, where politicians say, I can't, I can't cut it, you know, I would like to, but there are too many chunks. And I don't have the guts to cut entitlements because that's political suicide.


That's a recipe for a major crisis, of course. But the other possibility is that in the rest of the world, the supply of savings becomes less plentiful. So if in the rest of the world, for example, China, which has been a massive supplier of savings to the rest of the world, their domestic economy is extremely weak right now. They are supplying savings to the rest of the world, there's upward pressure on their current account surplus, because they're just producing way more than they can consume. They have a huge confidence crisis, et cetera, et cetera. And so even though China's having economic difficulties now, that's pushing up savings, they've been perceived, providing savings to the rest of the world for quite some time. Now, what if that changes? What if people start to say, Wait a second, I'm gonna sustain my standard of living by borrowing in China and the current account deficit, the current account surplus in China starts to shrink, and that puts upward pressure on real interest rates not just in China, but in the entire world. If that conflicts and starts to come head to head, not just with US government spending, but also spending in the rest of the world, then that's a clash.


So people, I think, mistakenly say, Well, no, what I'm really worried about is that the Chinese authorities who have $3 trillion worth of foreign exchange reserves, that they'll decide they don't want to hold any more US assets. That of course, is possible. But that is not really a major concern, because what that would do is cause their currency to go through the roof, and be highly problematic for them plus, what would they do? Would they just sell those dollars and put them into domestic money? Well, then you'd have a massive domestic inflation. That's that, as far as I'm concerned, it's a it's just a very weak argument, the stronger argument is, if China starts to consume its own savings, so those are the two big I think drivers of a possible lender strike and crisis. Okay. Okay.


Joseph Abramson 16:09

So nothing on the immediate time horizon. Now, the reason why is because I think that our viewers are quite interested in this topic. You know, from a tax point of view, and also a fiscal irresponsibility point of view. And if you think about things, big picture, you know, whether it's the US or the world, you know, after the financial crisis, we saw a lot of deleveraging. And so if you look at the use US households, you don't seem to be particularly indebted. corporates are in pretty good shape. And, and that can also be said, you know, on a global basis, but if we look at total debt, it really hasn't gone down $1 In the US, or, or globally. So we've seen private sector deleveraging, and public sector leveraging so that the system as a whole really hasn't the leverage, which might be one reason why the private sector has been so resilient to the very substantial increase in rates over the last couple of years. So I think it's really a question of, of the path and how the public sector would with the leverage. So your thought is, you know, over the next year or so, not much happens, but there's a little bit of less fiscal stimulus, which should be lead to a slowing economy and declining interest rates over the longer term, you know, there are potential for a crisis. And that could either be, you know, a Chinese lending strike, or just bond vigilantes saying, Enough is enough. Is there any third path?


David Abramson 18:12

Well, if you're worried about a crisis, I think those are the two really main things that you want to look for. The third possibility, which is not, you know, hopefully, it's not going to happen. And I can't really it's a geopolitical, something that happens geopolitically, you know, that when there are wars, usually, that leads to a period of inflation, okay. And massive government bond issuance, as they try to finance just very, very extreme military expenditures, right, none of the type that the US has had to deal with. Really, since World War Two, where they've dealt with, initially, the cold, cold war spending, and then as a hedge, Amman, that's not really what I'm talking about. I'm talking about a very major expenditure, a very significant one. And so that's a third possibility to hopefully we will not have to, you know, even think about that. But of course, that's historically how inflation has happened. So those are the two main possibilities for a crisis or a lender strike. But there could be a lot.


There doesn't have to be a big debt crisis out there. It's a risk. It could just be that there's a phenomenal productivity boom to do with those technological breakthroughs that made you wonder if I'm a robot or not, you know, that's something not only does it does it, put a cap on inflation, massive cap, very hard to get inflation when it's so easy to replace people and increase the productivity of people. But also, it makes it a heck of a a lot harder to get upward pressure on real interest rates right, as well. So I don't want to give you the impression that this is baked in the cake just because governments are always responsible. We had many years, where governments and politicians were following the same incentives they always did. And we had a massive bull market in bonds.


Joseph Abramson 20:20

And just bringing things back into the into the near term, you brought up a few scenarios at the start. So if we go back a year, pretty much everyone was wrong on the economy, a record number of forecasters thought that there'd be a recession. And so maybe tell us about some of the puts and takes in terms of the forecast for the coming year? Do you think we'll enter a recession? It sounds like even if we do it's a shallow one. But you know, gun to head?


David Abramson 20:58

Sure. So gun to head, I do think the US will go into recession. And I think part of the reason I think that is because the economy just was unusually strong, and that was unusually dependent on things that were temporary, those two things. I've already mentioned fiscal policy, it's the change in the structurally adjusted deficit, you could have a really big problem budget deficit, a really big one, like us has now. And if it sits there, big, it's not a stimulus, it could actually even be restraint. So that's like the number one thing, the other one you mentioned, has to do with the consumer and their balance sheets. And so what we got with the latest revisions of the household wealth, household balance sheet data was savings were revised up by $600 billion, from what we thought those were benchmark revisions, very important. And what that says is those COVID subsidies and of the improvement in household balance sheets that occurred as a result of them, which we thought and Jamie Dimon thought and everybody thought sometime in the second half of this year, they would be used up. And it's a one time thing. It's a stock, not a flow. Now it's like, okay, it's the first half of next year $600 billion is not chump change, right. But it doesn't buy you two years.


No way. And so what we are starting to see right now, and this I think is more direct answer to your question is delinquency rates rising by banks, not necessarily all financial institutions, but banks, especially regional banks, not only are they tightening their standards, but they're looking to stabilize themselves, the ones that are, you know, they didn't go bust, like Silicon Valley Bank, but they've had stress associated with their deposit flows, the way that they are going to restore credibility, it's very clear what their plan is, they are going to shrink their balance sheets. So you can see that if you look at him to growth, you look at bank credit, they're both contracting, they're down year on year. So it's very hard to make the argument that well, if the Fed doesn't hike rates anymore, then the economy will be resilient to that that's very hard argument to make, it's very easy to make the argument that if they don't cut interest rates in the next six months, that the economy will be under greater and greater wear and tear. And so I'll just also add, and this is a question mark, for sure.


But what has happened in labor markets in the last three months, anecdotally is the workers that got the best wage gains coming out of the pandemic, were in relatively low wage, low skill, low experience, services, jobs, make total sense, because coming out of the pandemic, you didn't have enough of them. But that is changing very quickly. And so there's lots of anecdotal evidence right now from different companies that we speak to that they don't have a problem getting those workers, we can also see it from, like 30,000 feet up. When you look at labor force participation rates, people like my age 62, that participation rate is not going up to where it was before the pandemic. A lot of my friends are retiring earlier than I expected, for sure. But if you go to the 25 to 55 year old, that participation rate is now above where it was before the pandemic. So labor markets are relatively loose. We've seen this in wage growth. It peaked in most segments of the labor market a year ago, even with without the economy weakening. We


Joseph Abramson 24:47

look at the Labor diffusion index, then really the only sectors where employment is showing decent growth are the ones that are still having this post pandemic. Adjust And they're they're largely low wage areas, you know, tourism and hotels, teachers, some people in health care as well, whereas the broad economy is not showing much in the way of, of employment growth. So what about QE it looks like and I know, what's your forecast that at least the Fed is done raising rates? Are they done with QE and and how does that play in terms of rates and monetary constraint?


David Abramson 25:40

So I used to think it was very simple. The idea was that unless interest rates were zero, or I guess below zero, we now know they can go below zero for short periods. Unless interest rates were down to zero, what the Fed did with its balance sheet really wasn't particularly important because interest rates were the binding constraint. The whole thing about quantitative easing was it's a desperation measure interest rates get down to zero, the economy's not responding. What do you do, you try to manipulate what investors and people want to do, you try to get them to take risk when they don't want to take risks, you force down further and further out the yield curve, you forced down the structure of risk free interest rates, so they start taking risk, because they can get it they can only get zero on a 10 year bond or something. I used to think it was that simple.


And so I think it's a little more complicated right now, because there are some signs that quantitative tightening, which is what you know, what the Fed is, has started to do, they're starting to to try to shrink their balance sheet, even though raising interest rates is the main mechanism by which they're tightening, but they're also nervous about this fiscal stimulus, they want to get their balance sheet down.


So they don't sacrifice too much credibility, that quantitative tightening at a time when regional banks are having problems getting deposit flows, because interest rates are very high. And it's really pressuring their spreads a lot. That's prep, probably adding on another layer of tightening. So I would expect that what that the direct answer your question is that they're going to continue to do that. Because right now, today, the Fed is not worried about recession, they would love an economic slowdown, they would love to see the unemployment rate get close to 5%, which they still continue to consider to be quite low. But and so quantitative tightening, helps them to do that a strong dollar helps them to do that tightening bank lending standards, as shows up in their quarterly survey.


They like all that. But what we learned in the past is these things can change very quickly. And the underlying backdrop, even though real interest rates are quite high. And maybe that that's part of your concern, Joe, that part of it. It's this new world where bond vigilantes are not going to let real interest rates go down very much. But what we do know is that inflation expectations right now, and actual inflation, it's just extremely well behaved right now. And so if you get an economic slowdown, and inflation expectations start to go down, they can easily get into two lows, oh, again, which the Fed is not expecting. And so quantitative tightening could very, very quickly reversed the quantitative ease.


Joseph Abramson 28:33

Okay, that's, that's fair enough. And I mean, to me, you know, makes a lot of sense. So, how does this macro outlook, play into the AI potential mania or bubble or what have you?


David Abramson 28:49

Sure. So, I've done a lot of work on this whole idea of the seven stocks, The Magnificent Seven. And for those of you that are really old, if you remember, the nifty 50 stocks of the early 1970s, there were 50 stocks that were considered to be just these amazing companies. And so as the underlying market started to crater in 1973, in the first oil shock, 50 stocks of these 50 amazing companies, they didn't peacoat until much later the breadth of the market, it just starts to fall. And so a question you want to ask yourself Put another way is these Magnificent Seven could be could they be like nifty, nifty seven, where they're amazing companies.


They have incredible moats around their business, phenomenal margins since March 2020. Those seven companies in the s&p 500 Those seven big tech companies, they've expanded their margins by four points. And since March 2020, the whole rest of s&p 500 s&p 493 If you want to call All it, those margins have shrunk by two points. So what I'm saying is, they're great stocks. But in the past, you've had these great stories that really fit the times. And they go into crazy unjustifiable valuations. And that's what happened with the nifty 50 had happened with the large cap tech stocks in the late 90s, like Oracle, Cisco, Microsoft, Intel, Dell. And that's what you have to worry about the multiples right now, for those seven stocks, although the four P is still quite high by the standards of your basic company.


They're the lowest they've been in 10 years that Ford P E. So the the mania type story that we would be concerned about is go to the Kindleberger; Charles Kindleberger bubble framework, which has been very, very helpful to understand what happened in Japan, with gold in the 1970s. With the tech stocks in the late 90s. Very different financial assets, but they all fit the following framework, they have four things. The first is their real, it's not just this smoke and mirrors thing, they have something that is truly compelling. It's a truly compelling, usually a macro story, like gold in the 1970s was, it was just a phenomenal inflation hedge, you couldn't print more gold, there was a display called displacement. So of course, with these big tech stocks, there's already been a displacement, they're already amazing.


But clearly AI is something that a number of them can really take advantage with, of with their big data and the amount of money that they've been investing in research, etc. It's really impressive. So there you go, number one, number two, extremely difficult to value because you're in a new world. And that that convinces people to say, the old people don't understand, you know, you can't look at traditional valuation metrics. Because this is new, this is amazing. We've never seen it before. And you need a different metric. So in the late 90s, with the internet, it was like, well, these companies, were always going to lose money for years. And we know they're worth a lot. So let's just look at the number of people that are going to their website and value them on that basis, so called eyeballs. And so in the case of these big tech companies, you could get into a situation where the Ford multiple goes up to like 80, or 100, like the nifty 50, stocks got two, which is totally unjustifiable for these companies, because they already dominate their sector. So it's the difficult to value. checkmark.


The third thing is broadening participation, usually the retail crowd where you get a number of investors, and they get very excited about the story and their neighbors are making money or their friends are making money from it. And they're not too worried about valuation or gravity or anything like that. It's just are they exciting, I'm going to buy more, but I'm not going to take big chances. I'm going to wait for corrections. I'm gonna buy the dips. And so I think that really is step mentality is is in the early stages of being created for these seven companies. Because what happened was, in 2022, those big tech stocks started to correct as the tech, you know, the tech capital spending, Staples started to move down and they had over hired and overpaid. And so they got hammered.


And the people that were not in those stocks, they felt great for about three months. And then those stocks started to recover. And any money manager that was benchmarked to the S&P 500 their tracking error was massive if they weren't in those 567 stocks, and then the regional banking crisis hit. And the big tech stocks went through the roof because they had massive cash reserves, and very little debt. And so people became convinced that oh, they're growth stocks, oh, they're market leaders. And oh, they're also defensive, you can't lose. So check mark for number three retail investors and money managers that don't want to have a lot of tracking error with things like the S&P 500. That's broadening the participation, for sure. And then number four for Kindleberger is plentiful liquidity, and we don't have that right now. And so if the Fed starts to ease, if there's more generous money growth, or money growth relative to underlying economic needs for bank credit starts to go up. That money could really feed the flames of a real historic mania in those stocks sometime next year. And that's exactly what happened in the late 90s. It's a longer story. I know we have a shortage of time, but certainly for those of you that remember the y2k problem, which didn't turn out to be a problem, but the Fed flooded the system with liquidity in 1999 because they're concerned there would be a computer bug, January 1 2000. And that money created a phenomenal upward pressure in any tech stock at that time. That's what we could look for next year if the Fed is in easing mode. And there's not an inflation problem.


Joseph Abramson 35:18

Okay, and you know, switching tax, maybe limiting things to two or three minutes. you've liked traditional energy for some time. Northland bought into that earlier this year, and our clients have benefited spectacularly from that we believe that this is an intermediate term story. I know more recently, you might have warmed up a little bit to some of the energy transition and and the new energy which we have zero exposure to. So you know, at this juncture, what do you favor, you know, traditional oil stocks, or some of the newer, greener versions?


David Abramson 36:07

Sure, so we definitely favor the fossil fuels. Full stop. So I know I want to keep this real short. But anytime there's a US recession every single time, not the 1970s, because it was a supply shock. But every time since we have the chart, oil prices go down 10 bucks, 15 bucks, 20 bucks, if it's a mild recession, way more if it's a serious recession. So we expect a mild recession, this is not going to be a nice smooth upward move in oil prices. But I really liked the way you put it, Joe, intermediate term correction, we've had some dollar strength, we've had an easing in the geopolitical risk premium, because what's going on in Israel and Gaza has not escalated, at least as of now, of course, that could change in a minute. But it hasn't. And Hezbollah and Iran's so far have not shown signs that they wanted it to escalate. And that takes the geopolitical risk premium, right out of the right out of the oil price.


As far as I'm concerned, that can give you dynamics three months, six months, for sure it can, especially with a strong dollar. But it doesn't change the medium term story at all. And the medium term story is very simple. It's very expensive to make this energy transition, it's very costly. And if the world economy is weak, next year, governments are going to get really, really nervous about these big subsidies that it costs to do the climate transition and green investing all this kind of stuff. And if anything, it's going to slow down. And this is what we've seen with GM, for example, the EV infrastructure network in the US, is just simply not appropriate. For a big rise in EV sales, you have to make a massive investment. Other places like China are much further ahead for sure. It's not like the story is going to reverse. But you're going to need lots of oil two or three years from now. And it's not incentivized. Plus, you're seeing possibilities. We'll see but pretty like good possibilities that US shale production is peaking, even in the Permian. And even the possibility that Russia is having trouble boosting its production, because they may be running out of parts and sanctions, we'll see. But that will be a major problem for oil supply.


Joseph Abramson 38:38

view is, you know, assets are attractive, you know, at a certain price. And I think that for EV, there's too much non economic money coming in. In other words, you know, government money, which means that the project's themselves don't necessarily have to have a positive return on capital. And that's led to too much money chasing too few projects. And then we've seen interest rates and costs go up a lot. And so from what I'm hearing among some of the bigger players in that field, is there's a lot of projects that are just uneconomical right now. And there may be a wave of defaults over the next few years. And then when you see that Rubble, long term, there's some very positive things and I think it'll be attractive but not now. And our thesis for traditional energy is a little bit different. We we do see demand structurally declining. But we think prices will not only at some point take out 150 But to something on declining demand, because there won't be any supply. It just doesn't make sense for these guys to explore. So in other words, without spending much money, they're going to get higher and higher revenue, just like we saw in tobacco in the in the 1980s. You know this in stocks are the best performing sector, even though demand was declining, and they were almost being taxed out of existence. So our thesis is the thing to watch out for is that governments, you know, put on some of these taxes like we've seen in Europe so far, we're not seeing them in North America. But this is part of our long term thesis. So maybe to close out. What is your number one non consensus idea for 2020? For?


David Abramson 40:54

Sure. So I think if I was to talk about investments, it would certainly be that big tech idea that the major overshoot, but I think probably more valuable for for the listeners is what's going to happen to inflation and wage growth, I'm not talking about a collapse in margins, or anything like that I'm talking about next year, it could easily feel like 2%, inflation is too high. Again, you remember, the Fed missed their inflation target, eight years in a row, below 2%, every single year.


And so one thing for all of you to watch for is inflation of 0%. Next year, just a real collapse. And the reason I say that is, there's two parts to inflation. I mean, there's a lot, of course, but you can split it into two parts, the San Francisco Fed does it the part of inflation that moves with the business cycle that the Fed can kind of directly influenced by influencing the economy and the rest. And the rest is driven by like technological innovation, health care, globalization, long wave has nothing to deal with the business cycle. And that got up to try to remember the peak got up around 8%, about a year and a half ago. And now it's falling very sharply. And this doesn't have to do with the Fed or the economy.


It's just an underlying residual. And so that's already falling. If we get an economic recession, where the cyclically sensitive stuff goes below 2%, you could, you could have much, much lower inflation than people think now if it's in the context of a more severe recession than we expect, that you're gonna have a big problem in the stock market. And stocks which have outperformed bonds by about 2000 basis points this year, maybe bonds will outperform stocks next year by 2000 basis points. That's not our view. But watch out for almost complete evaporation of pricing power. That's what I would be looking for. I don't know anyone else is looking for that.


Joseph Abramson 43:07

We're pretty close. But we read Alpine macro research. So maybe maybe we're biased. I mean, our view is inflation is already below that target. Right now. If you kind of annualize even the last three months, not just one month number, so we certainly have a view, you know, consistent with that. So, you know, maybe I'll summarize and you can chime in if I missed something. So Dave is looking at bond yields, getting down to 3%. And the idea there is the economy is going to slow more, and we're going to go from kind of fiscal spending being stronger to a little bit weaker, which moves fiscal thrust into a negative position.


The only piece missing for the AI bubble or Magnificent Seven or what have you to really blow up is kind of easy monetary. So if that plays out, we get cut in interest rates and maybe at least no quantitative tightening, maybe quantitative easing, then then this bubble will will really move into into full throttle. Regardless, we're gonna have, you know, maybe a cyclical six to 12 month period of weakness in oil prices. But this is a temporary setback in a structural bull market. Dave has his views and we have our views, but they they both agree. And if we talk a year from now, then our listeners will be most surprised and Dave's competitors will be most surprised by maybe possible deflation? Did I capture anything? Or did I miss something?


David Abramson 45:07

Oh, that was fantastic. Yeah, I very much agree. And so one thing that we didn't get into is what's going on in China. And if China continues to have a slow burn, not a meltdown, but they just have great difficulty growing over the next five years. That greatly increases the chances of everything that I said coming true.


Joseph Abramson 45:32

Okay, thank you so much, and we'll chat again soon.


David Abramson 45:35

That's great. Thanks for having me. Good luck to everyone.


Joseph Abramson 45:38

Okay, cheers.


SUMMARY KEYWORDS: China, Bonds, Rates, Debt, AI, 2024, Outlook, Yield,


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