The energy transition will be disinflationary since it ties in with broader trends in digitization and automation which ultimately drives down costs, said Macquarie Capital’s Head of Asian Strategy and Global Strategy Co-ordinator Viktor Shvets. Shvets spoke to Kitco on Friday from Hong Kong.
Worry more about disinflation over the long-term not inflation says Victor . He is global strategists at Macquarie bank and also author of great rupture. Victor, welcome to Kitco. Thank you very much for having me, Michael, uh, Victor, you said that people who worry about inflation overlook, that the economy is just different today than the economy of the past.
Yes indeed. Um, I think people are looking at today's environment as if we'll live in industrial age. Everybody looks back to 1960s to 1970s, but we don't leave the 1960s and seventies. There are fundamental differences. Technological environment is very different demographic environment, very different labor market and capital markets do not function the same way.
Uh, just, just to give an example, uh, if you go back through time, labor was a primary productivity driver. Uh, today that increasingly is no longer. So if you go back in the past labor usual, it was unionized even in the United States one-third of the labor force was unionized today in almost every country.
Unionization level is extremely, extremely low. Back in the olden days, people were employed in factories today. It's mostly service orientation or the gig economy is where people are really stretched considerably. Now, if your sink of corporates are again, 50, 60 seventies was a time of inventiveness, not innovation.
Every single we have today was invented in forties, 50 sixties and seventies, but the products, all it came through over the last 20 or 30 years. So if you were corporate in 1960s, you had a brand, you had a product, you had a distribution system today. Corporates buying lodge loses their pricing power.
Occasionally they gain it. But then they lose it very quickly. They lose control of their product. They lose control over their distribution. So once again, that's functions differently. Capital also very, very different back in the olden days, it was all about roads and bridges and factories and machinery.
Today 60% of private sector GDP in the us is intangibles in Europe. It's between sort of 25 to 50% intangibles don't function the same way. They don't have the same capacity constraints that can give you a spillover effects and synergistic benefits quite easily. So all of that is different. You also have very different demographics compared to sixties and seventies.
Um, and at the same time, uh, what you have is leverage and financialization. The legacy of the last three to four decades. We more than six times more leverage than what we used to be, uh, in 1960s. So when people say, Hey, you know what, we'll run out of capacity constraints. How do we know what our capacity constraints in this world?
Um, and that's a reason why Phillips cup. Uh, stop working for at least the last several decades. That's part of the reason we can't really compute what is inflation neutral, uh, unemployment rate. That's why the reasonable relationship between unemployment and inflation. So to me, I'm not arguing that there is no constraints.
Clearly there are, and we will find at some point, uh, but. What I'm arguing constraints, a melting away in front of us every day. Those constraints getting further and further and further away from us, which means we have to run much, much harder to catch up. Now that implies a decent inflation is still the predominant trend.
Even though there could be spikes of inflation in between. Now you did mention a disinflation and we do have Biden's infrastructure package that is really trying to land right now. Um, uh, you said something interesting in a previous interview, for example, you said that oil could be inflationary, whereas lithium, it could be disinflationary.
Yeah, well, essentially what technology does is reduces marginal cost of everything to zero. So information almost at a zero point now, trading costs almost at a zero point now publication almost whether it's book or anything else, almost at a zero point. Now over the next 10 to 20 years, we will be disintermediating physical Metta.
Rather than information digits. In other words, it's all about new energy platforms, new transportation platforms. It's about robotics automation. It's about Infotech biotech. It's about green energy. So it's going to be a more capital intensive era than the last 20 years, but it's not going to go into bridges and roads and factories and machinery.
It primarily will go into digital age, bringing that digital age. Forward crystallizing it. Uh, and what digital age does is reduces prices. Uh, and so the result is LeSean price can go up, but battery prices continue to fall. Whereas oil and much more traditional industrial age commodities tend to be inflation inflationary that tend to have, um, supply impact, uh, on the inflation rate as you go forward.
So the difference industrial age has capacity limitations. Industrial edge has limited scalability. The digital age have much weaker capacity constraints and almost no limitation on how much you can push it. And therefore over time technology reduces marginal cost. So any commodity that you use, whether it's semiconductors, if you regard semiconductors as commodity is the way I do it.
Whether it's lithium, whether it's culpa, whether it's cobalt, the nickel all around us, they're contributing to technology and digital age, which means that contributing to disinflation is something that oral or coal. For example, you mentioned leveraging, do we need to be concerned about government spending?
Yes and no, in so far as, um, it's all about how we look at the government debt. So the question I usually ask people globally, we currently have over $400 trillion of pieces of paper. Now, if you add a derivative contracts, and if you add off balance sheet financing, we really could be looking as much as $800 trillion.
So that's heretically five, 10 times GDP. Do you really say any of this will ever get paid off? Uh, well the answer is no. And so what we engineering is a control default, uh, and that control default can take couple of forms. Traditionally, it was about inflation. In other words, you erode the real value of debt as you go forward.
But now we have different means. Uh, certainly Japan invented it, uh, about 20 years ago, which was known as a QE. Uh, the rest of the world joining, uh, around 2008. So we now have central banks and treasury functions that can actually eliminate most of the debt as you go forward. Uh, so when people say, oh my God, we're spending so much money.
Interest rates will go through the roof. I usually say to those people, have you heard of bank of Japan? Um, have you heard of federal reserve? Uh, if you think of Japan, uh, 20 years ago, people were afraid that if inflation takes off and interest rates adjust, Japan will go bankrupt and we'll be spending 80% of his budget, just servicing debt.
You know, how much Japan is spending now on the debt. 4% of the budget full, not 40, not 80 full. And so as we progress, um, there are other avenues of dealing with debt, uh, which are much more effective. Uh, then, uh, then just inflation. So people who say we must inflate, uh, very much leaving again in industrial age societies and not recognizing extent to which we have changed.
Now. I'm the first one to accept. If we go back in time, if we could, uh, back to 1980s, we could make decision not to financialize. Why did we do that? Why have we decided as a society globally? That we need to have debt. Uh, why have we reached the stage that we need four or $5 of debt and financialization for every dollar of GDP when fifties and sixties and even seventies, they only needed one.
So, so what would make us to make that decision? Um, and if we go back in time and say, you know what, let's not have it. Uh, and if we decide not habit, the world today will be much smaller. Most people will be much poorer. Uh, emerging markets would never have emerged. Uh, and now that would have China by the way.
Uh, and so, and so we're a product of what we have decided four decades ago. So there is no point of going back and saying, we need to reset because reset implies that your 401k or worse Nasim. Uh, it implies that the house you're living in for which you might have paid a hundred dollars is only worth $50.
So that type of reset. Is completely unacceptable either from a social perspective or from a political perspective. So some form of trying to ignite a little bit of inflation using central banks and treasury functions to manage the sort of default or very long periods of time to eliminate debt. Syrup perpetuals and QEs.
That is our future. Uh, not reset. It. China's economy has come to the fore. It's really the story of this century. Uh, despite the impressive leap, uh, what could hamper China's economy, the way that the country is currently organized politically. Yeah, it's a great question, Michael. Uh, because, um, most people look at China and say, either it's a dramatic illustration, what the state can do.
Um, and what I'm will control sort of environment can achieve, or they argued. Sean is just a paper tiger. Uh, and so there are those two extreme views right now. Now the reason you have two extreme views, uh, is, uh, China developed. It's a call to make quad, distinctly different. Anybody who expected China to become a liberal free market economy, uh, we're proven decisively role.
Uh, and so the question going forward, given the China already caught up with the industrial age, given the China has already gone beyond, uh, the industrial age. Can you invent and whilst you're not free. Uh, one of the lessons from my book was to say, look, you know what? The lesson of last 500 years was that if you don't have a freedom of expression, if you don't have a freedom of exchanging views with other people, if you don't have a freedom of exploration, then you are destined to oblivion.
That's what happened to Imperial China. That's what happened to Imperial Russia. Uh, and that's why England had its industrial revolution. However, We're changing. As I said, the government doesn't function the same way as the capital doesn't function, the same way labor market doesn't function the same way.
Uh, at the same time, increasingly we have a much stronger computational power. We have artificial intelligence gradually on the horizon. Uh, you have declining demand for post-docs people who finished the PhDs and are getting ready to move beyond them. So the question becomes, okay. In that environment where humans are becoming less important in either innovation or inventiveness, do you need to be free?
Um, uh, or if you're not free, it doesn't mean that you're destined to oblivion. And so China is facing it right now. And John is trying to prove that degree of freedom that people act society does not need to be as extensive as what west believes. And that will not preclude you from being inventive. And that will not preclude you from innovating, and that will not preclude you from accumulating wealth.
And in many ways, the west kind of agrees as well. Because if you sync up the role of the government these days, certainly over the last several decades, the government's been involved far more in suppressing and managing business cycles far more in suppressing in managing capital markets cycles than they've traditionally been.
So one of the question I ask in the book instead of China imitating us, are we starting to imitate China? Uh, and can we find the right equity broom? In other words, uh, they put a brave which still preserves the rights that we all enjoy. Um, and at the same time, uh, provides us with the management of economy and management of our future.
That is in line with what people want. And the interesting thing, Michael, is it changes in generations because there is no question that millennials and Z generation have used much up. To the grand grandparents, uh, then to their parents. Uh, in other words, the younger generation want to have environment, which is a less intrepreneurial and Mo and more bureaucratic, um, less, um, free.
Uh, but much more fair. They don't subscribe to the idea of gross at any cost. They are much more communitarian. They much more sharing and far more society Oriental or climate Oriental, uh, then the previous generations were, uh, and so what you have, you have a generational impact driving at the great state control.
You have technology. Driving you to greater state control. And I don't think the west will imitate Shauna completely, but all I'm saying some of the differences between the way China runs its economy, uh, and the west Ron's its economy, uh, actually narrowing rather than getting in another interview. You said that if there is a financial crisis, cryptocurrencies could be the culprits.
Yes. Usually central banks and investors look at the past. That's a very traditional human way of doing it because if we didn't look at the past, if we didn't draw the patents, we probably would never have survived the jungle of Africa. So, so everybody loves looking at the patents. And so everybody you're looking back and saying, what caused our problems?
Was it debt, uh, whether the banking system, well that the mortgage markets, uh, what actually caused the, the prior problems and central banks are not immune from that. Uh, they are fighting always yesterday's battles. They're not really fighting tomorrow battles until tomorrow. Right. And so the question is, uh, what is tomorrow.
Um, and to me tomorrow is not about mortgages. It's not about real estate. It's not about the banks, which were quite recapitalized and now in a much better shape, uh, than what they used to be. It's not even about NASDAQ. Uh, NASDAQ today is populated by highly profitable companies, which has a lot of cashflow, a lot of return on equity or assets.
That's why the multiple today on MasTec is only three times, not a hundred times. The way it used to be back into south sun, but there is an underbelly of a NASDAQ, which is derating now. And there is a new asset clauses syncs like digital assets, uh, that could be cryptocurrencies that's could be part of your blockchain transactions.
That's an NFT, uh, that's uh, um, uh, special purpose vehicles. So specs, um, And it's really a, how they relate to a child and their size. First of all, the grown dramatically until Ray just latest correction, there were worse, at least $4 trillion. And the way I usually say, if you lost a billion dollars, it's just a bad day in the office, but if you lost a trillion.
That's really is systemic. So first of all, they've grown alone. Secondly, they becoming very interconnected. Uh, in other words, if you go back to all five oh six oh seven, it wasn't so much that the Mobidius WebEx is the way you combine them, the way you package them and the way you leverage them, uh, that created global financial crisis.
And that's exactly what is happening right now. So, if you invest in Cassie would arc, uh, ETF, for example, she invest into Tesla and she invested in Bitcoin that Tesla was investing in Bitcoin. Uh, then SPACs are now buying triple C debt and also investing in the new ventures. New startups. And the likes of Bitcoin or other cryptocurrencies.
So increasingly it becomes very insane issues. Uh, and you doubling exposure and tripling exposure, uh, was operationally recognizing that some of the exchanges now allow you three full-time celebrity. So even a hundred. Tom's leverage. So you can see how, if those assets continue to proliferate, if the valuations continue to climb, simply because people have nothing better to do with their money as they go forward.
It's really the interconnection between private capital, between, um, speakers, they special purpose vehicles and specs, uh, between digital assets NFTs. That's some way in that inter intersection, uh, there is going to be a blow up. Uh, and because, um, it's going to be so large at some point in time, uh, it will become systemic and the federal reserve or other central banks will not be aware of it, uh, in my view, until it actually happens.
So to me, that's area will be the most likely area where, uh, the markets could blow up. You know, there was digital assets and everything associated with those digital assets. How does gold look to you? Vis-a-vis crypto. Well, the way I look at it, uh, cryptocurrencies are not currency in terms of medium of exchange.
Uh, it is unlikely. It will, they will become, uh, mediums of exchange, uh, cryptocurrencies, um, are unclear how much they will provide you either with independence. Uh, or safety or protection. Um, and so in extreme, you can argue that cryptocurrencies are a protection against the meltdown. Uh, of the monetary system and 10 years ago, the meltdown of monetary system would have at a zero probability of occurrence today.
It's not very high, but it's not zero. So it, does it provide you with some store of value? Yes, it does, but it's usually better to have a store of value that actually have some kind of a pedigree and some kind of usage in the system. Uh, not necessarily income, but at least usage. Uh, and that's what gold comes in.
So if you look at the relationship between, um, cryptocurrencies and inflation or interest rates, it's not very good. Cryptocurrencies has a best correlation to equities rather than anything else. But gold actually does have a relationship to both inflation and interest rates and much less. So. To equity markets.
So I want to tells you essentially, if you're worried about inflation, if you're worried about getting out of control, uh, gold provides you with a safety mechanism. So, so to me, neither goal, no cryptocurrencies are really investible assets as such, but they do provide insurance for your portfolio, uh, against extreme outcomes, uh, that potentially could occur.
I, and in that respect, Uh, I then terms of volatility. Remember cryptocurrency is a 10, 20 times mobile utility than gold or the currencies themselves either in terms of volatility or in terms of usage. I feel if you're concerned, Are the inflationary outcomes. Uh, then, uh, then gold, uh, provides, uh, provides a better hedge, uh, than, uh, than cryptos.
Now. Also you need to separate everybody calls everything cryptocurrencies, but a lot of them actually not aiming to be currencies. Uh, there is no question that blockchain, uh, together with artificial intelligence are the two biggest themes. Uh, over the last, over the next 10 to 15 years, uh, and you can put robotics automation on the artificial intelligence because that's where it's going to belong.
So that's your biggest themes going forward and blockchain will and are revolutionizing ever say, for example, banking sector clearly is not going to look anything like. Uh, what it does today in five or six years time. So it's revolution, Isaac money, market, capital markets, registry systems. Someone has to be a little bit careful because everything is lumped together.
Uh, as a cryptocurrencies, even though the underlying technology is actually used, uh, for many uses that are going to be incredibly important as we go forward. Could you expand on that Victor? Uh, why you say that, uh, it is going to be a, this, uh, blockchain, uh, that is going to be, um, well, you know, the word is, uh, defy of course.
Uh, I assume it's just the taking of these organizations and then just, uh, creating a common ledger. Yes. Yes. It's a much easier, much quicker, much lower transaction costs. You don't need to have, um, correspondent banks, for example, to transact, you can bank effectively areas that are unbanked right now. In many forms, it also would lead you to central bank, digital currencies, uh, and central bank.
Digital currencies will perform many functions, including wholesale tokens, retail, tokens deposits, lending functions. And so if you are a bank today, Um, you have couple of problems. Problem. Number one is that you're living in a world where we have access capital. As we said, we have five, 10 times more capital than we need you saying surely.
So banks are not very good when there's too much capital around. Uh, number two. Capital increasingly allocated by the government for social purposes rather than private sector oriented purposes. Again, banks are not really structured for that, uh, three technology, whether it's blockchain or more conventional technology and AI technology enables FinTech companies to accumulate deposits as well as Josh and assessed risk.
As good as a commercial banks can do in fact better. That commercial banks can do it. And then you have a problem of central banks interference, central banks, increasingly determining cost of money and the volume of money. So in other words, if central banks fix the price and they don't like what private sector provides them, they just create liquidity.
Or they create liquidity. And if they don't like the price that private sector gives them, they fix the price. And so if central banks fix the price and warranty, why do we need prime dealer sport? Uh, and the answer, we probably don't need them. Uh, and then of course, central bank, digital coin coming in and China at the end of 21, 2022.
And then for 22, 23, that would apply to most other areas. We'll give another tool for central banks that can be used to, as I said, wholesale token retail, token lending deposit, taking everything. Now, central banks will tell you they don't want the decent, immediate the banks. They don't want a loss of deposits out of the banking system, but experienced to if central banks have a tool.
They will use it, you know, the next pandemic, the next is off stuff. They're going to use it. Uh, and so the question is if central banks increasingly will become not as relevant in multiplying money, if they're not as relevant in determining the price of money, if they notice relevant in garnering the deposits or assessing credit risks, uh, that what are there, therefore, uh, and the answer, it's not clear to me.
Uh, what exactly they're going to do? I'm sure that will be functions. I'm sure there will be pockets. I'm sure that it will be packaging. I'm sure that we're going to do things, but one thing is clear to me. Franchise value of the banks will be completely determined by central banks are in other words, not determined by the market.
It's central bikes, but will be determined what the banks have worse, what their spreads will be. And where they're going to function. And prior to Corona virus, and prior to expansion of digital technology, the way we have over the last sort of 18 months, uh, you would have set all of that, maybe 10 years away.
Uh, now you would argue no, probably as little as five, uh, it could actually occur a lot more rapidly. Victor, thank you for speaking with Keiko. Thank you very much, Michael. He is Victor Chavez. He is global strategists at Macquarie bank and author of great rupture. My name is Michael McCray and you're watching Kitco news. .