ECONOMY

Transcript: Viktor Shvets on Inflation and the Next Financial Crisis

On this episode of Odd Lots, we speak with Macquarie Strategist Viktor Shvets, to get his take on inflation. Unlike many other commentators, Shvets doesn’t see much risk of inflation over the long-term, arguing instead that changes in the makeup of the economy and the nature of fiscal stimulus are more likely to result in disinflation. He also talks about how he thinks crypto assets  could spark the next financial crisis. You can find the episode here. Transcripts have been lightly edited for clarity.

Tracy Alloway: 
Hello and welcome to another episode of the Odd Lots podcast. I’m Tracy Alloway.

Joe Weisenthal:
And I’m Joe Weisenthal.

Tracy:
So Joe, we just had a Fed meeting, where basically the central bank decided to not change anything. And the market reaction was let’s see, stocks went up, but probably the most interesting move that we saw was in the three-year breakeven. And that actually went up, I think, eight basis points to the highest since 2008. So you saw this immediate assumption in the market that we would get a bunch of inflation because the Fed’s on hold for longer, and meanwhile we have fiscal stimulus and the economy is recovering really strongly.

Joe:
Exactly right. I mean, that is, you know, it’s sort of interesting. I was watching the press conference and there were so many questions about inflation. So many questions about when the Fed is going to perhaps pull back one day on its asset purchases, the so-called taper, and that the answers were really the same. Like, Chairman Powell was incredibly consistent. (By the way, I should mention we’re recording this April 29th, the meeting was yesterday, April 28th). But the answers were incredibly consistent. He’s like, look, I’m not gonna do anything until we get there, until we see the inflation, until we get the full employment and everything. And so he’s kind of like, stop asking, but this dynamic in which everyone sees these pressures are building in the economy for an unknown length of time and a Fed that’s willing to not do anything until they actually emerge in a sustained way. And so you get these expectations of a greater a reflationary forces at the minimum to come.

Tracy:
Yeah. I find this a really interesting moment in markets because, as you mentioned, the Fed is pretty emphatic that it sees inflationary pressures as transitory. These are things like commodities prices going up because of supply bottlenecks from Covid and the central bank expects they’re not going to last that long, but meanwhile, the market seems to be positioning for something very different, at least if you look at the three-year breakeven that I just mentioned, that’s three years out and certainly that’s pricing in higher levels of inflation. At the same time, it’s really interesting that the market seems to be taking that stance because of course we’ve had 10 years of no inflation or deflation, despite lots of monetary easing from the central bank and a relatively strong economy, we haven’t seen price increases like you would have expected from some economic models like NAIRU or the Phillips Curve. So. It’s a really interesting moment in time and today we’re going to be talking all about inflation with one of our favorite Odd Lots guests. We’re going to bring back Victor Shvets, he’s a strategist over at Macquarie. Viktor, thanks for coming on again!

Viktor Shvets:
Thank you very much, Tracy.

Tracy:
So do you want to lay the scene for us? When you look at the world right now, what inflationary pressures — if any — do you see?

Viktor:
Well, there is no question that if you go through the next six, nine, 12 months, whether you look at the United States or whether you look at other countries as well, inflation will pick up. For exactly the same reason as what you’ve just outlined — base effect, recovery and demand and supply side bottlenecks. Whether you have a war or a pandemic, usually it has a demand and supply shock in some form. Supply disappears, companies become zombies. They are incapable of providing some services. Some of the capacities are just withdrawn, investment goes down. And so when you start recovering, suppliers never quite know how much capacity should they provide. Will demand go up 20%, 30%, 10%? And so the result is it usually takes four or five or six quarters to what I would call normalized demand and supply.

And I think what the Federal Reserve is saying is that this is a transitory period. That we are not confident that inflation actually will be sustainable. And as we go sort of forward to the end of 2022 or into 2023, we’re not that confident that there will be such a strong inflationary pulse. And I find myself in an unusual position because I usually quite disagree with many things that the Fed does. I find myself in an unusual position to actually agree that it probably is the case that the pressures are transitory. And if you think of inflationary breakeven rate, the interesting thing is that the five by five, for example, are lower than five. So clearly even the market itself is assumes that there will be more inflation to begin with and then it comes off later on.

Joe:
So when you say the five by five, what you mean is the market has expectations for where inflation will be over the next five years, but there’s also expectations essentially over what five years out will look like. Five years out from now, and kind of 10 years out, I guess. And you have this initial hump — the inflationary pressures now — but then the market is expecting sort of a return to normalcy after that?

Viktor:
Yeah, the market is not anticipating deflation. The market is not anticipating disinflation. But it doesn’t anticipate a runaway inflation where you’re consistently getting 3%, 4%, 5%. Because remember, if you just think of  G-5 economies and if commodity complex doesn’t move terribly far from where it is today, but sort of going forward, then it’s all mathematically correct that inflation will go to around 3%, 4%, maybe even touch 5%. And that compares to G-5 inflation, say in February, was only 0.7,%. In March, it was only like 1.5%. So there is no question inflation will go up, what the market is saying is that they think, and I would agree with that, it will pull back. In fact, I will go beyond that and say that disinflation is far more likely longer-term than 2.2%, or 2% inflation.

Tracy:
There are people out there — and Larry Summers sort of springs to mind here — but there are people out there who are describing fiscal stimulus combined with easy monetary policy as irresponsible — I think that’s the way Summers put it — but something that will ignite big price rises that the Fed doesn’t appreciate. Obviously you don’t agree with that argument, but what do you think it is that they’re getting wrong here? I see lots of people, for instance, reaching to the analogy of the 1970s or the 1960s as an era of high inflation.

Viktor:
Yeah, they do. And there’s a lot of investors and commentators who seem to feel that we’re probably somewhere around late sixties and yes it will take a bit of time, but ultimately, we are going to unanchor, so to speak, inflationary expectations and inflation will be much, much stronger than most people expect right now. I completely disagree with that. And primarily I disagree with that — whether it’s Congressional Budget Office or whether it’s Larry Summers — they’re all using very much an industrial age framework. In other words, the era where capital was capital. Fixed assets, were fixed assets. Labor was labor. None of those things are true anymore. So if you think for example, U.S. private sector GDP is now 60% intangible assets. If you look at Europe, depending on the country you choose, it’s 25% to 50% intangibles.

Even in China, it’s anywhere from 15% to 20%. Why is that important? Well, intangibles don’t have the same capacity constraints. They’re incredibly fluid and they spill over from one industry to another, the good synergistic benefits. So it’s a first point to remember that we’re not actually building roads, machinery, factories, railways and the rest of it. It’s a very different investment we’re making. And if you think of Biden’s infrastructure package, Republicans are right to say that only about 20% is real infrastructure. But that’s the whole point — that we should not be investing in real infrastructure. We should be investing in the future. So that’s the first area, which is capital and where do we invest, and how it behaves.

The other area is labor. Remember everybody is still relying on Bureau of Labor statistics sort of classifications. Are you a plumber, are you an electrician, business professional. Are you full-time? Are you part-time? When in reality, labor is really stretched in many areas. For example, you’re recording now this conversation. In the past, somebody else would have been recording. So you are stretched. You’re doing many jobs in a service-oriented industry. 20% to 25% of employees are now either non-conventional or gig economy. And so labor doesn’t function the same way as it has done in an industrial age. And so the way I basically describe it is capacity constraints — incredibly hard to compute even in the good days — today it’s almost impossible. In fact, I would argue capacity constraints just melt away in front of you. Every day they’re just going away, higher and higher. And to me, that explains why Phillips Curve did not work and hasn’t worked for several decades. And by the way, it even predates China. It didn’t even work in 1990s, forgetting the last 20 years. It also explains why commodity prices could go up but battery prices, for example, go down. It explains how we can ignite shale gas revolution. Remember shale gas was invented or for the first time tried in 1947, but in 1973, we couldn’t respond with shale gas, but today we can. So to me, it’s technology, financialization, changes in the functioning of capital, fixed assets, intangible assets, labor — all of that implies to me that I don’t think we really facing capacity constraints at all.

Joe:
You make a very compelling argument that various structural factors in the economy, we’re unlikely to see a repeat of the 1970s, that the sort of general conditions that we experienced, or at least the general inflation conditions, that we experienced pre-crisis will probably be more the norm after the short-term bottlenecks. However — and you mentioned Biden, again last night hearing the big sort of Biden speech laying out his infrastructure plan — and yet, however, we do seem to be having this big political shift. And the big political shift that we keep talking about on the podcast, it’s multifaceted, but the big thing for us is this shift from a reliance primarily on monetary policy as the main driver of macro stabilization, to fiscal policy. And that feels like a pretty big deal. So setting aside our current commodity constraints and bottlenecks, this new thinking and this sort of new willingness of a democratic leaders to spend more, at least in the U.S., perhaps in Europe and elsewhere, that feels new. How does that play into the mix and thinking about what the post-crisis economy is going to look like for you?

Viktor:
Absolutely, Joe, you’re totally right. It is a shift and coronavirus accelerated that shift. By the way, that shift was going on even before coronavirus. Almost nobody was exercising much restraint on fiscal spending, even prior to coronavirus, but Covid accelerated this process quite dramatically, and people accepted, and people, in fact, increasingly demand the spending. And so from a political perspective, it gets easier and easier to ignore sort of the guidelines or constraints of fiscal spending or financing or anything else. And so that is a major issue. Instead of just relying on a monetary policy, you’re now relying on a fiscal policy with monetary policy in a more supporting role.

However, a couple of things to highlight. Number one, where do we invest money now? Well, if you think of Covid-19 checks, for example, according to Federal Reserve, only 27% of the money was spent. The other 70%-odd went essentially either into financial speculation, you know, Bitcoins, equities, real estate. Alternatively, it went into stave off the bankruptcies, to repay the debt. And so, and so what you have seen is a relatively low fiscal multiplier. Now infrastructure, theoretically, it has a much higher, larger multiplier, but again, I’ve just said a second ago, only 20% of what Biden wants to do is real infrastructure. If you invest in green energy, alternative energy and transportation platforms, if you invest in R&D, fundamental research, this is all very, very good stuff. And actually longer-term raises your capacity capabilities, but it does not have the same fiscal multiplier as building a road or building a dam. If you think of human resources spending, that’s an even lower multiplier and much longer lead time, even though it’s totally appropriate and it’s absolutely the right thing to do.

So the first thing to highlight is that everything we’re doing today on the fiscal side is either exceptional circumstances — we justify it because it’s like a war, you know, we’re fighting a war, that’s why we’re doing it. Alternatively we’re doing something for a very distant future, which in turn is disinflationary. If you invest in oil, that’s inflationary. If you invest in lithium, that’s disinflationary. And so the way I look at it is we are not investing enough in the areas that actually would generate longer-term inflationary outcomes. In fact, what we’re doing is we’re strengthening the case for disinflation on a longer-term basis.

The other thing very quickly to highlight — we wrote a report not that long ago on sort of the zeitgeist or the spirit of the age. And basically what we argued is that fiscal policies are very, very hard. And the reason they are hard is that people have a schizophrenic approach to monetary versus fiscal policies. Monetary policy is supposed to be technocratic. Over the last eight or nine years, they’ve become completely free. There is virtually no adult supervision at all. Central banks can spend trillions of dollars and almost nobody cares. And the reason for that, there is a perception that monetary policy is technocratic and it doesn’t generate debt. Now that is not true, but that’s what people believe. Fiscal policy, on the other hand, people look at it very, very differently. They basically view fiscal policy as inefficient, unfair and generating debt that needs to be repaid. So once again, none of it is true, but that’s what people believe. And so the result is in almost every country — China clearly is an exception — but in almost every country, in order to engage in fiscal spending, you have to have community support. You have to go to legislature, whether it’s a parliament or Congress to get it approved, you need to itemize it. People need to know exactly where you spend every dime. Nobody asks Jeremy Powell every dime he spends.

But on the fiscal side, you need to explain where you’re going to spend the money. And it’s usually time-limited. It sunsets. Whereas monetary policy these days have completely open-ended, there is no sunset. And so the problem with structuring fiscal policy predominantly as an exceptional circumstance, is that as soon as economies recover — and I think that United States will be recovering very strongly in the first, second, third, and into the fourth quarter even of 2021 — as economies recover, almost inevitably within three to six months, there will be debate [about] we must put our house in order. Radical left is destroying America. There will be discussion [about how] we are bequesting to our grandchildren, trillions of dollars of debt. How are we going to finance it? And that sort of a discussion would imply that the line of least resistance right now, the least resistance, is for politicians to sunset fiscal policy. Economies are recovering. Everything is doing fine, let’s sunset it. Now nobody is going to do another Greece. Nobody is going to try to do austerity, but we’re not talking about austerity. We are talking about the level of fiscal pulse that we can actually maintain. And I think it’s actually going to go down before it goes up again, and then it will go down again before it goes up, it will be stop and go stop and go. And the reason why that is important, permanent policies have a very different impact to temporary ones.

Tracy:
There are people out there who say that 2020, the experience of the pandemic, has changed everything. I think Joe and I have had quite a few episodes by now about how the pandemic has changed everything, but that there’s more acceptance of fiscal stimulus. MMT has been making some inroads among policymakers so people aren’t as worked up around the deficit as they once were. And one of the arguments that I’ve seen about why to actually be concerned about inflation is that even though the current fiscal stimulus that’s been announced might not be enough to generate substantial price increases, it’s sort of opened this Pandora’s Box — well, Pandora’s Box isn’t a good term for it — but it’s led to this shift around fiscal stimulus where we don’t know how popular it’s going to be further on, and it could become very politically popular. People like to have stimulus checks mailed to them. People liked better infrastructure, things like that. So you could get repeated fiscal stimulus over and over. You clearly don’t agree with that, but I’d love to know more of your thinking around this.

Viktor:
Well, I actually do agree that there will be regular stimuluses. That’s why I’ve argued that nobody will be running primary surpluses anymore. Nobody is going to do austerity. Nobody is going to try to do another Greece or Portugal or something like that. That’s all gone forever. All we are arguing is can we create a consistent long-term fiscal strategy that doesn’t rely on revisitation of Covid, doesn’t rely on revisitation of wars or major financial dislocation. Can we reach the stage that we also will be managing our investment without reliance on the bond market, and directly funded out of central banks as we go forward. And so my argument was that that will be the ultimate destination, but it’s probably at least five, 10 years out. And the reason for why it is five, 10 years out, is because clearly in every country you could think of, there is a degree of polarization — not a degree, there is a very high level of polarization.

There is no consensus agreement. Anybody who is younger than about 35, basically agrees with the strategy. Anybody who is much older than that, does not agree. And you can mathematically calculate at what stage somebody like AOC is bound to become a president of the United States. If you think of the younger generation, they were roughly about 20% of the votes costs in the latest elections. If you project forward, somewhere between kind of 2026 and 2032, that younger cohort is going to be the dominant force. And so what we need to do is have a lot of problems, a lot of dislocations over the next five to 10 years, gradually demographics will coalesce around it, and then you have a different set of policies. Think of the monetary policy. When Japan introduced QE in the early 2000s, people were questioning whether that’s disaster, a complete disaster. Then there was QE introduced globally around 2008, between 2008 and 2012.

The first question every fund manager would ask you: ‘When do we normalize monetary policy?’ When I used to tell them we will never normalize monetary policy, people didn’t expect that. They didn’t accept it. It took people 10 years until they finally recognized that monetary policy can never be normalized, irrespective of what Jerome Powell thinks or what he might or might not do. If you think of fiscal policy today, I view it in a very similar light to 2008, 2012 monetary policy. One of the first questions people ask: ‘Yes, Viktor, we understand that we will be spending more money, but how are we going to pay for it? What is the end game of what we are what we are trying to do?’ Now when you tell them we’ll never pay any of that back, it doesn’t really matter, people don’t accept it. And so what you need, you need time. People don’t move in revolutionary steps. So what we have today is acceptance that fiscal policy can play a much more important role. What we don’t have is an acceptance that that sort of expansionary state policy is permanent and is never going to change. And that that expansionary policy will be funded through central banks. So the way I look at mixing fiscal and monetary policy together, by doing more fiscal, we’re reducing the speed of disinflation rather than creating a great deal of sort of sustainable inflation.

Joe:
So what does it mean for investors? There are so many charts that if you look at, I mean, there are so many charts that are shooting straight up, obviously, at least as of now. But not only that, there are so many charts that are shooting straight up that are clearly reversing a trend that had been in place pre-crisis. So the most obvious example is like, you know, EM stocks they had generally been in, I think about a two year under-performance run, at least since early 2018, going into the crisis, now a straight line up. Look at it some of the commodity indices, very downward trend, now they’re straight up. Is this new regime that we’re talking about, the new monetary policy, fiscal mix, and so forth — does it change how markets behave on a sustainable way? Or do we just sort of go back to this like 60/40 Goldilocks world in a year or two where you just buy some tech stocks and you buy some bonds and there’s a disinflation and, you know, you have a really easy.

Viktor:
You’re absolutely right. There is a regime change that is occurring. If you think of also the sixties or seventies, there was a significant regime change into late seventies, early eighties. There was another regime change occurring in the late nineties. And so there are those periods where there is a regime change. And so going forward, because we’re mixing fiscal and monetary policy together, we are not going to have such a consistent trend. Over the last 15 years, if you did not realize that we live in a disinflationary world, if you didn’t realize that both labor and capital is losing pricing power, you’re probably no longer managing money. You’re probably no longer with us. And so as we go forward, say over the next 10 to 20 years, this is going to be a much more complex world. Now, part of the reason is complex, as I said earlier, when mixing fiscal and monetary policy, rather than just relying on trickledown economics, asset prices and effectively creating through monetary policy disinflation. This time around it’s going to be some inflationary spikes. There is going to be some disinflationary spikes, there will be sector rotations depending on what the government wants to do and where the government wants to invest. So it’s going to be in my view, a more complex world because of the policies.

But there is another thing that is going on, and that is there is a technological change that is going on. Between mid 1980s and 2000 technologies were dominated by PCs, by corporations, by business applications, government applications. Around 2000 it started to change. Remember Amazon was a tiny company back in 2000. And so between 2000 and call it 2018 or 2020, it was a world dominated by what I describe as a digit manipulators. They’re basically company manipulating digits of information, whether it’s a social media, or downloading videos or trading stock exchange, or getting information, or whatever that might be. 

Now, those companies become incredibly powerful. Now, what we’re going to do for the next 20 years is studying, much more manipulating atoms and physical methods. So in other words, this is the age of manufacturing, logistics, different alternative energy platforms, transportation platforms, green energy. This is the period of robotics, automation. This is the period of infotech and biotech. Now this new era will be much more capital intensive than the previous 20 years. But as I said, early on about Biden, where you spend the money is different. So there is no long-term cycle for oil. There is no long-term cycle for coal or iron ore or steel, because we won’t be building a lot of factories, or a lot of roads, a lot of machinery. But there will be a massive continued upscaling of some commodities. So for example, if you treat semiconductors as a commodity, which I do, I think they’re going to have a long run. Similarly, if you think of copper, nickel, cobalt, lithium, silver.

So there will be part of the commodity cycle which will be in a bull run. The other thing that will happen is that, you know, the likes of Amazon or Facebook, they’re not very good at physical stuff. And so if you want physicality, a lot of capital goods companies actually will come through the woodwork. And instead of being value, could actually become thematics. You know, your Mitsubishi Electrics, your Honeywells, your Rockwell’s potentially your GEs, your Siemens. Those sorts of companies potentially could become more critical. There is also a new third generation of tech companies coming up, your Teslas, your Nios … Whether it’s robotics automation, new energy, there is a lot of startups. So one of the interesting things that is occurring, not only the policy mix is changing, but the winners among thematics are also starting to change.

The digit manipulators are still highly profitable and they will continue to be highly profitable, but very few companies ever make a transition from one world into the next. Some will, but a lot of them will not. So the question is what will happen to those digit manipulators? Are they becoming a highly competitive, utility-regulated platforms? And eventually with lower returns? So they would need to do things like share buy backs, self liquidations, dividends, and the rest of it, in order to drive value. So we have two things happening in my view. Number one, a mix of fiscal and monetary policy is different, creating crosscurrents. And number two, what you have is a technological backdrop that is also shifting quite considerably. In 10 years time, the winners are not going to be the same companies as what they were over the last 20 years. So what it basically means, instead of saying, well, okay, it’s a more capital intensive world, government spends more, I  should buy commodity materials, infrastructure companies, banks, and financials. To me, that’s wrong. Banks have no future. I don’t see a long cycle for oil or coal or many other basic commodities.

Tracy:
I want to go back to something that you alluded to earlier, or you said, which is that you don’t normally agree with the Fed, but on this one idea around transitory inflation, you think they have it, right. Why is that? Because, you know, for years we’ve heard the Fed talk about the natural rate of unemployment and things like the Phillips Curve. It seems odd to have the Fed, uh, suddenly grasp a big transition in economic ideas. So why do you think that’s happened in recent years?

Viktor:
Well, it sort of reminds me of when I was a fund manager. If you keep losing money consistently, eventually it changes your mind. But you have to remember for economics as a profession, any signs, progresses, only one funeral at the time. And so for economics as a science or art or whatever that is, to change, requires considerable change of basic tenants, basic fundamentals. Now that will happen, but that’s probably at least a decade away. So economics as a profession is still largely functioning in an industrial age that has no relevance almost to what we have today.

But the practitioners, people who actually are at the coal face, and they need to face their own losses or their own bad decisions, they do change their mind. And I do think that what federal reserve has basically done over the last 12 months or so, they said, you know what flat Phillips Curve basically means there is no relationship. Basically there is no such thing as an inflationary, neutral level of unemployment or interest rates. Now they’ve never actually spelled it out as openly as what I have said right now, but that’s basically the implication. And to me, that’s a right approach. They are moving in the right direction. But remember, they will come under pressure in the next three, four months as inflation rates go up, investors will test them and their screen — the things they are looking at — is still very conventional.

Viktor:
So for example, that screen has no Bitcoin. Has no Dogecoin. Has no non-fungible tokens (NFTs), has no specs, has no parity trades, has no private equity. It doesn’t have any of that stuff. It has like general financial conditions, overnight spread, debt spreads, your bank and commercial risk, you have volatility rates, you have spreads in the high-yield market. Things like that. When it’s almost guaranteed that the next crisis will have nothing to do with mortgages, will have nothing to do with banks and will have nothing to do with Nasqaq. But essentially they’re still looking at it if we’re facing a Nasdaq debacle or a housing, a mortgage debacle. So the interesting thing is that they’ve accepted the premise by saying that economies have changed and the past rules no longer apply, but their screen in my view has not yet changed. And so one of the things I keep asking people, is it more dangerous if those digital assets go up another 100%, or is it more dangerous if we go down 50% from the current levels? And clearly, going up and all the 50% or 100% will be far more dangerous because what is happening right now in that world, it’s becoming incredibly interconnected and increasingly leveraged. It’s a little bit like the mortgage market in 2007.

There was nothing horribly wrong with individual mortgages. It’s how you packaged it and collateralized and leveraged it that that created the GFC. And what do you see today is exactly that. People who are buying Bitcoin are also buying Tesla. Tesla’s buying Bitcoin. People who are buying Dogecoin will buy NFT. Some of the exchanges now allow you three, five up to a hundred times leverage on some of those transactions. The whole universe is now at least $3 or $4 trillion. And so the way I basically describe it, you know, if you lose a couple of billion dollars, it’s like a bad day in the office. But if you lose a trillion, that’s systemic. 

And so the way I look at central banks and Fed, I think they got over the hump of trying to separate themselves from a basic concept like Phillips Curve, or non-inflationary rate, but they have not yet transited into altering their screen to look for where the trouble actually will lie.

Joe:
So where’s it going to be? What’s your vision of the next crisis?

Joe:
Well, that’s what I said. Those digital assets will be the next crisis. And the interesting thing to me, of course, is all of those people buying NFTs, or buying Bitcoin or anything else, all those SPACs that are going down the triple-C debt umbrella, further and further down in quality. All of those people are declaring independence from the state in some form, but it will be the state that will need to bail them out. And that will be the irony of trying to become independent from the state when you actually will be relying on the state to help you, to bail you out and to avoid systemic outcomes.

Tracy:
Why will it be the state? Like what is the linkage between something like Bitcoin or NFTs and a regulated bank and the traditional financial system?

Viktor:
Well, it is a butterfly impact because we are, in other words, the butterfly, you know, flapping the wings suddenly creates a problem. That’s what it is. We are highly interconnected. We are highly  leveraged. I mean, the whole global economy, if you think of financialization is at least leveraged five times, one could argue, if you look at a gross basis, maybe eight times, eight to 10 times. So we’re incredibly leveraged. We’re incredibly financialized … In other words, one group of assets buys into another group of assets. And that’s the inevitable outcome of the monetary policies we’ve pursued for the last 30 or 40 years. It basically forces people to go down and down the line. And so what happens is that eventually central banks can’t tolerate any volatility at all. They can’t tolerate any price discovery because you never know some disaster in a digital universe might bring down mortgages in Tajikistan, which in turn will impact mortgages in Los Angeles or something like that. So something like that, you just don’t know.

You have to remember that if you think of triple-C debt right now, which is basically bankrupt companies, they’re trading at almost the lowest spreads ever. If you think of average high-yield spreads, it’s only 3%, again one of the lowest ever. Think what happened a couple of months ago when the MOVE index, the bond market index, pretty much in two days, went from 47 to 73. In the same couple of days, VIX went from 15 to 30. So you can see how significant dislocation in assets which have become increasingly integrated into various asset classes, a dislocation there could just drive suddenly the high-yield spread. And then you’ll find a lot of companies relying on the triple-C debt, for example, will be unable to service or will have to go bankrupt. So that’s what it is. It’s interconnectedness. So long as those digital assets are on the periphery, so long as just a couple of people who are really interested in that are doing it, everybody else is completely segmented and separated, then that’s not a problem. But that is not the way digital assets behave. You look at even NFT, look much they’ve gone up just in the space of 12 months. What I’m saying is if you do the same thing for the next 12 months and another 12 months, eventually you reach the stage that it will become systemic.

Tracy:
Viktor, fantastic having you on as always. And we’ll have to get you on in, maybe in another year to see whether or not crypto has become further embedded with the global economy and financial system.

Viktor:
Okay. But I would love to, okay.

Tracy:
Viktor Shvets from Macquarie.

Joe: 
Take care Viktor, thank you so much.

Tracy: 
Joe, one of the things I love about talking to Viktor is you start out talking about inflation and commodity prices and market expectations, and then somehow you get to ‘Bitcoin is going to lead to a state-sponsored bailout’ at the end.

Joe:
And Dogecoin.

Tracy:
And Dogecoin, yeah. I don’t disagree with him by the way, but I just love the transition.

Tracy:
It feels like the great Dogecoin crisis of 2050 is just like something that has to happen one day. Right? Like if you’re just thinking about the arc of history, it just feels like that that has to happen.

Tracy:
Yeah.

Joe:
Viktor — I do really like the way he thinks. I like his point about fighting the last war. I also think it’s just interesting because I do think that it is extremely tempting to think like, okay, this is the new era, post-great financial crisis. This is the new era of inflation pressures or labor market tightening, or the change in direction on rates or whatever. And there is some stuff happening, but I think he provides some very … a good temper to all that enthusiasm. Still the most likely outcome is the burst now, but then a reversion to an economy that has a lot of the same characteristics as the pre-crisis economy did.

Tracy:
Yeah, exactly. Shall we leave it there?

Joe:
Let’s leave it there.

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