Episodes

Dan Ferris: [Music playing] hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research.

Corey McLaughlin: And I'm Corey McLaughlin. I'm the editor of the Stansberry Digest. This week, Dan talks with Marko Papic, chief strategist at Clocktower Group.

Dan Ferris: And for our opening rant, we'll talk about some of the insights and ideas we heard at the annual Stansberry Conference in Boston last week.

Corey McLaughlin: No mailbag, but remember, you can e-mail us at [email protected] or call our listener feedback line, 800-381-2357 and tell us what's on your mind.

Dan Ferris: That and more, right now on the Stansberry Investor Hour. All right. How are you doing?

Corey McLaughlin: Good, Dan. How are you doing?

Dan Ferris: Very well. I'm tired, though. It's been an eventful three days here, a very busy three days here in Boston. I think I've been on stage 15 times.

Corey McLaughlin: Yeah. You've been on stage a lot.

Dan Ferris: Yeah.

Corey McLaughlin: I haven't been on stage at all. So I should be fresher, but I've been writing.

Dan Ferris: Well, yeah. You do – I do 10 times more on-stage stuff. You write 10 times more words every week. The two of us have a lot to do here. Let's face it, you have to be – you basically have to watch every presentation, don't you?

Corey McLaughlin: Yes... watch or at least listen to. I've been bopping up between my room writing and listening to you guys and our guests. So, yeah.

Dan Ferris: So I didn't even get to see a whole lot of them because of having to do other things. I know that of the speakers I saw I definitely have a favorite. Do you definitely have a favorite?

Corey McLaughlin: I do.

Dan Ferris: Yeah?

Corey McLaughlin: Should we –

Dan Ferris: Let's do the big reveal of our favorite.

Corey McLaughlin: Should we say it at the same time?

Dan Ferris: That's right. You first.

Corey McLaughlin: I liked the Colonel last night. I don't know if you heard – caught him.

Dan Ferris: I only caught a little bit of it, but the gist was something like Putin's a jerk and Russia is not as powerful as people make them out to be. So this war is probably not going to go his way.

Corey McLaughlin: Basically, yeah, it was interesting just to hear from somebody who is that close to or literally works in the Pentagon, Jonathan Schaffner, who is a friend of Joel Litman's... took so many questions from people, too, that were interested in just his take on all kinds of things that he was very open and honest, too, for a government guy. It was fascinating to get an unvarnished look at the war in Ukraine – where it could be going... the mistakes Russia has made.

A really, just in general, sentiment that gave you a feeling that what's portrayed in the media with this war is not what the U.S. government sees. There's just this disconnect out there that people think Putin is really in control here and from everything he was saying, it's the complete opposite and it could be over soon, could not, or it could drag on for a while. There's also a lot of unanswered questions.

Dan Ferris: Interesting. Well, the disconnect between media and reality isn't hard to believe these days, especially. My favorite one was the keynote speaker, Scott Galloway... really brilliant guy. I've read his book, The Four, which is about Amazon, Apple, Google, and Facebook. And he did a few things that I found refreshing and things that I agreed with and things that I didn't know he was going to talk about. When he talked about Tesla, I would have expected something else out of him.

He just said, "Look, it's a car company," and I wanted to cheer because it is. People talk about it like Tesla is our iPhones or some fantastic brand-new product that's revolutionizing the world. No. It's a car and it's got all the problems of a car company, the big one being competition. It's not a great business and there's no reason for it to be worth more than the next X number of car companies combined. I think at this point that number is four or five, and it got as high as 12 at one point. It was worth more than the next 12 publicly traded car companies combined.

Corey McLaughlin: Right... sign of a top there.

Dan Ferris: Then he talked about Facebook, Meta Platforms, the company that's now called Meta Platforms. He made this point that I thought was brilliant. He said, "Mark Zuckerberg wants to basically subsume the entire world into his virtual world so that he can control it and he's a megalomaniac." He was like, "I hope he fails at this. I hope they spend tens and tens of billions of dollars and go broke and go away because that's what needs to happen." I was cheering at that too.

Corey McLaughlin: Yeah. I also really like the point he made about Elon Musk and the Twitter acquisition that if it goes through, and he thinks it would, because Elon Musk just doesn't want to go to trial and he's a habitual liar. He doesn't want to go under oath and that the acquisition would be the second worst acquisition in history when it does happen, like AOL and Time Warner, because Twitter is such a bad company. It's a popular platform and hasn't been able to monetize itself at all.

Dan Ferris: Yep. What was the – he made a prediction. His presentation was about his predictions that he and his company have made or maybe just the ones he's made.

Corey McLaughlin: Yeah. It was 10 predictions he made for this year and he was reviewing them.

Dan Ferris: Right. And Twitter gets acquired was one of them and it looks like he's going to be right. So, didn't surprise me... very smart guy. I love his view on those four big tech companies, but we'll talk about that another time. So I was on two panels on the third day of the conference, which is today. And I heard a lot of things that were really interesting to me and found out a lot of things, for example, like – God, I could just pick one. There's so many. Dave Lashmet talked about this French company that owns satellite slots up in the sky. It's hard to explain the asset. Dave is so interesting and he just talks about all of these complicated technical things all the time but in a really fun way.

So, he taught me something. I could probably sit here and list a bunch of things, but the point is you come to these things thinking that you know all the people that you work with. You know what they're going to say, but you really don't. Bryan Beach did the same thing. I forget the business that it was. It was a very, very interesting business... a new business in a new industry. Again, I thought I knew his approach. I thought I knew the kind of companies he covers. It's really cool. We work with a great group of people. I'm pitching all the people I work with is what I'm doing here and I'm doing a bad job, but they are an incredible group of people and I was really impressed.

Corey McLaughlin: Yeah. What struck me earlier today when you guys were up there with you, Doc, Matt [McCall], and Matt [Weinschenk] for the "Bull, Bear, or B.S." panel, and you ran through 10 news items and basically had to give your thoughts on it and Doc made the point like we don't have one view here, but we present the information and the research. And people can fit that into their construct, I think was the word he used, which is a good way of I think describing what goes on here.

This is actually my first one of these conferences that I've been to and there is a lot of information. I've been trying to highlight each day. Really, I think you just want to – you can get a good sense of what other smart people are thinking or talking about. And whether you agree with it or not, you can fit it into how does it fit into your plan and what you want to do moving ahead.

Dan Ferris: Yep. Austin Root made the same thing during the "Best Growth Stocks" panel. He said, "You get the unvarnished truth," I think was how he put it, "from every analyst. They tell you what they think. There's no group think at Stansberry Research," is what he said. He's right. You get – when you read Dan, you get Dan. When you read Corey, you get Corey. That is it... which is great because all over Wall Street and basically in any financial institution, it has to be groupthink. They can't have a bunch of people thinking a lot of maverick thoughts and going their own way. It just doesn't work. That's not the way their business works, but that is exactly the way ours works. I am damn proud of it, I have to say.

Corey McLaughlin: There you go. It can be – honestly, it can be difficult for subscribers or readers to maybe make out what –

Dan Ferris: Admittedly. Yes.

Corey McLaughlin: But that's why I say, it was for me when I first started. "OK, so-and-so is saying this, so-and-so is saying that. Where do I come down on it?" Eventually, you have to realize there's every different type of investing research offered and just make your own decisions.

Dan Ferris: Right. So, admittedly, you're getting a lot of different viewpoints with Stansberry. If you become an Alliance member you're going to get 200 stock picks a year and I don't even know how many analysts we have now – I used to know that number... I don't know it – and their different views. But I will say this, for a good example, you would think if you read my stuff and then you read Matt McCall's stuff that we're on opposite sides of the spectrum, but we're really not.

We agreed on a bunch of stuff today on that "Bull, Bear, or B.S." panel. I'm glad that our attendees got to see that and it gave me the idea... Matt and I need to get together and show people really how close we are on some things and maybe we're far apart on others... then, of course, if Matt and I need to do, which other pairs of analysts need to do it? So I think we can do a better job of fixing that one issue at Stansberry, which is there are so many things you don't know which one to pick. This is low-hanging fruit, man, because there are so many ideas that you can juxtapose like me and Matt or me and Doc or Doc and Steve. There's a lot of low-hanging fruit there to pick.

Corey McLaughlin: Yeah, and how they fit with each other or how they don't.

Dan Ferris: Right. What do they agree, what do they disagree? Where do they overlap and does that imply a strategy? There's a lot of potential here and there always has been at Stansberry because we've always had that freedom of ideas.

Corey McLaughlin: I always say I always love when different people reach the same conclusion by completely different methods. So like energy stocks, for example, last year there was I think three or four different editors that all landed on energy stocks for not exactly the same reasons. So if you're a reader and you see that, that's a good one.

Dan Ferris: Energy. That's right. Those are – well, in general, I like the topics for what you and I talk about to be things you can't avoid. When you get four Stansberry editors coming from four different perspectives lining up on the same trade, maybe you can't avoid doing that. I agree. That's a good one. I have to talk about something that's not financial. I have to. For anybody who is listening who has never been to the Encore Boston Harbor hotel, it is of course a very nice place. It's like they took – they sliced off one-third of the Encore in Vegas... they lifted it up, and they put it here. I even said – I was talking on stage one time and I said, "Here in Las Vegas" and then I had to correct myself, "No, no, no, Boston... Boston," because you walk through this place and it feels like Vegas.

Corey McLaughlin: Yeah. My first impression was Vegas without the smoke and the cold air being pumped through that much.

Dan Ferris: Yeah. That's right, because the cold – the air outside is really cold. But having said that, it's in this really rough-looking industrial area. It's so weird. They make it sound like it's in Boston Harbor. Well, technically speaking it is, but it's not in that Boston Harbor. It's over here where the cheap land is... where they'll allow you to have a casino. I think that's probably what happened. You can't be this close to the real Boston Harbor with a casino. You have to be over there. So it's rather strange.

You're just stuck out here by yourself. I think if you go outside, I look out my window and there's a McDonald's and a Best Buy and that's pretty much it. I found it interesting and I also found out that we are going to be in Las Vegas next year. It'll be a bigger version of this and you'll look out your window at 2 a.m. and it'll look like you're looking into the sun because of all the lights. I just found it odd. I thought it was worth mentioning.

Corey McLaughlin: It is. One of the – somebody's Uber driver, I think it was Mike DiBiase's Uber driver – said that this used to be this whole area was a rundown area and they built this and everybody's taxes went down because this place is generating all the taxes. So it all comes back to the money.

Dan Ferris: Nice. Very nice. That's a good deal for everybody around here.

Corey McLaughlin: Around here, at least.

Dan Ferris: Yeah. So did you hear a trade here at the conference that you liked above all others?

Corey McLaughlin: I did, like Chris Igou had some interesting – our DailyWealth Trader editor today – with municipal bonds just showing the – well, boring municipal bonds showing the clear pattern of them relative to rate hikes and what Fed chairs say and when they say they're going to hike rates and when they stop. That was pretty compelling, very straightforward, simple, like muni bonds should do well if or when the rate hikes stop or signal that they're stopped... which, that's another discussion if that will happen. He also importantly said, "Hey, this is the level where if the Fed hikes rates to 15% we don't want to be in this." So that was a good, straightforward, simple one. He does that every day in DailyWealth Trader, which is nice. You?

Dan Ferris: Yeah. I like the fact that Marko Papic came back. He was here last year and he recommended oil. He actually was a barbell trader. It's oil and green energy technology. The transition to so-called green energy technology... it's coming. You can't avoid it. But the politics of it and the way it works out, it creates this structural shortage of the fuel that we're actually using now, which is oil. I was really interested to see what he had to say about that because obviously, it was a great one if you bought it last year. He's still on it. He said you have to be long both of these now still. I think I agree with him. I already knew that I agreed with him. I already knew I thought that, but I didn't know that he was continuing it... and he is. It's a trend with legs, simply put.

Corey McLaughlin: Yeah. He had a contrarian take on things by saying the world is not ending, which was interesting to hear... again, something that you can hear and whether you believe it or not. If the world is actually ending, we don't have anything to worry about it, but the point.

Dan Ferris: Yeah, financially speaking... economically.

Corey McLaughlin: His point, he brought up some good arguments for why China can't invade Taiwan, why they can't piss off every other country around the world... because all these countries rely on other countries to buy their stuff. They have a higher debt-to-consumer debt percentage than the U.S. does, which is saying something.

Dan Ferris: Right. The command-control economy has shoved, Scott Galloway said $94 trillion into real estate. That's just a number that I can't quite fathom. It doesn't mean anything to me. It's too enormous. It's almost 5X U.S. GDP. It's a little just wow. So you might say there's a little bit of overhang there. That will have to work itself out. Who knows how they'll respond to it in their command-and-control fashion and what the implication to that will be? So, yeah. It's – I always like Marko. He's a great guy, very smart, but yeah. That was my favorite.

That continues to be one of my favorite ideas for investors right now... oil. I'd be pickier about the green tech side of it probably than Marko. He probably knows more about it than I do. The oil side I think is solid. The other thing that I heard – this is one of the things Matt McCall and I showed everybody that we can agree on was housing because housing is basically – it's a structural shortage. Inventories are still low. yes. Mortgage rates have just soared out of sight in record time. Yes. That brings prices down. But eventually, there is market clearing. Eventually, people let go of that house at whatever price they need to let go of it and there is – there just is not enough supply.

There's a good reason to believe that housing is, in general, in the United States, I realize it's regional. It's local. In general, in the United States, it's going to be a pretty decent business for years to come. We're still working off the hangover from the peak of the housing bubble in 2006. These things are long trends. I like that one.

Corey McLaughlin: Yeah. Generally speaking, with Marko's, with Joel Litman, who showed some interesting data on again, why China is not as strong as people think or may think. If anything, I actually came away with a positive takeaway of "things maybe aren't as bad as a lot of people think." Although, I've also seen a couple of different people to the point of when different people say the same thing from two different points of view, the sideways market, you're not the only one who's talking about that. I saw a couple of different presentations on that showing pretty compelling evidence that stocks, U.S. stocks could be headed that way for 10, 15 years.

Dan Ferris: So, basically, that means flatter, negative returns from the January 2022 peak... just peg it there for a decade or more.

Corey McLaughlin: Yep. The more I hear that, the more it makes sense to me as far as this bubble we've had – "end of a long bull market" bubble. And then inflation where it is, it's going to be higher than 2% and what does that look like? I think it's pretty compelling to me at least. I don't know if it's going to be right about that. I think you got to prepare for that is the point.

Dan Ferris: Corey, you sound like me. You sound like you're going to write the next issue of Extreme Value. That's great. I love it.

Corey McLaughlin: That's – you got that. I'm good.

Dan Ferris: You're good. You do plenty of writing. That's right, lots of good ideas. That one, I'm seeing more people embrace that one. Mike DiBiase – I forget the exact title of his presentation – it was like "An Economic Winter Is Coming." It was really sunny and fizzy and fine, I tell you. So he recommended a discount retailer, which I thought was reasonable. Those discount retailers did well in the last two recessions. They provided positive returns. Stocks in general don't generally provide great returns in recessions, but discount retailers do. He found a good one. So I thought that was a good idea too. Probably too many good ideas to list here.

Corey McLaughlin: Yeah. There's a lot. There is. I still have to download stuff in my brain and rewatch some videos.

Dan Ferris: All right, then. So lots of great ideas. Let me ask you this. What was the biggest surprise for you, if there was one?

Corey McLaughlin: Biggest surprise, I can't say I'm going to deflect to the surprise part of this question, but it's nice to just see subscribers in person and see them writing down stuff that you guys are saying and really laughing at certain things, eye-rolling at certain things. It's that human-connection part of it. We're behind computers and sending e-mails, and to actually see the other person who is reading your stuff is not surprising, although I guess it is surprising in today's world.

That was a point that was brought up by a couple of different people including Scott Galloway about the mental health toll of these tech companies and social media. I think the impact there on society in general has not been explored. There's no real – I don't think there's any real convincing studies or anything that have taken place because all this stuff is still ongoing. If you're a kid and you're on your phone eight, 10 hours a day – I sound like an old man, but that's not how I grew up – I don't know how the brain, the teenage brain affects that. I don't think anybody does because all this stuff is ongoing. Anyway, that was a strange curve to that question. My point is the in-person stuff is what I – is a nice surprise for me.

Dan Ferris: Well, actually we're overlapping substantially here because Scott Galloway's mention of the whole – of the social media, young people on cellphones and smartphones, having it be a very damaging thing to them socially. That was mine. So yeah. We're copacetic here. But the surprise for me was when he started talking about the damaging effects of social media and then he went off on an interesting tangent and he started talking about lonely, depressed young men and that that is a bad thing for our society. I'm like – I usually pull back.

When somebody says, "This is bad for our society and you should feel the same way," I feel the same way when I say it, but when somebody says it's bad for our society I think, "Oh, OK. What do you know? Our society is so diverse and you don't really know what's good or bad for it, do you?" I kind of had to agree with him. Young men being extremely lonely and having record-low levels of sexual activity and not starting families and –

Corey McLaughlin: Yep. Something that's not talked about, but it's there. Anybody in that age group, I think, knows that.

Dan Ferris: Right. I wish – I came away from that – Scott's a very wealthy entrepreneur. I came away thinking, "I wish more people like him would be less like Bill Gates, the megalomaniac running around the world trying to take control of everything and more like Scott Galloway, talking about the importance of relationships." He had a whole bit on relationships and these problem of these lonely young men.

Corey McLaughlin: Yeah. That was a common theme on the first day, I think, about relationships and happiness is really relationships. That was said a couple of times. I think people are just looking for that in the post-lockdown-pandemic world and forgot about it.

Dan Ferris: So, all right. Good to talk with you as always. I think what we'll do right now is we will talk with Marko Papic and hear it straight from him... can't wait for everyone to hear this guy. He is brilliant. He's been on the show before and he's back with us today. Let's talk with him right now. Here comes Marko Papic... coming at you right now.

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Marko Papic: Thank you. Good to be back.

Dan Ferris: We were talking a little bit before we started recording and we both agreed that macro investing, it's the thing where it doesn't seem to matter for years at a time and then it's all that matters. I think we also agree that this is one of those moments when it's all that matters. So I feel you're a part of the "Investor Hour macro posse." So I have to talk to you now and basically it's like a plea for help. What's going on? Help me understand. I feel like you can pick almost any reference point like what happened in the U.K., Bank of Japan intervention, even update me on what you think the Ukraine War means. So you pick the spot, but there's a lot of them. You can start anywhere you want, but where are we? Help me out here.

Marko Papic: Well, I think the most important thing in the world right now is actually Jay Powell, unfortunately. I say "unfortunately" because it's boring to talk about the Fed with so many geopolitical issues that are happening, but I just go back to the day when Russia mobilized and he made this big speech and announced – Vladimir Putin made a big speech and announced mobilization and the S&P 500 futures dipped and I got all these e-mails and messages from people like, "Oh my God. Here it comes." And I was like, "Here comes what?" It's a nothing burger. Who cares if Putin is mobilizing yet another 100,000 of useless soldiers that will probably get mowed down by the Ukrainians?

So the S&P 500 futures realized that very quickly. So they rose back. Then later in the day, Jay Powell had a press conference and we tanked. So, Jay is much more relevant and powerful than Vlad is. And actually literally everything that is going on in the world is irrelevant if Jay Powell continues to be very hawkish and continues to raise rates at the pace that we've had so far. So I think that that's the first thing we need to unpack and discuss and think about because a lot of the geopolitical issues – I can literally see Russia using a tactical nuclear weapon over the next couple of months.

If it does so on the day where Jay Powell says we need to pause to reflect, the market will be up. So I think the central-bank tightening, it's overdone. I think they are going to pause for reflection, as Lael Brainard introduced the verbiage into the lexicon, which was very important. You can start seeing them make the breadcrumbs. The BOJ is doing yield-curve control. You've got ECB, which basically is doing yield-curve control with Italian bonds. The U.K. basically had to institute yield curve control. So everybody around the world is already pivoting against the tightening. So I think that's the most important variable out there.

Dan Ferris: So maybe just a quick explanation of yield-curve control for our listeners.

Marko Papic: Yeah. So basically take what the ECB is doing. It's raising rates. It's raising rates. It's raising the cost of borrowing at the same time that it's capping the cost of borrowing for the government by buying Italian debt. The U.K. basically did the same. They've been raising rates to try to keep up with the Fed. Then the cost of borrowing for the country rose massively after the budgets that they tried to push through with tax cuts. So the Bank of England is both raising rates at the same time that it's buying long-term debt to cap the yields on the long-term debt.

Dan Ferris: Right. So, raising short term, capping long term.

Marko Papic: Capping long term. Yeah. So I think –

Dan Ferris: That's yield-curve control to me. Just want to...

Marko Papic: That's right. No. Absolutely. I think what's interesting about that is it's counterintuitive and it counters the very – what they're trying to do, which is why it's important because it tells you that they don't actually have the guts for real pain. So I don't think the Fed will either at some point... probably sooner than we think. So that would be my first issue. When the U.S. central bank, when the Fed decides that it's had enough, everything else can start mattering again. Until then, it's really just all about them.

Dan Ferris: Right. So I'm going to push back a little bit as I always do in the idea of an imminent pivot. So it seems to me we all know that they lag. The CPI is lagging. Monetary policy then lags months. So by the time he sees 2% CPI year over year, then he'll pivot. What I fear is that he will really follow through on this, that these people are so model driven and so committed to this theoretical academic view of the world that he'll stay too focused on that and he'll be too driven by that and that the idea of tamping down inflation also. He's located in Washington, D.C. and inflation is like "we can't have that." So I just – every time I hear about the pivot, I get a little skeptical and I think, "No. You don't understand. He is going to – he wants to break something I feel." I feel like his mindset is –

Marko Papic: That was the title of my last report, which is funny. No. So look, I think yeah. That's definitely a future that I contemplate. So let's unpack that future. So if the Fed truly is only going to pivot once they get inflation to under 2%, we're going to have the most calamitous recession in the history of the United States of America –

Dan Ferris: Right.

Marko Papic: – which is a future that can happen. And the other thing that I would say is that if that does happen I would guarantee to you that inflation will then rise again. So the issue is that – so if they are committed to following what they think is the path of Paul Volcker. They will end up being Burns. The reason – so for listeners –

Dan Ferris: They'll end up what? I'm sorry.

Marko Papic: They'll end up like Burns.

Dan Ferris: Oh, Arthur Burns?

Marko Papic: Yeah. So they won't guarantee the Arthur Burns scenario. So in the '70s, everybody basically in finance is raising these myths like every other epistemic community.

Dan Ferris: Exactly.

Marko Papic: Our myth is that 600 basis points of difference was all that it took to dampen inflation, which is one of the most stupidest things I've ever heard. So Arthur Burns was the chairman in the early '70s and he – the Fed chair. He raised rates. He caused the '73 to '75 recession, but inflation started creeping back up. By the way, he brought inflation down from 12% to 5%. So he was successful. If he were at 5% CPI right now, real wages would be positive in the United States of America and nobody would care about 5% CPI politically at least.

So Arthur Burns got the job done, but then in the mid-'70s a couple of things happened. First of all, Jimmy Carter was the president. So a populist, wasn't looking to expand supply... wasn't a supply-side reformer like Ronald Reagan. On top of that, the '73 to '75 recession delayed the supply-side reform response. For example, specifically North Sea exploration... It took longer. It took basically five years longer. It took five years longer to bring North Sea oil online and reduce OPEC's bargaining power, which is an important thing. North Sea oil was discovered late '60s, early '70s. But '73 to '75, you're not going to invest in capex in the middle of a recession.

So what happened was Burns was ineffective. And then of course, '79, '80, you get Volcker, which causes two recessions, not one. He raises rates 600 basis points more than Burns. So a myth emerges that this six-foot-seven behemoth, Paul Volcker, is like Jesus Christ. Arthur Burns is the fallen angel from hell.

Dan Ferris: Right. He's the guy who didn't go far enough.

Marko Papic: But the problem is it completely misses literally everything other than the 600 basis points. It misses the fact that Volcker got lucky with the early stages of globalization. He got lucky with the ascendancy of supply-side reforms [inaudible] fair economics of Ronald Reagan and Margaret Thatcher. He didn't have to deal with unions as much as Burns did. He also got lucky with the fact that supply finally got online after a decade of delays. So where am I getting at? If they tried to get us to 2% CPI next year, which would be, I think, really difficult to do, it would require massive destruction of the Mint.

It would also ensure that we don't get the supply-side response necessary for a long-term abating of inflationary pressures... because look, why do we have inflation? "Oh, it's Biden's stimulus." Well, no. False. False. First of all, it's Biden/Trump stimulus. Second of all, forget stimulus. Forget that. That's easy. You raise rates, done. Demand gone. The problem is we have this plethora of idiosyncratic supply problems that seem idiosyncratic, that seem separate from each other, but actually there are a cacophony of evidence that's telling you that we have completely dismantled the well-functioning and well-oiled machine.

Dan Ferris: Right, the global supply chain.

Marko Papic: Supply chain... just in time, all this stuff. Why do we do it? We decided that global warming was going to kill us tomorrow. Not in 10 or 100 years... tomorrow. So we need to deal with it right now.

Dan Ferris: It's an emergency.

Marko Papic: Right. And the problem with that is that what we've done is we've starved fossil fuel industry of capital. We've turned off the capital tap, the capex tap, at the same time that we didn't turn off the demand tap. We're not all driving Teslas. I'm sorry. Someone wants to drive F-150s. So the problem with that is that we have an energy crisis, which is of our own making. We have a supply-chain crisis because five years ago, we all thought China was cool. Now, we all think China is going to kill us. So now we have to also fight a war with China tomorrow. We have to solve climate change tomorrow. Then finally, of course, COVID, I guess that's nobody's fault, but COVID disruptions also created supply-chain problems.

Dan Ferris: Marko, I feel like what you're telling me is that on more than one front, we're on a wartime footing and that's generally an inflation-area impulse.

Marko Papic: Yes. And it cannot be resolved with Jay Powell and 300 PhDs in economics following models, as you said. In other words, I can't believe that 300 PhDs at the Fed are that dumb and that I, writing research on the beach in Santa Monica, California, I am smart. What I'm getting at is this... if you're right and they cause inflation to go to 2%, they will also delay the supply response necessarily to resolve –

Dan Ferris: Right. They're crushing demand. They're not fixing supply, period.

Marko Papic: And the issue is supply. If you go to the San Francisco Fed website, the San Francisco Fed has all these models and whether it's demand or supply causing inflation, like all models it's probably whatever, you can drive a truck through the assumptions. Generally speaking, their assumption is 60% supply, 40% demand, which I don't think is crazy. We might quibble. You might say, "No, Marko. It's 70% Biden stimulus and demand." But still, there's that 30% supply.

The point is if we get down to 2% inflation, we're going to have a calamitous recession. We're not going to have a capex response. You're not going to rebuild supply chains. "China is evil." Who cares? If there's a recession, no one is building a factory for chips anywhere in the United States of America. You can throw all those cool, fancy national security bills that just passed into garbage. We're not seeking more money to fossil fuel industry.

Dan Ferris: Right. And Volcker's actions were on the end and inflation is great for capex.

Marko Papic: Well, no. Inflation is, but not a recession.

Dan Ferris: Right. What I'm saying is I'm amplifying your point here. We don't have – the circumstances are opposite at that point. The recession crushes the capex and then you're back where we are right now.

Marko Papic: Exactly. So what I would say – so that's why I said, so I think they'll pivot, but whatever. It's a little conviction... I'm not going to hang my hat on it.

Dan Ferris: No. We're basically making a prediction here and you don't bet your whole wad on a prediction.

Marko Papic: Absolutely. I just want to also, for the listeners, articulate exactly what your scenario means. I think that if they are committed to the legacy of Volcker or the myth of Volcker, if they are committed to that, then I guarantee to you right now, inflation will not be under 3% for the rest of this decade in non-recessionary quarters. In other words, they will absolutely miss their target for the rest of this decade if they try to end the cycle now. That's – we're just not going to get the supply-side response, and they're going to end up being burned no matter how high they raise rates.

Dan Ferris: So you started out telling me they've already gone too far. We could be there.

Marko Papic: No. I think a recession in the – yeah.

Dan Ferris: Recession in 2023 sounds like done deal.

Marko Papic: It's done deal. If you look – OK. So what do we use to predict recessions? Who knows? Nobody knows. What I like to look at is real, nonresidential investment. So I want to look at investment. CEO decisions to do capex, basically. They're really useful, not so much that this is an investment or capex-led economy, but they just tell you where the animal spirits are. Then you can create a chart with CEO confidence as well. So CEO confidence in their investment decisions are pretty much coincident. CEO confidence right now is lower than 9/11, 2008, and COVID.

Now, investment is still right on the brink of becoming negative on an annualized change. So the chart looks like CEO confidence is gone through the floor and investment is right there. Investment should follow CEO confidence. The two charts are basically like – they move in sync over decades of U.S. history. So what this tells you is the animal spirits of business – leaders and owners – is crushed.

Dan Ferris: Commercial risk takers not willing to do it.

Marko Papic: Not willing to do it. If that investment collapses then everything else will collapse. Now Jay Powell keeps talking about slack in the labor market. Again, I can't believe 300 PhDs at the Fed are stupid. They know labor-market indicators. All of the labor indicators are the last thing you look at. Nobody cares.

Dan Ferris: It's the end of the chain.

Marko Papic: It's the end of the chain. Nobody – so look, if they want slack in the labor markets, by the time you see it is too late, as you said earlier. So yeah. I think the question now is are they aware of the heterogeneity, the complexity of the inflation problem? Are they aware that it's not just demand, that it's not just buying stimulus? I think the answer is yes. So to push back – so I gave you my view of what happens if –

Dan Ferris: In that – right.

Marko Papic: In that scenario. By the way, it's not just – one last thing about your view. If that happens what should we prepare for? We should also prepare for 2024 election to produce non-market-friendly outcomes. What I mean by that is that also happened through Burns as well. He didn't get a supply-side reform politicians. He got more Jimmy Carter. He's got more populism. I guarantee you right now, we get a recession 2023 that's deep, we go under 2% CPI, 2024 is going to be a poop show. I think this is a family-friendly podcast. So I'm holding back.

I don't care, right, left. I bathe myself in nihilist difference. My job is to forecast this. It doesn't matter. We're not going to get someone who's going to say, "Hold on a second, guys. Let's get more supply on the market." That's not what we're going to get. That also then prolongs the inflationary world because we get more populous. So I think – so let's go back to the other imminent pivot. I don't know if it's imminent. It might not be imminent enough. My view is this, I think that they're driven by politics and they have no idea what they're doing. So I would say – so I would take the other side.

Dan Ferris: Not going to argue that.

Marko Papic: Model, shmodels. I don't know if you've ever heard of SOOMA modeling: S-O-O-M-A modeling. Have you ever heard of it?

Dan Ferris: No. I don't know SOOMA.

Marko Papic: "Straight Out Of My 'beep'."

Dan Ferris: "Straight Out Of My Ass." You can say that.

Marko Papic: I can say ass? Good. Look, 2021, 300 PhD's in economics at the Fed got inflation wrong. A bunch of people like me got it right and I cheated on my Macro 101 from my roommates. The homework at my university and undergrad, I got a C plus from macroeconomics. My undergrad, because I cheated on the homework. I'm just going to say that straight up. I got it right. It was so obvious we were not in a transitory inflationary world. So why did they then think it was transitory? I think it was political. Joe Biden got elected. He wanted the extra fiscal stimulus. He didn't want the Fed to start raising rates and so they didn't.

Dan Ferris: So transitory is a pure political narrative? Do we believe that they knew this from the first time they used the word? Jay Powell used it five or six times that first time.

Marko Papic: I don't know, but you know what? They said all sorts of stuff. It wasn't just that. I think Lael Brainard was the one that said or maybe Yellen, she wasn't in the Fed, but there was another one like premature tightening would cause majority of Americans to feel unwanted pain.

Dan Ferris: Bostic or somebody.

Marko Papic: Yeah. So one of the doves said something like, "Hey, let's not tighten prematurely because it will hurt." So 2021 it was like, "Hey, let's take it easy. Let's be gentle. Let's caress the economy." It's like, "Guys, there's going to be inflation." By the way, meanwhile in emerging markets, every single central bank is like, "Inflation. Let's raise rates." Right?

Dan Ferris: Every single. Yeah. All over.

Marko Papic: Every single. Emerging market... the Brazilians, the Indonesias, the Malaysias... are like, "No. We're going to raise rates. I don't know what you guys are smoking, but over here in this country we raise rates when there's inflation."

Dan Ferris: Right, because we're at double digits over here.

Marko Papic: They weren't even –

Dan Ferris: Well, not at that time. Not at that time.

Marko Papic: They were just like, "Hey, look. COVID is over." So we're here waiting for 12 months. Then what happens is real wage, real incomes in the U.S., real wages start to turn negative. Then it becomes a political problem. Consumer confidence starts collapsing as does Biden's popularity. So he makes a big speech about how inflation is a big deal. Jay Powell gets reappointed and then boom, we're going to fight inflation. So now 12 months after that – so that was end of 2021 when they saw Jesus. Sorry, when they saw Paul Volcker.

Then they're going to start inflation, but again, it was the pivot that the Fed happened almost the exact same time as Biden finally read through his Twitter feed and was like, "Oh, hashtag-inflation is trending." Now that hashtag-recession is trending, I'm supposed to believe that they're going to be model dependent. I don't think so. So that's why I think they're going to – Lael Brainard again, I think it was two weeks ago. She's the dove, for those of you who don't follow the Fed, and I do not blame you. It's boring. She basically said, "Look, you – it may be time for us to reflect on the consequences to the real economy of a really fast depreciation of rates," which to me sounds like just setting up for another transitory.

It's going to be a reflection. We're now going to reflect for some time in 2023. Again, because hashtag recession is now definitely trending more than hashtag inflation. They just need the CPI to come down. And once CPI comes down from 9%, 8% to 6%, 5%, the truth is real wages in this country will be pretty much flat, if not positive.

Dan Ferris: Five or 6%.

Marko Papic: Yeah. So real wages are basically wage growth minus inflation and right now they're deeply negative because wage growth is 4% to 6% depending on how you calculate it, which data you use. Four to 6% inflation real – nominal wage growth minus inflation is right now negative. It's minus four. So if you get CPI from 9% to 5%, you're sitting pretty as a politician... long-term expectations of inflation be damned. So I think that's what's going to motivate them to pivot. Again, it's going to motivate them to also pivot because they're aware that there's supply issues. They're aware they're not going to fix supply issues with raising rates. So yeah. That's where I think they land.

Also, the other issue is that they're starting to break things, as you said. It's not the equity market that they're breaking, but they're breaking American geopolitical allies. So normally when the Fed raises rates, what breaks is Malaysia or Thailand or South Korea or Russia or Brazil, and they may take 12 to 18 months for all that global stuff to round trip back to the U.S. You have an LTCM crisis or something. This time around it's literally the United Kingdom just having a balance of payment crisis. United Kingdom, the Bank of England, they have the Fed on speed dial.

Dan Ferris: So the fear extrapolator in me, we're talking about breaking things, looks at what happened in the U.K. and says – and Hugh Hendry talked about this when I interviewed him recently. He was like, "It opens the kimono for the world on repo and people don't know anything about this. They don't know that these huge financial companies and other companies are funding their business to the tune of billions and billions of dollars every morning at 8:30. If it's not done by 11:00 there's a big problem. There was a big problem in the U.K. That, to me, that's the breaking. It's like Bear Stearns. Exactly that's what I just said, that's what happened to Bear Stearns.

Marko Papic: But there is a difference, though. There's an important difference.

Dan Ferris: Right. It's not Bear. It's U.K. It's England.

Marko Papic: Exactly. There's – what I'm getting at is look, the big difference here is whenever people get technical and your eyes glaze over, as mine do, it's bullshit. It could be easily fixed. Let me explain. Bear Stearns wasn't Bear Stearns. Who cares about Bear Stearns? What happened in 2008 was a real estate crisis. That was the problem. We have a sovereign debt crisis, but that's not a crisis because the – see, it's easy to throw tens of millions of Americans out of their homes. That's easy. That's actually easy because they can't print their own money. So nobody cared.

When it's a bunch of guys who went to elite schools and are running countries they're just going to be like, "Oh, wait. What's the problem? Some repo-market thing that Hugh Henry knows about and that he's going to talk about?" "Brr." That was the sound of a printing machine. So this is where I'm getting at... 2018, 2019 – wait, no, when was it? Late 2019... same thing happened. The Fed was raising rates and we've got a repo market crisis.

Dan Ferris: Twenty-nineteen or twenty-eighteen? September to December –

Marko Papic: No. It was 2019. It was all this really complicated research being pumped out by investment mags.

Dan Ferris: I remember this. Yep.

Marko Papic: Credit Suisse guys [inaudible] like wrote some piece that literally melted my brain. I was sitting there and all the young guys in my firm were like, "Marko, this is it. This is when it ends." I was like, "What ends?" "The cycle." I was like, "You do realize they're going to restart QE, right?" "No, man. No. It won't happen." I was like, "Boom, they restarted QE," and you and I can't even remember when it happened.

Dan Ferris: Yeah. It's nothing. It's true.

Marko Papic: It's nothing. So this is where my pivot thesis comes from because the kimono is removed, as you said. It's like the bubble – where's the bubble? Everyone is looking for the bubble. The bubble is in sovereign debt. That's the bubble. The bubble is not poor, regular folks who can be thrown out of their homes and made homeless. No. The problem is governments. So what are governments going to do? They're just going to do printing, which the fancy term I brought up at the beginning and I apologize for that, was yield group control. I should have just used the printing sound like "brr."

They're just going to turn on and buy their own debt, which then negates interest-rate hikes. So I hate to harp on monetary policy, but so many things matter. What I would say is that if you're right, we have a path. We know what happens. If I'm right, we have a path and we know what happens, which is that the cycle continues. One thing in the near term probably that makes the most sense, if you're right we have a calamitous recession. Bonds are going to rally. If I'm right and they back off, then the front end has to stay where it is or come down and then the back end, which is long-dated bonds, will also come down. So I got to tell you and I know this is dangerous. This is your worst trade in the world. I'm just sitting here and seeing how can bonds keep selling off? It seems to me that whichever path we take –

Dan Ferris: They're going to have to, yeah...

Marko Papic: – the long ends has sold off too much.

Dan Ferris: All right. Well, yeah. You're not the only person I've heard say that, but I'm going to give you my final question if you can, real quick, do the bit that I always do at the end of every interview... same question for every guest at the end. If you could leave our listener with just one thought, what would it be? If you've already done it –

Marko Papic: No. I don't think we've done it. I would just say that one thing we didn't talk about is obviously geopolitics and politics. It's just a really weird moment right now where monetary policies is driving everything. I would say that look, just start arming yourself with knowledge of politics and geopolitics because they are going to drive markets. Once we get an answer to our question "is Jay Powell going to follow Volcker or not?" Once we have the answer to that question, the next decade becomes just about getting politics right.

Dan Ferris: All right. Well said. Thanks for being here. I appreciate it.

Marko Papic: Absolutely.

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Well, that was certainly the most time I think we ever spent talking about the Federal Reserve all in a row. I never would have thought that I would have let a conversation about the Federal Reserve just take up that much of an interview. But obviously, there's a lot going on there and I think Marko makes the point very well that unfortunately, he said, they're the most important thing to listen to right now and I can't disagree with him. Of course you heard his view and mine, and neither one of us is making a prediction really. We're just saying if this happens or if that happens.

The whole world, the whole market is sitting on the edge of their seats, right? You're sitting on the edge of your seat. I'm sitting on the edge of my seat. What's going to happen? What did the Fed do next? So it made a lot of sense to cover the various scenarios today. I hope it's as valuable for you as it is for me, especially to talk with a guy like Marko about it. Well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to www.InvestorHour.com. Click on the episode you want, scroll all the way down, click on the word Transcript and enjoy.

If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com. And do me a favor – subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. While you're there help us grow with a rate and a review. Follow us on Facebook and Instagram – Our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want me to interview? Drop me a note at [email protected] or call the listener feedback line at800-381-2357. Tell us what's on your mind and hear your voice on the show. Until next week, I'm Dan Ferris. Thanks for listening.

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