Fiscal Stimulus and the Risk of Runaway Inflation (w/ Kevin Muir)
ED HARRISON: Kevin Muir, it is a pleasure to talk to you. I think this is the third time that you've been on Real Vision now. I'm very looking forward to this conversation. We're going to talk a little bit about investing, macro, we're going to talk about Canada in particular. Let's start it off with what are you looking at, like what is in the investing world, the thing that you think that people are missing the most that you want to talk about? KEVIN MUIR: Well, it's great to be with you today, Ed. The one thing that I find perplexing and the most unusual is the fact that here we are and I've had two bubbles in my lifetime that I've experienced, I've had the dot-com bubble and I've had the credit real estate bubble of 2007. Here we are in the third bubble and staring us right in the face and nobody wants to call it a bubble. To me, that's the very definition of a bubble, because everyone always tells me, "Oh, if I was around in the dot-com bubble, I would have nailed that trade. I would have been short because it was so obvious." I said, "No, back then, it wasn't so obvious. It wasn't clear that these things were going to collapse." Yes, there were some people that called it, but on the whole, the reason that it got so frothy was that everyone truly believed that the internet was going to change the world. In fact, the internet did change the world but just the prices of those securities were mispriced. Fast forward to the real estate flash credit crisis bubble. Again, we saw a situation where everyone says, "Oh, it's so clear. The Big Short, all these guys nailed this trade." Well, no. A lot of guys tried and then they got their head handed to them and a lot of people gave up and by the end, there was very few people that were actually fighting against the bubble. That's the reason the payoff was so great, was because there was so few people actually taking the other side. Well, today I'm confused as to why-- well, I'm not confused. I'm actually, I understand why everyone's not willing to call this a bubble, because that's the very definition of a bubble, is the fact that when you're in them, they're very difficult to know you're in them. I look at the sovereign debt bubble and I look at interest rates at minus 60 basis points in Germany and I see people telling me how 100-Year Austrian bonds are the greatest thing since the spread. I see that the summer just that reach for duration that was just epic. I think to myself, here we are, we're in another bubble. I'm not afraid to be the guy that's going to stand out here and say we're in the midst of a bubble, and for now, everyone's telling me I'm a fool and I don't understand the 3Ds, the debt, deflation, demographics. I argue that those things are all in the price. When I think about the investing landscape going forward for the next decade and how you want to set up your portfolio, I ask what the bigger risk is. Is the bigger risk the thing that everybody's warning me about, which is more disinflation and interest rates going even more negative, or is the bigger risk that we get the thing that no one is expecting? That is inflation. ED HARRISON: Very interesting. Yeah. How do I unpack that? The macro, let's look at it from the macro context. What are the macro factors that would lead to that bigger risk actually coming into fruition? KEVIN MUIR: Well, one of the things that I'm a big believer in is the fact that we don't understand why we've had disinflation or disinflation over the last three, four decades. We look at it and we look at this trend in 1981, interest rates for the 10-Year were 15% and they're now 1.50%. We think to ourselves, well, this trend is going down, and it's just going to continue downward. Many people are drawing trend lines and saying, "No, no, this is going to go negative, the US has headed minus or to zero or maybe minus four, whatever the number." One of the things that I think that we haven't understood is why we've had this. I've view it as-- it's actually a feeling of economics. It's a feeling of understanding what's truly driving the economy. We've focused on the monetary side of the equation so much that we've ignored the fiscal side. It was only once we hit the zero bound that we realized that the monetary policy wasn't is in control as we thought it was. All it was doing was actually affecting the behavior of individuals and encouraging financial speculation and other things of that nature, but wasn't really affecting the economy as much as we thought. What's happening is that we've constantly tried to stimulate the economy with more and more monetary policy. We've done this to the point where in Germany, they refuse to do anything more, but to shove more and more negative rates into their system to try to fix it. What we finally have hit this point is when we realized that that's actually not effective anymore, and it actually doesn't do what we think it does to the economy. When I think about why this trend might change, it might change because we wake up to the fact that really the fiscal side of the equation is much more important than we ever imagined. Then once we understand that, and you see it with Draghi recently calling for more fiscal, even Ben Bernanke in the time of the Great Financial Crisis was calling for more fiscal, as central bankers push back and say, "No, we've done everything we can, we now have to do more fiscal." Once the government's realize that they can basically go spend with almost no cost, let's face it, Germany can go spend and actually make money by spending. As long as they don't lose the money, they invest in infrastructure that is productive for their economy, they're actually better off as a society because the interest rate is negative. Once people realize this, and once governments realize this, we're going to get a wave of fiscal spending that will actually create the inflation and it will be the old adage that be careful what you wish for, it might come and it might come too fast or too hard. ED HARRISON: Well, a number of different places I can go with that. What I'm thinking in particular is- - the first thing I'm thinking actually is I'm thinking about like Bill Gross. I'm thinking about Jeremy Grantham, Jeffrey Gundlach. That's the third one. They were all saying that the end-- the bond bear market is upon us that just as you were saying that bonds are in a bubble at this point in time and it's only going to go higher. I think we were probably at like 2.50%, maybe something like that at that time, but the bond rates went lower. How do you time this if-- there's only so far down that interest rates can go most people will say, how do you time this? How do you know when this could potentially occur? KEVIN MUIR: Well, I think that the thing they missed at that time was it was actually caused by the Fed being tight. That bond bear market like when they-- I think was Gundlach's famous two closes above two and a quarter, three and a quarter and that ended up being his technical signal for when it was about to break out, where yields were going to break out ended up being the absolute basically the top in yields, and from then, it went down. I think that that was caused by the Fed being too tight and it caused a bear market in US bonds and people misconstrued that. I actually think that the next bear market in bonds will not be from the Fed being too tight, it will actually be from the Fed being too loose. If you think about a long bond investor, what is their number one concern? It's inflation. If you have a Fed that is on top of maintaining the purchasing value of your dollar, then as they raise rates, you should actually be more willing to go out the curve and buy long bonds. This is the same deal with the-- you see Stanley Druckenmiller talk about the fact that QE is actually bond negative. Everyone, that doesn't make sense for a lot of people. They say, "But wait, the Fed's buying bonds, why would that cause the long bond to sell off?" The reality is that if you actually believe that QE is inflationary, and we could debate if it actually is or not, but if you believe that, at the very least, it should cause investors reallocate their portfolio and actually sell long dated bonds because they expect higher future inflation. I think that those that were expecting higher bond, sorry, higher yields because of higher rates in the US, I think they're mistaken, that will not be the trigger. In fact, the trigger will be a Fed that is too easy and doesn't actually chase the market higher. That is what the true bond bear market will be created was when we finally get the inflation and the Fed should be raising rates and they deem that they can't afford to because there's too much debt out there. That will create a self-fulfilling inflationary loop in my opinion. ED HARRISON: Well, rather than go further in terms of the macro side of that, let's talk about the how do you play this or how do you-- give me a scenario, a mechanism for being able to take advantage of this. Because I know that at The Macro Tourist, you wrote up something on this particular subject and you went step wise, right through how you would construct an investment to take advantage of this situation. KEVIN MUIR: Well, one of the easiest ones most people will say is you should just buy gold. I'm not disputing that that's an easy way to do it. There's doubt that that might solve your problem but you don't want to be only invested in one asset class only, like as your protection against inflation returning. We spoke a little bit about this earlier, if you think about a portfolio that's long, let's say 60/40 traditional portfolio, that's long 60% equities, 40% bonds or whatever it is that you view is appropriate. I think about the return of inflation, I could see a situation where that inflation causes both bonds and stocks to go down. You need something to offset that and so sure, gold will help, but another way to do it is actually to own inflation breakevens. Inflation breakevens are-- they are the difference in the yield between a TIP of a certain maturity and that corresponding treasury of the same maturity. ED HARRISON: When you say TIP, just for people who don't know what TIPs are, what are those? KEVIN MUIR: Those are Treasury Inflation Protected securities. Those pay you a yield plus inflation. If you go look at the, let's say, the 20/44s, the TIPs, they'll be yielding 75 basis points. Let's say that the equivalent Treasury is yielding, I don't know, let's say 2.5. Let's do the quick math, that's 25 plus 1.5, that's 175. That would mean the inflation breakeven, which is the difference between those two, is 175. 175 basis points. If you think about it, if you were someone that was going to hold this to maturity for the next, whatever that works out, to 25 years, if inflation ends up being higher than 175, then you would have been better off owning the TIP. If inflation ends up being lower than 175, then you would have actually done better by holding the nominal just regular Treasury security. That inflation breakeven is in essence, the forward expected inflation that the market is pricing in, the difference between the two. If you do the math and go through it all and hedge it, you can actually be long that security, that inflation breakeven. You figure out the proper hedging ratios, you go long the TIP and you go short that, and then what you could have is a situation where even if bonds go down in that environment where I was talking about where you see inflation rise and both stocks and bonds go down, you could have a situation where the TIPs yield is actually or the TIPs return over that period is negative but that the bond short that you have on is positive. It ends up being that inflation breakeven could be a security or an asset that might be non-correlated to both stocks and bonds. We've talked about this in the past. One of my big concerns is, if we get a situation where the 20-year negative correlation between stocks and bonds breaks down, which is something that I'm deeply concerned about, because I think that many modern portfolios are built on the basis that you own some stocks and you own some bonds. When things go bad in the stocks, the bonds are going to save you. ED HARRISON: It's a hedge. KEVIN MUIR: It's a hedge, so it ends up being they're negatively correlated and saves you. Well, that might work but I really worry about if you're a German investor and you're buying something at a negative nominal yield, how much that's going to save you in a time of stress? Who knows, maybe they go to minus four, but maybe it actually goes the other way and they actually end up being a negative return. If you also include inflation breakevens into a portfolio, in a time with inflations rising, you could actually have an asset that is negatively correlated to those financial assets, which I think are elevated. ED HARRISON: The first thing that comes to mind when you say that is convexity, in terms of being able to hold that trade over a longer period of time, that is that as the price moves up or down, then that ratio that you're talking about has to be reallocated. How do you deal with that? KEVIN MUIR: Well, you do need to manage the portfolio because it's not something you can just go and put buy and put on. One of the ways for those retail people that want to play this, it's not the most capital efficient way to do it, you can go and you buy TIPs, which is the TF and then you can hedge it with a short position in the corresponding ETFs of government securities. Now, one of the things I want to stress here is many people will go and short TLT. The trouble but the TLT is the duration is actually eight years on that ETF whereas, the TIP is only or sorry, the TLT is 18 years, whereas the TIP is only eight years. What you have to be careful is if you went and did that trade, you would actually have a yield curve trade on. You can't just go put that on, you need to duration match them. Lucky for us that the IEF, which is the mid-range Treasury protected, or the Treasury ETF, that it has the same duration as the TIP or very close to it. It's not the most capital efficient way to do it but one way to gain exposure to inflation breakevens is actually to buy TIPs ETF and short the IEF against it. ED HARRISON: Very interesting. Now, I think that the one of the more interesting things about this is the concept that bonds and stocks won't be negatively correlated, that's what you were talking about. That's because in the scenario that we're talking about now, we have a secular bull market in bonds which is predicated largely on the fact that inflation has been falling. As a result of that, that puts a floor on underneath stocks. If you're in an inflationary environment, then bonds would sell off, but then potentially stocks would sell off as well. KEVIN MUIR: That's right, stocks will obviously go-- like the earnings will go up because of the inflation. The question is, will they go up enough to compensate for the fact that PEs will go down? It's not entirely sure. It depends on how fast the inflation comes. I won't say for sure that they're both going to go down. I just worry that that is something that most investors are not the least prepared for. Not only that, most portfolios are set up to assume that that's not the case. The one thing that I've learned is that crises always occur in the stuff that people aren't expecting, and that's by its very definition of crisis. If it was obvious, everyone would have already hedged for it. That's one of the reasons that I think that inflation is something you should be worried about as opposed to deflation because deflation feels to me like we've been down this road before. We know what we've seen in 2008. Sure, it will be bad but I think that we'll figure out a way if we do get those crisis situations again, the Fed will go and they will put stimulus and we'll do more fiscal stimulus, they'll be able to stop it. The real endgame occurs when we get inflation, and the Fed won't be able to stop that and they won't be able to afford to stop that. That is actually much scarier of the situation for a portfolio than deflation. ED HARRISON: Well, the economic environment behind that is the interesting-- the macro behind that environment, because let's go through some scenarios. Actually, let's use Europe as an example because they're the ones that are most hamstrung on the fiscal side and they're the ones you were talking about who were using monetary policy exclusively. Bad things happen globally, and in particular, in Europe, you have a recession of some sort. We're already at negative 60 basis points on the German 10-Year. What happens then in terms of the policy response? What can they do? What can the Germans do? What can Europe as a whole do in order to create any momentum in their economy? KEVIN MUIR: Well, this is the pushback I hear all the time is they say, there's no room for fiscal, nobody will do it. They can't, they're hamstrung by legal reasons. There's a variety of different pushback that it just won't happen. I see a couple of things to that. I, first of all, there was all sorts of things that during the tarp that the Fed did, previously, people told me that they couldn't do, and even now in Germany, where they're finding ways around trying to figure out to get it into the utilities and there are ways around the legal reasons, but the main one is, those are all selfimposed restrictions that they put on themselves. It's not like it's an actual financial restriction. It's not like it's a country that's trying to defend their currency and they don't have the assets to defend it. This is a selfimposed restriction that they put in place together. I think in a time of crisis, or even maybe not in a time of crisis, maybe they just get together and changed it. I know I'll get all sorts of notes back about how no, there's no way they can do this. The attitude isn't there. I think don't sell the politicians short on their ability to spend. I think that what you need to look for is a change in tone. That's the most important thing. I've seen it where when you get the CEO of Deutsche Bank coming out and telling you, "No, we do not need more negative rates." He said, "My customers, they're not going to borrow any more at minus 75 than they did a minus 50." Like, let's just go and stop. Think about the absurdity of expecting corporations to respond by spending more in an environment of more and more negative rates. If you're sitting there and you're the CEO of a company and you're thinking about whether you should invest in a plant or something like that, do you really think that that 25 basis points is going to change anything? Like there's not a chance that's going to change anything. In fact, what you would rather see is a situation where rates are headed higher because you know as a CEO that's investing in infrastructure, that the chances of the product that you're investing or the CapEx that you're investing in actually are being useful, going forward are increasing because the economy is doing better. The risk of ruin from them making CapEx decisions makes it as much more important than the 25, 50 or 100 basis points that they lowered. All you end up doing by lowering rates is it have more financial shenanigans going on. You don't actually help the real economy. I think that's what the Deutsche Bank CEO was saying. I think you'll see there's a Goldman Sachs paper where they talked about how sensitive corporations CapEx plans are to changes in interest rates. ED HARRISON: The Fed did something on this as well. KEVIN MUIR: Yeah. You would think that it's hugely correlated. It's actually-- there's almost no correlation. I believe in the last decade, it's gone negatively correlated, meaning as they lower rates, there's less of a chance of them spending. I would attribute that to the fact that as they lower rates, it is indicative of an environment of less economic certainty. Therefore, corporations are less willing to spend. Although I don't believe that you should go and raise rates and that would immediately solve your problems because I still believe that there needs to be something done on the fiscal side, I do believe that trying to solve your problems with more and more it stimulus is absolute madness and to make a portfolio based upon that continuing is very dangerous. Because when it turns, it'll turn quickly and we'll be surprised at how fast that mantra disappears. I think we'll look back 10 years from now and we'll laugh at the idea that we thought we were powerless to create inflation. You could even play this tape back [indiscernible] and we'll see how I did on that, but just like in 1981, nobody believed that inflation could ever be tamed. There was Dr. Doom himself like Henry Kaufman of Solomon brothers, he kept predicting higher and higher inflation rates. He thought bonds were going to go to zero, they're certificates of compensation. They weren't called bonds back then. What happened was there was this secular turn and for the next 30 years, we had lower and lower rates of inflation. Once people realized that that fiscal can solve their problems of this inability to stimulate the economy, we're going to see the same change in inflation going forward. ED HARRISON: You're talking a lot about monetary policy there. I think that that's a great introduction to talking about the Fed in particular, because the dollar is the world's reserve currency and that's the central bank that people are looking at. In fact, I think we were talking earlier before the interview about the fact that the Fed relative to other central banks is the tightest in the world, it has been for quite some time. How does that play out do you think over the medium term, say the next three, six months? KEVIN MUIR: Well, Jim Bianca's got this great chart where he plots the Fed-- the number of countries that have policies that are higher than the Fed. What you'll see is that we're actually at zero right now. The Fed's the highest policy, and if you go look at periods that this has happened in the past, they coincide with major economic issues. That makes a lot of sense because the Fed is, as you mentioned, the US dollar is the world's reserve currency. If you have the world's reserve currency being the highest, it basically squeezes liquidity and you get a situation where those dollars need to be paid back throughout the world and you end up having a global economic slowdown. I think it's really interesting to talk about how we got here, like, how did we get to this situation where the Fed is the tightest and you're like, how did that set up? Well, I think it goes back to Trump coming in and Trump came in and he did fiscal. Let's face it, the US is the only country at that time doing fiscal. They went and they did 4.50% of GDP as a deficit and they're spending. The Europeans are getting mad at Italy because they want to run at 2.50% the budget deficit and here we have the US running at 4.50%. What that did was that caused a booming economy and it caused capital flow into the US. It ended up being that famous saying about it being the cleanest shirt in the dirty laundry pile and it attracted capital and it end up being a self-fulfilling prophecy, more capital and chasing assets and it goes up and the dollar is going up. What happened was Powell, who was new to his job looked at this and I think that when he came in, he truly believed that he thought that the pain from the 2008 credit crisis was so large that it made more sense to stop a bubble before it was created than mop it up, which was in contrast to Greenspan who had previously said something to the effect. ED HARRISON: Yes. I remember that. KEVIN MUIR: Yeah, he'd said, "No, you're better off just cleaning it up afterwards." Powell came to the conclusion that, no, the pain from all this is way higher, therefore, I'm going stop it. ED HARRISON: What does that mean? Like in terms of how does that change this policy response in terms of-- because the way I'm understanding it and we talked about this earlier is that he's saying that financial assets are bubblicious more so than the real economy, that they're not necessarily insane? KEVIN MUIR: Right. I would argue that this is my buddy Aiden from Pavilion that brought this to my attention. He talks about there's been multiple r-stars, levels that that the Fed feels is above the period or the point where they should be raising rates and one of the r-stars is for financial conditions which is dramatically different than the r-star for let's just say Main Street. ED HARRISON: You could have a Main Street r-star that's like zero percent, but r-star for financial conditions is 2.5%. KEVIN MUIR: I think that what happened was when Powell came, he was convinced that raising the rates to stop that financial bubble is just of environment was his number one goal and I think the easiest chart to look at for that is you look at the real yield on the 2-Year TIP, meaning like the yield that you would achieve after inflation on the 2-Year, which is two years the policy response. You could see, and it was in a range from like 50 basis points to minus 150 basis points. Basically, from the period that Bernanke to Yellen and then Powell came in. When Powell came, we all of a sudden saw that real yield jumped from 50 basis points to 100 basis points to 150. Finally, it was at almost a 200 basis points when he did his-- we're long way from neutral. That caused a lot of pain and he basically got to the-- he raised rates to the point where the global economy cried uncle, he pushed the global economy into a recession. The ironic thing about it is that the rest of the world while he's raising rates due to the fact that he's trying to offset Trump's stimulus, fiscal stimulus, the rest of the world is trying to solve their problem with even looser monetary stimulus. ED HARRISON: Which isn't going to work. KEVIN MUIR: Which isn't going to work and it's going to cause these crazy distortions. That's one of the reasons that we now have the German 10-Year at like negative 60 basis points. ED HARRISON: Basically, Trump was right in the sense that the Fed was too tight. KEVIN MUIR: I 100% think that Trump's right. Like he has legitimate complaint when he says that the Fed is too tight. People will say, well, the Fed shouldn't be the banker to the world, they should tune for the US economy for the world. Well, that could be but you can't-- when you trade the market, you have not the market you want and the reality is that they can scream and yell that they shouldn't be the central bankers of the world. The truth of the matter is that they are the central bankers of the world. They have thrown the global economy into at least a slowdown and possibly a recession. ED HARRISON: Where does that go then from here? Because we were talking about this earlier, the data that came out, we saw some jobs data that were pretty good. The ISM data wasn't as good. When you listen to what Fed officials are saying, like Charles Evans of Chicago, they're basically saying it's a push. We know that you guys are saying there's a 77% chance or something of that nature, that we're going to hike or cut rates in October, but maybe we will, maybe we won't, and certainly going forward, this could be the end. KEVIN MUIR: Well, if the Fed continues to be tight and drag their heels at lowering rates, then there's a good chance that they will actually tip the global economy into recession, that like-- the question is, does the Fed have the-- or do they even want it? Do they want to go out and get ahead of the curve and actually lower rates? So far, you're right that there's been very little signal that they've want to do that. It's baffling that they've been so reluctant and that these slowdowns are staring them in the face. We're taping this on the day of the unemployment number and like, that's a backward looking indicator and by the time it starts to go down, it's going to be too late. If the Fed does their classic mistake of keeping rates too high for too long, then there's nothing to do except to wait for them to make the final mistake, and then they'll chase the curve down at that point. In the meantime, though, the question is, will the rest of the world pick it up and start doing some fiscal on their own? Might that change the equation from that perspective? There is a chance that maybe the Fed is trying to wait everybody out and force other countries to solve their problems and make it so that they're no longer the only game in town and that may be some other countries can lift the global economy up as well. ED HARRISON: There are multiple places I could go with that, but let's go actually to Canada since that's where we are. We're in Toronto here. I wanted to make a shift to when you look at global interest rates, the Anglo Saxon countries-- Canada, the United States, UK, Australia, New Zealand, basically are the highest interest rates in the world. Japan and Europe are all negative or zero. My sense is that Canada is doing really well. Where do you see the Canadian policy going? How is the Canadian economy doing given that policy? KEVIN MUIR: Well, Canada is in a difficult spot in terms of the setting policy, because on the one hand, we have a real estate-- well, it's a frothy market to say the least. Some people use the word bubble. ED HARRISON: We're talking about that. Yes. KEVIN MUIR: We have this situation where our real estate has done much better than, for example, our friends in the south, the US. Our real estate market has been going up ever since the Great Financial Crisis and is actually a point of concern. Yet at the same time, we have our manufacturing base struggling. We have our main-- we're known as a petrol currency and oil stinking and in fact, we've shot ourselves in the foot with our energy policy, with our lack of pipeline. Much of our energy is trapped in Canada and we're trading-- we have something called Western Canadian Select, which is a benchmark in a trade that a discount to Western, the WTI which actually trades to a discount to Brent. Canada, we don't seem to be able to do anything right on our energy policy now. I'm hopeful that's going to change. When I look forward, and I ask myself what's going to happen in Canada the next year, I originally thought that our housing market was due for a pause, was going to come in. Then the bond bubble of the summer came and in doing that, what's happened is interest rates have once again lowered. One of the things that I do believe, although we spoke about how interest rates do not affect the real economy, at least when it comes to corporations, or it has minimal effect to the corporations, I think it has very dramatic effects to individuals. ED HARRISON: By the way, this is a perfect example of your multiple r-stars example. KEVIN MUIR: You're absolutely right, because the r-star for Canada was very sensitive to the fact that as they lowered rates, the consumer-- because the consumer had room, they could actually go out and buy houses, went out and bought houses by the bucketful, and it just ended up being something that fed upon itself. Now, we're in a situation where I thought it was going to roll over because of the sheer force of just there's so much debt in Canada that eventually, the consumer will reach a point where they cannot put any more debt on, or at least it'll be incrementally difficult to put on more debt. Then what happens is that interest rates had lowered. Not only that, we could maybe talk about the election a little, both major parties are actually running on a policy of real estate friendly policies. ED HARRISON: Wouldn't you, because you're a politician. KEVIN MUIR: You're right. At one point, the liberals were trying to tamp it down because they, again, just like Powell, they were worried not about the financial excesses, they were worried about the real estate excesses. They've realized that they need to get elected and they're running on this policy of more friendly credit to new homebuyers to make it more affordable. All these things that probably pushed off the real estate correction for another year. I still think that we're more vulnerable than the US. I look at the US housing situation and although some people are concerned about it, I contend that the US is in much better shape the consumers way less indebted. Although the 1% houses, those in like the gateway markets like New York, LA or San Francisco or maybe even Miami have gone up a lot. The other markets like Atlanta, Phoenix or just middle of the road country, middle of the country cities, they haven't gone up the same way and the affordability is still much greater there. I see a situation where the US actually, from a housing perspective, could outperform Canada dramatically going forward. Back to Canada, I think that our day of reckoning is probably still a yonder year away. I think once that comes, it will slow our economy. At the same time, I'm hopeful that some of the changes that we're making from an energy point of view, meaning that we're finally getting our act and deer in terms of pipelines, and there's been a change of government in Alberta, and it seems to be much more business friendly. Premier Kenny was just down on Wall Street trying to sell, you don't tell a bird it's open for business, they lowered corporate taxes. They're trying to develop the Canadian energy infrastructure again, and make it so we're once again doing better. I could see a situation where a year from now, the Canadian real estate's doing poorly, but yet the Canadian energy's doing better and we get to once again, it's almost Canadian and that it's a little bit of both, and it's not going to be going one way or the other. ED HARRISON: Well, we were talking about this before, it seems almost as if Trudeau, Prime Minister Trudeau is on both sides of the fence with regard to energy because the Liberals, there's a great outpouring of climate change activists who are telling them that pipelines are bad. At the same time, people in Alberta are saying we need to have some pipelines so that we can actually supply the market in the United States. What's going on? KEVIN MUIR: Well, he's managed to make everybody mad, which is not very good from a politician point of view. He was probably going to be a difficult sell for Alberta anyways, because his father was the architect of the National Energy Program and Albertans have a long memory. Then when he came in, and he did a couple of things with the pipelines that basically showed that it was incompetence and it was probably mishandled. He's both making Alberta mad and also making the climate people mad. He's not winning on either side. I get a little frustrated. Although-- it's not politically correct to say that you want candidates to be going and pumping more oil. The long and short of it is I look at Norway and I see them as more of a model for us. Norway pumps as a per capita, five times more oil than us. Yet they still managed to live their lives with a focus on more and more green energy and more climate friendly solutions. I don't think that they need to be mutually exclusive. I get frustrated with the idea that to solve a problem of the climate, we're going to go after the supply instead of going after the demand. If you really wanted to solve the issue about climate change, then why don't we double the gasoline tax everywhere instead of trying to stop pipelines from Alberta going to the US and making it more efficient. The ironic thing is that when those climate activists delayed all those pipelines, it didn't in some cases stop the oil from flowing, what it did is it put it on rail cars. If you think about it, rail cars first of all are way more dangerous than pipelines. There was actually a horrible accident in Quebec where a train full of rail cars went down and lost control and exploded and killed many. You have a situation where it's the unintended consequences of your actions aren't achieving what you're hoping to achieve. If we truly want to address the climate issue, then let's put a gas tax on it, put an energy tax, take the demand down instead of trying to curtail the supply. ED HARRISON: I'd love to talk about Canada a lot more but in terms of time, I want to make a shift because last time we spoke, we had a conversation about MMT. I thought that was interesting. Some of the things that you've touched upon during this conversation go in that vein, but it's clear, obviously from this conversation that you're not like a wild eyed, we have to max out the spending guy and what's your view on MMT as it can be used going forward? How does that relate to your view of inflation? Why you think that's the thing to worry about the Black Swan, if you will? KEVIN MUIR: Well, I'm frustrated that MMT has been associated with the left so much because it doesn't have to be. It is actually non-denominational, like it's not a left or right policy. In fact, I've argued that Trump is the most MMT president that we've ever had. We were eight years into an economic cycle and Trump, what did he do? He didn't go and try to balance the budget like the Keynesians would say you should do. He didn't go and say I got to crank rates because that's what the Austrians like malinvestment of capital would say you do. No, what he did was he said, we're going to cut taxes. He says, why are we cutting taxes? Because there's no inflation. Even when it comes to the rates, I think he was asked numerous times, well, if the economy is so great, why are you giving the Fed a hard time about raising rates? He goes, because there's no inflation. Those are all very MMT like arguments. Now, I think that if-- I laugh and say if I was a benevolent dictator in Europe, what I would do tomorrow is I would actually raise rates to 100 basis points. I would immediately put them positive. Then what I would do is I would go and I would cut taxes, and I would infrastructure spend until the economy balanced. When I use MMT, I use it as a framework to understand that this monetary madness that they're engaging in is not going to create the inflation that everybody's worried about. I use it as a way to understand how the policies that are getting put into place are actually going to affect the economy. It's not going to be some like hyperbolic, or we're going to create hyperinflation from these QEs and to me, it's understanding how the plumbing of the economy works. I contend that the MMT guys got way more right than most traditional economists. Like if you go through Mosler and Kelton, they both were all over your understanding the problems associated with Europe, way before most of the rest of the world did. They were-- when we take the example of the 2009 open letter to Ben Bernanke or maybe it's [indiscernible]. ED HARRISON: Oh, yeah. I remember that. KEVIN MUIR: When you take that, they would have said, no, the QE is not going to cause disinflation that you're all worried about. I use it as a way to understand how the modern fiat based monetary system works. It's a valuable tool and I'm frustrated by the fact that people hear it and they immediately dismiss it as the left leanings of a crazed socialist. It's not and it's nothing more than a framework to understand how the modern economy works. ED HARRISON: As you were saying that, the thing that occurred to me was that, I think going forward, you could cut taxes, as you said, or you could increase spending. It's not necessarily the case that you actually have to increase spending. KEVIN MUIR: Right. You could only cut taxes. One of the things that I'm recently excited about is the fact that India came out and cut taxes from 35% down to 22%. To me, it looks like they're just going and doing exactly what Trump did. We look at the effect of what happened in the US, let's face it, the US was the strongest performing economy over the last few years, and people will attribute it to the American dynamism of their capitalist system. Yes, there's no doubt about it, that America is dynamic. There's lots of great things about it. If he had gone and tried to balance the budget, instead of spending, I suspect that you would have gotten an economy that was much weaker, and we would have for sure been in a recession now. ED HARRISON: One last point in this that I think is interesting that, as you were talking about it, another thing came up to me, and I was thinking about elected versus unelected officials because when you talk about monetary policy and its impedance, one of the possibilities is that you move in a Swiss Japanese direction, where the monetary agent goes out and buys more and more assets in the real economy in order to, in a sense propping them up-- I'm talking about equities and things of that nature. Obviously, there are unelected officials and you could make the argument that's a quasi-fiscal operation that they're engaged in. When you're talking about MMT or cutting taxes or infrastructure spending, you're basically talking about elected officials who are held to account making those same decisions. KEVIN MUIR: I think the idea of them going out and buying risky assets is a terrible idea. Who was it that talked about it in Europe, was it the Black Rock guy? ED HARRISON: Oh, I don't know. KEVIN MUIR: No, I can't remember. I shouldn't have said that. Somebody came out and said, I could see a situation where they buy European equities. I think that is the dumbest idea that I've ever heard of. We have-- the problem with it is already that we're propping up financial assets as opposed to putting money into the real economy. Why we think that putting money into the financial economy is going to trickle down to the main guy is just beyond me. It's just ridiculous. It's ludicrous. I'm actually more sympathetic to an argument that Bernanke came up with, and he wrote about this in his Brookings blog, he talked about the fact that instead of the Fed only being in charge of monetary policy, you could make a fiscal account that they go and they hand over to politicians in times of slowdown when they want to do stimulus and they basically say to the politicians, listen, it's up to you guys how you spend this. Just spend it. Whether you give it to the people, whether you invest in infrastructure, whatever it is, this is the money that we want spent. Because one of the big push backs about MMT is the fact that no politician is ever going to stop spending. Once you start spending, it's going to continue and it'll be difficult to take back. I'm sympathetic to that argument. I hear the MMT-ers give me all sorts of reasons why they're going to be able to control inflation. I think that they're not going to be able to control inflation, I think that it will eventually be abused. I think for a long time, it'll work really, really well. Then it eventually will, like all things will be abused, which will be abused. Listen, we've abused monetary policy, all you have to do is look at the like, minus 50 basis points in Europe and know that monetary policy is being abused tremendously. We will abuse fiscal policy in the same way. I go back to Brooke and to Greenspan or not Greenspan, Bernanke plan. His argument is that if we give it to the, or basically to the Federal Reserve a fiscal account, they could take back that more easily than the politicians could. This is back to my main point is that more and more individuals are understanding the limitations of monetary policy. As we understand those limitations, it will be easier and inevitable that the problems of disinflation go away and in fact, are replaced with the problems of inflation. ED HARRISON: I think we're going to leave it there. That's a great way to round it out. I really appreciate the conversation and I hope that we can have you back again soon. KEVIN MUIR: Thank you very much, been a pleasure meeting with you.