Truflation: CPI & AMA with Raoul Pal

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0:57Hey, everyone. If you like this podcast, go behind the paywall to get privileged access to the smartest minds in finance. Visit realvision.com slash rvpod and use the promo code podcast10 to get 10 % off our essential membership for the first year. Join the Real Vision community and learn how to become a better investor. And now to today's episode of Rao Pal Real Vision. how do we get growth again i mean that's to me the bigger question so gdp growth is driven by a simple formula which is basically population growth productivity or debt growth we hit the debt growth limits back in 2008 so all debt growth now is just servicing of existing debt i've proven that out with my work in gmi that's essentially all that's going on now obviously if interest rates rise then you have to even borrow more money but that's that's basically at that level when we're looking at population growth well demographics is destiny and it's it's it's baked in the cake now for the next 30 years the populations around the world are going to shrink the u.s population uh birth deaths rate has collapsed now so there is no increase from gdp there is a slight increase in gdp from population growth in the united states versus other countries because the millennial cohort had kids some of them had kids um and then after that you've really got to deal with productivity so what is productivity really all technology does since the beginning of time is increased productive output per unit of energy kilogool now when we were all farm workers it was based around you know what we ate versus what we could what we can produce from the fields then we brought mechanization and that was an increase in that and then after that sorry the dogs are knocking here then it's okay we love dogs then after that it's been the application of technology per unit of electricity or if you want to get broader than that per unit of energy per kilojoule so if you look at the overall long term price of oil, inflation adjusted over the last 60 years, it's basically been$40 in inflation adjusted terms forever.

3:15And so it's basically a fixed input cost. And so technology, compute power, all of these things, the advances in semiconductors, all of this has allowed for more productivity per unit of energy. OK, great. but there were two there were several things happening in this period that i call the exponential age which is this massive nexus of all these technologies hitting at the same time is firstly productivity is increasing dramatically because all technology was basically increasing um human manpower and speeding up human manpower that's where the productivity was coming from that was everything from excel spreadsheets to computers they didn't think the next part of this is AI.

4:01So that's the, whether it's the human creativity layer, or whether it's the knowledge layer. Now, knowledge was scarcity. That's why lawyers are paid so much and doctors are paid so much. We have just changed that entire equation. And it's not yet apparent to people where this is going to go. But that's a destruction in the scarcity of knowledge, because it's now abundant. In fact, it's infinitely abundant. So we have infinitely abundant knowledge. And basically, as compute power keeps going up with Moore's law and others, we end up with infinite compute power as well. So that drives productivity.

4:37And we should see that filtering through as AI starts coming through into the workforce into our daily lives. The other part of the equation is the energy cost. So we're seeing a massive dramatic transformation in the energy mix in Europe and other countries, as they are forced to go off oil. Now, that may lead some structural rigidities in oil for the time being because the supply issues but generally speaking the bet that the europeans are making and increasingly the rest of the world is that if we can pour enough money into renewable energy and i'll include nuclear in that then we can eventually lower the cost so we're seeing cost of electricity driven by renewables collapsing below any fossil fuel sources of energy.

5:24Problem is it's not scalable enough yet to replace, but over time that'll happen. So what you get is imagine if productivity is going up from technology and the energy cost goes from an equivalent of$40 a barrel down to$10 a barrel. Okay. That is a massive multiplier in productivity. And that finally changes the debt deflation cycle. Well, it won't change the deflation cycle, but it'll change the debt cycle and the growth cycle permanently. And that's what I'm very focused on. Also, at the same time, the baby boomers end up dying off. And what you end up is increasing GDP per capita. Now, a lot of that obviously accrues to these tech giants.

6:09We need to see how that plays out over time. But at a structural level, that's how I see the world playing out. And with there's there's lots of talk now in the TradFi legacy press, the financial press, about China and deflation. And I've seen a few over the past few months, a few gadflies and wags kind of say that, you know, they sort of tease the the deflation word out there a bit. But you've been hardcore on this, and whenever you go to the mat for something, I'm usually first to kind of go, I don't know, Raul. And then five or six months, I go, oh, well, he knew it all along. So it seems like you were ahead of the deflation call.

7:03I heard you mention it in your analysis just now. Are you sticking with the fall to deflation? Yes. So, you know, I do a huge amount of work. I've been doing, writing Global Macro Investor for the last 19 years. Myself and Julian Bittle probably have one and a half thousand charts of which we use in our database to build our models and frameworks of understanding from. Inflation is obviously one of the large inputs. So I look at this in multiple levels. I don't rely on just one thing. So a simple level, if we use the trueflation data, it leads by one month. so truflation in may was roughly three percent and lo and behold the june cpi numbers come out roughly three percent the june truflation number was about average 2.8 percent so i think there's a recent chance i don't do month by month forecasts it's a waste of time i look at trends generally but generally speaking i think the 3.3 number is likely to be overly optimistic that's my general view.

8:05And if we look at where July has been trending in truflation, it's been 2.2%, which would be the numbers reported in September. So I see the ongoing lead of the truflation data. That's one. We also then go back and look at the big macro picture. We've taken every single inflation episode from the 1940s through to the 1980s, where we had significant inflation. We just averaged those out, looked at it, compared to it, and it's been following that trajectory, which is an ongoing disinflation. It's actually been accelerating past it, which has been our forecast, because we see all of the component parts of inflation deflating.

8:42So our forecast for inflation is essentially for inflation to hit zero by year end around that. And that's headline CPI. And then core CPI follows in 2024, and I think may even go negative. And that's driven by not only the base effects year on year, but also the rapid change in some of the components to core CPI. So the headline effect, we've got stuff like fertilizer prices are going to be bringing down food prices. They lead it by three months or so. We've got many, many leads that just continue down. Commodity price. I know a lot of people start to think it's a commodity price band. We don't see it anywhere.

9:20And commodities are a small part of the inflation forecast. Wage terms, stuff like the Dallas Fed and the Richmond Fed, we kind of average those out and use those as a forecast. Wages and benefits have been falling dramatically. We see that in a number of pieces of data. So the sticky elements of wage inflation, we think, continue lower and sharply lower over time. So we've got food inflation falling, wage inflation falling. Then we use stuff like the Schiller Case 20 Composite Home Price Index year on year, compare that against CPI, shelter CPI, shelter cpi is a huge part 35 of total cpi and 60 of um services cpi um that is um shiller home price index leads by 15 months so that gives us forecasts of um core cpi really just continuing to deflate so we also look at stuff like the atlanta core sticky fed index that x shelter has been collapsing.

10:20We know the shelter number is coming down as well. So across every single data point that we've got, we've basically got an ongoing disinflation happening where headline inflation followed by core inflation get to zero and in some cases deflation. Now, obviously after that, you'll have an upcycle in the business cycle and that will lead to the usual rebound in CPI. Again, we're not believers in the structural CPI story. I know people are using wages, but you need to offset some of that versus the labor force participation rate because the labor force participation rate keeps collapsing. So there's less people getting those higher wages over time.

11:05And then we've got the AI and technology. So we actually think it's going to be pretty sluggish coming out the other side. But we will get the usual cyclical inflation pick up as commodity prices pick up etc the other side of this cycle but we think it's normal we think really everything that we look at was really supply chain driven and the supply chain dynamics if we look at you know the new york fed supply chain stuff that gives us deflation this year as well so that's kind of where we're coming from uh we don't see a bounce of inflation now month or month you know one month to the next i don't really care it's not the thing i forecast for me what matters is living out into the future six to nine months.

11:45That's where the investment time horizon is, particularly in global macro, which is why we managed to catch the bottom of the markets, particularly technology and all the things that were getting beaten by inflation and liquidity. Our liquidity analysis also gives us negative or zero inflation going into year end. So there's a ton of stuff that we look at. Doesn't mean we're always right. But we've got, for us, a pretty good House of Cards that suggest that this continues. Hey, everyone. We're going to take a quick pause and hear a word from our partners. We'll be right back.

12:22Well, it's great to be with you here. I have two questions for you. One about the renewable energy versus oil transition, and the other about the structural change in the way central banks are going to operate in this new regime. The first, we've already started to see some cracks in the funding for some of these renewable sources. We've seen Siemens have huge write downs in terms of their base technology that basically a lot of the models that they have would cost a fortune to keep running. We've seen We've seen headline news that basically business is not as usual in that regard. I agree in principle that if you throw enough money at a problem, you can solve it.

13:12But the question becomes, how big is your war chest to justify trying to subsidize these versus perhaps pursuing the traditional oil route, which when coupled with these new increases in productivity, you can actually start to see some proper GDP growth that comes from aggregate productivity and trying to reduce the ratio of output to debt. And the other question. Hold on. There's two questions are too long. Too many. Too long. Too many. So on the renewable side and the amount of money it costs, this is going to sound ridiculous. It's irrelevant. And it's irrelevant because of the magic money printing machine.

14:06So every major government, the Fed, sorry, every major central bank, the Fed, the ECB, the Bank of England, the BOJ, the PBOC, and a whole bunch of others are monetizing the interest payments on their debts. And what that does is mutualize the cost across the population, particularly for the workers, because asset prices rise, and people on salaries which don't rise as much as asset prices get, their future sales essentially get poorer. This will continue ad infinitum until this problem is solved because there is no way to deal with the debt. So I believe that they are all acutely aware of the issue that they're facing, which is why all of the debt payments are being monetized three and a half years after being issued.

14:56It's one of the reasons I think we have a lot of stimulus coming this year. It's also one of the reasons I think the central banks have been overly hawkish on purpose so they can get inflation unemployment down so they've got the excuse so how do they do it how do they get the political backing to do this and it's simple it's the magical trick which is recession you know there's two things that allow you to do anything in politics one is a recession the other's war and we've had both well we're having both so you know that's the russian uh ukraine situation, that war had led very clearly to an acceleration in Europe to this idea of energy independence.

15:37Of course, they were going to use it for that. They know they have to get productivity higher and they have to get productivity higher fast because Europe has a really aging population and a really big debt problem. And the US has been slower on it. Why? Because they have a less aging population. So, you know, there's a lot of mechanics as once you see what I call the everything code, you can't unsee it. So I don't believe it is in most people's interests to have oil at the center of the geopolitical system for the reasons that we've seen with Russia. And we don't know where the situation of China and the multipolar world is going to lead to.

16:18But what you do know with 100 % certainty is the biggest strategic mistake you can ever make is not having your source of energy secure. So that's what's going on here. They will put unlimited amounts of money. Mistake that you should ever see.

16:39Sorry, continue, Rob. so so that's what i think they will do is the is um continue to do this now that comes with a cost as i said you're printing money and what you're doing is driving up aso prices so at core yes we will continue to see technological advances in oil but if you've seen for the first time that um renewable investment is now exceeding um the investment in the oil sector and that's a that's a secular trend that will continue. And then obviously we've got the ability to add nuclear into the mix. Everybody's been slow at that. I don't really understand why they've been slow at that.

17:21But they have been, and the Germans have been going into reverse while the Finns - Yeah, they went the other direction. That's right. And what we've seen, we're seeing India moving that way. China's clearly moving that way. Josh Wolf was talking about this recently in Congress. We will see that change because it changes the equation. Now, the other thing that's going on, I don't know where we are with this amazing saga playing out with this IK99, the superconductor. But if that's the case, it changes everything, literally everything. So there's a lot going on in this equation. Beautiful. Go ahead.

18:01And you said the magic words, Raul, the magic money printer. I know you've been a longtime advocate of not viewing the price of assets denominated in currencies, but rather in balance sheets, in central bank balance sheets. So where does this, in this new paradigm, where does this leave the US dollar in particular? Well, this is all a game of relative purchasing power. Now, what we've seen is over time, all of the central banks have been doing the same. So what you get is this optical illusion where the dollar doesn't collapse. The euro doesn't collapse over time. Yes, the structural inefficiencies of the euro goes lower.

18:43The dollar actually ends up going higher most of the time because most of the world's debt is denominated in dollars. And every time the global economy slows down, everyone's scrambling for those dollars. So you've got a structural bid to the dollar, which is the dollar milkshake theory that you've heard so much about. And I've been a dollar bull for over a decade now. And that's played out pretty well. I do not see that equation changing. And people say, yeah, but China, they're going to get off the dollar. They can't. They owe so much fucking money in dollars. There's no way without nuking their entire economy.

19:15So everybody understands that this game is not a game that you can walk away from the dollar quickly. If the U.S. is printing money, well, so are the Europeans and so are the Japanese and so are the Chinese and so are the Brits and so are the Canadians and so are the Australians. And that's the issue, and that's why assets rise really is because you're debasing all fiat. You're listening to Truflation.com Spaces with an AMA put to Raul Paul. He is putting on a clinic, and you'd be wise to get in here, get your questions and comments to us, either in-app by requesting to speak or adding us in the thread.

20:02Before we get to some listener questions here, we've got our head of data, Ivan Jelik, with his hand up. Go ahead, Ivan. Hi, and thank you for hosting this again, and thank you for joining us, Raul. Just one question in regards to your model. I love the fact that you are monitoring what you mentioned, 1 ,400, 1 ,500 of charts, and would like to hear your view on how all of those are predicting or showing where the labor market is going, because that is next to the inflation. It's really another important area that will impact and have domino effect on the other areas like interest rates and so on.

20:44So what's your view on that and what does the data show there? Where is the labor market going? So we show exactly the same thing for the labor market. Again, the labor market lags like inflation by about nine months or so. So that's why the Fed have been late, because they're living in that period. But if we look at, for example, the ISM has a six-month lead on U.S. unemployment rate, that suggests that the unemployment rate starts rising from here. We also look at the ISM versus non-farm payrolls. That starts suggesting that towards the end of the year, non-farm payrolls go negative. um we look at um non-farm private sector payrolls and we have our own proxy survey there that gives us kind of negative 300 000 prints in the in the private sector payrolls um we look at stuff like jobless claims as a percentage of deviation from 12 month rolling lows they're at levels that we see in a recession and they tend to keep going so there's again every single part of the inflation of the unemployment segment, it's everybody's got to understand everything is lagged.

21:47So when you're looking at things now, it's all lagged. It's lagged by nine months versus where ISM is generally. So generally speaking, we see nothing but employment softening. Now we do not see a mega employment cycle because of the structure of the workforce. So this is really important. We're going to be writing a piece about this, about how it played out in Japan. is Japan has had low unemployment in and out of recessions. And the reason that has happened is because of the structure of the workforce, because there's so many retirees versus workers. But it hasn't led to wage inflation in Japan.

22:23And I don't think it will lead to wage inflation in the West because of technology and a whole bunch of other issues. But generally speaking, we would expect unemployment to rise maybe 100 basis points from the low. Maybe it goes a bit further than that, but we expect it to remain a bit sticky afterwards. But again, wait and see, because once you get further out, we're talking like mid-2024, we're then starting to have less granularity and clarity on forecasts. So it becomes much more probabilistically based. So, yeah, generally speaking, we see nothing but a rise in unemployment, nothing shocking, enough to give the Fed the cover that they need and the other central banks to give it a cover that they need.

23:10to reverse course and bring back the money printers for the reasons we talked about and so if they bring back Raoul just quickly sorry just if they bring back the money printer and they they they put in a lot of money into the supply will that not drive inflation again I mean there's going to be a whole no money printing money printing does not drive inflation this is a complete misunderstanding by everybody there is no statistical link between money printing and inflation. What money printing does is create asset inflation in optical terms because of the debasing of the currency. It does not increase your wages.

23:47It never has done. It doesn't increase net aggregate demand either. So that's the issue here is it doesn't do those things. Really, inflation is driven at a cyclical level by supply dynamics and demand dynamics. so when the economy's recovering inflation rises if you've got supply constraints big issues then inflation rises more than expected if you don't and you have relatively stable supply conditions then you just get a normal cyclical inflation that's how inflation generally works you can't make it structurally in these types of economies once you go to a non-reserved currency economy let's say turkey something else well that becomes very different because then you get capital flight and you get a whole bunch of other issues that cause inflation at countrywide level.

24:37Hey, everyone. We're going to take another quick break and hear a word from our partners, and then we'll be right back.

24:46All right, and let's bring in some listeners now. Drew Roberts, I think you're first up. Go ahead, brother, for Raul or any one of the panel. Have you ever read a book called Debt by David Graeber? Yes, of course. I find that fascinating. He convinced me, Adam Smith, I just don't agree with. So, I don't know. It's an interesting one if you're in the listener gallery. So, my question is this. How destabilizing is it to make internet money out of thin air? Like a significant amount. So, I think the internet money out of thin air, I presume you're talking about crypto, which I know you're a crypto person.

25:29Yeah, shit coins essentially. Well, I don't know. I don't really have a view on that. But I do know, and one of my theses is why I got involved in crypto since 2012-13, was really based on the fact that if you've got a broken financial system where nobody has any ownership of anything, proven ownership of anything, in addition, you have a need for the financial system to operate on different rails so people have the ability to opt out, then crypto has a great opportunity. And that's the larger cryptocurrencies. The rest, I don't really care about. and next up is uh will bank from listeners um go ahead will hi uh ral thanks very much uh by the way truflation for everything you've done it's been really great to track that over the last couple of years um i'm an rvip member i'm big fan of the everything code ral so thanks for everything you've done with that it's quite amazing um just picking up on a couple of things yeah let's see if it works out it's still a theory yeah i'm not i'm not betting the whole house on it but i got most of the house on it um uh so a couple of things that you mentioned um i i understand that you know um balance sheet uh inflation um asset price inflation doesn't necessarily cause economic inflation in the manner in which we understand it but um surely one of the aspects of the current situation is that we're going to see commodity price inflation, mainly because a lot of the countries that do generate a good deal of the world's critical commodities, particularly the New Age commodities, are looking to double down on their place in the world.

27:11And they aren't willing to live in a necessarily in a dollar denominated structure or in the way perhaps they've been forced to. So does that commodity inflation then start to actually produce real-world economic inflation, in your opinion? So I go back to the time that we actually had massive demand-led inflation when supply was not able to catch up with demand, and that was when China came onto the world stage. So back then, we saw the price of oil hitting 140 bucks. we saw one of the biggest commodity bull markets of all time. At its peak, inflation got to 6 % and then collapsed to negative.

27:55Really, over that entire period in time, inflation was running at about 3.5%. So no, because commodities were only a small part of inflation. This is a myth narrative that's come out of the 70s and the kind of gold bulls around inflation and the commodities cause it. Commodities are such a small part of what the overall inflation picture is. And it's the rate of change of the commodities that really is the big driver here. And you have to have multiple hundreds of percent in some of this stuff to really drive long-term inflation, because it's like 18 % or whatever of total headline CPI and less of core.

28:37So, yes, we will see commodity prices rise. Yes, we will see potentially structural imbalances in copper and a bunch of other stuff. Yes, yes, yes. And yes, we will have inflation in the next business cycle. So that's 2025, 2026, 2027. We will see a pickup of inflation and everybody yelling to say inflation is going back to the highs. Look at this. It's the 1970s over again, all over again. And the likelihood is it gets crushed by technology. Look, there's not a single person alive in financial markets who doesn't understand there's a shortage of copper. Every single producer, every single country, every single company understands that.

29:18They all understand the problems with lithium. They all know this. So if we've got everybody with a knowable complication around the basic metals and other resources that they need, they have enough time to plan and think around it. And we've already seen companies taking action. So I tend to find that the commodity analysts are only supply-driven analysts and they don't look at demand. We've got to get through. I mean, the best person on this is Dwight Anderson, who's been on Real Vision a few times. Dwight understands both sides of the equation. Most people don't. Most people just look at supply and assume demand is linear.

30:01It doesn't. It goes up and down with the business cycle. So we need to ask ourselves, how long is demand going to be slow for, considering we're pretty much in a global recession right now and a relatively mild one? How long does it drag on for? I don't think it drags on that long. But how strong is growth out of the other side? And do we have commodity-intensive industries driving that growth or technology-intensive industries or people-intensive industries? And those are the structural factors we need to look out for. So I do believe commodity prices go back up again. Some of them will be crazy.