Is the U.S. Economy on the Edge? ft. Daniel Lacalle

33:06The euro should be a project that should be defended. But it cannot be defended when the objective is to make it subterfuge to maintain the enormous fiscal imbalances of governments. And the idea that the euro is going to strengthen with an ECB that cannot be hawkish, has its supposed higher for longer policy lasted less than 14 months. It's a joke, no? It's supposed hawkish policy meant monetizing the entire next generation EU plan. Therefore, I don't see how you can be bullish the euro, apart from those little spikes that you see short term that look to me like short opportunities. You mentioned a little bit the imbalances.

34:00Talk about those imbalances, how they manifest themselves, Target 2 and other flow of funds between member states. Just to give particularly our American viewers a little bit of a sense of the challenges underneath the hood in those economies. I'm going to be very simplistic, but people will understand this. The euro area is a vendor financing scheme in which Germany is financing the monster irresponsibility of many of the nations that joined the euro area by letting them import more of German goods and services. So what happens is that there is a giant increase in that imbalance, in the target two imbalance, which is what shows the difference between what is owed between one country and the rest.

34:54Now, the other element that is, in my opinion, very problematic is that the euro area has been created as a bull market construct in which as long as the economy is growing, it does not matter if the growth is coming fundamentally from government spending and from debt. However, when the economy starts to stagnate and inflation appears, which is something that the euro did not, that the euro creators did not foresee, then the entire thing crumbles and it becomes closer to Japan. So ultimately, basically, what ends up happening is that for Germany, being in the euro area has some benefits coming from investment of and and purchases of German goods and services from other euro-area countries.

35:50But it also has the enormous burden of inflation and maintaining the solvency of other nations with their own credit viability. Where's the escape valve for this, Daniel? Where do we start to see those stresses materialize? Is it the euro? Is it in bond prices in Europe? I think that it's going to, there will be. We don't know when, but there will be a debt crisis in the euro area sooner rather than later, because it's impossible to disguise everything under the ECB umbrella, because it manifests in inflation. The European Central Bank seemed like the perfect solution to this bull market construct, because when it came time to do a quantitative easing program, there was very little inflation, everything looked good, and the ECB could disguise the fiscal insolvency or the fiscal challenges of the euro issuers.

36:56But now there's inflation, and there's persistent inflation. And inflation measured as CPI has been tweaked with, as we have seen in so many places, the calculation of CPI has been tweaked with to show a completely different reality than what citizens perceive. So now the ECB is caught between a rock and a hard place. The ECB, on the one hand, cannot really take hawkish measures. And at the same time, if it goes too dovish, then the problem is that the impoverishment of citizens is much larger. And without any economic growth, the discontent is significant. In the United States, that same policy led to discontent.

37:50But with growth and with real wage growth and in the euro area, you don't have any economic growth and you don't have real wage growth. Let me ask you this. Back in 2010, I wrote an article for CNBC. Here's the opening line. I want to read this. This is 2010, November of 2010. One day reality sets in. The most powerful force in the universe isn't love. It's the bond markets. I wrote this, obviously, about the 2010s debt crisis in Europe. I guess my question is, when you see all of these structural forces, almost like a vice grips squeezing economies, how long can this be swept under the carpet for?

38:31How long can you pretend and extend before that moment happens? It's very, very difficult to keep it for a long period of time. France now has the same risk premium as Greece. Obviously, the Greek risk premium has been brought down by the ECB action. But what's important is to show that, you know, little by little, these things, risk builds very, very slowly and happens very fast. The ECB thinks that it has everything under control because it has the anti-fragmentation tool and because it has the ability to increase quantitative easing according to the requirements of the market. That's not the case.

39:20That is not the case, because that is dealing with the flow of debt, not with the stock. The problem that you saw in 2010 that manifested in 2011 was a stock problem, is when investors started to sell their European bonds, the ones that they had already issued and were already in their books. It was not just a problem of flow, i.e. deficit financing every year. It was a problem of investors saying, I don't want to have the bonds that I had already collected in my portfolio of these nations. That happens, and it's likely to happen again. And if the policy of the Federal Reserve now is going to be more hawkish, we're going to have probably less rate cuts than what were initially expected.

40:13And at the same time, the United States government takes finally care of the deficit spending and starts to really cut deficit spending. Then, like in 2010, which manifested in 2011, those enormous imbalances of the euro area issuers are going to transpire. Right now, people look at Spain and they say, hey, Spain is growing. Portugal is growing. Italy is growing. So the problem is not in the southern European economies. The problem is in Germany because it doesn't grow. That is not true. Germany, it doesn't have a problem in the bond market and certainly doesn't have a problem of solvency. What is happening is that everybody's looking at GDP in the southern European economies, but it's not looking at debt accumulation in those economies.

41:04So like in 2003, when everybody said that Greece was the motor of growth of the euro area and Germany was the sick man of Europe, four years later, boom. People look at GDP as if it was the solution to everything without looking at GDP, debt accumulation, interest expense. interest expense is becoming the largest item in the budget in most of the Southern European countries, which means that the moment that bond yields really start soaring, that is going to be a big problem. Obviously, we don't know when, but like you did in 2010, it happened 12, 14 months later. Yeah. Let's talk a little bit about this.

41:58I mean, at one point, talking about GDP here, I mean, the Greek economy, and people remember the Cypriot banking crisis, they remember what happened in Greece. Just to give a sense of the relative size of these economies, the Greek economy is a little south of 250 billion US dollars. France, 12 times as large, I mean,$3 trillion. I mean, it's very hard to ring fence that kind of debt if there were to be a problem. That is the case. That is the problem. The problem is that when the Euro area, the European Commission, the ECB, start forgetting that what they need to do is to really rein the public finances of governments, because if not, they're going to enter into a problem, by ignoring what is happening in southern European nations in 2014, and now ignoring what is happening in France.

42:52The problem is not a small economy that I remember, I think it was Jim O 'Neill that said that China created a Greece every three months. It doesn't matter. It doesn't matter. The next problem is not going to be Greece, and it wasn't. The next problem is going to be France, and France is impossible to bail out. All right. I want to shift gears here and talk a little bit about the United States and just bring in some of these themes that we've been talking about. We talk a great deal about liquidity here. You mentioned at the top of the show, it's an important topic on Real Vision, the great work that Mike Howell has done, the great work that you've done, and others.

43:28The focus of liquidity conversations generally is monetary policy rather than fiscal policy, because you can see it happening so quickly. Obviously, September 50 basis point cut by the Fed, November 25 basis point cut by the Fed. You see it immediately priced into markets. Fiscal policy, fiscal policy, on the other hand, may have a slower impact on the economy. But it's something that we need to talk about because, as we've been discussing here in Europe, those pressures can build up almost like tectonic plates beneath the surface over time. Talk a little bit about your view of the U.S. fiscal position right now.

44:05Well, the U.S. fiscal position is a nightmare. Because think about it, a 2 trillion deficit in a year of 3 % economic growth, 4.2 % unemployment, and tremendous level of inflow of capital into the United States is insanity, is insanity in every shape or form. So, if the United States -

44:56the Federal Reserve printing money because they're evil or stupid. The only thing that they print is because the government has already spent it and increased issuance of debt. So deficit spending is printing money. If you have a fiscal policy that is expansionary in a period of recession, that expansion may help the economy get back on track in a key in your way. I've never believed it, but it doesn't matter. That's what governments do, because the government has fiscal space. However, if what the government decides willingly to do is, in a huge recovery, remember that it was in January 2021 when the Biden administration arrived, in a huge recovery with the economy already booming, you decide to massively increase government spending and massively increase deficit spending, what ends up happening is that you are destroying the fiscal space of the government for a period of contraction.

45:58It cannot take a decisive action, or certainly it cannot support because the level of government spending is so bloated that in 2024, government spending in the United States is$2 trillion higher than it was in the 2019 pre-COVID period. So why is that a problem? Because that deficit spending and that increase in debt means in the future more taxes, less real wages, less growth, and certainly more inflation as well if it continues that way. So the path of insanity of the fiscal policy of the United States was predicated on the idea that nothing had happened so far, therefore continue. And that is hugely negative because think about this.

46:50Imagine that you're driving, I don't know, 150 miles an hour down the highway and you think the following thing. I have not killed myself yet. Let's accelerate. The idea that nothing has happened yet and therefore you can continue to drive deficit spending higher for longer is insane. In the Treasury's own estimates, the Treasury's own estimates, without estimating any recession, any downturn in employment and any reduction in growth, the estimates of deficit 2024 to 2034 were$14 trillion more of debt. That is crazy. And that, again, I come back to the point for citizens means less economic growth, less real wages, lower productivity and more inflation and more taxes.

47:44So you have to be exceedingly worried about that. Therefore, the United States was moving very, very fast into a debt crisis. And again, like we were saying before, we don't know when, but we know that it was on the path to it. And so what it needs to do now is to curb that deficit very, very quickly. And it needs to do it in two ways. It can only be only one. It needs to reduce government spending. That is not enough. And it needs to accelerate economic productive growth. It needs both. So that may take care of the deficit problem. Just bringing the deficit to 2 % of GDP would certainly be enough, more than enough, for the dollar to remain the world reserve currency, for inflation to come down, for the entire economy to go back in demand.

48:42And it would still be a deficit, but it would be at least acceptable in terms of the level of economic growth if it is boosted from the productive side. Yeah, on a deficit to GDP basis. Talk a little bit about what your outlook is for the fiscal situation in the US based on some of what we've been hearing from the incoming administration in terms of policy plans. Obviously, Mr. Musk and Mr. Ramaswamy getting a lot of buzz here in the United States. But in terms of the translation into actual policy and to actual macro mechanics. Talk a little bit about what you see going forward. I think that the importance of this Department of Government Efficiency is to make public to the average citizen all of the different areas in which the government is overspending.

49:37Because a lot of people say, yeah, the government has to reduce spending, but I don't know where. And when I look at on and when I Google government spending, it basically all of it goes to interest expenses, defense, Medicare, Medicaid, Social Security. So where are you going to cut? Well, the reason why it's important is because they are going to come to the to the average citizen and say, look, here we're spending millions that are completely unacceptable. Here we're spending millions. And the way to really cut has been proven in Argentina by Millay and maybe proven by the Department of Government Efficiency in the United States, which is to cut a lot of those things that headline macro analysts basically just don't care because you basically look at trillion dollar figures.

50:31So you start cutting million, 10 million, 11 million, 100 million pieces of unnecessary spending, you're going to immediately reduce the deficit very, very quickly. My own estimates are the following. I think that with the policies that have been announced, the government deficit can go down from the current insane level of 2 trillion to 1 trillion in two years. And if at the same time economic growth is accelerated, the deficit to GDP can be brought down very quickly. Finally, we also have to take into account if there's going to be the amount of tariffs that have been announced. If the tariffs to China are announced, that is another$300,$320 billion of revenues for the United States.

51:24So basically, what you have is cut spending, increased growth, and the effect of tariffs if they are implemented. But tariffs are not the main driver. The main driver is budget cuts. And it can reduce the budget by not just making direct cuts on previously spent, but improvements in efficiency. For example, it is ludicrous what the United States spends in healthcare when, at the same time, you have the possibility of improving the expenditure very, very rapidly through competition and with more level of free market options for healthcare providers. So all of that may be the solution. Obviously, we'll see how they implement it.

52:21But I'm sure that Ramazwamy and Musk are not going to basically just present a paper and let it die in the depths of the deep state. I'm sure that they will present to people the reasons why you can actually cut between a trillion to one and a half trillion in the legislation without harming economic growth or social services. So that would be essentially a 50 % reduction in the deficit to GDP ratio as a consequence of cost cutting and presumably increased growth from some of these pro-business policies. How long does that take to have a significant impact on the, we're talking about on the flow side now, on this debt stock side, how long does that take?

53:08Oh, the key thing here, and my recommendation is to do what we have seen in Argentina, we have seen in so many other countries, which is to do it decisively and quickly. If you do it gradually, it's not going to work. If you do it gradually, it's not going to work. And I think that maybe in this second administration, Trump may have learned that lesson, That, you know, when you're told, oh, let's take it little by little, then it doesn't work. You need to be aggressive and it needs to happen within the first 100 days of the administration. Because if it doesn't happen in the first 100 days of the administration, by June, you have a dead ceiling problem.

53:51Yeah. Boy, if we could get some competition and improved outcomes in health care, that would be a huge tailwind for the United States. It's obviously healthcare in the news here in the US and especially in New York for all the wrong reasons right now. Yeah, absolutely. I mean, there are many, many solutions that have been published in numerous occasions. There's a great, great, great book. It's called America's Health Nightmare Sold. But most of it comes from lack of competition. In many states, you have one, maybe two healthcare providers. and that's basically cartelization of healthcare. That doesn't, so Americans suffer the negatives of a single payer system, but without the benefits of higher competition.

54:40All those things can be improved. And I think that there's definitely a large room to do that. And again, no one can say, oh, it's impossible to reduce the deficit. It's ridiculous. Of course, you can reduce the deficit. You can cut it to zero. Put immediately in the administration the starting point, not at what you spend, but at what the deficit is. And you say this zero deficit, and from there, you have some room, but you need to start with the zero deficit, not from the, this is what we spent in fiscal year 2024, and therefore, it goes up and up and up. Daniel, let's talk a little bit as we talk about all of these issues and their impact on risk asset markets.

55:28Let's talk a little bit about gold and take a look, if we could, at the 10-year chart for gold. Obviously, well, the chart speaks for itself. It's essentially a$1 ,000 increase in this chart that we're looking at right now. Daniel, talk a little bit about your view of gold, what's driving this rally, and specifically Talk a little bit about your forward outlook for gold. My forward outlook for gold is that we are likely to continue to see gold strengthening for two main reasons. Number one is the increased demand from central banks. Central banks all over the world are starting to reduce their overexposure to euro area and US sovereign debt and to balance it with more exposure to gold.

56:17They have such little gold, sometimes in the case of most of them, it doesn't get to 4 % of the assets of the central bank, that there's a tremendous level of room to continue growing. And that doesn't mean that they're going to completely get rid of sovereign debt in their asset base. It's just to balance it with an asset, gold, that actually does protect you in a period of persistent inflation. So that's one thing, demand from central banks, which coincides with challenges of supply, because the underinvestment in gold mining is actually a significant problem considering the demand for gold prior to central banks changing their policy.

57:07So that is, let's say, a second derivative of the first element, which is central bank demand. central bank demand and a shortage of investment that may create some scarcity. The second element that I think is very important is that we may be hearing, we may be discussing the possibility of the United States reducing its deficit and reducing its tremendous fiscal problem. That's not going to happen anywhere else. Everywhere else, the policy is print and monetize. print and continue to disguise government imbalances. And therefore, gold as the counterpart of the enormous risk created by money printing is going to, in my view, continue to strengthen throughout the next year and the following.

58:02Because people are starting to see that But we used to hear the idea that you needed to have a balanced equity and bond portfolio. Well, guess what? Governments are not going to give you real returns in this fiscal nightmare scenario. So bonds are not going to save you, sovereign bonds in particular, in an environment in which there may be some volatility and some corrections. And that's where gold plays a huge part in terms of having a balanced portfolio. that allows you to generate returns over time. Yeah, as I look at the chart more closely, more like a$1 ,500 increase in this$2 ,600 or thereabouts asset over a trillion 10-year basis.

58:48Daniel, as we're going down this line of thought, let's talk a little bit more broadly about commodities. You talk about some of the challenges in the traditional mix of US equities and bonds held by many investors, retail and otherwise, here in the United States. Talk a little bit about the role of commodities in that portfolio. I think that you need to look at commodities from a trading perspective, not from an investment, long-term investment perspective. When you see a trend like we saw with copper and electric vehicles, pick it up, make some money, and get out. because the overall long-term trend of the Bloomberg Commodity Index is actually very, very, very poor relative to equities and relative to other risky assets that may do well.

59:39But there are opportunities. And obviously, I think that the most important one is to not look at what we like to look, but what is important. What does that mean? We like to look at geopolitical risk, at conspiracy theories about supply and demand. Forget about all of that. That doesn't work. At least, at best, it works very short term. But what you need is to look at the real trends of money growth and the manufacturing sector impact. Money growth is going mostly, as I said before, to government spending and to credit card debt. Manufacturing continues to be weak. Therefore, the demand side of commodities is the, let's say, the element to look at.

1:00:31Because supply is going to adjust to the demand side. So I'm particularly cautious on oil medium term. and more bullish, obviously, because of the seasonality with natural gas. But with aluminum and copper, you have to take the trends from basically January to June that may give you a good trend of growth in those prices coming from electric vehicles, coming from renewables, coming from the discrepancy in the investment side that is going more to clean tech and less to fossil fuels. And that generates some potential. But in general, the commodity complex, to me, is not the most interesting investment on a long-term basis.

1:01:26Daniel, a big show today with lots of big ideas, from the big picture macroeconomic outlook and narrative down to the price action in different currencies and commodities. policies. Daniel, since we've had this very deep conversation here, how would you sum it up? Final thoughts, key takeaways for our viewers and our listeners? I would say that the final thought is very unlikely that we will see any significant mean reversion in the market. I think that winners will continue to win and losers are likely to continue down the path of stagnation. I think that you cannot expect strong economic growth and high productivity growth with the fiscal and the taxation systems that are being globally built.

1:02:15That we need to address the imbalances that are being created in the public sector by protecting ourselves, investing in the assets that are actually shielding you from monetary destruction. And ultimately, what I would say to everyone is, you can almost forget about all of the other elements of valuations, etc., etc., and think long term about what is inevitable, is that governments that have created these enormous levels of debt, and what's most important, all of the debt that will be issued in the future, i.e. those unfunded, funded, already assumed commitments. All of that means monetary destruction.

1:03:05Therefore, be on the other side. Continue to invest in equities, particularly in the United States, particularly in disruptive and high added value sectors. Continue to invest in independent currencies and independent money that allows you to benefit from an environment that is not going to be solved through government deficits and government spending. And because of that, don't expect governments to give you real positive returns in their bonds or the bonds that they issue. Well, with that, Daniel, I almost have to ask, what about Bitcoin? I think the Bitcoin is phenomenal. I think the Bitcoin is showing, number one, that it is going from being a startup currency to something that is actually a contender, and that is creating its own liquidity.

1:04:00And I think that that is what is most important. So it's starting to de-correlate from other risky assets. I think that Bitcoin as well moves, as you see in these charts, in these periods in which it consolidates at a certain resistance level to continue going up afterwards. So what we need to pay attention to regarding Bitcoin is how it is separating itself from other cryptocurrencies, how it is becoming more a reserve of value unit of measure and method of generalized mean of payment, and at the same time, how it is creating its own liquidity and therefore separating itself from being an asset that goes up when everything goes up and goes down when everything goes down.

1:04:47I think that that is what's most interesting about it. It's a very young asset. And therefore, the people that are talking about the future have a lot of things to look at before being certain about what the future is going to be. But what is important about it is that it has gone from being a startup currency with very elevated volatility to a much lower volatility and much more intrinsic liquidity generating asset. Well, it's a teenager now. It is a teenager. Exactly. That's what we said the other day. I was in Mexico and they asked me, what is the future of Bitcoin? I said, what do you mean the future?

1:05:28It's in its infancy. Imagine what people would have said about the US dollar or about the British pound when it was 15 years old, that it was nothing, that it was irrelevant. So let's look at it. Let's look at it because it's growing and it's growing stronger. And it's actually and a lot of the things that me and so many other people were cautious about. No, I was the thing that I always was most cautious about Bitcoin was the fact that its liquidity came from the US dollar. So the Fed hiked rates and the Bitcoin declined. But I think that the key point here is that it is building its own liquidity, is separating itself from other crypto assets, and it's generating its own narrative and its own story.

1:06:15And it's fascinating to watch. Daniel, a great, great show. I hope you'll come in and check in with us again, Q1 2025, so we can talk about how this is all going. It will be a pleasure. Absolutely. Absolutely. Thank you. Well, truly a pleasure to have you here, Daniel. By the way, before we go, tickets for our upcoming in-person crypto gathering in Miami now up for sale. Head over to realvision.com forward slash CG2025. That's realvision.com forward slash 2025 to get yours. Thanks for watching. Thanks for listening. Have a great afternoon, everybody.

1:07:24We'll see you next time. anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus 500. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. If you liked this episode, I'd love for you to head over to realvision.com forward slash join for a free membership. Start your journey today to unfuck your future. Just one click away. Have you ever wanted to trade Bitcoin but haven't dared try?

1:08:06With Plus 500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments, S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere.

1:08:40Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus.