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Sean Brazney Interviews CPM Group's Jeff Christian - May 2019 Part I

May 6, 2019
Video Transcript

Sean Brazney: I'm here with Jeffrey Christian, Managing Director of CPM Group. Who is joining us all the way from Hong Kong. Thank you for joining us Jeffrey.

Jeffrey Christian: Good Morning from Hong Kong.

Sean Brazney: We're here to talk about our Year for Accumulation Report. In the report you mention that further monetary tightening is unlikely without sustained inflation and that we see inflation having some head winds in front of us here over the near to medium term. Can you expand on some of that data for us?

Jeffrey Christian: Right, I think the Fed has commented pretty eloquently about this in some of its recent statements, but basically, you're looking at an economy where you're having rising employment, falling unemployment, and your starting to see some wage pressures and that could suggest inflation, but if you look at the broader economy and you look at the components of general price inflation, there's still a lot of slack in the economy, and in fact in some cases it's getting even more slack. So, you're not seeing a lot of inflationary pressures. There's a tremendous excess of... retail capacity in the world and you're seeing increased use of online purchases, which is causing an increase in the retail capacity excesses in the United States and elsewhere, because people are no longer going to brick and mortar stores and you're seeing several thousand stores close, that obviously has a labor effect, but what's more importantly it's creating a tremendous amount of cost pressure keeping the prices down of consumer durables and consumer non-durable goods that are being purchased. So, you're not seeing a lot of inflationary pressures in the consumer goods that are being purchased. You're also not seeing a lot of inflationary pressures either on labor for services or for manufacturing. You have excess manufacturing capacity on a U.S. and a global basis. So, there are a lot of factors that are keeping inflation down and are likely to keep inflation down for the next several years.

Sean Brazney: I guess the flip-side of that question is with little to no inflation, do you think it's likely the Fed would loosen monetary policy?

Jeffrey Christian: I'm not sure that the Fed is going to loosen policy. I know there are people out there who are talking about the idea that the Fed could lower interest rates. I think that that is sort of wishful thinking on the part of some investors. Again, the Fed would be unlikely to increase... a decrease interest rates unless it really saw a severe economic problem on the horizon. As we're speaking, on Tuesday in the United States, the Fed issued its monthly credit... consumer credit report and you're seeing 3%, 4%, 5% expansion in consumer credit in the United States on a monthly basis, year over year. So, you're still seeing a tremendous growth in borrowing and in debt in the consumer side, you're also seeing it on the corporate side and the government side, obviously. So, there are a lot of reasons to think that the interest rates do not need to fall, that people are quite comfortable borrowing at current interest rates, and if anything you've got perhaps too much debt being taken on in the current economic environment, which is one of the reasons why the economy looks as strong as it is. I mean, if you look at the economic strength that seems to be weighing against being worried about the state of the economy, a lot of that is being debt fueled right now, both on a fiscal basis for the U.S. government, but also on corporate and consumers. So, I don't see there's a lot of scope for lowering interest rates and there aren't any real reasons to lower interest rates unless the economy starts getting really nasty. We don't necessarily see that on the immediate horizon.

Sean Brazney: In A Year for Accumulation Report, you do mention the Fed balance sheet and the U.S. Dollar, more specifically, a reduction in the balance sheet and how it pulls dollars from the system. Do you think that's an important topic for our listeners? Can you actually explain that a little bit more for our listeners?

Jeffrey Christian: It's one of the more esoteric aspects of monetary policy, but it's a very important thing. As the Fed has been liquidating its balance sheet, basically what it's doing is it's letting bonds that have accumulated over the last decade come to maturity and it's closing them out, it's not buying new bonds, it's taking those dollars and returning them to the U.S. treasury. That's reducing the stock of dollars in the world and the balance sheet reduction is now something on the order of $600 billion, not a lot on the multi-trillion market, but it is enough to have been exerting upward pressure on the dollar exchange rate, because if you look at the world, 70%-75% of world commerce and wealth is denominated in U.S. dollars. So, in order for people and corporations to buy things, they need dollars, and in order to service your debt, pay your monthly interest rate or close out your debt, you need dollars. What we've seen is some upward pressure on the dollar over the last two years, because of that $600 billion reduction in the balance sheet, which is in essence sucking that money out. Interestingly, when the Fed said it was going to pause in raising interest rates, it also said it was going to pause in liquidating its balance sheet, but if you look at the data through May 1st, the most recent data from which we have data, the Fed has continued to liquidate its balance sheet and it hasn't been replacing those bonds that are maturing with new bonds. So, you're continuing to see that and that's being reflected in a stronger dollar than a lot of other people had been thinking that you'd see.

Sean Brazney: Well, Jeffrey, thank you so much for your valuable time and information, as always, especially for getting up so early and joining us out there in Hong Kong. Thank you again.

Jeffrey Christian: You're welcome. It's always a pleasure to talk to Monex.

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