Kevin Muir On How to Position Portfolios for an Upcoming Inflationary Cycle

2nd December, 2021

Episode 20: Show Notes.

These days it feels like the price of everything — from housing, cars, gasoline, and even travel — is skyrocketing. Today’s guest, Kevin Muir, makes the argument that the inflation we are seeing around us is not a transient blip that will normalize with the easing of the pandemic, but an enduring force and a new economic reality. Kevin is the author of the MacroTourist Newsletter, with a tongue-in-cheek tagline of “All I Bring to the Party is 25 years of Mistakes.”  He is an expert macro thinker and trader and offers many nuggets of wisdom throughout the episode.

Key Points in This Episode

  • Kevin’s career evolution from trading at a prestigious investment bank to striking it out on his own
  • How it’s easier to make money than to keep it, and the importance of remaining humble and constantly learning
  • His views on market bubbles, and how today’s environment compares with previous bubbles
  • The rise of the retail trader as a formidable market force, and how hedge funds have to now think harder about right-tail risk
  • Modern Monetary Theory and its place in the current debate
  • How the fiscal and monetary response to COVID was different from past cycles and will have different consequences
  • What has changed in the market that will lead to inflation enduring in the 4-5% range
  • How to position portfolios in the new economic regime


[00:01:04] Andrew: Hi, this is Andrew from PitchBoard. I spoke with Kevin Muir, a veteran trader who writes the MacroTourist Newsletter. He talked about the traits of a good investor buying bonds that are so risky right now, in which asset classes should do best in an era of higher inflation. This is a conversation you won’t want to miss.


[00:01:21] Andrew: Hi, this is Andrew from PitchBoard. Today I have the pleasure of speaking with Kevin Muir. Kevin is a trader who writes the MacroTourist Newsletter. He worked for a large Canadian Bank in the 90s running their proprietary equity derivatives book. Kevin, welcome to the podcast. It’s great to have you on.

[00:01:37] Kevin Muir: It’s great to be here with you today, Andrew.

[00:01:39] Andrew: You’re a Macro trader and investor, what drew you to macro trading and macro investing as opposed to being a stock trader.

[00:01:50] Kevin Muir: Well, I grew up in a household with a father that was actually a research director for an old firm that doesn’t exist anymore. It was Richardson GreenShield that was eventually acquired by Royal Bank, which ironically was the bank that I was working for when we took over Richardson GreenShield, but I had grown up with a lot of talk about individual stocks. I taught Moose pasture mines, and all these great the typical Vancouver type, promotions and stuff.

Although I liked listening to that, it was really the book Market Wizards. When I read that I was, I was in my teens, and I read Market Wizards. It was about a bunch of different macro traders in this World of foreign exchange and futures trading and back then the hedge funds weren’t quite as well known. It just seemed to be that I read this book, and I was like, that is what I want to do and from that day onward, I’ve always wanted to be a macro trader.

[00:02:50] Andrew: So when you were working for the bank, obviously you did you traded individual stocks, but were you always thinking about macro issues. Were you trading macro at that point, or?

[00:03:02] Kevin Muir: No, when I worked for the bank, I was actually originally hired as the program trading slash index trader. It’s hard to believe, but back then there were very few people that could use computers on the trading desk. My boss likes to joke around and say there were lots of people that were better than you at computers. There were lots of people that were better than you at trading, but I was the right mix of both. So I actually got my job at RBC Dominion securities in the early 90s, while I was going to university I hadn’t yet graduated. I got hired directly onto the desk. I finished my degree at night while I was working there. I’d started with doing the program trading, meaning like index trades, big portfolios of stocks, all the ones.

Then back then there was a big business in something called Basket trading in terms of the clients would ask the dealers for bids and offers on entire portfolios of stocks, and you would execute them in one transaction. I was hired to do that. I had a great time. I learned a lot. Then eventually I hit this point where I was like, I wanted to trade proprietary, it’s called and that means for the bank’s balance sheet, and what I eventually became was the equity derivative trader. Although I spoke to many clients, the vast majority of my trades were done on behalf of the bank and I was trading index futures. We were the market makers for something called Tips and Hips, which eventually became an exciting use.

We did the index rebalancing. I just had a real, I love the game, the game of trading and it was a great place to be working at the time, because RBC is the Goldman Sachs of, of Canada. They’re extremely entrepreneurial. They had an appetite to take smart, intelligent risks, and they let young people like myself go and run with the ball. It was a great place to be, and I network there, but it wasn’t so much trading macro as it was specifically equity derivatives.

[00:05:15] Andrew: Equity derivatives. So you left the bank in 2000?

[00:05:20] Kevin Muir: That’s correct.

[00:05:21] Andrew: 2000 and you set it off on your own, and that’s when you became a full time macro trader?

[00:05:26] Kevin Muir: That’s correct. When I joined RBC, it was still, although the bank owned RBC, it was very much that old school, lots of traders that dictated what they wanted to do, and the bank wasn’t that involved. By the time when I left, we had moved from our old building at Commerce court, Eastern to the big huge tower, Royal Bank, and the bank was becoming more and more integrated. Rightfully so you can’t have some 28 or 29 year old punk, just randomly taking shots with the bank’s balance sheet and doing some strange stuff. I was getting frustrated, because every time I came up with a good trade, I turned around, and they said, “You can’t trade that, you can’t trade that.” It literally was one thing after another.

Then my first daughter was born and she was born with a heart defect that was thankfully, corrected at birth. It was one of those really important moments for myself in terms of life, and I decided that life is short. I wanted to, I was getting put up at the bank and I took off and decided to go and do something else. When I was thinking about what I wanted to do, I thought I almost went to work for a hedge fund.

I hit this point where I thought to myself, well, if I go work for a hedge fund, and then quit in a year, because I wanted to work for myself then everyone’s going to remember me is the schmuck that went and worked for a year at a hedge fund, but if I go work for myself for a year, and then it doesn’t work out, and then I have to go work for a hedge fund, no one will remember that year. I decided to take a shot at it. I said, “I’ll go work to try trading for my own account and doing some different things.” Eventually, if I have to get a real job, I have to get a real job. One year turned into two, which turned into five, and it’s going on 20 plus years that I’ve, in essence, been trading for myself.

[00:07:16] Andrew: What is it about trading macro that you like? Do you find it a puzzle for you that you’re, you’re putting together all these different data points and arguments and you’re trying to figure out where the world is going, as opposed to just looking at one stock where it’s ultimately very micro at that level?

[00:07:36] Kevin Muir: Right, you’re right. I’m a CFA. I remember my CFA, I had all sorts of trouble with level two and although I did pass it, it was just barely by the skin of my teeth. It was because level two had all the accounting. I’ve never been in the weeds and read balance sheets, fellow. I just, it never really interested me. I was much more interested in monetary policy, fiscal policy, or specific supply demand imbalances, at a more macro level. It just ended up being something that I was more attracted too. It was also, although I am a macro trader, I really, I would call myself more of a generalist than truly a macro trader, because I will go and trade different specific issues. I will go find miss pricings of individual securities, but they generally will be more technical in nature.

Meaning that I won’t go and try to find a cheap stock, I’ll go find some pseudo arbitrage where it’ll be one stock on some of the other and then you can hedge portions out, or balance sheet arbitrage where I’ll look at the bond versus the equities. I’ll say this has mispriced. I guess the macro trading or just this general trading has allowed me over the years to go wherever the opportunities lie. People sometimes ask me, “How do you make your living? What do you trade mostly? A lot of people say, “Well, I just trade SMPs, or I just trade foreign exchange, or I just do this. I don’t have the ability to say that, because my revenue or how I’ve made my living throughout the years has really varied one year it might be that convertible bonds will be a great opportunity in that and I’ll go and I’ll learn about convertible bonds and I’ll trade all those.

Then the next year for example, in Japan when Avanade and Avi came in and changed policy, there was a really great time to be a foreign exchange trader and to trade in the end. So that year I did well there. One of the things that just attracts me to be able to jump around is that it allows me to go wherever the opportunities are, and that is really what I like the best, I consider this the greatest game. I’m extremely fortunate to be able to do this for a living. It’s a lot of fun to be able to go and try to figure out where the best risk reward place to allocate your time and your capital is at all times.

[00:10:19] Andrew: It sounds like you’re learning new stuff all the time, because you’re not just focusing on just say focusing on financials or you’re not just focusing on credit or something like that.

[00:10:33] Kevin Muir: Right. I would completely agree. I think that is another reason why I consider myself so fortunate, because it’s so fun and so interesting. I’ll just tell a little story about this. When I started at the bank, we did what’s called index arbitrage, meaning that when the futures the – well, they are not S&P 500, they’re TSA60 or 35 futures, when they were mispriced versus the underlying stocks, we would sell futures and buy stocks or do the opposite. When I first started, nobody cared. I was, we were often side, we’re just trading these things and nobody cared.

As the futures became more and more used and there was more volume, all of a sudden, we started moving the markets and all the regular institutional guys on the regular desk would start talking to us and say, “Are we at premiums? Are we at discounts? What’s going on in your market?” I had a little leg up for a while because I understood these flows. Now, fast forward to today, there’s more and more people using options than we’ve ever seen before and specifically, the S&P 500 is one of the biggest markets out there in terms of different entities that want to lay off risk or hedge or protect against the possibility of something going wrong.

As those clients use them, whether they be institutional clients, retail clients, they’ve made the market so large in the S&P 500 options, that it’s actually a case of the tail wagging the dog. One of the things that’s really that I found fascinating over the last couple of years is that I’ve come to realize that the dealer positioning from those puts and calls that they’ve sold to their clients is actually affecting the market. It’s just been absolutely fascinating to go and learn this and to figure it out, and to start to really understand. It’s just yet another example of why it’s important to keep an open mind and to keep learning.

It’s like your doctor, you think about your doctor, your doctor goes to medical school, the last thing you want is your doctor just to never be okay, I learned everything I learned in 1984, now there’s no more to learn about medical, about the body. That’s not true. The reality is that they’re making progress all the time and learning different things. So a doctor needs to be kept up on the various advancements, same way with the markets. That’s why I think it’s really important to keep learning and doing these things, because you’ll find that there’ll be situations where things will change, dynamics will change.

[00:13:17] Andrew: I guess it’s also and I think you’ve written about this, it’s also important to recognize your own fallibility. I think the tagline, if for your newsletter, correct me if I’m wrong, but it’s something like, all I bring to the table is 25 years of mistakes or something like that, which I find really refreshing, because so many newsletters or investment services, they act the opposite way. They pretend that they’re always right and that’s why people should hand over their money. Can you talk about the importance of recognizing your mistakes, but also looking for why you might be wrong?

[00:13:55] Kevin Muir: Okay, in terms of recognizing your own mistakes. I’ve always said that making money is easy. Keeping your money is extremely difficult. People think when they first get into the markets that they’re playing against the market. As time goes by, they start to realize that they’re actually playing against themselves, because if you think about it, the market doesn’t care what you do. The market has no feeling. It’s all how you’re reacting to the market and how you’re dealing with the different psychological aspects of the traders. I’ve had the good fortune to talk to many, many traders over the years in the decades.

As I get older and talk to more and more of them, I realized that the thing that really separates the good traders from the truly outstanding traders is risk management and their ability to deal with the losses, because let’s face it right now, there are so many people making so much money and it just seems so easy. They’re just everywhere you look, there’s some young punk that’s gotten made a good jillion dollars. I’m not a perpetual bear like some of the people you’ll see the crusty old guys yelling at clouds, telling people to get off their lawns. I’m far from one of those, but having said that, I was around in the dot-com bubble, I was around when I saw that lots of people made lots of money and very few people made money on the other side of it.

If you think about how many were actually came out of the dot-com, as rich as they were Mark Cuban was one of the few that was actually able to sell. Anyways, going back to your question about staying humble, the moment you start to think that you’re smart and that a ton, is the moment you get your ass handed to you. That’s when I always joke about the market gods and the market Gods strike you down, they know. I think that staying humble and being aware that you’re going to make new mistakes and that you have to always be on the lookout for that for the devil with inside you to make the mistake is so important and in a lot of ways, it’s actually way more important than all the other pieces, because those other pieces are actually fairly easy. But the part that human psychology part is so difficult.

Like Sir Isaac Newton, one of the smartest men that has ever walked the planet. He went and I think it was a South Sea Bubble. I think he bought it. I don’t know, let’s just make up numbers. He bought it at 10 bucks, and sold it at 20. I thought he was a genius like that, I made all this money. Watch to go to 80 more importantly, watched all these friends make money. He couldn’t take it anymore. He ended up buying in and bankrupting himself on the other side. Now here’s one of the smartest people in the world.

One of my heroes is Stanley Druckenmiller, who’s the hedge fund trader that worked with George Soros. he talks about the dot-com bubble, how he went and hired a couple young guys, and he watched them make all this money in the last legs of the of the dot-com bubble move, and he couldn’t take it anymore. He actually bought it and he said, “I bought the highest.” He did it with sizes, he did it with a billion dollars or something like that of stock that he bought at the highs and made the highs. Within a month, he was offside 30% or something like that. He had the good will to sell it and then go short and realize that he had made an error.

The point is that, that human fallibility is what you need to be on the lookout for, because that’s the real difficulty once you figure out the rest of it, which I think is a lot easier than figuring out that human fallibility part.

[00:18:13] Andrew: Right. You mentioned the tech bubble. That leads perfectly into something I wanted to ask, which is, what similarities do you see between the current era and the tech bubble of the 90s?

[00:18:26] Kevin Muir: Oh, there’s tons of them. It’s so similar, I laugh about it, but the only thing I would say is this difference or it’s actually more interesting to ask the question, how does this one differ from the Tech, because the human beings are human beings, we do the same thing over and over again. This is one of the reasons why you should study market history. We talked about the South Sea Bubble, it doesn’t look that much different than any other bubble. Then they just go, these repeat over and over again. But they’re always slightly different. So to me, it’s what is different about this one. One of the things that I think is fascinating about this bubble versus the 1990s bubble, is the speed upon which it’s occurring. I think that this has to do with the fact that we have social media, and easy access to computers.

In my day, it took let’s just say that we got a stock that would get people excited. We would start buying it and then it would make the news the next day and then it would go up a little bit more. Then people would come home and see the news. Then they would buy things – nowadays it hits the tape. There’s a whole bunch of people sitting at home ready to pounce all over, because back in my day when I first started, there wasn’t the or there was the internet but it didn’t exist like it does today in terms of sharing information about stocks. Most of the information that was shared was over word of mouth through trading desks, and through Reuters tape or Bloomberg or whatever.

Now, the reality is that the retail trader at home has almost every bit as much information as the most sophisticated trader sitting at Goldman Sachs, in terms of being able to figure out what’s going on in the market. To top it all off, one of the things that I always tell people is, in some ways the retail trader actually has a huge advantage over the institutional trader, because they’re not dealing in size, so they can execute basically on the quote often and then they also don’t have the problems of having to chase performance.

If you’re an institutional trader and you’re a money manager, you’re always worried about the fact that if you underperform in a month or quarter, the money’s going to get taken away from you. You as a retail trader have the ability to just say, okay, that’s fine, I’m underperforming on an absolute basis, but I’m comfortable with that. There’s been a huge democratization of the financial markets. What it means is that we have a situation where the cycle goes way faster than I could have ever imagined even five or 10 years ago.

I’ll give you an example, right now, there’s a trade out there that’s very popular, and it’s become this uranium. There’s this, there’s a great fundamental story. There was a catalyst that came along that made it attractive. I got back, I was away for summer vacation, I got back and I bought a little. I expected this thing to play out in the next month, two months maybe. It played out in two days. I have been just absolutely floored by how fast it is gone. I think that that’s really the true difference between this bubble. I wouldn’t even want to call it a bubble, this bull market and the previous one in the dot-coms.

[00:22:15] Andrew: You don’t have a bubble. Let me for the sake of argument, call it a bubble. I wonder if because investors have seen successive bubbles over the last two decades. If it’s possible that bubbles now increase at a faster rate, because the quote Soros that when people see a bubble they jump in rather than jump out?

[00:22:43] Kevin Muir: Yep, for sure. One of the things that I’ve been talking about, I coined a phrase, it was a series of rolling bubbles. I talked about the fact that what we’re seeing now instead of one big one, is that we see small little ones that occur in their very specific. You’ll get, we had a spec bubble, for example. It was six months of the specs. Then we had maybe a Bitcoin bubble where there were six months of crypto when people were going after crypto, and then we had a lumber bubble. Then we had all these different things. What I found is that there’s probably it’s increasing, as I say, the speed upon which these little mini bubbles are occurring is happening more and more.

Maybe you’re right, maybe that has to do with people seeing them and realizing that they can jump on here. I’ve been shocked about since the COVID. I’ll give you a little insight about professional traders’ posts like during the COVID period. Some professional traders or many professional traders, struggled, especially at the beginning part of the COVID rebound, because what had previously worked in terms of how far stocks run on news was completely blown out of the water, because there were so many people at home trading.

I’ll give you an example. Usually you go and let’s say there’s something on CNBC that mentioned some stock and let’s say a string of $50, it’s good information or somebody says, “I like this name.” Like some money manager on CNBC says, “I like to steam.” In the past what would happen is trading at $50. It might have a $2 pop and what would then happen is it would generally sell back off, because really nothing’s changed. Some money managers like it, who cares? Their not nothing really has changed. What happened was post COVID, there’s so many people at home sitting there just trading and doing stuff.

You’d get – somebody come on CNBC say, “I like the stock, the thing would pop $2 and the professionals would sell it. Then there’d be just a wall of retail behind that I would buy for the next three days. They would run them over. So the world has definitely changed. We can talk about this in terms of just thinking about game stock and AMC. How, in essence, retail banded together and pushed those things to absurd levels. I’m hesitant to call the market as a whole a bubble, but I will call those stocks a bubble, because they have completely and utterly disconnected from fundamental reality, but it doesn’t matter. It’s because of this new phenomenon of the Reddit crowd WallStreetBets/retail, getting together and doing their diamond hands or whatever. It’s been difficult for some professional traders to adapt to those realities.

[00:26:04] Andrew: Did many professional traders see the rise of the retail investor? Immediately start betting against that? Because of course, historically, when you had a huge amount of retail traders, like in the late 90s, that’s been a warning sign, right?

[00:26:21] Kevin Muir: Yep, for sure, listen, the first time that, I guess was a Gamestop was the first one that really, that was the one that really got a lot of guys offside. Game stock went from $5 to $10 and then it went to $20 and at that point, it started to track some people and they got short. Usually if you short something $20, you think it’s worthless. I think most people would have thought that at that point that it’s pretty close to worthless had a lot of debt, crappy business.

They were the least, maybe it doubles on you, that’s the worst that can happen. Then what happened was, well, it doubled and then doubled again. Then Elon came out and said the game stinks, and it went absolutely exponential. It ended up ruining guys in terms of hedge funds. There is no doubt in my mind that that episode changed the nature of way, the way that hedge funds and professional money managers thought about risk, because all of a sudden, in the past, they were always worried about what people call the left tail, meaning big declines in stocks.

So up until this point, we had most of the big errors that occurred in terms of big losses from funds with funds that were levering up, and writing puts or taking excessive risks by exposing themselves to big downside moves and then a 1987 crash comes or a 2008 type great financial crisis occurs, and they get blown out of the water by then. There had rarely been a spike in the equity markets on the upside that had ever hurt people. This completely changed the whole dynamic of how it worked. Now all of a sudden, hedge funds had to worry about not just the left tail risk, but the right tail risk.

[00:28:27] Andrew: Is that resulting in thinking more in hedge funds, using index products for the short side of their book, rather than individual stocks?

[00:28:37] Kevin Muir: So there’s a lot of different hedge funds that do a lot of different trades out there. I would say that when most people think about hedge funds, they might think about a bunch of a hedge fund that goes out and buys 20 different or 50 different stocks on the positive and then shorts 50 different stocks on the on the sell side. They hedge their book or they do some variety of that. They’re still doing that. There’s no doubt about it. I think what they’re doing is they’re being more careful with their, what’s happening on the right tail.

So in the past, maybe they would have let it ride when it doubled in their face, or maybe they would have even sold more. I’m sure there were people that when game stock went from 10 to 20 thought oh, this is a great sale, it’s a great sale attended to be in better sale 20. So the shorter, I think what’s happened is that they’ve had to reconstruct and rethink about how they do that. What people need to realize is that most hedge funds price things based upon volatility. Anytime you get more volatility, they reduce the notional size of their book.

The easiest way to think about this is that, if you’re a hedge fund or let’s not even see your headphone, let’s just say you’re an investor, and I give you a stock that I say, here’s a stock and it can go, let’s say, I think it can go up 20% in a year, but you’re going to have dropped down to 50% of your capital. Okay, and that’s one investment. Then another investment is, here’s a stock that I think is going to go up 10% a year, but the draw downs are going to be 2%, some really low number. If you looked at that, and said, ‘Okay, which investment is more preferable, you’d realize that the second one is way more preferable and all you do is you levered it up, meaning that you borrow more to do that trade, because there’s going to be less draw downs.

So at the end of the day, most hedge funds price the amount of leverage they use in their book, based upon the volatility of the returns of what they’re trading. As the volatility of even their shorts go up, they have to take all their risk down. This is one of the ironic things that it’s, you probably didn’t realize it at the time, but as the Gamestop was ripping higher, there was a little there was a week or two when the stock market was actually going down at the same time. Apart from people that weren’t in the know, if you just looked at and say I don’t understand why that’s happening, look at game stocks going up, what was happening was, hedge funds were de-risking, because they had faced, there was a volatility event in their portfolios.

They were looking at this game stock, and they’re saying, holy smokes, I’ve just lost X. I got to go and reduce my risk all over the board. I would say that it’s not made by hedge funds, all of a sudden just replace their shorts with an index . Maybe to some extent, some do, but on the whole, I don’t think that’s what happened. I really think that what’s happened is they just reduced their short in general, and they’ve learned to deal with the volatility.

[00:32:15] Andrew: Yeah, because no one wants to be the next hedge fund that gets caught on the next game stop and you don’t know what it is, I guess that’s the risk, right?

[00:32:22] Kevin Muir: Right. They just had to rethink their whole idea about shorts in general, which is actually scary for the market by the way, because the less shorts you have in the market, the less bids there are on the way down.

[00:32:37] Andrew: Right. You lose that question.

[00:32:39] Kevin Muir: There’s a lot of talk and there’s been a lot of talk for a while about a Fed put started as the Greenspan put and then with each Fed chair, the name changes, but the idea stays the same.

[00:32:52] Andrew: To what extent do you think and I’m thinking about equities here, who extent do you think that drives the market and should, is it rational for investors to be counting on that or with counting as maybe that’s too hard of a term, but our investors making the mistake of they think the Fed is going to come to the rescue if the market falls 10 or 20%.

[00:33:17] Kevin Muir: I don’t think mistake is the right word. I think that people don’t understand what’s happening with investors and with the Fed and how this is playing out. So they think that investors are going and levering up, because they see the quote unquote, Fed put. Although I do agree that the Fed is there, and does change policy too quickly, based upon changes in financial asset prices. I don’t think that there’s a ton of investors that are taking excessive risk, because of that fact. I think I guess that’s the word how I would say that that narrative spin spun the wrong way. I would approach it like this.

Think about all of the pension funds and all the RSPs and all the 401Ks and everyone out there that is saving and think about what’s happening as interest rates are coming down in price, this or in yield coming down in yield. They are becoming more difficult for savers to meet their targets. If you’re someone that is saving and the yield on the bond is 7% and you buy the bond and then you have a nice comfortable retirement. It’s really easy. All of a sudden, if that same person that goes and tries to retire and it’s 2%, it ends up being more difficult. What happens is that those investors are reluctantly sent out the risk curve.

This was actually a policy decision and [Inaudible 00:35:10] talks about the wealth effect when they first did this. That ends up being almost a huge short position in the market, because those people are trying to hit a target of savings and they’re forced to buy. It’s almost like they’re short the market and the more it goes up, the more that there’s financial repression, the more they have to go up the risk curve. I don’t know if I buy that narrative that there’s all this huge speculative access, because the Fed is doing the Fed. I don’t actually think, although there are some excesses, I think there’s parts of this market that people are completely misunderstanding and don’t haven’t really begun to acknowledge.

So one of the things that I’m a big believer in understanding is that, I’ve come across MMT a few years ago. MMT stands for Modern Monetary Theory and MMT the basic tenet is that sovereign governments are not financially constrained, they’re only constrained by real resources, meaning inflation. You might hate this, you might not this, you might think it’s going to all end badly, but the reality is that more and more, we’ve actually gone down this road of adopting MMT policies.

The perfect example is that after COVID, we all forget it now, but in March of 2023, there were tons of bearish people out there who thought the stock market was going to collapse, the economy was going to collapse. One of the one of the calls that I was lucky enough to get right was I said don’t be surprised that the government can come in here and fill the hole and fill that hole they did. They did it in a monster number. One of the things though, that you need to be aware of is they filled the hole and too often people confuse monetary policy with fiscal policy.

In 2008, in the great financial crisis, they tried to fix all the problems through monetary policy. They went and they did, they lowered rates to zero, they did quantitative easing, which is the buying of bonds. None of that worked. We can talk about why that didn’t work. This time was completely different, because they went and they spent tons and tons of money and went and did this. Now, the reason I bring this up is because although everyone says oh, the government spending all this money, it’s terrible, blah, blah, blah. If you think about it, although I loathe accounting, if you think about if you have someone’s debt, it’s someone else’s credit.

So the government has gone and created this monster deficit. Well, on the other side, there’s somebody’s credit and that somebody’s credit is the private sector. So to me, it’s actually not that surprising, given these monster deficits that we’ve been running, that the stock market is doing as well as it’s doing, because I think it’s the other side of the deficit equation. In this lesson, it’s way more complicated than that, because there is an element of the private credit creation through banks is another way that occurs. I don’t want to just make it equal, if you just make deficits, it has to go into the stock market. I think that many people are missing that element of what’s occurring right now.

[00:39:01] Andrew: For those listening, there’s a book based on what Kevin just mentioned, about MMT by an economist named Stephanie Kelton that’s really interesting and very accessible. But when you talk about that move from, I think, what you’ve called monetary dominance to fiscal dominance, and it’s perfectly into something else that you’ve focused on recently, and that is the prospects for inflation going forward, because you’re an investor, how to best position yourself? Can you talk about, I know you read a fascinating paper recently about that, and just what your thoughts are about how to position yourself?

[00:39:40] Kevin Muir: Sure.

[00:39:41] Andrew: Or rising inflation.

[00:39:42] Kevin Muir: Sure. Maybe I’ll just talk briefly about why I think it is going to occur. Let’s just go just explain why we didn’t get inflation in the great financial crisis and why I think we’re going to get inflation this time. In the great financial crisis, we had a situation where credit started imploding. We had stock markets selling off because people had borrowed too much. What had happened was at that point, the government started lowering interest rates, because if you think about the past 40 years, the past four decades, ever since Volcker basically beat the back of inflation by raising rates and tamping down inflation in the early 80s. We’ve had a situation where anytime that the economy has slowed down, the way to fix it has been to lower interest rates and by lowering interest rates, what eventually happens is the private sector would respond and borrow more money and the economy would come out of any dip.

In the past four decades before the great financial crisis, we were almost exclusively trying to fix everything with a monetary pulse. Then the great financial crisis comes and the trouble is that the private sector has borrowed so much that when they lower rates to zero, it doesn’t matter. Nobody wants to borrow, everybody’s in trouble, there’s the debt deflationary self-reinforcing doom loop occurring. The bank, Bernanke, and everyone comes up and they decide the central banks decide they’re going to do extraordinary monetary policy. What they’re going to do is they’re going to actually buy bonds. That’s called Quantitative easing.

The market gets really scared about this, because it never occurred. It hasn’t occurred for many, many decades. They think that this is going to be what sets off hyperinflation. The central banks buy all these bonds, but little to everyone’s surprise, there’s very little inflation and the economy struggles and coming out of the, that great financial crisis was one of the weakest recoveries on record. There basically hadn’t been anything that week in terms of economic recovery in years and decades and decades and decades.

So why is that? Well, the theory was that the banks were going to go or the central banks were going to go buy bonds and when they buy bonds, they take the bonds from the central from the commercial banks and they give them cash and that cash goes into the system, and that cash is going to then be lent out and it’s going to create all this hyperinflation. That’s why you saw things like the monetary supply going through the roof, and all this crazy stuff, and everyone, all these Zero Hedge types talking about the end of the world, because we’re going to be with him the Walmart Republic, but the reality isn’t income.

The reason it didn’t come was because Quantitative easing doesn’t work when there’s so much debt in the system like that. If you think about it, logically, let’s just go through the logistics of how Quantitative easing occurs, the steps and think about the respondents of the different actors involved. Okay, so the central bank goes, the Federal Reserve goes and buys, let’s say, a billion dollars of bonds from JP Morgan. JP Morgan goes and sells them the billion dollars of bonds. Now, all of a sudden, instead of having that billion dollars of bonds on their balance sheet, they have cash.

The old way of thinking about economics was that they were going to lend that billion dollars out, and that billion dollars was going to have the money multiplier effect of runaway inflation. Well, if you’re JP Morgan, do you really go and lend out money, because you have cash on the balance sheet? Was that really what was stopping you from making loans in the first place? The reality is that no, it was never, you were never really what’s called a reserve constraint. You base your loans more on how many willing borrowers there were, what does their own balance sheet look like?

We had to rethink this whole idea of Quantitative easing, whether it causes inflation and in the early or the post great financial crisis days, there were very few people who understood this. The MMTs were actually one of the few that really got this and explained it to people, but very few were listening. Well, in the ensuing decade, more and more people started to understand this. So if you remember in the back in the Bernanke days, he used to beg the government to be spending, because what had happened was, there was a mentality on Wall Street in Washington, that if all this debt had been the problem, that it created the great financial crisis, then surely what the government should do is cut back on debt.

Even though the private sector was cutting back on debt and spending less, the government made it worse by actually doing the same policy at the same time and everyone goes, no, no, that doesn’t make any sense, Obama was one of the most spent presidents around? Well, a lot of those things were actually the automatic stabilizers. If you look at the discretionary federal budget of the US government over the past five or six decades, you’ll see that every year it went up. Before the great financial crisis was set for three years, I think it was 64, when Kennedy came in it was 68, when Johnson did something, and then it was, there was one in 96, or 97 with Clinton.

Every other year, the budget went up in real terms, meaning the government spent more. Well, a great financial crisis comes, and we forget about it now, but there’s that whole sequester there with the Tea Party, and the government started actually cutting back on their spending. We actually had five years of the government cutting back on spending, at the same time that the private sector was doing the exact same thing. We were trying to fix everything with monetary policy and that’s why we ended up having to have three different Quantitative easing programs that none of them actually worked, instead of doing fiscal.

Now, fast forward to COVID. COVID comes and now people understand this better. Instead of the government’s cutting back on spending, they spent and they spent nobody’s business. Now, the market probably doesn’t understand. If a government wants to, it can make inflation anytime it wants to. If you think back to the past four or five decades, we’ve had nothing but disinflation, lower and lower interest rates. It’s like you’re hard pressed to find somebody in the markets today that remembers inflation. When you talk to most people, they think it can’t occur. They’ll give you all these reasons, they’ll talk to you about demographics, they’ll talk to you about the amount of debt in the system, they’ll talk to you about all the technology and all these things, they’ll tell you all the reasons that there can be no inflation.

I’ve always said, if the government can create inflation whenever it wants, it just needs the political will to do so. The part that many investors are missing today is that that political will is finally here and you can see it by the deficits and the change in attitude that you have about above the deficit. Like right now, for example, we’re having an election in Canada, in the prior elections a decade ago, we would have been talking about the deficit way more than we are. We’re running the biggest deficits that we’ve ever run, and we barely talked about it. What I think that investors need to realize is that there has been a sea change in the way of our attitude towards debt.

When you combine that with some other factors, one of which being globalization and if you think about China entering the WTO, and the fall of the Berlin Wall and the Iron Curtain, both of those factors unleashed a wave of labor and free trade and that pushed down the costs. It was all part of the globalization trend, I would argue that that is completely behind us. We’re actually going to see the opposite, we’re going to see globalization, meaning the tariffs are going to go up. Tariffs are going to go up, governments are going to spend more, all of this means that we’re going to get more inflation.

Now, as I mentioned before, can’t stand when you get on those dooms websites, those financial Doom websites, and you start reading about how this is going to mean the end of the world and how this is going to end in Armageddon, and you better buy guns and ammo and get your bunker ready. That’s not true, but it does mean that we’re more than likely going to have a wholesale change in the way that our financial markets work in the way that investors should be set up. If you think back to the 80s when I told you about Volcker coming around, up until that point, everyone thought that there was no way you could back inflation.

There was actually a fellow at Salomon Brothers, who was the best firm at the time and his name was Dr. Doom. He was Henry Kaufman, and he thought that he had a huge following. He predicted over and over how inflation was going to be there and there was no way we were going to get rid of it. I think we’re at the same inflection point, where we’re going to turn the corner on disinflation and in the years and decades to come, we’re going to see more and more inflation.

Okay, now, you were asking about the paper. I stumbled upon this great paper. It was written by a bunch of fellows from the man group, which is a futures hedge fund, in essence, and they went through the performance of various assets and strategies during periods of inflation. What they did was they took the last 50 years and they identified periods that they saw the CPI and inflation heading up. They talked about the oil embargo. They talked about the Iranian revolution. They called one the Reagan boom or something. They had a whole bunch of them to – they went through it all, and they went through how various asset classes did.

I guess, the number one asset class was energy. What some of the other surprises to me were that trend strategies did well, and we can talk about that, but it’s a complicated thing. But on the whole, commodities did really well, and bonds did really bad. That would probably be my for the retail investor advisor view, two things to think about, commodities did really well, bonds did really bad. I look at bonds. I just think to myself, Oh, my goodness, they are a potential disaster looming for many investors. I think I’ll just back up and say, bonds over the last four decades have been the greatest trade of our generation by far.

The richest hedge fund manager in the world is a fellow by the name of Ray Dalio. He’s made his fortune and his whole firm based upon something called Risk parity. Risk Parity is the idea that you create a portfolio that attempts to make the various asset classes more equal in terms of volatility. So when he came to the conclusion he looked at and he said, “Listen, I’m going to go buy stocks, and I’m going to buy bonds.” But the thing about bonds is they move way less than stocks, stocks end up moving up and down 20, 30% of where my bonds barely move.

What he did was he created a vault, he of volatility adjusted it. In doing that, he created this Risk Parity. For the past four decades, he’s basically been long stocks, and long levered bonds. It’s been the greatest trade ever. The reason that it’s been so great is because bonds have not only performed really well, because interest rates have been in a secular decline, but they’ve also been negatively correlated with the stock market. So what does that mean? That means that when you had really, really bad days like the 1987 crash or the 2008, financial crisis, really bad days and equities, bonds exploded, and you did well. So therefore, because they were negatively correlated, you could actually take more risk in your portfolio and not only that, the bonds on the whole, we’re also over the long run a positive tailwind for your insurance. We have a whole generation of investors that have been taught that bonds are the ballast for your portfolio, meaning that they are what, something that you use to counter the risks from the stocks.

I think that if we enter into a time of inflation, you will see that that relationship, that correlation between stocks and bonds, will break down and will go from being negative to positive and that is what if you go back in history, you’ll see stocks and bonds move together. The one thing I always stress to investors is that be careful that the thing that you think that is generally the ballast for your portfolio doesn’t become the anchor that drags it down. I think that the biggest challenge out there for investors is how to deal with the fact that negative correlation is gone and not only that, the bonds are potentially a real problem for those trying to create a balanced portfolio.

[00:54:02] Andrew: Particularly, obviously, for those who own longer duration bonds, right?

[00:54:08] Kevin Muir: That’s right. If you own one or two year bonds, it doesn’t matter. A lot of investors are what’s called the 60-40 portfolio, which is 60% stocks, 40% longer term bonds. That has traditionally been a great that’s almost risk parity without the leverage. It’s been a great portfolio for many, many years, many decades. I think that Hades is finished in that it potentially needs to be rethought.

[00:54:42] Andrew: You think that money starts to move from the bond market into the stock market?

[00:54:47] Kevin Muir: Well it already has, 100%. We actually think that someone was saying that the Bank of America does a survey of their own ultra high net worth individuals and they look at their positioning, and the positioning of bonds has never been lower in their positioning and stocks has never been higher.

[00:55:06] Andrew: Now from a contrarian perspective, you might look at that and say, that couldn’t put a bit of a temporary bid under bonds.

[00:55:13] Kevin Muir: I completely understand that argument. The trouble with bonds is, let’s just take the US tenure. It’s 1.3% yielding.

[00:55:22] Andrew: Now, what more can go, yeah –

[00:55:23] Kevin Muir: Yeah, so well, first of all, you could say, okay. You could have made the same argument about German boons and they went negative, but we’re in an environment where the attitude amongst governments has changed. If I thought that we were going to try to balance budgets tomorrow, if I thought that we were going to go back to balanced budgets, trying to pay down debt and really take care of the purchasing power of our dollars, then I would be the first one to tell you, you should buy bonds, because bonds are probably going negative, because there’s, there’s, there’s so much debt out there, and those things will overwhelm the system.

But given the attitude in a given what I see in terms of governments, if anything, I think it’s just increasing. I don’t see any signs that governments are going, “Oh, geez, what I have to do, we have to start balancing this budget. We have to start figuring out how to trim this, because that’s fiscally responsible.” Yes, there’s some people who mouthed those words, but look at the deficits, they’re huge and then the other thing about it is, think about it from the generational point of view. I contend that in the coming years and decades, there’s going to be more and more friction between the different generations.

Let’s just take a millennial and a boomer. The boomers, the last thing they want is their savings, let’s say inflated away. They don’t want that, but at the same time, the millennials are looking at what the boomers have promised themselves in terms of their obligations, and they’re like, this is ridiculous, why am I paying for these people to retire at this age. So I think you’re going to see more and more millennials starting to vote and you’re going to see them adopting policies that are much more government interventionist, much more fiscal spending, much more trying to fix things. That’s going to mean more inflation going forward.

So I just go back to those bonds, they go, yeah, you can play Hot potato and try to buy them at 1.3% yield, and maybe sell them at one or point five, but when you think about inflation, I think running over 5% right now, and even if it was transitory, even it was going to take it was going to come back, I still think that inflation is more than likely going to average above the Federal Reserve’s target. We haven’t even started to talk about that. Another secular change that has occurred is that previously central banks were viewing the inflation target as a ceiling. Meaning that when inflation got up to 2%, they wanted to raise rates immediately, because the reality is that they didn’t want inflation to stay above 2% for long, so it was a ceiling.

Now all of a sudden, the central banks are saying, well, listen, the reality is that 2% ends have been the upper level, and then it dips back down to lower below 2%, so on average, we average one and a half, for one and a quarter, so really, if we want to achieve our target a 2%, what we really need to do is let it go to three and stay there for a little while. That’s average inflation targeting and that’s another change in attitude that we’re seeing. I just look around, and I see wholesale changes in attitudes about inflation.

I think that those that are buying bonds saying look at this, it’s going to have the same thing as the great financial crisis. I’m going to be able to sell these at 5% from 1.3. Yeah, maybe, but to me the risk reward on that is completely messed up, because I could also see a situation where we have four or 5% inflation on a regular basis for a long time. Even if you end up not losing money on a nominal basis, meaning that your bond just stays even in terms of where it’s yielding, forget about rising yield, you’re still going to be losing over 2% in real terms.

[00:59:48] Andrew: In real terms, yeah.

[00:59:49] Kevin Muir: I guess, that’s my real point is that bonds just can’t help you in real terms. They’re negative, the yield, they’re yielding negative rates, and they’re going to continue to yield negative rates. So one of the biggest challenges for investors is, how do you deal with this new reality?

[01:00:07] Andrew: You’ve identified commodities as one potential asset class that might dwell in an inflationary environment. Do you see any differences between current episodes of inflation where commodities did well and today? What I’m getting at is, are there any risks you see whether it’s China, China’s slowdown or something, something else that could derail your thesis?

[01:00:31] Kevin Muir: Okay, in 2008, we had a situation coming out of the great financial crisis. As I explained, the Western governments didn’t spend and in fact, they tried to cut back. Lucky for us is that we actually had China pick up the baton and run with it and they spent, they did one of the greatest fiscal expansions ever. They created that commodity boom that we saw from 2008 to 2011 or whatever it was. Many people have mistakenly assumed that the only way for commodities to rally is if China’s rally. You’ll see that that that belief, and although I will be the first to acknowledge to come up with the China is the biggest consumer of many commodities, that increasingly, they’re not the ones setting prices and in fact, they’re trying to hold the commodities down recently, by making strategic sales of some of the reserves.

We’re seeing more and more that the Western economies are setting the price. I think that every single cycle looks different and you should be careful, because this one will look anything like the last one, and it will look anything like the next one. But I just think about commodities, and I think that on the whole, you should own them and you should figure out how to play them. For example, it might be different in that, with all the move to the EV, electric vehicles, that instead of oil leading the way this time, copper is going to lead the way, because if we’re going to electrify the world, in terms of we’re all going to move to electric, we’re going to need a whole lot more copper. We haven’t been finding enough copper and mining a lot of copper, and there’s a huge monster lead time in terms of creating copper. We’re going to more than likely have copper shortages for a long time.

So there will be individual commodity stories within this big huge secular cycle. So you might find that copper, nickel, and all the electrical ones do better this time than the previous. But investors just need to think about owning real assets, as opposed to financial assets in the coming years, decades.

[01:02:56] Andrew: To what is –

[01:02:57] Kevin Muir: It’s tough. Listen, I know that not a lot of times people say things like, “Oh, geez, well, how do I change it? That’s so hard, like you’re not giving me any tickers? What should I do?” One of the things that makes it so difficult is because we’ve had it so long that it’s not been this way, and it is so difficult to do it. One of the things that I would encourage you to do is you have to stop chasing the old winners, like don’t buy Facebook, Amazon, Google and start thinking about the new winners and thinking about different styles and different investors, different, if you’re if you’re allocating to money managers, maybe go buy a value manager as well, instead of just going and chasing the latest growth manager and things like that.

At the margin, investors need to take steps towards that. The other thing I would just say while I’m on the topic, if you have to own fixed income, think about tips, treasury inflation, Protected Securities, or real return bonds is what we call them here. There’s different little steps that you can take to protect your portfolio going forward.

[01:04:06] Andrew: It’s funny, you mentioned a value manager, because the guest right before you is a value manager. So people if they once this episode is people will go to the previous one, there’s a valuable interview you can listen to it too. With commodities, how much do you think the rally in commodities, because of inflation or with inflation as the backdrop? How much of that is based on what we might call the fundamentals and how much of it is based on speculators and investor activity? I mean, and I guess then ultimately, does it matter?

 [01:04:43] Kevin Muir: There’s no doubt that speculators have climbed upwards and moved markets. Like when you saw lumber, I think lumber is the final throes of that Crazy rally with speculators and ultimately, it doesn’t matter. I take a little bit of the view like Warren Buffett, always says about short sellers on his stock Berkshire Hathaway goes go ahead short sell, I’m eventually going to have to buy it back. The reality is speculators are really their job is to provide a bridge in liquidity over a period of time. Sometimes they make a situation worse, but if they’re making it worse by moving up something that doesn’t deserve to be up shortly, it’ll go back down.

So for example, lumber, you could argue speculators made it worse, they jumped aboard this thing and they sent it up higher. Well, they got their ass handed to them, like this lumber went and it went down and got halved and they got halved again. It was absolutely brutal. I don’t worry too much about speculators moving things, because in my experience, stock prices, or asset prices, they’re going to go where they’re going to want to go eventually. That is the one message that I truly, ultimately believe. It’s just a question of how long it can be mispriced and it can be mispriced for a while, but I don’t think it’s that big a deal.

In terms of what you asked, like does it matter? I don’t think it matters. How much are they involved? I don’t think they’re involved as much as you think they’re involved, or as much as the media might portray that they’re involved. I saw something recently, I wish I had the stats handy, but it showed the amount of inflows into the various commodities or sorry, the various ETFs this year. This year, I think equity ETFs, as you would expect, went through the roof and in terms of inflows, and in terms of outflows from there was huge outflows from bond ETFs, which is probably what you’d expect. The big surprising thing, to me at least, was that commodities were basically unchanged. There had been no dramatic increase in commodity ETFs on the whole, like in the grand scheme of things.

[01:07:02] Andrew: Despite the fact that prices went up.

[01:07:03] Kevin Muir: Yes, despite the fact that prices went up and prices are going up because there’s more demand and there’s less of the stuff being produced. That is the simple fact of the matter is that’s why it’s going up. Copper is going up because, not because people hedge funds are buying it. Copper is going up because they were using more of it. There’s less of it, not enough of it being produced.

[01:07:30] Andrew: We’re running out of time but I want to talk about your newsletter. Can you tell us a bit about what you write about and things you cover and what’s it and how people can find it? All the key details?

[01:07:47] Kevin Muir: Okay, so you can check out my newsletter, as Andrew mentioned, I do that as my tagline is that all I bring to the party is 25 years of mistakes.

[01:07:57] Andrew: Which I didn’t mean as an insult –

[01:07:58] Kevin Muir: No, no, no, I just joke about –

[01:08:00] Andrew: I think it’s enduring –

[01:08:01] Kevin Muir: Yeah, no, no, I’ve actually, it’s funny that every now and then I get people coming to me and telling me they say, “You know that the Macro Tourists are actually derogatory.” I said, “Yeah, I named myself firmly tongue in cheek.” Like that was always the joke about it was that macro tourists are generally people who wander into a square that they have no reason to be there and make a mess. So that’s when you had if you’re sitting there and you’re a high yield manager, and then all of a sudden some macro tourists would come in and there was always some dumb client that would do something that would, that you knew the move was almost over when the macro tourists came. That was always a joke. That was, so it’s the nature of my writing on my letter. I tried to make it fun, that’s the one thing I have a picture that I included at the front of every post. I tried to make it informative. I try to make it honest.

The one thing I will say is that the topics that I write about vary tremendously. It’s just my trading. It’ll be one day, I’m talking about inflation, about tips breakeven and then the next we’ll be talking about S&P options and gamma. Then the next day I’ll be talking about uranium. It’s just all over the map. There’s really no way to describe it, except to say that hopefully you’ll have a smile on your face when you read it. Hopefully you’ll learn something.

[01:09:27] Andrew: Because life is too short to be serious all the time.

[01:09:31] Kevin Muir: I tell you – what I think is the last thing, Andrew. If anyone wants to see some examples, just send me an email [email protected] and I’ll be happy to send off some of my recent posts.

[01:09:43] Andrew: Okay, great. We’ll wrap it up on that note, Kevin Muir, The Macro Tourists. Thanks so much for your time. This has been a lot of fun. Thanks as always to our PitchBoard listeners. We’ll be back soon with another episode. Okay.

[01:09:54] Kevin Muir: Thanks, Andrew.


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