[00:03:13] Jeff Snider: So you have people who think, well, the economy’s doing really well, but there’s all this stuff in the banking system. What do we make of all this? Is the economy going to hold up? Versus, you know, is the banking crisis just sort of a niche thing or a mild thing that’s just taking place in the background and it won’t have any big impact on the markets or the economy?

[00:03:42] Jeff Snider: And it’s understandable why people would be like, what is going on here? So the market perspective is that the economy isn’t holding up very well at all. It’s actually really weak. When you look around outside of, say, the US unemployment rate, there’s all sorts of weakness, especially in the goods economy, the inventory cycle, things like that.

[00:04:05] Jeff Snider: So there are a lot of things underneath the surface that are already heading in a recession-like direction, and that’s before we even get to March and April and May and all the banking stuff. But that’s the banking stuff. It sounds like it should have an immediate impact, right? We have these major bank failures. They’re not really major banks, but they’re big enough banks that we notice, and as they fail, you think they would have an immediate impact on the economy. But the truth is it usually takes some time for first the credit crunch to develop and then the credit crunch to really impact the economic system as well as the financial markets too.

[00:04:52] Jeff Snider: So we have a lot of longer-running problems that are starting to come together, and they haven’t really come all the way together yet. So we’re in that kind of ambiguous stage where things look kind of dicey and concerning, but yet at the same time, almost reassuring because the world hasn’t just fallen apart, like some people make it sound like. It’s not like you just flip a switch and the economy goes from good to bad all at once. So we’re in that phase, that transition phase, and as time goes on, you can see more and more how the markets anyway are very sure that we are going to transition into some pretty awful circumstances up ahead. The question is, you know, when does that actually happen?

[00:05:44] Rebecca Hotsko: Yeah, and one indicator that is flashing warning signs that you’ve written about extensively is the three-month, 10-year yield curve spread, which is now the most inverted it’s been in 40 some years. So, can you explain the dynamics behind what’s driving this high inversion in this near-term forward spread? And what does this indicate about expectations for the economy?

[00:06:08] Jeff Snider: Yeah, you see the three-month, 10-year Treasury spread and something called the near-term forward spread. Those are kind of interchangeable, even though they’re picturing different parts of the marketplace. It’s basically what does the market think short-term interest rates are going to do in the near-term future?

[00:06:27] Jeff Snider: So right now, as we know, the Federal Reserve, like you mentioned, Rebecca, the ECB also, so you have the two major central banks. They’re trying to push up rates because they believe the economy is too good. They believe the economy is inflationary, and so they want to restrain it by raising interest rates.

[00:06:49] Jeff Snider: Setting aside the fact that higher interest rates are not restraint whatsoever, that’s what they want to do. And so they’re raising interest rates, which they don’t control interest rates. They only control interest rate or money rate alternatives. So they only have the ability to influence interest rates really in the short run and mostly at the short end of the curve.

[00:07:14] Jeff Snider: So if, for example, if you’re going to own a two-year Treasury, you might pay attention to what the Federal Reserve is doing because you might get a better return in a short-term money rate rather than holding a two-year Treasury. However, you go further down the curve to say the 10-year Treasury.

[00:07:36] Jeff Snider: Now you’re thinking, well, I’ve got an investment that’s going to last 10 years. I’m less interested in what the Federal Reserve or ECB is doing. I’m more interested in what the economic conditions are likely to be over that 10-year period. So the further down the curve, the further out in time you get, the less you’re influenced by the Fed and the more you’re influenced by what you think or what everybody else in the marketplace thinks is going to happen in the economy over that longer-run period. And there’s, as any market, there are different consensus views traded back and forth. And over time, the market starts to move to one direction or another. So inversion is simply where more and more people, more and more participants in the marketplace begin to realize that conditions are aligning, such that safe and liquid instruments are going to be in high demand down the road, which we perceive of as falling interest rates.

[00:08:41] Jeff Snider: Through time, the Fed wants to push rates up, and the market thinks rates are going to go down. And we’ve gotten into this short run period where the Fed is still thinking rates are going to go up, and the market is now really sure that rates are going to go down. Not way out in the future, but really, really soon, maybe as soon as the next Fed meeting, probably by the summer, and almost certainly by the end of the year.

[00:09:15] Jeff Snider: So what the curves are telling us is that the marketplace perceives conditions that are opposite to what the Federal Reserve does. The Fed says inflation hike rates, the markets say the economy, the banking system deflationary, money rates are going down. And that’s what’s led to this huge mismatch between the short end, which is way up here, and the long end, which is down here and continuing to fall.

[00:09:43] Jeff Snider: And as more banks fail, as more economic data comes in that’s more and more aligned with that view, the curves continue to change in shape, which tells us that both the probability of this deflationary scenario happening has gone up even more as well as we’re starting to get a real good sense of timing here, where it’s the thing that the market’s been worried about is closer and closer and closer, and that’s where we get these extreme curve shapes.

[00:10:16] Rebecca Hotsko: Okay, let’s talk about deflation and the potential for that because you recently tweeted, I’m going to quote here, ‘There’s no inflation risk. Zero. Markets are absolutely certain it’s deflation and maybe a lot of it in our near future. That isn’t really about falling prices either. Rather, big unemployment.’ From the guests that I’ve talked to over the past few months, the consensus was largely that we might see these periods of inflation, these waves of inflation. And now, I don’t know, perhaps the data has changed and if I spoke with them again, their stance would change on that. But I’m wondering if you can give us a sense of why you’re saying we might see deflation and why you strongly believe that’s going to be the case. What is the data pointing to?

[00:11:10] Jeff Snider: Well, that’s, again, that’s not my belief. That’s the market belief, and the market is 100% certain about that. Well, as near as certain as you can possibly be in a dynamic world, nothing’s ever certain. But these extreme curve shapes where interest rates are inverted, as you mentioned already, like we haven’t seen in a long time.

[00:11:34] Jeff Snider: The other variable in that is, you know when curves were this inverted in the 1970s, that’s when interest rates were up into the double digits and higher, especially the late seventies into early 1980s. That was basically the market saying interest rates are going to go lower, but go lower as inflation was going to be, was going to cool off during recession.

[00:11:59] Jeff Snider: Now we have interest rates that are nowhere near double digits. They’re still relatively low in the historical context, even though the Fed has tried really hard to push them up. Instead, what’s happened is we’ve got massive extreme inversions at low levels of interest rates, low nominal levels of interest rates, which is the market saying that interest rates want to go back down to zero.

[00:12:26] Jeff Snider: And contrary to popular perception, low-interest rates are not stimulus. Historically speaking, low-interest rates are consistent with tight money, deflationary periods, depressions even. You go back to the 1930s, the 1990s in Japan, historically speaking, and Milton Friedman called this the interest rate fallacy for this reason, because everybody gets this backwards.

[00:12:47] Jeff Snider: As I just said, the 1970s, the inflationary seventies interest rates were in double digits. So the market is saying interest rates want to go back down to zero, and what does that actually mean? That means that when we talk about interest rates, we’re talking about again about the US Treasury market or the German bond market, government bond market curves.

[00:13:12] Jeff Snider: These are safe liquid instruments. If those rates are going to zero, that means their prices are going way up, which means the demand for safety and liquidity is going to go way up in the near future. Safety and liquidity in high demand is not inflation. That is absolutely deflation. If huge chunks of the marketplace, the monetary marketplace, and the financial marketplace are going to bid high, huge prices for safe and liquid instruments.

[00:13:42] Jeff Snider: So, the market is telling you that safety and liquidity are about to be in huge demand, which is not consistent with inflation, and it really hasn’t been the whole time. When you look at what happened over the last couple of years, it wasn’t actually inflation. It wasn’t a monetary phenomenon. It was the economic mismatch between supply and demand, the lockdowns, COVID, pandemic, all that stuff that interrupted the ability of the global economy to supply goods, particularly in the way that demand, which had been artificially boosted temporarily by government interventions. Just this huge mismatch led to an outbreak of prices. But we’ve seen these kinds of supply shocks throughout history. Go back to the 1940s, for example. See the, in the 1940s, early 1950s, supply shocks that were non-inflationary. They’re short, discreet periods, and by short, I don’t mean a couple of months, it could be a couple of years, but there are discreet periods where it doesn’t lead to something like the 1970s. So the markets are saying the supply shock was the reason consumer prices got out of control, and we have deflationary money that is starting to get out of control if you haven’t noticed lately.

[00:15:03] Rebecca Hotsko: And so in terms of this supply shocks in that mismatch within the economy, has that largely, has the data suggested that has largely resolved itself then?

[00:15:13] Jeff Snider: Yeah, I mean, there are still pockets of problems. You know, some of the emblematic goods or pieces of the supply shock, like copper, for example, it’s still difficult to source enough copper. But some of the most emblematic goods, like semiconductor chips, we couldn’t get any semiconductors. In fact, there were millions of almost finished vehicles just sitting on dealer lots because they didn’t have chips. Well, that has flipped from “we can’t get any chips to finish cars” to “oh my God, we have such a huge glut of chips, we have to shut down South Korea’s economy”. So yes, in a lot of ways, all of, not all, but most of the supply problems have been worked out. There are still some kinks in the logistical end of things. There are still container problems, there are still pockets of those things like that. So there’s still stickiness to the supply shock, but by and large, those have been dealt with. And the problem today isn’t supply. It’s more and more turning to demand. And one way we can see that in particular is in crude oil. Crude oil is still one of those areas which is restricted by supply in some ways, intentional as OPEC just announced an oil production cut, which is going to be effective, I think, right now. And yet, oil prices, what if oil prices yesterday, they flash crashed in early Asian trading, they got down into the low sixties. So even though supply is still a tremendous issue in oil, oil prices are trending lower because of both deflationary money. That’s what happened yesterday. We have a liquidity problem on the oil market as well as major concerns about global demand, which gets back to the tweet that you referenced before.

[00:17:13] Jeff Snider: Deflationary money and a deflationary economy isn’t necessarily about falling prices. Prices went up, and they may never go back to pre-2020 levels. It may be that deflation works out this time, as it did in 2008, for example, with a huge outbreak of unemployment. That tends to be the way the deflationary economy works out. So you can imagine if we’re going into a deflationary economy, that would weigh on oil prices, even if oil prices are highly constrained via supply. In fact, they’re very constrained. Supplies are really tight. Yet, again, oil prices are going lower because the oil market is really picking up on these themes.

[00:17:56] Rebecca Hotsko: And just on that point where deflation can be driven by unemployment or falling prices, I suspect they have largely different impacts on the economy and financial markets depending on which way that transpires. So in terms of it being from unemployment, how does that look in the economy and how does that impact markets?

[00:18:20] Jeff Snider: Yeah, that’s the worst. John Maynard Keynes said this way back in 1923, it was a hundred years ago. In 1923, he wrote a book called “Social Consequences,” where he said the twin evils of money are inflation and deflation, and by far the worst evil is deflation. And the reason deflation is evil is not because prices go down, which sounds like a good thing, and people mix that up with free-market capitalism and progress. Because in free-market capitalism and progress, prices tend to come down, but that’s not deflation.

[00:18:56] Jeff Snider: Monetary deflation is where we interrupt the circulation and free flow of money and credit in the economy. And as Keynes pointed out, when we do that, the lack of money in the economy causes businesses to react in all sorts of ways. One of the ways that they do react is they have to fire workers because they don’t have enough money for payrolls. They have enough money to pay for inputs. They quite naturally act defensively and lay off tons of workers. So in a deflationary economy where the circulation of money is interrupted, it is workers who tend to get the worst end of it.

[00:19:40] Jeff Snider: So you can see why Keynes said this was the worst of all worlds because it is. The little guy always gets slammed. Think about what happened in 2008. It was mass unemployment because of a deflationary economy. And how that works out into the, I mean, obviously for the workers and employment, that’s nothing good. But for the marketplace, that leads to all sorts of second and third-order economic effects. So in the real economy, you have producers that no longer have demand because demand has dried up. If people can’t spend, if they don’t have jobs, and worse than that, even if you do have a job, you’re worried about whether or not you’re going to be the next one to be laid off.

[00:20:30] Jeff Snider: So you cut back on spending and start saving anyway, so you have this self-reinforcing vicious cycle that gets into not just good spending, but also services spending. Businesses don’t invest, which has all sorts of problems there. There’s disruption in financial volatility in the marketplace. Maybe you look at the banking system differently.

[00:20:52] Jeff Snider: I mean, any number of impacts that go on from there, which all trace back to the deflationary monetary. Cycle, which is, again, it’s a monetary phenomena. We’re disrupting the natural flow of money and credit. 

[00:21:03] Rebecca Hotsko: Right. And so as of the time of recording this, the unemployment rate is still very low. When do you suspect this starting to happen and transpire in the economy?

[00:21:15] Jeff Snider: I think we’ll see the effects in the second half of the year. Timing it is relatively impossible because you never know what the data, like I said before, there are all sorts of indications that it’s happening. It’s just not happening in a way that most people would be able to perceive unless you watch these things closely.

[00:21:39] Jeff Snider: Most people, they just watch the unemployment rate. They might see the GDP report, and the GDP in the first quarter wasn’t great, but it wasn’t terrible either. So it’s natural why people would say the economy seems to be hanging in really well here. I mean, we’ve got all of this stuff we’re talking about. There are banks failing, and yet the unemployment rate, as you just pointed out, Rebecca, is exceptionally low.

[00:22:08] Jeff Snider: But even the unemployment rate being low, it doesn’t really offer you as much comfort as you might think. I point out frequently, especially lately, that the lowest unemployment rate in the modern US era was in, I think, July 1956. And then the recession began in August, the very next month. So the low unemployment rate doesn’t necessarily tell you much about what’s happening in the future. It kind of tells you where things are now.

[00:22:39] Jeff Snider: So we look at the economic data, we say the economy seems to be holding up, but this is how these transitions always happen.

[00:22:49] Jeff Snider: Any number of historical examples? 1974 is a perfect example. 1981, 2008. To a certain extent, I point this out all the time too. The NBER in 2008 did not re-declare the Great Recession until December of 2008, when it began in December of 2007, and the reason they gave was that in the initial recession period, the data didn’t look all that bad. They actually cited the payroll reports. They said it didn’t really look like a recession until all at once, the economy just fell off a cliff.

[00:23:25] Jeff Snider: 73, 74, perfect example, that the recession began in late ’73 with the oil shock, and we really didn’t notice a huge wave of layoffs until the summer of ’74, really August and September. So you had almost a year period where, sort of like Wile E. Coyote, you’re off the edge of the cliff and you don’t realize that you’re off the edge of the cliff, but then you fall off.

[00:23:54] Jeff Snider: So I think we’re in that sort of stage and we have been for quite some time. We’re already off the edge of the cliff, but we just don’t notice it. We’re Wile E. Coyote just hanging in the air here.

[00:24:10] Rebecca Hotsko: Do you think this deflation problem is going to be concentrated in the US or will it be a global deflation problem? 

[00:24:18] Jeff Snider: No, it’s global. I mean, it’s not just the US Treasury curve that’s massively inverted, or the US dollar money curves. I used a German bond curve as an example because the German bond market is supposed to be placid and boring. It’s not supposed to look like US treasuries.

[00:24:38] Jeff Snider: So, the German bond curve inverted way back in September, which was already unprecedented because if you go back to 2008, apart from one single day in 2008, the German curve didn’t invert. Now we’ve had almost constant inversions since October and November that have gotten worse and worse and worse to the point that the German curve looks just like the Treasury curve.

[00:25:03] Jeff Snider: So, no, this is not a US phenomenon. This is a global phenomenon because, of course, it would be. If we’re really looking at trying to understand what we’re facing here, we’re having to pay for all of the distortions from 2020. First, the pandemic shutting down the economy, and then governments just throwing as much as they possibly can to try to fix the problem. Creating even more distortions on top of distortions, it made just a huge mess. That wasn’t just the United States, it was all over the place.

[00:25:40] Jeff Snider: And we also have a global monetary system that links everything together, which is why in the middle of March it wasn’t just a regional US bank that failed. We also had Credit Suisse, which is a Swiss bank.

[00:25:56] Jeff Snider: So yes, there is a global aspect to everything that we’re talking about here. It’s not just the US that’s in trouble, it’s, and you look at bond curves all over, not just Germany, there’s Canada everywhere. It’s the entire marketplace is saying this is a global deflationary problem and it’s getting worse and worse, and it’s getting closer and closer and closer.

[00:26:16] Rebecca Hotsko: Right. And I want to ask you about China because you’ve written about this on Euro dollar University. How, I just remember at one point a lot of people were thinking that the reopening could be inflationary and there was a risk, and it doesn’t seem like it materialized that way. So I was hoping you could speak a little bit on what changed or what fell short of expectations regarding China’s reopening?

[00:26:38] Jeff Snider: Yeah, in one sense, that’s another one of these ambiguous situations, right? Because you would think that what happened to China last year was obviously due to zero Covid and Xi Jinping’s decision to lock down big SWAs of the country. So now that the Chinese government has come to its senses and is no longer locking down its people, they’re letting the Chinese economy back up and do its thing. It sounds like China’s going to be a source of real strength, because if you believe that lockdowns were the problem last year, the removal of lockdowns would remove the problem this year. And since China is such a hugely important part of the global economy, it sounds like if China’s coming roaring back because it has all this pent-up demand after a year of being really restricted, that’s going to contribute more to the same problems and imbalances that we faced in 2021 that led to consumer prices getting out of control. A resurgent China, given the still-lying levels of supply problems, should really be consumer price positive. In fact, I think the European Central Bank, more than the Fed, has referred to this on a couple of occasions as one of the risks they see in inflation.

[00:28:02] Jeff Snider: But as you just said, Rebecca, it hasn’t really materialized. In fact, markets are absolutely sure it didn’t. I mean, for a lot of reasons. One is that the reopening hasn’t necessarily been as strong as advertised because maybe China’s problems weren’t actually zero Covid and the lockdown. Maybe China has more structural and longer-running problems than just pandemic politics or what’s left of them.

[00:28:28] Jeff Snider: Plus, China is also highly susceptible, and it’s a reflection of the global economic condition too. So as the global economy starts to head into a recession, especially with the inventory cycle being such a big problem, that’s going to negatively impact China regardless of whatever’s going on in the reopening.

[00:28:48] Jeff Snider: So maybe China’s reopening wasn’t all about zero Covid. Maybe the reopening itself wasn’t as good as advertised, plus the global trade recession starts to really dig in here, and suddenly China’s reopening goes from, “it’s going to save us all from recession” to “it didn’t really happen.” Complete disappointment.

[00:29:08] Rebecca Hotsko: And if we start to see deflation coming into the data, how long do these periods typically last? 

[00:29:17] Jeff Snider: Oh, there’s such a wide variation. That’s what makes it so incredibly difficult because you can’t, you’d like to say there’s a template that we can just follow. If this happens, then we know this happens in, you know, three, two to three months. The truth is that you can see any number of varieties of ways that this can work out, which makes sense because it’s a complex system, and you can’t really predict how one individual thing or how one part is going to lead to the next, and then to the next and then to the next, because there are usually follow-on and knock-on effects, which is why I was talking about second, third-order impact.

[00:30:04] Jeff Snider: So, I mean, it could be, you go back to some of the examples. 1937, for example, which was sharp deflation inside of the Great Depression. You had the deflationary impact in the early late 36, early 37, and then the economy didn’t really fall off until summer again, August, September. So, you know, seven, eight months. There some other examples. 2008. You had the original deflationary shock, which showed up in August of 2007. Then you had a sort of shallow recession develop, and then by the summer again, the summer of 2008, it just kind of falls off a cliff. That’s the repeating theme here. If there is a template, it seems to be August and September, so maybe that’s the answer.

However long it takes. If we get to August and September and nothing happens and maybe we’re in the clear, but you know, it’s just, there’s any number of factors that make it difficult, if not impossible to say, “Here’s the date on the calendar, scratch it down, and this is when we’ll start to see things.”

But what we are seeing is, in terms of the marketplace and these curves that we’ve been talking about, the markets, the curves are reshaping themselves into the sorts of patterns that are consistent with this deflationary outbreak happening. Now, one of the things that we see is called “bad steepening.”

So, you know, the curves are inverted where we have short-term rates up here, and then longer-term rates are down below here. And bad steepening is, well, curves don’t want to be inverted. They want to be upward sloping because that’s the natural way of things. You know, think about how we always think about interest rates over the long run needing to be higher than they are in the short run.

It’s the most normal, fundamental shape for a curve to take, so inverted. It can’t be inverted forever. It’s gotta work. It’s gotta steepen itself back out one way or the other. The good way would be if we have short-term rates up here and longer-term rates down here, longer-term rates rise. That would mean we’ve avoided the recession.

We’ve avoided the deflation. The market is now in agreement with the Fed that things are more likely to be better and inflationary than not. But we also have this bad steepening. And the bad steepening is where interest rates along the entire curve fall, but they fall faster at the short end than the long end.

So the curve kind of goes like this. And that’s typically what you see right when a recession is beginning, right? When deflation is really starting to bite into the economy. And you also see this little bit of a tail on the end of the curve, which is another signal that the thing that we’re all afraid about, the thing that, that the markets have been hedging against all this time leading up to now.

They now believe it’s happening. So there are some pretty compelling indications that, again, not putting a specific time on it, we’ll just say sooner rather than later. 

[00:33:22] Rebecca Hotsko: I’m glad you mentioned that because I forgot to ask you that question. And I am curious because we just heard from Treasury Secretary Janet Yellen on how the US could run out of money as soon as June, and I wanted to get your thoughts on that.

[00:33:37] Rebecca Hotsko: What is that being shown in these yield curve inversions as well or, and I guess, what do you think is the likelihood that this could happen? 

[00:33:45] Jeff Snider: Well, I mean, we’ve seen debt ceiling impasses before, notably in 2011, which is somewhat similar to what we’re facing today. You had a banking crisis back then too. We didn’t have the yield curve inversion because the yield curve had already collapsed after the 2008 crisis. Then, along came this debt ceiling impasse in June and July of 2011. That actually led to a downgrade in US debt, which made a bad situation worse because it scrambled a little bit of the mechanics in the repo market and collateral and things like that. They were already bad to begin with, and then you have another disruption, another source of friction, and it just made the bad situation worse. So, I think that’s kind of what we’ve got right now. The debt ceiling, to me, is not a primary problem. It will get resolved at some point. But it’s another unnecessary problem for the market to try to dissolve. And now we’re getting into the part where it’s starting to scramble up Treasury bill prices, which is a huge problem. Treasury bills are the primary form of collateral to begin with. One of the primary sources of deflationary money is Treasury bills. We don’t like volatility in those markets. So, when the debt ceiling makes Treasury bill prices volatile, it just adds more strain to a system that is already highly strained.

[00:35:18] Jeff Snider: So maybe that is one reason why the curves are saying maybe this is just a straw that breaks the camel’s back. The debt ceiling is not the problem, but once it gets resolved, we’ll still have all the same problems, but it is a problem on top of so many other ones. 

[00:35:33] Rebecca Hotsko: And then I guess just thinking more broadly, for a while now, it seems like investors were highly focused on hedging against inflation and how they can position their portfolios to protect themselves against this.

[00:35:45] Rebecca Hotsko: And so what implications does a period of deflation have on asset prices and perhaps what assets do well during these times, if any. 

[00:35:56] Jeff Snider: Well, anything that has safety and liquidity attached to it, because that’s, again, the markets are telling you what they think will be in high demand over the months ahead. And by the way, we, you know, you gotta follow these curves here.

[00:36:13] Jeff Snider: I know that central bankers and economists, they tell you, no, no, no, no, no. We don’t follow the yield curve. We don’t follow the bond curves. And they make that mistake every time, time and time again. Every time the yield curve inverts, they say, no, no, no. This time it’s different. This time it doesn’t mean anything.

[00:36:37] Jeff Snider: So, Markets have been, their track record is not perfect, but near as near perfect as you can get. Whereas policymakers are wrong every single time. So if the markets are telling you safety and liquidity are in high demand, you would do well to heed that advice because it’s advice that’s coming from inside the monetary system itself.

[00:37:00] Jeff Snider: The biggest, most sophisticated players in the monetary system, the people who make and distribute money, if they’re hedging for demand, high demand for safety and liquidity, that’s what you need to take into account. The markets are saying you want to own safe and liquid assets. So for just the most basic retail investor, that means the same investments that are being bid up now.

[00:37:27] Jeff Snider: So you want duration in terms of bonds, which I mean, that’s, there’s a lot of risk involved there, but if you are convinced that we’re heading into a deflationary period, long duration in bonds, especially in the middle part of the curve, toward the end of the curve, so TLT and things like that, they’re going to outperform because of safety and liquidity.

[00:37:52] Jeff Snider: Another one, which kind of seems counterintuitive, is gold because people perceive gold as an inflation hedge, when in fact, gold is a terrible inflation hedge. It’s a terrible hedge against regular levels of inflation. It’s actually a good hedge against what Keens call the twin evils of monetary policy: extreme levels of inflation, as in the 1970s, or extreme levels of deflationary danger as in 2008 and its aftermath now. In 2008, gold was all over the place, volatile, which was probably what’s going to be moving forward. But by and large, in terms of all the asset classes in 2008 and the 2008 crisis, gold actually performed relatively well.

[00:38:37] Jeff Snider: And you could see with all of the problems that we have going on today, similar to 2008, but some differences too, gold might be another hedge that you could use, not against inflation, but disorder, dysfunction, and disarray. 

[00:38:52] Rebecca Hotsko: Do you have a similar outlook for other precious metals, or is it just gold for those reasons you mentioned?

[00:39:00] Jeff Snider: We’ve seen silver outperform too. And silver obviously is not outperforming for its industrial characteristics because the rest of the industrial metals are screaming deflation. Now, copper is one, but iron just recently fell off. Aluminum’s another one that former high flyer, because of supply problems, that one can’t get a bid even with China reopening.

[00:39:22] Jeff Snider: So, silver, it’s interesting that silver’s acting more like gold than it is like copper or something like that. So you gotta be careful about what exactly you’re looking at. But yes, silver, anything that exhibits or anything that historically correlates with safety and liquidity, you know, that kind of a hedge, that kind of instrument, that’s what you’re going to want to be looking for.

[00:39:49] Rebecca Hotsko: Okay. So you mentioned long-duration bonds and gold as well, and TLT was the ticker for that ETF, right? Okay. And then I did want to ask you, because in one of your recent YouTube videos on your Dollar University, you said that we continue to get warning signs as well as a lot of data that shows this crisis isn’t over. There is more to come. What happened with the banking crisis wasn’t the thing; it was the first stage of the thing. And so I wanted to ask you what you think is going to be the next domino to fall here? What should we be expecting?

[00:40:32] Jeff Snider: Well, that’s a difficult question because again, you know, we never want to get into the business of making predictions because it’s the least profitable business there ever is. What we can do is look at what’s happening today and make judgments about the situation and sketch out probabilities for the future.

[00:40:53] Jeff Snider: So in terms of what the markets are saying and the progression of how we got here, I think that’s instructive too. Remember, the curve inverted last year back in March. Actually, the first inversion was Eurodollar futures way back in December of 2020. But the yield curve inverted, the two-year, 10-year spread in March, and everybody said, “No, the yield curve inversion doesn’t mean anything.” We watched the near-term forward spread or the three-month, 10-year spread. Then that inverted, and those two inverted last November, and they said, “Nah, don’t worry about those things. Those things don’t mean anything either. We’re going to look at the unemployment rate. The unemployment rate is incredibly low.”

[00:41:39] Jeff Snider: Now they’re saying, “Okay, yes, the unemployment rate is really low, but the risk of recession has probably gone up, and it’s only going to be a mild one.” So just in terms of that progression over the last year, we started out with, “There’s no problem. Don’t worry about it,” to now maybe we’re facing a mild recession.

[00:42:03] Jeff Snider: Plus, you look around at what’s happened over the last six almost two months. Actually, it’s almost two months since Silicon Valley Bank. We’re still talking about US regional banks. We’re still thinking about things like commercial real estate and the rot that might be in those portfolios. We’re still wondering what’s going on in the monetary system.

[00:42:26] Jeff Snider: At least, I am with repo collateral and things like that. Those teams continue to follow the same progression because before March 9th, nobody was talking about the banking system. Now we’re talking about the banking system on top of talking about a recession. So in very broad terms, we’re moving closer and closer to where we have probably a nasty recession and an ongoing banking crisis.

[00:42:53] Jeff Snider: Because every time both of those have been declared over and done with, remember February the jobs report and every the retail sales numbers, they said, ‘oh, we’re not even going to have to worry about a soft landing. This is a no landing scenario. The economy’s just going to continue going on forever. It’ll never even slow down.’

[00:43:16] Jeff Snider: So we keep moving in the direction of at least a bad recession and at least an ongoing banking crisis that just neither of those things will go away. It’s almost like a vampire or a zombie. They just don’t want to die because again, the markets are telling you those two things are going to happen.

[00:43:39] Jeff Snider: Now, what does that mean specifically? You can’t really predict, you know, what are the next banks that are going to fail? I mean, there’s a bunch of them now. I mean, Moody’s downgraded 11 more just a couple of weeks ago, a week and a half ago. So we’re reasonably certain there are going to still be more banking problems and more banking problems are likely to lead to a credit crunch and a credit crunch on top of what might be a mild recession on its own leads us into some pretty bad recessionary cases.

[00:44:18] Rebecca Hotsko: And you did write that crises come in waves and waves are stages. They’re incremental. And so you just kind of mentioned this of what we could be expecting in the coming months, but I guess I’m wondering what should investors be thinking about doing during this time? Because sometimes inaction can be just as detrimental to a portfolio waiting for things to get worse.

[00:44:40] Rebecca Hotsko: Maybe they never do. Or maybe you just end up sitting on the sidelines too long that you never get in. So I guess how should they be thinking about acting during this time and positioning themselves beyond what you mentioned with the gold and the long-term bonds? 

[00:44:55] Jeff Snider: Yeah, Rebecca, that’s the worst part of all this because it does go in stages. It doesn’t go in a straight line, which would make it incredibly helpful. You would think that, “Okay, the crisis starts, we can see it coming. We can see it developing day after day after day. It’s completely unambiguous. We know what’s going to go on,” but that’s not how it works. Crisis, something happens, then everything seems okay, then something else happens, and then everything seems okay.

[00:45:28] Jeff Snider: And every time we go through these ebbs and flows, when everything seems okay, it’s easy to convince yourself because everybody will be telling you this: “The crisis is over,” right? Because every time something happens, they say, “That’s it. That’s the worst. So don’t worry about it.” And then something else happens, and they say, “Oh, that’s it. That’s the worst. Nothing else.” And then something else happens. It’s just back and forth, back and forth, back and forth all the time.

[00:46:01] Jeff Snider: Except over time, what you notice is what I was just saying. Slowly, we’re moving in the wrong direction. We can’t really perceive it because it’s like the boil, the proverbial boiling frog where it doesn’t notice that the temperature’s rising because we keep going back and forth, back and forth, and every time something doesn’t happen, it’s like, “Okay, this thing is over. We’re out of it.” And J Powell’s going to tell you, and Janet Yellen’s going to tell you, and everybody in the financial media’s going to tell you because they take their opinions from J Powell and Janet Yellen. “Everything is fine.”

[00:46:44] Jeff Snider: So what I would recommend is if you believe we’re heading into a crisis, make that decision today and act on it today. Don’t get caught up in the back and forth. Don’t get caught up in trying to time it. “Oh, I’m, I’ll be, I’ll be the, you know,” don’t be the greater fool. Don’t think you’re going to be the last one out of the excess. If you believe that we’re heading into a deflationary crisis, make your decision today and act on it today, and just let it happen.

[00:47:21] Jeff Snider: Because if you get caught up in the back and forth, as I said, the economy as well as the marketplace, it seems like it goes back and forth in a relatively narrow range where nothing bad happens, and then that one goes too far in your Wiley coyote and you realize you’re way off the cliff. That’s the September, 2008.

[00:47:37] Jeff Snider: There are any number of warning signs, but if you were still thinking in the summer of 2008 that everything was fine, you found out too late and because a lot of people made that mistake, remember the, I dunno if you’re probably too young, but you remember the market rally. And from Bear Stearns until June in July of 2008, there was a rally in the marketplace because everybody thought Bear Stearns represented the end of the crisis because that was one of those incremental stages.

[00:48:00] Jeff Snider: So it’s easy to get caught up in the back and forth. It’s easy to get caught up in. While we don’t see the worst happening right now, so maybe the worst isn’t going to happen. So that’s why it’s important to look at the information that’s available right now. That’s what’s so important about these market curves, because they’re telling you what the actual system believes as far as the probabilities of the situation moving forward.

[00:48:23] Jeff Snider: Make a decision based on the information you have and stick with it. 

[00:48:27] Rebecca Hotsko: I guess in terms of the market, we saw a recent rally, or it’s held up quite well despite everything, at least the s and p 500 has. So in your view, do you think that all of these risks have been properly priced in so far? Or why is it being complacent if not?

[00:48:45] Jeff Snider: No, the stock market isn’t a real market to begin with. It’s a beauty contest, and no, these risks are not being priced in because there are several misconceptions about a lot of things, including inflation, including central banks being everybody’s friend. If you thought that the stock market weakness from 2021 into 2022, and now this year, is all about interest rates and rate hikes, if you think the Fed is the biggest problem in the stock market, and then you also think that the Fed ending its rate hikes and navigating into a soft landing and Goldilocks scenario, that’s going to be tremendously stock market positive because you no longer have inflation, you no longer have the Fed hiking rates, and the economy doesn’t suffer anything, maybe more than a slowdown. That sounds terrific. So a lot of people are literally buying that in the stock market, ignoring all the warnings, including banks failing one after another after another, convincing themselves that we’re heading into this golden era when that’s a mistake that gets made repeatedly. I mentioned 2008 was a perfect example. The stock market hit a record high in October 2007, which was two months after the crisis had begun, and just a couple of weeks before the Great Recession started, and then there was another big rally, as I said, in early 2008. You can see these dead cat bounces all the time. I think that it really comes down to these rationalizations where because the system gets into these ambiguous periods, it’s really easy to fall into that trap and say, ‘This thing is over, so I better get in the market now because it’s going to rally as soon as everybody realizes it’s over. It’s going to be risk-on forever.’ That plus the idea that the Fed’s got everything covered. You can see why stocks are at least performing relatively well right now, at least until all of these things become unambiguous.

[00:50:56] Rebecca Hotsko: Right, and so in terms of when things might actually be better, one signal that I thought we could look at is when the curve turns positive, again, particularly the two 10 yield curve gets into positive territory, perhaps then things have resolved by then.

[00:51:13] Rebecca Hotsko: Is that something we can look at, or is that skewed? 

[00:51:17] Jeff Snider: It’s not a definitive signal. Nothing here is. I wish it was that easy, right? It’d be great if everything was just, ‘Hey, this means this.’ That’s why you really have to take such a broad survey, and you really have to pay attention to what’s going on. But yes, that’s the start of the end.

[00:51:40] Jeff Snider: The start of the end. In getting toward recovery, when will be, when the yield curve starts to come back up and straighten back out, we have to go through the bad steepening, which… It’s bad because it represents the start of the problem that we’re all worried about. But then once the curve steepens, that’s just the beginning of the next stage of evaluation, which doesn’t necessarily mean we’re getting close to the recovery phase.

[00:52:10] Jeff Snider: There’s a lot more to really figure out what’s happening at that particular time. But that is definitely one signal that tells you at least we’re into the thing and starting to think about getting through the end of it. Because there’s just as, there’s a variety of ways to enter a recession in deflationary period, there’s also a variety of ways to exit a deflationary period.

[00:52:37] Jeff Snider: We could have a very short, sharp recession, something like maybe 19, 20, 21, or even 1980, which lasted only about seven months. It was very bad, but we got out of it really quick. I mean, that might be the best-case scenario, but you could also end up with something like 2008 or 1981, 82, where it was the slow grinding recession.

[00:53:02] Jeff Snider: Then we went off a cliff, and it took a very long time to recover. And of course, after 2008, we never did recover. So there’s a lot of work to be done as we go into the recession and the contraction of deflationary period. And then there’s even more work to be done getting out of it. So there’s a variety of ways that that could happen.

[00:53:29] Jeff Snider: And so we really need to be careful about the individual signals as well as the individual conditions at that time.

[00:53:38] Rebecca Hotsko: And you mentioned that there’s not one specific way to get out of a deflationary scenario, but other than I guess looking at a yield curve, what are some other signals that investors can look out for and follow?

[00:53:50] Jeff Snider: Ironically, you want to look at some of the credit spreads because usually, Some of the best performing assets and some of that attract. The early risk takers are distressed debt, because as companies go bankrupt, nobody wants to buy those things. Of course the sharks come in and circle and find distressed debt because, You really, the, the best performing acid in history is distressed debt.

[00:54:12] Jeff Snider: Because after there’s all sorts of failures and everybody’s, you know, these things are selling for pennies on a dollar and they start to come back up again. That’s, that’s usually a sign that there are risk takers coming in. And the risk takers have a pretty good idea when to come in and take those risks.

[00:54:26] Jeff Snider: And as they take risks, they attract other people who take risk. And really risk taking is an important part of the recovery process, getting out of the deflationary period. So distress, debt, credit spreads, those are an indication but also, They don’t go in a straight line either. There’s always that back and forth with those.

[00:54:42] Jeff Snider: So you do have to put a lot of these signals together. So it’s the yield curve steepening. Is credit spread starting to come back? Are we seeing enough positive signals in a wide enough cross section of the marketplace? What’s the dollar doing exchange rates? What are stocks doing? Believe it or not, after stocks go through a sub substantial decline, there’s some value in potential recovery in stocks.

[00:55:02] Jeff Snider: It’s really a comprehensive view where you find a majority of the signals or enough signals that tell you that there’s a substantial enough foundation for recovery to finally start to happen. 

[00:55:13] Rebecca Hotsko: I guess lastly, I do want to ask you about your outlook on the dollars. There’s been some worry about it appreciating.

[00:55:23] Jeff Snider: Yeah, there’s the idea that the dollar is going to be replaced. There are a lot of people who have been saying this over the last 15 years for quite obvious reasons. The dollar actually does need to be replaced because it’s not actually a dollar system, it’s a Euro dollar system, and the Euro dollar system malfunctioned in August of 2007 and hasn’t been the same since, which has opened the door to all sorts of competing ideas.

[00:55:54] Jeff Snider: Everybody likes to talk about China, Russia, and the BRICS, but China, Russia, and the BRICS aren’t actually trying to replace the dollar. They’re trying to manage this dollar problem that they do have, which is not the dollar going to zero, but that the dollar is in such short supply. It makes it very difficult for them to conduct their global trade business.

[00:56:20] Jeff Snider: So they’re searching for ways to reduce their dollar issue, dollar shortage issue. And one way, one of the ways you do that is bilateral trade. Do as much trade in your local currency as you possibly can, but that isn’t going to bring the dollar down to zero. It’s not the world replacing the reserve currency system, this Euro dollar system. It’s simply them trying to deal with it.

[00:56:48] Jeff Snider: Yes, the dollar system, the Euro dollar system does need to be dealt with at some point. I’m not holding my breath on that one, but that doesn’t necessarily mean the US dollar exchange value is going to go to zero. In fact, it’s probably going to go in the opposite direction as it has over the last 15 years.

[00:57:12] Jeff Snider: Every time we hear this dollar is doom theory come up, what happens? The dollar goes up in exchange value because there’s not enough dollars. That’s not likely to change anytime soon. In fact, the markets are telling you that’s not going to change in the foreseeable future. So it could be that we continue to incrementally replace the Euro dollar system with all sorts of other things, and the dollar continues to go higher in exchange value even as it’s being replaced.

[00:57:45] Jeff Snider: That’s not actually, that seems to me the most likely case. The dollar system needs to be reformed, but that doesn’t mean the dollar is doomed. That’s conflating two different issues. 

[00:57:57] Rebecca Hotsko: Well, thank you so much for coming on today. Jeff, before I let you go though, where can our audience go to learn more about all the work you put out and learn more about all the topics that we’ve talked about today?

[00:58:08] Jeff Snider: As I just mentioned, since we’re on a global Eurodollar standard, I happen to name my enterprise Eurodollar University for that very reason. Because hardly anybody has even heard the term, although more have nowadays than before. But there’s a tremendous need to really understand what the monetary system is and what it actually does.

[00:58:30] Jeff Snider: So, Eurodollar University, yeah, I have a YouTube show. Check it out. It’s called Eurodollar University. I have a website, Eurodollar University, where we have memberships and subscriptions available to do research and things like that there. But basically, Eurodollar University, that’s me.

[00:58:47] Rebecca Hotsko: Perfect. I will make sure to include all of those in the show notes so the listeners know where to find you.

[00:58:53] Jeff Snider: Yes. Thank you very much, Rebecca. I really appreciate it. 

[00:58:56] Rebecca Hotsko: Thank you, Jeff. 

[00:58:58] Rebecca Hotsko: All right. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, make sure to sign up for our free newsletter, We Study Markets which goes out daily and will help you understand what’s going on in the markets in just a few minutes. So, with that all said, I will see you again next time. 

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