Is Europe’s economy collapsing due to energy and capital mismanagement? In this must-watch interview, Andrew Lees (Founder of Macro Strategy Partners) joins Trey Reik to reveal why energy is the foundation of GDP, why renewables won’t sustain the modern global economy, and how bad policies are accelerating economic decline — especially in Europe.
Key takeaways from this interview:
- Why energy is GDP, and what happens when it’s mismanaged
- The renewable energy illusion: Why it may never sustain global demand
- Europe’s economic collapse: The energy policies that are destroying growth
- The U.S. vs. Europe: Why capital is fleeing Europe & where it’s going
- How energy shortages are fueling inflation & economic stagnation worldwide
- Why the Federal Reserve may be forced to cut rates sooner than expected
- China’s weakening role in global finance — what it means for investors
- Gold, central banks, and the safest assets in times of uncertainty
Meet our new Wealthion host, Trey Reik: With over 41 years of investment experience- 23 of them focused on gold markets and monetary policy—Trey is a leading expert in precious metals and global macro trends, bringing deep insights into the forces shaping today’s macro and markets.
Investment Concerns? Get a free portfolio review with Wealthion’s endorsed financial advisors at https://bit.ly/43boi1e
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Andy Lees 0:00
Europe is committing suicide. There’s no question about it. And so people are looking to try and find some sort of relatively safe place to be. There is nothing to GDP other than energy. So 100% of GDP can be explained by energy. Why are we going into renewable energy? And the answer is, in a free economy, you wouldn’t it’s clearly unviable. It’s just not possible.
Trey Reik 0:31
Greetings and welcome to our show. My name is Trey Reich, and I’m here today with Andy lees, an old friend and founding partner of macro strategy partners, a London based boutique of macro research and much more. Andy, thanks for being here
Andy Lees 0:52
today. My pleasure. Looking forward to it excellent.
Trey Reik 0:58
I thought, for those in the wealthion universe who are not familiar with you and your firm, if you could just give us a brief history of your background, how you ended up at macro strategy and what we’re trying to accomplish at the macro strategy firm.
Andy Lees 1:18
Okay, so I was, I’ve been in the market since the mid 80s, 1986 I think, first of all, at the fund management side friends provident, which was being an insurance company over here. And then through warburgs and the various sort of iterations of lats, warburgs, SBC, UBS, etc. And then after the GFC, I did, things were obviously changing at the bank, and I decided it was better to go out alone, because within the bank, you were getting more and more restricted on what you could actually talk about. So it was no longer your views, it was house views, etc. So I set up a small macro trading, a macro research company at UBS. I had been macro sales, macro derivative sales and macro research. Set this place up, got two or three, well, two partners who are publishing research on similar sort of grounds, and, you know, various back office admin sales people. So we’re a small company, but really trying to, trying to understand what’s going on. Basically, I guess, we look at things in our own ways. There’s no sort of particular sort of decision to look at things in one way or another. It’s just that that’s the way we are sort of thing. And I’ve focused, I’ve come through energy productivity, and from those sort of simple things, you start to understand structures. People will say, are you left with are you Keynesian or Austrian, or what have you? I say, I’m an engineer, and that’s the way I sort of see myself as trying to understand how things work. And it gives you very, very different perspectives and And personally, I think that there’s, it’s sadly missing in a lot of what happens these days, certainly within politics, that there’s not the understanding of what’s really going on.
Trey Reik 3:30
Excellent. So I’m familiar with your work on productivity, and in my opinion, I think what separates macro strategy from many other macro shops is your focus on energy and how energy is so commonly, I think, misunderstood in terms of its role in the economy and society. And one of I think, your conclusions is that, basically, GDP, in all its form, is a reflection of energy. Can you talk about your views there?
Andy Lees 4:11
Yeah. So whilst we are sort of told, or figures would suggest, that energy is, you know, four or 5% of GDP, that’s just the cost of getting fuel out of the ground. It’s still just, effectively a paperweight. Is a dumb product, until you actually sort of use it. It’s got to be transported. It’s got to be refined. It’s got to be converted into electricity. It’s got to be used. So when you look at it from one perspective, we’re saying it’s 5% of GDP, but it’s not. It’s 100% of GDP. Everything that we do, whether it’s transporting it, whether it’s refining it, whether it’s using it, all you’re doing is that creating of steel, that creating of technology. That’s one side of the ledger you could eat. Believe you that’s that. As through that process of making that steel, or what have you, you’re utilizing energy. You’re realizing the energy. You know, if you think about it, moving your arm, that’s energy, thinking, talking, it’s all energy. There is nothing to GDP other than energy. So 100% of GDP can be explained by energy, but there are three identities that explain GDP. So everything can be described as an energy transfer, conversion, energy consumption, whatever way you like to look at it, but when you’re using that energy, what are you doing? You need a medium for it to work on. That medium is going to be tangible capital. So turning resources into tangible capital in one form or another, and in that process of, you know, combining resources in different ways, you gain knowledge in tangible capital. So this is what all the economy can be explained by either energy, tangible capital, or intangible capital. They’re not one or the other. You can’t add them up. They are three identities, effectively. So, yeah, GDP is entirely explained by energy which then has obviously huge implications for the fact that energy consumption growth, or energy production growth, has been slowing for decades. How, in the UK, our energy consumption has declined very aggressively over the last 20 years, resulting in the worst productivity since the industrial revolution started various things like that. But then you can start to look into the detail of how energy should be. Look at the laws of physics relating to energy, and they will tell you how the economy should be structured.
Trey Reik 6:57
Interesting. So where you know we’re heading with this, because I think you’re one of the first shops to really put this out in black and white, is the question of whether renewables are a reasonable assumption to replace fossil based fuels in any time in the next 10 to 20 years. So you have a concept, the ER, o, e, i, in terms of, you know, energy received and input. Can you talk a little bit about how that applies to renewable technologies? You
Andy Lees 7:35
question whether renewables can be used in the next 1020, years, they can never be used. It’s a totally unviable energy source. It is what’s called Low transformity energy. Let’s, let’s look at it very basically to begin with. If we look at renewables today, we’re told that they’re at grid parity, or better than fossil fuel based electricity. Now, technically, that is correct, but it’s complete red herring. It’s comparing apples with oranges. That figure that grid parity or better is taken by the assumed supply of electricity from that solar cell or wind turbine over its life, divided by the capital cost of that doesn’t even include operating costs, but that electricity will come intermittently, variable, etc, comparing that to price of conventional Electricity is a very sort of you’re comparing low quality stuff with high quality stuff. Now we can look at this if we put in a real life situation. So we look at Europe, for example, where there’s 2728 countries. We chart the percentage of energy that comes from sensitive electricity, that comes from renewables, against the price of electricity in each country. And these are official figures, euros data for the prices and VP world energy data for the energy percentages. And you’ll get a very clear line of best fit very clear pattern, and when you solve that, you’ll find that renewable electricity in Europe is about five times the price of conventional electricity. And you can see why that would happen just by looking at the capacity factor so a solar cell or a wind turbine has to be rated. You want to compare one with another. Is this one better than that? One more efficient, etc. So taking the solar cells, for example, what you would do is they’re based on, I think it’s 1000 watts per square meter. Of sunlight directly overhead to mimic it’s 35 degrees north 12 noon, which is Tennessee, Iraq, that sort of latitude or longitude to mimic that. Now the problem, of course, is that’s 12 noon. The Earth moves around the sun. You know the you don’t get sunlight directly overhead. So when you put it in the real life situation, Europe’s solar capacity factor is about 11 or 12% depending on which year, and the wind’s capacity factor is about 24 25% so the combined capacity factor is just under 20% now that means that that lifetime supply of electricity divided by the capital cost, that lifetime supply comes in a huge range between 0% One minute, at which stage the electricity price is effectively infinite, to five times that average capacity, ie one over point two, five times that capacity, the average capacity at which time most of that electricity is going to be dumped is that there’s just no way for it. So that’s the sort of basics that explains why renewable electricity is very expensive and it can’t work. But we then need to go and to look at rather renewable electricity, renewables themselves. And so this comes to this concept of transformity, which is effectively the fifth law of thermodynamics. And it basically says that, let me quote, the fifth law of thermodynamics tells us that energy flows follow a transformation hierarchy, where each level of transformity, so the quality of work the energy can do, is calculated by the energy, which is cumulative energy over history, embedded within that energy. So let’s think about this. We if we go to a very simple concept that we should all know from economics, is that there’s a real cost to everything, and everything’s got to create utility to pay for itself. Well, we’ve already said that everything is effectively an energy thing, so everything’s got to create the energy to pay for itself. Now what this means is that the further upstream from that primary energy source, the technology is, or the capital is, the more productive it must be to compensate for the further upstream it is, the further upstream the technology is, the more energy conversions have gone into its production, and therefore the more productive it must be to pay for all those upstream conversions. Now we will normally think of that as well coal, for example, how much energy has gone into forming that coal in the first place is solar has the transformity of one, because it’s the base of all energy on the earth. But to make that coal, you’ve had all that energy over history that’s gone into it. Now you do include the energy, let’s call it design, R and D and design, but that will be diluted because of the scale of trees, etc. But it’s all the energy to create the trees in the first place. So the precipitation cycle, the solar energy coming in, all that. So what you have, taking the figures at face value, you have, solar has a transformative one. Wind is about 650 I guess it depends on location. Coal is around 40,000 so we’re trying to replace something with high quality with something very low quality. And just to make that, make you understand this easier. I mean, some people will remember the concept of embedded water. It’s a similar sort of thing. But if we look at the present system of solar energy, at the moment, we are trying to upgrade the transformative with capital stock. We’re basically creating solar cells and batteries and increase grid power to increase connectivity. Now, all of that is capital, and all capital is effectively historic energy conversions gone into their manufacture so embedded energy. So just with what we’re doing, we’re basically saying we want a certain amount of solar energy, but we’ve got all that more energy that’s within that capital stock to upgrade it. Now, at the moment that. That energy is coming from fossil fuels. We’re building solar cells with fossil fuel energy. We’re building the batteries of fossil fuel energy. The people that are building them have been built with fossil fuel energy. Effectively, all our existing capital stock has been built with fossil fuel energy, if we try to replace that so, so we end fossil fuels, and we try to service the existing capital stock with renewables. We need about 7.68 years worth of annual solar irradiance to meet, to offset what we have, because it’s such low quality. So it’s an impossibility. Is not, you know, at some stage will become more energy efficient. We won’t, because energy efficiency, the transformity, the quality of work, is equal to the energy embedded within the work. So
Trey Reik 15:54
if, if this is so conclusive to you, and I think you know, anecdotally, these types of short falls are becoming more apparent. Why is it taking so long for the mainstream, in terms of politicians, etc, to recognize and deal with this? Where do you think we are in the process of recognizing that renewables are not a short fix. Well,
Andy Lees 16:23
I think the market is starting to price the shares that they’re you know, the performance of the shares has been dreadful for the last year or so, down 8070,
Trey Reik 16:36
80% or what have you which which shares are you talking about the
Andy Lees 16:40
sector renewable energy sector. You’ve also got the countries that are really focusing on this. So Europe, you’ve got German industrial production is down, I think 50. I think it might now be 17% from its high, which is about 2017 you’ve got French industrial production. I think that’s down to about 15% back. That’s fallen slower, but for longer, Italian is down about 22 23% and obviously that’s creating, you know, you’ve got a massive deindustrialization process going on which is causing job cuts in auto industry, chemical industry, all of German major companies. They’re not investing domestically. They’re investing in the US. They’re investing something like 10 times as much in states as they are domestically, for the obvious reason that they cannot afford it. Unfortunately, our politicians are still head in the sand. JD Vance was over here a couple of weeks ago, and he was making a lot of comments which are along these sort of lines. And our politicians, unfortunately, rather than accepting it, they were just furious about it. If I look at the UK, as I mentioned earlier, the since, well over the last 20 years, UK primary energy consumption is down. Now I’ll probably get it wrong is it’s either 20 or 28% can’t remember my figures Exactly. Now people will say, Oh, that’s good. Well, no, it’s not. It’s dreadful. It’s dreadful because it means our standard of living is effectively being eroded. A lot of that’s been hidden by the fact that we’ve outsourced energy intensive work to China, etc. So we have no production base at all these days, our last steel plants are closing. Refineries are closing. We have nothing unfortunately these days. But that’s only part of the picture, because the real part of the picture the fourth law of thermodynamics. It says all systems will self order to optimize the degradation of the energy gradient within the constraints of the system. If there is no external energy gradient to degrade, they will degrade the internal energy gradient. What that means is that without that external energy we’re consuming down our capital stock. We’re not investing in plant and equipment. So you can see that wherever you look around this country, it’s all in decay. We’re not we’re simply not investing in stuff because we haven’t got the energy to do. All capital is embedded energy within it that you know, the history of using that energy to make that steel, make that technology, build that building, etc, that’s all being left to decay. And it’s also in the population, where we have a terrible fertility rate. We have not invested in people for a long time. In the education of people. Look at the education of the politicians. I mean, the front bench of the Labor Party, the governing party, none of them have ever been in a proper job. So this is the problem. We have a real deterioration in the system that’s happening, and that’s, you know, that
Trey Reik 20:23
the what percentage do you think of Europe’s decline in terms of total percentage of GDP, you know, you highlight that in the mid 90s, Europe was 26% of global GDP, and by the GFC, it was 22% and more recently, it’s 14. What impact or what percentage of that decline Do you think comes from Europe’s energy policies?
Andy Lees 20:53
Well, I mean, obviously China has grown aggressively, so we’ve been diluted by that. But you could argue, why has China outgrown Europe? Is because of our bad policies, not just energy, but it’s all part and parcel of the same thing is because of our bad policies that have caused this. And you know that that percentage, you say 14% that’s just going to keep is just falling in a straight line, and it’s going to continue to do so until we change this. None of their policies related to energy make any sense, as I say, if you look at the UK since 1790 our last 20 years has been our worst period, worst 20 year period since records began in 1790 for total factor productivity. And that is all down to a misallocation of capital, a large part of which is going to be because of energy. But again, this brings an interesting question, why are we going into renewable energy? And the answer is, in a free economy, you wouldn’t it’s clearly unviable. It’s just not possible. So why are we doing it? Is because we’ve got a managed system, and a managed system will basically allocate capital other than in accordance with the utility it creates. So it’s the system that’s the structural problem that’s causing this, rather than the other way around. So
Trey Reik 22:31
European stock markets are the strongest basically in the world. Year to date. Do you think despite all of these impediments that Europe, you know, is underpriced, that American exceptionalism got too far ahead of itself,
Andy Lees 22:50
one of the figures that I’ve highlighted for last few months is the US net international investment position. So effectively us ownership of foreign assets, or does it own foreign assets? Or do foreigners net own US assets? The US has its net international investment position has fallen from a deficit of about two and a half billion, a trillion. Sorry, this was around 2010 2011 it had been falling slightly before then, but by the end of the GFC was still about minus two and a half trillion. It is now minus 22 trillion. It is equivalent to 80% of us. GDP. Now, whilst I can look at the US and say, there’s problems, ultimately, I can see why money’s going into the US from Europe, as I say, Europe is committing suicide. There’s no question about it, and so people are looking to try and find some sort of relatively safe place to be. And the US, at the moment, is given the reforms that Trump is promising, etc, I think the US is the sort of place to look at if he can cut the size of government and what have you, then it’s, I think, that the money is going to gradually shift to the US. I would love to say Europe is going to make big changes. And, you know, some people are saying that that Europe will make the change and that that money will flow back. I don’t see it happening in the short term. Unfortunately, I do see that there is where I think we are is probably four or five years behind the US. So if I look at the US in terms of the politics, through the US has built the sort of infrastructure over the last four or five years to get the right kind of politicians into power, to start getting people that. Know what they’re doing into power, we over here are at the early stages of that. We’ve got Reform Party, but we’re now starting to build the infrastructure behind it, the sort of the news channels, the there’s a company called Great British political action committee to hold these parties to account. There’s things like that that are very early stages, but they do offer some, to me, some sort of potential, promise going forward, hope going forward. But that’s not not immediate. So I would think that Europe’s got to go further downhill before. You know, the public wake up. Look at Germany at the weekend. You know, yes, the public voted for the two, sorry, the two right wing parties accounted for just under 50% of the total. But the cducsu are refusing to work with the AfD. So you still got big problems. They’re still preferring to be a left wing party, you know, Republican in that name, only party sort of thing. And that’s the big problem that we all face. And this is, this is not just sort of ideology. This is why I get fed up with the political classes and the media, because they they’ll have their conversations, and it’s all based on an ideology this. I think government should do this. I think government should do that. But again, if you understand that there’s a real cost to everything, and everything’s got to create the utility to pay for itself, otherwise it’s at the expense of capital disruption. Then you start to understand what government is, what left and right wing are. So left wing government, the political spectrum is. Left wing is what’s called constructive it’s big government, which is called constructive rationalism. Right Wing is small government, which is called critical rationalism, freedom. So what does this mean? So if we look at right wing critical rationalism, that’s the system discovering prices is clearing to reality. Is finding truth. It’s the scientific method. Left wing government is clearing off truth to an ideology, to a to a constructive reality. And that’s the problem, because you’re basically shifting the system from real world everything’s got a real world value, a real world price, and you’re saying, No, my price is more important. And by shifting to that, you’re basically destroying capital. The entire purpose of government, beyond what’s called the rule of law, is to misallocate capital. If you think about it, is his entire purpose is to allocate capital other than in accordance with the utility it creates. So it’s this, is, this is where we need to get to, to be having this kind of discussion, to understand what left wing, what right wing is, and why one is always going to fail, why one is your road to serve them, why it is your long March through the institutions, until we have that conversation, we’re still going to struggle, but that’s where we need to get to. Do
Trey Reik 28:27
you think that the constructivism government trend has peaked? You think Trump is an example that it has peaked?
Andy Lees 28:37
I would love to hope so. I ice if we clearly big government has created massive economic, social pay. So if you look at GDP growth, it’s been trending down for decades, decades and decades, and it’s all related to this energy consumption, I did some figures before looking at this so energy consumption BP, World Energy statistics shows energy is data starts around the mid 60s, from 1967 to present, the trend of world energy consumption growth has fallen from, I think it’s 3.7% to 1% is down about 4.6 basis points per annum. So it’s still growing, but growing at a slower and slower pace. World, GDP growth has done pretty much the same thing over the period. I would associated all with big government, constructive rationalism, and it goes back further. You can look at it in the UK, it goes back a lot, a long way further. We have got to the point where there is in Europe, there is no growth. So it’s no longer an opportunity cost. Of slower growth from big government is a real cost. So in 20. 22 when energy prices soared, suddenly, government became realistic. They started to give up on some of their ridiculous spending policies and allow the system to be free for a moment, sort of thing. So they basically said, you can cut down trees, you can burn coal, etc. So it seems to me that economic decline, real decline, is where the pain is too much, when it’s an opportunity cost of slower growth, that’s that’s okay. The public will bear it, but we’ve got to that point in terms of pain. But I think another real big aspect of this is the internet. Whilst over here, the politicians, the media, hate the internet. They’ll say, it’s it’s all lies. In fact, it’s the only place that you can find the truth. Yes, you’ll find a lot of rubbish, but you will also, it’s also the only place where you will find the truth. IE, is a proper market to get to the right place. And it’s that information that’s starting to build, that people are starting to see reality. I think so. That’s why these institutions are starting to form. And of course, this is again, massive contradiction. You cannot have free information, free, you know, access to truth and big government, because they are contradicted. They’re completely opposites. Now, people will say, Well, we have, you know, in the States, we have freedom of speech, etc. The problem, of course, is that through constructive government, they create the narrative. They create half of our jobs. They create all the the rules and regulations that define what you and I can do, even though we’re in the private sector. So they are basically telling us, directing us, making us, creating the knowledge that we know we’ve got to somehow break that. And I think for the moment, that’s what the internet is doing, whether or not the government’s going to crack down to stop that. Obviously, over here, there’s a lot of that madness going on trying to stop it, but it’s at the margin. It really is. I think the real stuff is still getting out there. There’s and this is why, you know, Reform Party are way out in the polls, in the lead in the polls, sort of thing, like with Trump. I wouldn’t say the Reform Party is the sort of the polished article. It’s not what we really need, but it’s at least a step in the right direction. So,
Trey Reik 32:43
you know, bringing this to sort of a conclusion, or, you know, an inflection point, you do a lot of work on savings, which I think is a term that gets very little attention, you know, in the modern era of unconventional central banking, and, you know, credit, etc, etc. But you have pointed out that the US has a negative net national savings rate for about, I guess, the past two or three quarters. And what do you think the implications are of that, as to, you know, when a lot of this excess borrowing, etc, is going to be rationalized.
Andy Lees 33:30
So then national savings, that’s you’ve got your household savings rate. Household savings encompasses corporate savings, because households own the companies, etc, and then you’ve got the government deficit against that. So that’s obviously a negative savings. So that that’s total net national savings rate is about minus 3% I think it’s minus 2.8% moment, and it’s actually been negative now for several years, about three years or so, it’s been trending down for a long, long time. Though, I think it did go negative very for a very short period during the GFC bounce back, but it’s now been negative. Looks sort of structurally negative at the moment. The issue is you’ve been able to fund it. And you’ve been able to fund it for various reasons, because you were spending and getting growth. There was tons of foreign capital coming in, the net national investment rate. So that was paying for, you know, its own return, as it were, it was that flow of money coming in. And I think there’s another large aspect, which is China has been for a long time running a massive savings surplus and exporting capital to the world to begin with, up until, I think it’s from 1994 when it devalued its currency to about 20. 2014, world FX reserves went up from about 1 trillion to about 12 trillion. Since then, they’ve been relatively static. But gold reserves, which are not included in that, they’ve obviously gone up by about gone up to about 333, and a half trillion. I think that is a big global story that’s starting to unfold at the moment. I think this is really important, actually. So China had kept its exchange rate steady against the dollar for a long time at an artificially low rate, and it did that, obviously, by sterilizing money domestically and buying treasuries with it. Since about 2014 it’s focused more on a trade weighted basket, so it’s focused more on Europe and what have you so if you look, China’s trade surplus with the states has fallen quite heavily, but its trade surplus with Europe has gone through the roof, and it’s that’s almost as big now as its trade surplus with the states. The issue is that domestically in China, the economy has obviously been slowing, and to keep that FX rate steady, as I say, the central bank have bought treasuries, or they’ve instructed commercial banks to buy treasuries. Now, on the PBOC balance sheet, that foreign asset is, is their asset against which they’ve got a massive liability domestically, which is the RRR ratio the commercial banks reserves at the central bank. That reserve ratio, reserve ratio is the reserve ratio is the reserves of the central bank divided by the commercial bank liabilities that has fallen from 16% back in 2014, 2015, to about 5% and this is because domestically, they’re needing more and more the economy is slowing, So you need domestic monetary growth to basically support it, to sustain it, and that is just not coming. The banks are not in a position to do that, so they have to have the reserve ratio lowered to allow them to support the domestic economy. This is because of the demographics starting to reverse in China, various things. But this means that suddenly their ability to continue intervening in the international market is is gone. So they’re either going to have to let their currency go lower, or they’re going to have to sell their FX reserves to support the domestic economy or let the domestic economy collapse doesn’t really matter. But point is that we’re at that sort of position now where I think those sort of flows are going to start to become more problematic. So the ability of the US to fund its stuff, it might be all right. Because, as I say, if it’s doing the right restructuring, it might be okay. But I would suggest Europe and others will really struggle, because they’re going to see capital go out from domestically. They’re going to, you know, throw money out, and China is going to have to effectively keep devaluing its currency to to keep its own economy going. So I think there’s problems there. If we look at the short term in the States, obviously we have that S, P, P, M, I the other day, which Bloomberg is saying is was very weak, and people are starting to reassess whether the US might be slowing other a bit of other data suggests this monetary growth has been very soft, about 3% Three and a half percent for the last few months in the States, annualized growth. And what’s also been important is the velocity of money, which had, when we had the the COVID and we locked down the economy and printed huge amounts of money, we obviously that money couldn’t go into the real economy. So it was, I don’t know, stuffed under the mattress, went into assets. What have you went into keeping bond yields low. Over the last few years, that velocity has grown aggressively as the money’s come from those savings back into the real economy. But the that velocity growth has slowed and slowed and slow. And last quarter it started to fall, and it’s going to continue to fall. So I think the US is going to struggle with monetary growth domestically, because interest rates are tight, and I don’t think the Fed’s going to cut them in the means in the short term, you’ve now exhausted, or nearly exhausted the reverse repo. Now most of that has funded the quantitative tightening. Unless the Fed ends that quantitative tightening, you’re going to have to fund that through the. Is basically crowding out other parts of the economy, or commercial banks starting to up their loan growth. It’s not going to happen. I don’t think so. I think we’re in the point where the economy is looking like softening. From here, let’s say, until the Fed does something. And again, the Bloomberg story, looking at the s and PMI is also highlighting that Trump’s policies of getting rid of big government, trying to fight big government in the short term is leading to job losses, which, you know, whilst in the long term, that’s that’s exactly what we need. Those people to come out of government unproductive jobs and find productive jobs that will drive growth over the long term. In the short term is going to be painful, like the UK did in the early 80s. Just hope that Trump’s got the same balls that Thatcher had to carry on through.
Trey Reik 40:54
So when people look for how many fed you know rate cuts, they’re going to be the PMI data that you referred to last Friday, you know, knock the consensus from one rate cut to two for this year, and now it’s July and December, etc, etc. But my my feeling is that Fed rate cuts in the next six to 18 months will have less to do with, you know, CPI upticks and downticks and employment upticks and downticks, and more to do with liquidity. You know, the reverse repo being down near zero, and the Treasury, you know, the Treasury general account coming down, and bank reserves getting to that sort of 10% that you’ve mentioned that has been identified by Waller, etc, as a, as
Andy Lees 41:49
a compensating for the declining velocity of money, right?
Trey Reik 41:53
So don’t you think that is more emblematic of where you know rates are heading on the Fed side. Well, I
Andy Lees 42:02
think, I think that that is where they’re heading. They’re going to be heading lower because of that. But I would say they’re both the same sort of things. You know, the money is creating, creating the stuff in the real economy. Again, why is the velocity of money falling? Because it was used unproductively by big government spending policies. And if it’s used unproductively, it’s again not creating the utility to pay for itself. So it will basically be at the expense of destroying money. So again, you need to compensate for that with lower interest rates or a basement expansion, and I think we’re at that sort of stage where it’s not going to happen in the short term. But let’s say over the course of this year, the bond market is probably not anticipating enough rate cuts. I think they’re going to be slightly more, not aggressively more, but slightly more than is presently assumed in
Trey Reik 43:03
sort of wrapping this all up. I know you’re not in the stock recommendation business, but generally, specifically, categorically, you know, how do you, how do you look at the investment landscape over the next, you know, 12 months,
Andy Lees 43:19
I think it’s very, very difficult. What I would say is that until Europe makes changes, from government perspective, of you know, this kind of policies, I think you’ve got to assume that the US money will flow out of Europe into the state, so whilst the dollar has corrected in the short term, for whatever reason, I think that, personally, I think that is a mistake. I mean, the reason is because people think that the US has obviously got these big deficits, etc, and no one’s going to fund it. Well, they have done for a long time, and I think they’re going to continue to fund it in the short to medium term. So I would think that the Euros Sterling, etc, will continue to will underperform. I think that the US equity market is at an extreme overvaluation. But that doesn’t mean that it doesn’t need to. It can’t continue. As I say, we’ve had 22 trillion of foreign capital coming in over the last 15 years, or whatever it is supporting assets, whether that’s actually money coming in or just not money going out, it doesn’t really make any difference. But I would personally think that we’ve had the huge expansion of money around COVID Up to what 2022 or so, the US economy then slowed, went into recession. But that recession was declared not recession, and has been revised away and the. The Treasury responded with massive fiscal stimulus. We’re not getting incremental fiscal stimulus. Thirdly, we’ve had this massive AI investment boom. So you’ve had each one of these sort of bubbles have been continued by something else. I think we’re at the end of that that, you know, I’m not saying AI is not going to be a brilliant thing, but I just think there’s a reassessment going on at the moment, and I think you’re going to find that things start to slow. So I think the US equity market could come down. I’m not saying it’s going to crash, but I think it can come down a bit, and I think bond yields will probably soften.
Trey Reik 45:43
You talk a lot about the I think this is an Andy Lee’s concept, the dollar value of global money supplies, and that is starting to hit, if I’m correct, sort of 0% growth, which has been a warning sign in the past in terms of global liquidity, doesn’t the dollar have to weaken, you know, to not put global GDP in jeopardy.
Andy Lees 46:12
Well, the dollar value world money supply is it’s each country’s local money converted into dollars. So is a total right? So if we take a two country world, Europe and the States, and I used to do this because they used to be roughly the same size, but obviously Europe’s a lot smaller now. But if you assume that they’re the same size economy, and Europe doubles its real GDP, then all other things being equal. So there’s no change in US GDP or anything else. Suddenly, by Europe doubling its real GDP, the dollar value of world money supply will have gone up 50% If, on the other hand, Europe prints money, doubles its money supply with no change in GDP. So it just doubles its money supply again. All other things being equal, the euro will fall and there will be no change in the dollar value of world money supply. So the dollar value world money supply is effectively a measure of the real productivity of the world economy, at least in dollar terms. So the US is the only one that can change the price of the dollar, as it were, create more dollars, etc. So we can boost that, not just by the dollar falling, but by Europe and China and Asia becoming more productive. They’re not doing so. So yes, I think you’re right that the dollar would need to fall for that to happen. What you’ve got at the moment is that in 2020, and 2021, and 22 I guess it probably was, you saw a surge in the dollar value world money supply, because of the printing of money worldwide and the US keeping its currency down, keeping printing a lot of money. Since then, it has slowed aggressively. So if you look over that five year period, it still annualizes, about 5% growth. But if you look over the last three years, it’s very weak. I mean, it’s, you know, just barely growing it. I think now, in the last few weeks, the dollars weakened, so that has lifted it in short term, I don’t think it will last, as I say, so again, I think this is what’s going to be needed is back to the Fed is going to have to cut rates, otherwise the world will weaken. The world the US. You
Trey Reik 48:50
and I have spent some time on the gold track together, just throwing this in as a as a footnote. What are your views on gold as a way to navigate this tricky environment over the next year or two?
Andy Lees 49:10
Well, I mean, big government, constructive rationalism is the misallocation of capital, so you need to basically expand money supply to compensate for that. That’s what you need to do, is you need to socialize that misallocation of capital, which you do through printing of money so structurally. Unless we get off this ridiculous system we’re on, gold’s got to be a long term buy. I look at Gold since 2000 to 2011 12, I think it went up by about 20 odd percent per annum, 25% per annum, and then it was static. Last year it went up 50% or whatever it was. So on the long term, last year, six. Sort of looks, in a way, relatively small. If it continues on that trend, it can go a lot, lot higher. I short term, I got, as I mentioned yesterday, I got squeezed out in November, December, of a long position, and that probably possibly changed my sort of opinion. But just short term. I think the US interest rates are just too tight at the moment, and so that might act as a sort of break on it. I also, in the recent report, I highlighted that gold, if you look at those international reserves of gold. So gold held by central banks is almost back to the highs of Bretton Woods, about 1967 68 was the highs. Now we’re not quite there, but we’re almost back to there. Whereas I think most people, most of the real balls that say, you know, this can go dramatically higher in price as in another naught or so on the price. I don’t know where they’re really coming from, because if it was these sort of shares of world, world reserves, then why is it going to go dramatically higher? Interesting, but you’re the expert. You tell me,
Trey Reik 51:24
Well, I must admit that the Trump tariff fears have clearly created a physical, you know, imbalance between London and and COMEX. We’ve all, you know, read the articles you know, think 2000 tons have come to the US and the
Andy Lees 51:44
trade explain to me this. I understand that that’s been happening, but why hasn’t that lifted the physical price relative to the future? Instead, it’s been the future that has traded has gone out to a much bigger premium than the than you would expect. What am I missing? I think
Trey Reik 52:02
that it’s, it’s merely a spread. So people in, people at COMEX, or market participants at COMEX, are trying to bring physical metal to COMEX stocks to take delivery. And in order to do that, they have to wave a flag, you know, with a pretty steep premium, and folks in London are just plugging that gap. So it’s, it’s, it’s basically just a spread trade, right?
Andy Lees 52:33
And presumably, if the audit of the Fort Knox shows that there’s plenty of gold, then I assume that that sort of takes a potential bid away. If it shows it’s empty, then it goes it sky’s the limit,
Trey Reik 52:50
right? I of course, am pretty confident that when they get to Fort Knox, the gold is going to be exactly, you know, where it’s supposed to be. I’ve never been a big conspiracy theorist there, and Scott Besson has been assuring us all week that it’s all there. And any senator that wants to go and look is welcome to do so. But you know, the deliveries from COMEX, as you know, have been sky high. We’re 50% above the prior record for any month. So, you know this physical gold is being delivered, and it does show, you know, the imbalance between paper gold and physical gold. We read about that all the time, and we’re always waiting for, you know, the great short squeeze, which, again, is not a topic in which I have a lot of, you know, faith, but it is interesting that the demand for physical gold has clearly, you know, overwhelmed the system here in the short run, which brings, you know, the question when physical balances are are re or physical stocks are rebalanced. You know, is there some, you know, risk of a downdraft here in the gold price, but we’ll find out. Yeah.
Trey Reik 54:08
Well, Andy, thanks for your time. Always good to chat. Um, great noodling material, and we look forward to catching up with you in a couple of months. Excellent. Thanks, Trey. Much appreciated. Thank you, sir.
