Michael Every, Global Strategist at Rabobank, returns to the program to discuss the trap the world’s central banks are in.
Spiking inflation resulting from their stimulus policies is colliding with slowing economic growth.
Their choice at this point is to impoverish the public through rising costs (and eventually so kill the economy) by continuing to stimulate, or plunge the debt-burdened economy direction into recession or depression by tightening.
He also gives us a wide-ranging perspective on thedevelopments in Asia (and China, in particular) and why the current lines of trade and supply chains will need to be re-drawn.
Why address this now?
Because governments and central planners have been kicking the can as far as they can down the road for decades, pushing off the repercussions of the decisions they make today.
But eventually, the road runs out and the can can no longer be kicked any farther.
And it’s increasingly looking like we’ve arrived at that point today.
Adam Taggart: Governments and central planners have been kicking the can as far as possible down the road for decades, pushing off the repercussions of the decisions they make today, but eventually the road runs out and the can can no longer be kicked any farther and it’s increasingly looking like we’ve arrived at that point today.
Michael Every: If you look at central banks today they’re in a similar impasse. You raise rates, disaster. Your current rates, disaster. You just waffle and do jazz hands, disaster. You need structural reform.
Adam Taggart: Welcome to Wealthion. I’m Adam Taggart, founder of Wealthion, welcoming you back for another week of making sense of money and the markets so that you can make better informed decisions about building your wealth. There’s an old saying that because it’s the world’s largest economy, when the united states of America sneezes the rest of the world catches a cold but now with China’s economy on track to take over the number one spot by or before 2030, whatever happens in Asia increasingly now has direct ramifications for the rest of the world and a lot is happening in Asia right now. The majority of folks who watch this Wealthion channel are from western countries so to bring us up to speed on the key developments we should be paying attention to in the Asia pacific region, I’m pleased to welcome Michael Every back to the program. Michael is global strategist at Rabobank and is based out of Singapore. Michael, thanks so much for taking time out of your busy morning to join us.
Michael Every: Thank you very much for having me. It’s a great pleasure to be here.
Adam Taggart: Thanks. Michael, as we jump right in let me just start with the question that I asked all of my guests at the beginning. What is your current assessment of today’s global economy and financial markets?
Michael Every: Let me turn to Charles Dickens, if I may. “It was the best of times, it was the worst of times,” and I won’t continue on with the full beautiful quotation about idiotic leaders but that sums up my feeling pretty strongly.
Adam Taggart: I think actually it’s probably very well put. When you say, “best of times and worst of times,” can you just give an example or two of both the best aspects and the worst aspects?
Michael Every: Sure. Well, let me start with the worst which is what people traditionally expect from me and then pivot to the best. So from the worst we’re seeing a shocking increase in inflation right the way around the world.There is a whole slew of countries seeing double-digit inflation far higher than what people in the west are experiencing and sadly, the majority of them are the poorest people on the planet. So they’re seeing a savage setback to their particular already low set of living standards and the outlook going forward is that food and energy prices will continue to remain high or go higher so they’re going to get poorer and poorer and of course we’re looking at our own retirement funds, not trying to necessarily heal the world but it does bear remembering at all times that you have got a huge swathe of humanity that’s being bulldozed by what’s happening in the background. Then of course you’ve also got stark inequality within western economies between the winners and the losers. I mean you see that very much in the US but you see it in western Europe, too. You see it in emerging markets, et cetera. So that’s the worst of times and that’s before you start looking at the environmental crisis, if you want to talk about that, et cetera. At the best of times some people are making more money than god. Elon Musk is the richest man on the planet, whether he’s a genius or a snake oil salesman is an open question I’m not going to get into it but there are very divergent views on that and on any daily basis I wake up, check the news, and discover that some digitally printed nonsense asset which didn’t exist a few days ago is suddenly worth more than the Ford motor company. Some people somewhere are basically becoming the richest people who have ever existed without lifting a finger while a vast slice of humanity is struggling to put food on the table. So it’s the best of times and it’s the worst of times.
Adam Taggart: Okay. I think somebody listening to that might say it’s the worst of times and the worst of times based on both those but no your point is right that there’s a great chance to make a ton of wealth right now. It may be the unfortunate reality that it’s only a precious few that are doing that while the vast majority are experiencing the worst of times that you mentioned. Alright, I want to get into all of that if that’s not too big of an ask for this discussion. Let me start. So Michael, you are an incredibly prolific writer. You write a daily piece that goes into detail of many of the trends you mentioned and many other macro and micro trends that are going on around the world and one that you wrote recently really zeroed in on the disconnect between the financial economy and the real economy and reminding us to be very cognizant that they’re two very different things and by, “real economy,” I assume you mean manufacturing, supply chains, commerce, et cetera, things that take real infrastructure to operate and to deliver goods and services. Can you just explain why you wrote that and why you think it’s so important we keep that in mind? And then in your answer can you address whether you think those two things can remain separate and indistinct for a long period of time or do they have to eventually reconcile and if so how do you see that happening?
Michael Every: Okay, thank you. Let me start by maybe explaining a little bit more about what I do. Within my role I do not give investment advice and I want to make that abundantly clear to everyone who’s watching. I don’t manage any money. I don’t do either of those. I have a broad range of stakeholders and clients that I deal with and whilst all of them have a foot in a financial economy, for example looking at the yield curve or exchange rates and hedging against volatility, all of them are real businesses, very much in the food and agriculture sector in particular. Growing food, packaging food, producing food, shipping food. So the physical economy that allows all of us to imbibe the calories that keep us alive every day but they all have to coexist with the financial economy to make sure as a going concern that they’re still there, day in, day out. You can’t be 20% wrong on the exchange rate or unhedged on the interest rate front and continue to just pump out the food that we all eat. So I have a foot in both camps, if you will. Always have done, always will do, and I’m not trying to tell people how to get rich. I’m trying to tell people how to avoid blowing up while they’re trying to do what I think are useful things that keep us all alive. So I come at the markets from a very different approach from people who are just trying to squeeze out an extra return every three months or outperform a benchmark every year. It’s not how I think as a result, and the daily view alluded to, I will continue to point out that when you have the trend we had just this week where you’ve seen another altcoin copy of a joke currency suddenly become worth 30 billion US dollars overnight and the whole thing is literally a joke of a joke of a joke, yes, some people are making a lot of money from that but it’s not going to feed a single person and to come back to why we need the connection between the two, if we have a political architecture which applauds this kind of institutionalized idiocy and puts it on the front page of Forbes magazine or bloomberg starts lionizing and the financial time starts interviewing these people, then what is effectively just printed money, printed wealth? Absolutely will be accepted in cloistered circles for a while and that will filter through to the real economy as any money creation does, but if you don’t have a physical economy that can keep pace with that you’ll just have hyperinflation or you’ll have asset inflation where that money stays and eventually the longer-run view of society and political economy tells you if that isn’t redistributed or at least fairly circulated amongst all the people who are actually out there in the fields sweating or in factories sweating or delivering the product of those particular fields and factories to people are at home clicking and making billions by clicking, society isn’t going to last very long. So there’s a disconnect which can only last so long before it breaks down very, very, very badly.
Adam Taggart: Alright and those are big statements and I really don’t want to gloss over them. First off, let me just clarify for folks when you were talking about the joke of a joke of a joke of the cryptocurrency I believe you’re referring to shiba inu —
Michael Every: Which I hadn’t even heard of it until this morning. I’m not going to pretend I’m there deep in this crypto space. Remember cdo and cdo squared and cdo cubed?
Adam Taggart: Yeah, deja vu all over again and I just want to let folks know shiba inu is sort of a parody coin of dogecoin which was a parody of bitcoin and so we’re at the like third derivative here of parodies, but to your general point and that’s maybe an extreme example but it shows the rule that you’re talking about where if we can kind of just create fresh wealth almost out of thin air by just all agreeing that all of a sudden that the shiba coins have real value isn’t that really a wealth transfer? Meaning that there there really is a finite amount of purchasing power in the world and as we create more of the units that divvy up or added together make up that purchasing power we’re just really just sort of shifting who who gets a claim on that purchasing power and so today cryptos and some of these crazy ones like the ones we’re just talking about, the purchasing power is shifting into them and it’s because for whatever reason enough people in that ecosystem are agreeing on that. On a larger level, this is inflation which you talked about where we’ve seen over the past year and a half, I only know the numbers really in the US, it’s been basically 10 trillion dollars of both monetary and fiscal stimulus again just in the US. Many other nations have followed suit so it’s some big multiple of that worldwide where we’ve greatly multiplied the currency units. The problem is when you make more of them they don’t get fairly distributed as you say. They really pile up in the pockets of those that have the greatest advantage just making them, on a relative basis, even more wealthy and maybe that game can go on for a while until as you say the people who are doing the sweat work of growing our food, preparing it, getting it to our tables, et cetera, making the bridges and highways and airways and seaports work, when they begin to fall below the poverty line at some point we’re going to have some potential really large social crisis you said sort of a breakdown of the system. So is that why the inflation that we’re seeing right now is such a concern for the folks that are paying attention?
Michael Every: I don’t think that is because they’re choosing to ignore everything that you and I have just said and just cash in. Of course anybody anybody in their quote unquote, “right mind,” would. I think they’re just more shocked to see inflation, full stop, because it’s taken them a long time to realize that there wasn’t any inflation in the system because they had broken the back of labor globally and now because of the breakdown in supply chains, which I think is something else we need to pivot to in a moment, effectively what you have with a broken global supply chain is the return of labor bargaining power. If you can’t import things freely from other countries because these supply chains are strained you can’t effectively arbitrage labor and say, “Well fine. We’ll just get it from Mexico and Mexican workers. We’ll get it from China and Chinese workers.” You don’t get it. You can only get what you can get locally and that gives labor all the bargaining power in the world again. So I don’t think central banks are worried about the inflation we’ve seen so far in terms of the supply side push because that is a one-off. They’re terrified at the idea that labor might suddenly have bargaining power back despite the fact they’ve spent months and months preaching about how important social justice and equity and diversity and equality is to them. As soon as they actually see any sign of that becoming entrenched in the economy, it’s time to raise rates and take away the punchbowl for ordinary people.
Adam Taggart: Okay, great. Well, let’s dig into that because the path I was going down, which you can tell me whether you think it’s a long-term concern or not, is sort of the arab spring where we did see about 10 years ago where inflation got out of control in the countries of North Africa and some places in the Middle East and when your average worker can’t put food in the table they’ve really got no other alternatives but to rise up and try to throw out who’s ever in power and that that’s what happened there. So if I hear you correctly what you’re saying is maybe that is a long-term potential of unchecked inflation but in the nearer term you feel like because of the the breakdowns that we’ve had in the real economy, meaning these supply chains that have really broken, we may actually have a little bit of the reverse for a period of time where local based labor is able to finally demand some wage inflation, which they haven’t been able to get for decades. I see you nodding as I’m saying this but let me hand the football back to you here but I guess how optimistic are you of the prospects of labor really being able to get meaningful wage inflation? And by meaningful I mean higher than the price inflation so they’re doing better on net given the current situation on the ground.
Michael Every: Very difficult. I mean the stars that are lined for labor more fortuitously than they have done for decades when you’ve even got yellow in the treasury talking about labor versus capital which is a marxist taxonomy if you will which I’ve been using my entire professional career and nobody else was up until recently, then clearly at least in terms of the rhetoric there’s been a shift in thinking but when it when push comes to shove, when you actually see either attempts at unionization or attempts at collective bargaining or workers saying we don’t just want a hefty pay rise we want a hefty pay rise above inflation and we want sustained pay rises to narrow the gap with unaffordable houses for example or increasingly expensive food or winter energy bills then you see the panic here and the proof in the pudding will be central bank after central bank, I don’t want to only talk about the Fed but I would imagine they’re probably the most important to viewers, deciding are we going to hike or not are we going to taper or not if you look at the action in the yield curve over the past few days you’re seeing a very aggressive curve flattening where you’re seeing more and more rate hikes in central bank after central bank being priced in with the market saying yeah they’re gonna squash labor once again absolutely they’re not gonna allow any second round inflation effects but the long run cost of that are lower bond yields, meaning we expect that to be a policy error. So if I can just continue for one more minute, it isn’t that I’m just saying you’re going to have these workers uprising and pitchforks and burning torches. I’m saying logically if you continue with a system where a cloistered elite continue to just create almost infinite wealth and don’t share that with anybody else and everyone else is feeling poorer and poorer in real terms, global history suggests you end up eventually with that particular problem. In the interim if you start to see workers say well we have the power to push for higher wages so we don’t need the pitchforks and the burning torches it looks like central banks will blow everything up. They’ll raise rates and say, “We’d rather put a gun to our own head than allow you to have any share of this,” but you could also be slightly more cynical and say well particularly in America which is a very, very creative culture, rather than people picking up a torch or a burning pitchfork why don’t they pick up their mobile phone and just spend all day trading dogecoin? Why don’t they just sit down with their friends and create crap coin or marxcoin or whatever you want? If you can’t beat them, join them. Show what a farcical, idiotic system it is. Everybody stop working tomorrow, go home, create your own coin, or just day trade. See how the rich like that when no one does anything other than doing what the rich do.
Adam Taggart: So you say that like it’s a hypothetical but when you look at what’s going on here we are seeing a lot of that and they’re having trouble getting people to go back to work. I mean a bit of that’s already happening, right?
Michael Every: Yeah well it’s logical. I mean why would anyone work in the way we’ve set up this system? Take a step back, look at it objectively. There are a few professions that are still very well paid in nominal and real terms. The data are unequivocal. For decades, more and more jobs simply don’t pay. On the other hand, you can make more money than God. Excuse me being sacrilegious for anyone religious watching. I’m English and we throw these phrases around much more easily. More money than creases, shall we say, just by swiping right, picking which one of a series of digital penguins with sunglasses is slightly funnier than the other, or getting together with someone techy, which you can do for a couple of hundred bucks and creating your own NFTs or coins or whatever and if you’re lucky, and so there’s a lottery element to it, you can make more money in a few weeks than you will do in 10 or 20 years of working. So you’re only going to get the really, really uneducated working, the people who don’t understand how to do this and gradually there’ll be fewer and fewer of them. The whole system cannot be sustained the way it is. That’s my long-run view. It’s just a question of how long until we get there.
Adam Taggart: Yeah, exactly. I mean it’s just not sustainable because there’s zero value creation going on there. It’s just the transfer purchasing powers we already talked about. It doesn’t bring one more bushel of wheat into existence, one more barrel of oil, none of that. Here are the things that could kind of foul up the playbook for those that are either on the consumer side just trying to day trade all day or on the central planner side trying to pull all the strings, puppeteer the world. Increasingly the central banks are really stuck so they have been throwing a ton of stimulus out into the world and inflation is beginning to bite as you began here and it’s beginning to become a real issue for a lot of people. Sadly the poorer first, the poorer nations, the poorer levels of western countries, but it is creeping its way up the wealth scale to the point now where it’s becoming, and if it continues will really become, a political issue for those that are running the system. People will start losing elections over this but at the same time rates are about as low as they’ve been in recorded history and the global economy even after that tsunami of liquidity that’s been pumped in over the past two years is slowing down markedly and it really I believe sort of started in Asia, at least Asia started slowing down before certainly the US and now looking at the US Q3 GDP estimates it’s really been decelerating. I guess first let’s just talk at a high level and then I want to get to specifically what’s going on in Asia. If the central banks are basically looking at both sides of the precipice that they’re seeing on the other side of the knife’s edge here and saying, “If I continue stimulating the inflation’s going to get me eventually but if I try to hike here I’m going to kill this economy which is already pretty stagnant at this point,” how does that resolve in your eye?
Michael Every: It doesn’t. I mean one of my long-run theses is that the post-1945 architecture is collapsing. We see that around us more and more evidently. Look what happened in Afghanistan recently for example and the post 1989 architecture is collapsing when you see more and more talk of the US China cold war even if you can’t call it cold war in America because too many US pension funds and multinational corporations are just too friendly with China to wonder how it called that so the white house has to come up with different names like competition. So the global architecture on which everything else is based, everything, whatever you’re investing in, it’s sitting on that substructure. It’s crumbling away and central banking as we understand it, inflation targeting, when in fact we all know that they’re looking at house prices or stocks. We all know that’s actually what they’re looking at is itself at a structural impasse. As I put in a note, I think it was on Tuesday, if they raise rates here they err, E-R-R, if they leave rates unchanged they err, E-R-R, and if they say, “Err,” they err because there is nothing they can do here and in fact, this leads to another broader thesis which does tie back to Asia in a second, I promise you, is that if you rewind back to the 70s just after the dollar had broken a link to gold and Bretton Woods had ended, after a period of high inflation and high energy prices in particular we saw that the paradigm that had lasted from 1945 till then had collapsed. The result was globalization and what in Europe at least we call neoliberalism, so reaganomics. Deregulate everything. Trucking, air traffic control, start there. Basically market forces, consumer is king, regulation out the window, and there’s still a big school of thought in America that supports this even though it’s utterly, utterly failed. Utterly failed on every single parameter you look at, it’s been a historic catastrophe. I’m fervently in that view. I’m not anti-capitalist. I’m anti-completely deregulated capitalism which ends up as basically institutionalized mafia which Adam Smith himself openly said would be the case. If you look at central banks today they’re in a similar impasse. You raise rates, disaster. You cut rates, disaster. You just waffle and do jazz hands, disaster. You need structural reform which is what we had under Reagan but ironically what you need is an anti-reaganite reform to re-regulate, to restructure, to onshore, to nearshore and to make supply chains resilient rather than these long-strained international supply chains back to Asia and here’s how it ties in to say, “Okay I’ve got three particular suppliers for every product and I have lots of stock in the inventory store so I no longer get caught short if everything’s interrupted for six months. When I export I export to six different companies or six different countries, not just one. I have a diversified, distributed, resilient, antifragile system in terms of how I run my company, how I run my portfolio, how I run my country,” which changes everything in central banks until they embrace that, which they won’t. They’re part of the problem, not part of the solution.
Adam Taggart: Alright very well put. So, a number of things. First off, everything that Michael just said is really, really consistent with the conversation that we had last week with Neil Howe, author of The Fourth Turning and a lot of the general themes that Neil told us to expect, Michael just gave us a bunch of actually very specific examples here so if you haven’t watched that video I’ll put up a link here to it. You can watch it there after this one if you’re curious and Michael, I totally agree with what you’re saying there in terms of what’s needed. The system will be more resilient. My sense is it will be more expensive because we’re paying for the redundancy but sort of like organic food is more expensive than conventional food but you’re getting more healthy food out of it and more longer term benefits. It’ll be somewhat similar. We have a very cheap supply chain right now. In other words, it delivers things very efficiently, cost effectively, when it works perfectly but when it doesn’t, like right now, it’s very expensive. The ripple effects, the delays that you were seeing certainly here in the states with the pile up at the western ports and whatnot, it’s showing the true cost of the current systems that we have and you’re saying those just aren’t going to be possible going forward. We’re going to need somebody to really demand more anti-fragility. So, if I can put words in your mouth, it sounds like what you expect going forward is disaster when you said look there’s disaster is the predictable outcome of all three options that the central banks can face. We’re going to be facing basically a time of turbulence, that might be a nicer way to say it, but in terms of the type of leadership that we’re going to need to kind of make the transformation to the new type of order that you’re talking about, what’s really interesting to me is I agree right now, at least as I see in the west, we just don’t have that leadership right now. They’re still tripling down on the status quo. They’re doing everything that’s in their power to try to keep the current system alive for yet one more day. What’s interesting to me is if you look at president Xi in China, it’s really funny. I mean he’s basically A, looking more like a better capitalist than many of these western nations and this is a big part of the discussion I want to have with you here, he really does seem to be saying, “Look this system is going to implode and I can either ride it to the end and then just take the collateral damage that happens or I can take pain today but a smaller degree of pain and begin to make the hard reforms so that we don’t fully go off the cliff and we end up going into this future better prepared than if we had not taken these proactive steps.” I see you nodding as I’m saying this so let me you go here but is China maybe kind of leading the way on the type of reforms that the rest of the world is going to have to emulate going forward?
Michael Every: Very much yes and no. So I have to say it both at the same time. I was nodding because this is an area that I’ve done a lot of thinking about for a very long time. Well before I started in this position and I’ve been quite public about in various publications recently and I’m going to be a little bit controversial here because again I know we mainly have American viewers of this show. You need to read some Karl Marx. You do. Now you don’t need to read the whole books or basically floor to ceiling you could read Marx for the rest of your life and it all contradicts itself in different places, but you should have a grasp of some of the key arguments that he raised because even though he was very wrong in his ultimate conclusions and he had no idea what communism would look like beyond just happening which is the ultimate kind of very loose forecast, “It would just happen and I don’t know what it will be,” Marx’s critique of capitalism in some key aspects prepares you better to understand how capitalism works than any contemporary neoclassical economic theory does. Using a modernized reduction of Marxist thought allowed me within my own professional career to predict the global financial crisis before it occurred in the US. Very few people saw that coming. Those that did were all heterodox economists rather than orthodox. I would like to just take 60 seconds if I can to try and explain why even though it’s a hugely complex issue.
Adam Taggart: Absolutely.
Michael Every: Okay. If you listen to anyone who’s a contemporary economist, they are a neoclassical economist. They must be unless they state otherwise. The fundamental logical precept of neoclassical economics is this: everyone in the way the economy is modeled starts with a commodity which they represent with the letter C. You sell it for money, M, and you use that money to buy another commodity, C. So it’s CMC. You start with something, you sell it, you buy something else. In other words, their simplified model of the economy is everyone is playing pass the parcel, just swapping from left hand to right with money just being used to enable the transaction to happen so you don’t have to haggle over the relative price of goods. Does that sound like an economy that exists around us today? Absolute gibberish. Marx, amongst many of the things he said, had two very profound and very, very obvious insights. The first one is he said in capitalism you start with money, which is M. You buy a commodity, which is C. You add value to that commodity via what he called the means of production which is a factory but of course you can do it with your brain nowadays. There are lots of ways to add value. You sell it but you turn it into C plus or C-, he called it. So it’s got more value than C. It’s a value-added commodity and you sell it for M-, which is a profit. Now, that’s so obvious you would think, “How is this not part of a neoclassical model?” but it isn’t. But if you follow the logic of what Marx says, if you’re selling something for more than you got it for, where’d the money come from? Is it a zero-sum game? My profit must be your loss? No. Is it that I export more so my country gets rich and your country gets poor? No. It can be but it’s not that. Clearly there’s new money coming into the system all the time. And where does that come from? Well, you can print it in which case you get inflation or it’s spent into existence by the government which is basically state borrowing, you have to pay it back at some point in the future, or banks create it and how banks allocate that extra money creation, whether it goes into productive investment to make sure that the stock of money is matched by the stock of goods, or whether it goes into leveraged buyouts to push up the price of an asset a pre-existing stock. That will tell you, over a long run cycle, when you’re going to have your crash. So Marx above and beyond anything to do with the labor theory of value and underpaying workers all of which he believed too, he fundamentally understood that if you have too much of the wrong kind of investment into what he called fictitious capital rather than productive capital, “Are you physically producing things?” You are just resetting the stopwatch every few years for another crisis. Guess what. No central bank understands this. No neoclassical economist understands it. Not one model can ever predict where crises or financial market crashes come from within capitalism. Only a Marxist can do that which is why [inaudible] can see the structural flaws within our system whereas our best and our brightest are out there trading dogecoin.
Adam Taggart: Fascinating. Thank you for going through that. I think probably some of the Austrian school folks would say, “We are familiar with malinvestment,” but I think your point is interesting which is China maybe has the ability to see the shortcomings of the system better than a lot of the current western nations because they’re so wedded to the status quo that’s been going on for so long and they’ve been the primary beneficiaries of it it’s almost like that Upton Sinclair. It’s hard to get a person to see the flaws of something that he’s paid to support. I’m mangling the saying there. Let’s talk about Evergrande. I mean they are to a greater extent than the western economies letting their institutions that got overextended pay for their errors. A huge surprise for a commanding control economy but they are regulating more. They really do seem to be trying to kind of clean up things more than the US or Europe right now. Again, you know more specifically about what’s going on there. Why don’t we talk about Evergrande for a moment and just use that as an example and feel free to pull anything else in. What is China doing today that you think is the most meaningful for how it’s going to enter this future that we’re coming and maybe I’m wrong, maybe I’m giving them too much credit but what are they doing right now to prepare for what’s coming? And how is that differing from the approach that the other western nations are taking right now?
Michael Every: Well first of all, China’s doing some thinking. That already differentiates it.
Adam Taggart: I guess that’s true.
Michael Every: The problem is, as I said just a minute ago, Marx completely understood the problems with capitalism. By the way, he was a big fan of capitalism’s dynamism. He never said it was an unproductive system. He said it’s a crazily unstable, volatile system, which sweeps all before it but then keeps peaking and crashing and peaking and crashing. That was his criticism of it fundamentally above and beyond, the fact that workers weren’t paid enough. Anyone from that particular ideological background understands this and can act but what model do they have as an alternative and again, Marx doesn’t have one. Lenin doesn’t have one. Stalin put one forward. [inaudible] ended up saying, “Let’s copy capitalism to try and catch up and then we’ll see.” We don’t know. So Evergrande is obviously emblematic of what’s happening in that you’ve got a company which is massively over leveraged probably with a lot of hands in the till that shouldn’t have been there building far too much high-end property for a housing market dominated by people buying multiple properties rather than their first property at 40 or 50 times income multiples.
Adam Taggart: Sorry to interject here but I’ve read that the Chinese real estate market is the single largest asset on the planet.
Michael Every: It is. Yeah. It is about 70 trillion depending on how you value it and most of it is hot air in terms of the quality of the asset, the relative pricing. Would anyone outside China pay that price for it given the opportunity to live anywhere else? So it’s a trap market. The fact that demographically there won’t be anyone to buy them in the future China’s demographics are such that on some estimates even within China itself, by mid-century half the population would have disappeared and by the end of the century up to maybe a billion people would have disappeared depending on the most extreme fertility scenarios you can place going forward. So there’ll be no one to rent them and no one to buy them and you don’t own the property, you have a lease on it for 70 years. So you’ve got a 70 year option on a piece of a box in the sky based on a piece of land still owned by the government for which you’re paying more than New York, Manhattan prices knowing that there’s no one to rent it to now and there won’t be any market to rent or sell to in the future so yeah dive in please absolutely it’s an absolute bargain. Now is the time to get in but this is driven an enormous swathe of the Chinese economy for a very, very long time and this is the issue they’re doing the right thing and addressing this and I think other countries should as well in terms of social stability in terms of preventing polarization which they openly say they don’t want to see. The kind of mess you’ve got in America now between blue and red, no country wants to see that and obviously property is a large aspect of that so unless everyone’s benefiting in lockstep, you’re just making society angrier by only having some benefit. So they’re doing the right thing on that front. I think you can argue that. Even if they’re going to lengths that look completely unpalatable in today’s billionaire friendly western world. The issue is what do you replace it with? Now, they’re talking about social housing and I do actually think, and I’ve said in print, that if they bail out Evergrande it will be as a husk and it will be socialized effectively or nationalized and they’ll end up using it to build social housing so all the luxury apartments being built now will actually end up housing poor people one way or another. The problem is that doesn’t really pay for itself in terms of the revenue that they normally generate selling the land to these developers so you end up with a fiscal shortfall and then like every good state planned system you’re spending more money than you get in tax and you start to get repressed inflation or monetization, etc, and it can get messy if they don’t run a large trade surplus, which they determine to run which America and Europe and Japan would not want to see them run in the future and which then makes the domestic issues in China become geopolitical because while they’ve got a trade surplus, that wall of dollars basically protects them to do whatever they want domestically to a certain degree. So I’m throwing a lot into the pot here but the simple fact of the matter is you shift away from the model they’ve had which is very much an asset bubble, very much western style by multiple properties and get rich, what do you have instead? And we only have a question mark. We have fragments of answers but in the interim we will have much lower growth. So anybody from wall street and I speak to quite a few and I get spent a lot of research from others all still selling you research suggesting that China and Chinese markets are the same as they were 20 years ago when they were on this kind of bubble capitalist 45 degree or exponential growth upswing. I have no real understanding of what’s going on I just don’t want to see it similar to the Upton Sinclair remark that you were sharing with me earlier where you get returns in China they’ll be much lower. There’ll be state caps on what the return can be and it will be in socially useful areas so effectively China would be like investing in a government bond. China inc would be low return, state-backed, safe. And by the way locked in because your money goes in and there’s capital controls. You can’t get it out. So yeah if you want to invest in that that’s fine but it’s a very different beast to the go go seven, eight, nine, ten percent growth kind of animal that many people are still looking at.
Adam Taggart: Right. Kind of the China miracle that we’ve seen over the past two decades plus. Those days may be over and that seems to be a recurrent theme of everything you’re saying here which is sort of the world as we’ve known it is ending. It can’t continue going forward and again, I’m putting words in your mouth here, but in terms of what’s going to replace all this we’re just left with question marks at this point in time. Nobody seems to have a good game plan and just to be clear, I don’t want to try to suggest that China is doing all the right things here and certainly they’ve gotten themselves into a world of trouble. They’ve got a lot of issues. One being this ridiculous property asset bubble that they let build over the years but at least they seem to be addressing it a little bit sooner than we. And now reason why I kind of dug into this was are we seeing a little bit of glimpse in the future of what’s going to need to come to other countries with she kind of grabbing the horse by the reins here and beginning to deal with a little bit of the pain up front here? Well look Michael this just go in so many different directions. I’ve got a ton of questions. I’m only going to be able to get through a fraction of them in the time we have left but real quick on Asia, because we do have a lot of western viewers here and one of the requests I get from Asian viewers and from western viewers is, “We’d love to get perspective on other parts of the world.” You’ve done a pretty good job here already but what else is going on in Asia right now that you think would be wise for a western audience to be paying attention to right now?
Michael Every: I think the key issue above and beyond this structural slowdown in China, which may be delayed next year because of local political dynamics but after that will definitely kick in, is how the rest of the region makes up its mind of what it’s going to do vis-a-vis the US versus China and local political dynamics for example what India’s role is, what Asean’s role is, what Japan’s role is, and you are seeing a careful, “two steps forward, one step back. I’m not in any rush, I’m taking my time, but I’m kind of building up my plans,” momentum to start disentangling supply chains, to start looking at alternative infrastructure networks. So instead of everything looking like a hub and spokes where effectively you have China and everything else little lines coming out of China going to the rest of Asia it’s the US, you actually have clusters like an Indian cluster here an Asean cluster here, a Japanese cluster there and this ties back to what you were just saying about the world — ending is a very dramatic word but changing definitely, a different paradigm emerging and depending on who is doing what with whom and how, that will tell you what your growth outlook is for different regions. So for example if you’re locked in to selling to China and it’s a slowing China, guess what. You’re going to be slowing. If you’re diversifying and looking at other sources or looking domestically, guess what. The prospects are probably going to be a bit brighter. If, for example, like India you can manage to make the stars align which India kind of does and doesn’t, it’s never never plain sailing there but you can see where they’re heading, you’ve got an alternative growth cluster for the next 20 or 30 years given their lower starting base. It won’t be like a 10% growth rate like China had but you can get 6, 6.5, 7 in a good year. So huge opportunities on a large scale in different areas but it will all be related to who is dealing with who and that’s going to be part of this reshuffling of the global supply chain order or a rearranging of the jigsaw if you will, which we’re just starting to see the process kick in.
Adam Taggart: Okay and again, I’m not a student of Asia but I think we’ve seen one example relatively recently with China stopping purchasing coal from Australia. Long-term partnership for natural resources for what I can tell. Seems to be a political reason China decided to stop buying coal from Australia and it kind of set off a bomb around the world. All of a sudden China was buying coal that other players like India were sourcing from and then all of a sudden India didn’t have enough coal and then Europe was running out of coal because of its energy issues and then China got in the big bidding war. So, as you say, there’s going to be this sort of colossal dust up as all the lines get redrawn and things take time to equilibrate but it sounds like what you’re saying is once they do and we see what those new relationships are in the new world order, it’ll be a lot clearer but I’m just curious as you mentioned India, it seems like you feel like their growth prospects are not bad on a relative basis going forward. Are there any other parts of the aipac region that you think either particularly positively or negatively about its general prospects for understanding that we’ll wait for your final call until you see how those new lines of geopolitical relationships get drawn?
Michael Every: Vietnam also very positive. I mean that’s not a new story. They’ve been doing well for a long time. They’re clearly able to benefit both from trade with China but with the west and they’re really emerging as a rapid growth export center to the US in particular. Maybe that will hit a wall at some point for the same reason that exports from China did, the US did, but the geo strategic bank drop suggests that the US can’t afford to lose Vietnam too. So I’m positive on that. And Indonesia, it never outperforms. It’s not a country that most US viewers would be excited about, but similar to India it chugs away there in the background, chugs away on a good year 4.5-5% growth rate. It can do a bit better with help if Japan leans in, if the US leaned in again from a geostrategic perspective saying and we’re going to do our best to try and put money into infrastructure which Australia is also talking about hoping to do. Even India is all linking in together. Yeah that can go up to a 6% growth rate hypothetically and suddenly you’re looking at economies of pretty decent scale and pretty decent growth so there is upside here in this downside. The only thing I want to make clear is that when I’m talking about the supply chain shifting it’s a difficult process because if there’s one thing China is also completely cognizant of above and beyond the flaws of capitalism, it never wants to repeat what happened to the US. They are fully cognizant how the US was de-industrialized and hollowed out and obviously they were the primary beneficiary. If you read working papers from the people’s bank of China which is what I’m basing this on, not just smoke and mirrors, they openly say, “We will never allow that to happen to us. It was a historic era of enormous proportions.” So they will resist this with every policy lever they have, meaning for markets there will be much more volatility in the interim period. For example, if you want to shift a supply chain from China to India, all the intermediate steps that you need to take, Chinese companies will not help you do that. So you’ll have to basically duplicate the entire supply chain somewhere else de novo before you can do it. You can’t do one component at a time. It’s got to be everything. So it’s a very lumpy process I’m describing of not a lot, not a lot, not a lot, bam but you have to be positioned for that correctly.
Adam Taggart: Yeah, that’s a very, very good reminder. So many questions I want to ask you about there, I just don’t have time. Let’s do a quick lightning round and then I want to end with your view on sort of general market outlooks, what you think the market may do as we enter this period of increased destabilization. So real quickly, the Koreas. I had Jim Rogers on not that long ago. He’s quite sanguine about Korea and thinks it might become kind of the potentially the main economic powerhouse of Asia going forward. He even thought that there might be an open Korea, not necessarily a unified one, but an opening. You don’t have to agree with him but what’s your thoughts on Korea?
Michael Every: Well, demographically it’s in a lot of trouble but it has a lot of strengths in other areas. They’ve got a huge level of consumer debt. They’ve got a lot of domestic problems to deal with alongside a lot of domestic strengths. The North Korea issue is always going to constrain how bullish you can be on them because they’re a relatively small country and they’ve got an enormously problematic neighbor. I mean you have to be pretty optimistic to believe that the two countries can be unified because even though in theory the North would have a lot to gain from doing that, particularly if Kim can be given a the keys to the Korean equivalent of Disneyland and basically said go have fun for the rest of your life, there’s no way China would stand for it, would never allow there to be a kind of unified pro-western career on its border. We have to understand the geopolitical realities of that so I question whether Korea can be that particular node or the center point but I do think it can be an important economy in the regions the same as it is now.
Adam Taggart: Sorry, just since we’re in lightning around here I’m gonna switch to Japan. Japan, just a basket case that’s getting even worse or is there a reason to have some optimism about that country?
Michael Every: Again, it depends what happens with this supply chain realignment. They’re now talking about trying to bring industry home. Demographically, again, the population is shrinking so growth will always be quite low but you are now seeing a shift away from abenomics which was all market focused to redistribution which is a dirty word in the US to actually make sure people have more money in their pocket which actually will boost domestic demand. So if they act on what they’re saying and they can work together hand-in-hand with Australia and with the US and with Asean, things could look up there but it will be a bumpy ride and it won’t necessarily be good for stocks in the short term but in the long term after the sell-off and a new base then it could be good.
Adam Taggart: Okay and when you say it could be good would that require some changing of their immigration policy? Are they going to need to bring in young blood to make that good future or can they do it with the current demographics they have?
Michael Every: Well, that’s a question for many countries. Do you have to have a growing population just to get the growing GDP growth or does it make a difference if you just have growing GDP per capita regardless of what the population size is doing? That’s a philosophical or a moral question for each country. I don’t think we should presume that one size fits all in every country has to grow its population because otherwise GDP doesn’t grow. It’s like well for a start, that can’t happen because some countries will lose population due to immigration. So whenever I hear people say, “Well, immigration is great. We gained 100 doctors,” it’s like what about the country that lost 100 doctors? I never hear anyone talking about that.
Adam Taggart: Okay, well put. Alright, last part of lightning round here in Asia, Taiwan. Definitely increasingly a political flashpoint between China and the US. Do you see us getting through this to some sort of detent that works for folks in this new world order that we enter into or do you think it’s an intransigent problem that is going to erupt in some way?
Michael Every: It’s more likely to be the latter than the former unfortunately because the rhetoric from both sides is to climb higher and higher up the tree at the moment. If you look at the power dynamic, both in terms of the military forces in the region and the economic impetus, time is on China’s side quite clearly. If things were to change in terms of the supply chain dynamic that I’m talking about that might start to shift. So therefore that gives you the possibility of certain people seeing it as okay we’re rising now but we know we’re going to level out and then come back down again so therefore you only have a narrow window. I hope this can all be resolved but far smarter people than me who are far more in the loop than I would ever claim to be are certainly concerned and it will require cool heads, pragmatism, and hopefully judicious policy mix to make sure that we can continue with the current status quo.
Adam Taggart: Okay three resources the world seems very scarce these days but hopefully we find them here in time. Alright, well as we get to the latter part here of the discussion, let’s get into your market outlooks. We hope you’ve been enjoying this discussion with global strategist Michael Every. The interview continues over in part two where Michael provides his views on the financial markets and what he thinks investors should prioritize today given tomorrow’s outlook. To watch part two just click on the link provided in the description of this video below or go to YouTube.com/wealthion but before you go please don’t forget to hit the like button and then click the subscribe button below, as well as that little bell icon right next to it if you haven’t already/ It only takes a second and it really does help us out, as the more subscribers this channel has the more excellent guests like Michael we can attract onto this program in the future and if you’d appreciate a free, no strings attached portfolio review by a financial advisor who can help manage your portfolio with the risks that Michael has talked about here just go to Wealthion.com and we’ll help set one up for you. Okay, I’ll see you over at part two of our video interview with Michael Every.