Viktor Shvets on Inflation and How Crypto Could Cause the Next Financial Crisis

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, we just had a Fed meeting where basically the central bank decided to not change anything.

And the market reaction was, let's see, stocks went up, but probably the most interesting move that we saw was in the three-year break even. And that actually went up, I think, eight basis points to the highest since 2008 So you saw this immediate assumption in the market that we would get a bunch of inflation because the Fed's on hold for longer. And meanwhile, we have fiscal stimulus and the economy is recovering really strongly.

Joe Weisenthal (0:57)

Exactly right. I mean, that is sort of interesting. I was watching the press conference and there were so many questions about inflation, so many questions about when the Fed is going to perhaps pull back one day on its asset purchases, the so-called taper.

And the answers were really the same. Like Chairman Powell was incredibly consistent.

By the way, I should mention, we're recording this April 29th. The meeting was yesterday, April 28th.

But the answers were incredibly consistent. He's like, look, I'm not gonna do anything until we get there, until we see the inflation, until we get the full employment and everything. And so he's kind of like, stop asking. But this dynamic in which everyone sees these pressures are building in the economy for an unknown length of time and a Fed that's willing to not do anything until they actually like emerge in a sustained way. And so you get these expectations of greater reflationary forces at the minimum to come.

Tracy Alloway (1:58)

Yeah, I find this a really interesting moment in markets because as you mentioned, the Fed is pretty emphatic that it sees inflationary pressures as transitory.

These are things like commodities prices going up because of supply bottlenecks from COVID and the central bank expects they're not gonna last that long. But meanwhile, the market seems to be positioning for something very different, at least, if you look at the three year breakeven that I just mentioned, that's three years out. And certainly that's pricing in higher levels of inflation. At the same time, it's really interesting that the market seems to be taking that stance because of course, we've had 10 years of no inflation or deflation, despite lots of monetary easing from the central bank and a relatively strong economy, we haven't seen price increases like you would have expected from some economic models like Nehru or the Phillips curve.

So really interesting moment in time. And today we're gonna be talking all about inflation with one of our favorite Odd Lots guests. We're gonna bring back Viktor Shvets. He's a strategist over at Macquarie. Viktor, thanks for coming on again.

Viktor Shvets (3:07)

Thank you very much, Tracy.

Tracy Alloway (3:09)

So do you wanna lay the scene for us? When you look at the world right now, what inflationary pressures, if any, do you see?

Viktor Shvets (3:20)

Well, there is no question that if you go through the next six, nine, 12 months, whether you look at the United States or whether you look at other countries as well, inflation will pick up for exactly the same reason as what you've just outlined. Base effect, recovery in demand and supply side bottlenecks. Whether you have a war or a pandemic, usually it has a demand and supply shock in some form.

Supply disappears, companies become zombies, they are in capable of providing some services. Some of the capacity is just withdrawn, investment goes down. And so when you start recovering, suppliers never quite know how much capacity should they provide. Will demand go up 20%, 30%, 10%. And so the result is it usually takes four or five or six quarters to what I would call normalized demand and supply. And I think what Federal Reserve is saying is that this is a transitory period, that we are not confident that inflation actually will be sustainable. And as we go back, go sort of forward to the end of 22 or into 23, we're not that confident that there will be such a strong inflationary pulse. And I find myself in an unusual position because I usually quite disagree with many things that Fed does.

I find myself in an unusual position to actually agree that it's probably is a case that the pressures are transitory. And if you think of inflationary breakeven rate, the interesting thing is that five by five, for example, are lower than five. So clearly even the market itself assumes that there will be more inflation to begin with and then it comes off later on.