Viktor Shvets on Why We Might Be Heading for a Deflationary Bust

Tracy Alloway (0:05)

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

Joe Weisenthal (0:10)

And I'm Joe Weisenthal.

Tracy Alloway (0:11)

Joe, it feels like there's a lot of uncertainty at the moment.

Joe Weisenthal (0:15)

You think? Why, why, what's uncertain?

Tracy Alloway (0:18)

Kind of everything at the moment. So obviously you have what's going on with geopolitics and Russia's invasion of Ukraine.

And that's obviously a big thing for markets. But even without that, you were sort of at this inflection point where central banks were just beginning to respond to inflation risks. And there's this question of how much of an impact that's actually going to have on risk assets.

Joe Weisenthal (0:43)

Yeah, that's exactly right. And I think it's kind of been a confusing couple of weeks in terms of understanding both the plan from central banks and of course, primarily we're talking about the Fed and the market response to them, because we did have the start of a rate hiking cycle, a 25 basis point, many more hikes expected.

Now we've, the immediate market reaction was this rally. And so there's questions about, which was not necessarily expected. And the question is, well, is this the market doesn't think the Fed is going to go that hard? Does it think the Fed isn't going to need to go that hard?

Or is the market going to be surprised that the Fed really is going to do what it says? And maybe we're going to get multiple 50 basis point hikes. Lots of confusion. The start of the rate hike cycle has not really created any certainty about what's next.

Tracy Alloway (1:31)

No, and we actually had to have Jerome Powell, the Fed chair, come back on and just emphasize that they were actually going to hike at a potentially significant rate. And then we saw the market reaction. But even beyond the US, there's been a lot of uncertainty. And just looking at China at the moment, we've had a big sell off in China tech stocks yet again.

At the same time that there was this expectation that they were going to be easing even more. And then we saw them crack down further on the tech space. And then they seem to walk part of it back.

So this is another open question mark over what exactly China's central bank is doing here. They seem to be taking two steps forward and then one step back and trying to calibrate everything. And I feel like it's just confusing the market at the moment.

Joe Weisenthal (2:21)

Everything. The real estate in China, of course, is a huge, huge deal of energy, so much.

Tracy Alloway (2:28)

Yeah. Okay, well, on that note, on the note of uncertainty, we are going to be bringing on one of our favorite guests. We're going to be speaking with Viktor Shvets about, well, everything really. What central banks are doing, the situation in Russia, what's going on in China. He's going to try to bring it all together.

Viktor Shvets is, of course, the head of Global and Asia Pacific Strategy at Macquarie Capital. So Viktor, thank you so much for coming back on the show.

I feel like one of the things that happens when we are in times of uncertainty is everyone starts reaching for a historic parallel. And then they try to fit that on what's happening now. And there's never a perfect one, but it does feel like the one that's emerged as consensus, most recently, is the idea of going back to the 1970s era of high inflation, some sort of commodities shock that then feeds into the broader economy. Is that the right way of framing things?

Viktor Shvets (3:25)

As you correctly said, no historical parallel is perfect.

If you think of 1970s, we today live in a very different world.

Labor market and the structure of labor market is massively different than what it used to be. Our financial leverage, addiction to asset prices is radically different to what it used to be.

If you think of technological innovation, we really live in a world where technology is everything. When people say tech, I basically say, what do you mean by tech? Everything is tech these days. Whereas 1970s and 60s were much more about inventiveness rather than innovation. We have a very different demographics. We have very different income and wealth inequalities. We're closer to 1910s, 1920s gilded age than we are to 1970s. So there is no perfect parallels.

The way I prefer to look at it is to say there were three big shocks to the system. One was in the early 1920s. The other one was between 1945, 48