01/31/2019 - The Roundtable Insight: Yra Harris and Bill Laggner on Global Financial and Economic Risks

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By: Tenzin Lekphell


FRA: Welcome to FRA”s Roundtable Insight ..  Today we have Bill Laggner and Yra Harris. Bill is principal and co-founder of Bering Asset Management. He and his managing partner, Kevin Duffey, managed the Bering fund using an approach based on identifying boom bust cycles, value in the marketplace, bubbles, and distortions created by both fiscal and monetary authorities. Yra is an independent trader, a successful hedge fund manager, a global macro consultant trading foreign currencies, bonds, commodities, and equities for over 40 years. He was also CME director from 1997 to 2003. Welcome gentlemen!


Bill: Hi Richard!


Yra: Hey Richard! Great to be here.


FRA: Great! I thought we’d do a focus today on what we see happening for the coming year, 2019, and the economy and the financial markets. What distortions and imbalances can be identified for potential investments and/or trading opportunities? Maybe we begin in China with the China slow down. Did you see a potential unfolding of a severe credit crisis in China and and could this be a catalyst for other effects globally such as in Europe for the European bond market? Bill do you wanna begin?


Bill: Sure I sound like a broken record on China. I’ve been talking publicly for over 6 years now. The Chinese miracle, the Chinese situation is I think late innings we’re seeing more signs of that now. The Hong Kong property market falling out, the amount of capital that has fled the country over the last 4 to 5 years. I think that China’s trying to deal with multitude problems and a lot of that stems from central planning. The illusion works great when asset prices are going up and people have this perceived better standard of living but the reality is that it’s all built on debt.

If it’s not built on debt, it’s built on a series of other government policies that, lets face it, all of us have seen in history only buy so much time. There are costs to these interventions and I think we’re in the early stages of seeing what those costs are.I think the economy slowing down, I think they’ll break the peg to the dollar and I think the global slowdown is China, let’s face, is a major player in manufacturing world. So the continuing slowdown in Europe, the stagnating economy here in the US, I think wreaks havoc on the Chinese and I can see that there is even more in last 18 months of so, more disagreement within the Chinese party and I think that’s yet another reflection of an economy going in reverse. There turning on one another. They’re very similar to what’s happening in US and even in Europe. The political classes are turning on one another and those are all indications of late stage behaviour of the cycle.


FRA: Just a quick follow up question on that for China you mention that you see the potential for the break of the peg, would that be a devaluation on the currency and if that were to happen, could that affect the European bond market and the euro?


Bill: Yeah I think they have to break the peg. Years ago they did a devaluation for a short period of time which was 40/50%. Will it be as severe this time around? Maybe not but I do think they need to weaken the currency and in their mind, they’ll try to buy them more time and they can continue to try and export products and keep the illusion going.

But the problem with China is, and of course they’re also trying to attract foreign investments, but what are the rules in China?

The rules seem to change weekly so I don’t’ see long term capital making its way into China.

I think they end up having a devaluation of the currency, they may do it in stages, most smart macro people I know think they do it in stages and they’d probably agree with that.

They’ve got massive debt issue and so when countries have massive debt issues they resort to devaluing the currency and they do it in ways we’re witnessing today.


FRA: And Yra your thoughts on that?


Yra: ( inaudible 5:17-5:20) sitting here dazed and confused in some ways because I go back to the comments that come out of the White House Administration, from the Chinese which is well if we can work through this trade situation; we can take your trade deficit and basically balance of payment problems and we can take it away because we can buy so much stuff.

When I heard that, it was an interesting comment that of course S&P rallied dramatically off of it. Couple other things didn’t happen; at that time, the Yuan didn’t rally and when I read people analysis they said well that’s because in order to do that, they have to weaken the currency and number 2, the most extensible reaction should have been the Mexican peso should have soared. If China were to actually embark on a massive consumption program which that statement to me (inaudible 6:31) and that’s what Michael Pettis, who I have a lot of respect for, he’s been arguing for 10 years or as long as I’ve been reading his work which is (inaudible 6:39) professor he knows China really well. Because if you embark on a massive consumption program, that Yuan has to go higher because otherwise you would crushing your middle class or trying to aide because a weaker currency would mean you’re paying more for imports and that would be exactly what you’re trying not to do.

I’m perplexed wherever we’re at here, with all that discussion that takes place and again because of global supply lines, if China were to massively import massive consumer goods,

Mexico would benefit more than any other that’s because the peso on a relative basis is probably of the mainstream emerging (inaudible 7:30) is weakest of anything in the world.

We can probably argue the Rubble but Mexico and Russia serve different purposes in the global arena. So I understand people talking about depreciating the Yuan but since that announcement came out, the Yuan has dropped about 6.87 down to today about 6.72 so i’m not sure and then I’m gonna add in what happened on Monday; the Chinese actually invited S&P to come in and start rating some of its bonds.

When I saw the headlines which didn’t get much play than anything else but I thought it was interesting because it tells me the Chinese don’t proceed willy nilly.

I happen to agree with Mike. I don’t trust a thing that comes out of China statistically and I’ve vlogged about that for 10 years and thought about it for 20 years because my sense of that whenever I would speak on panels, it’s really a simple rule. If you don’t allow google to operate freely, I can’t trust any information that you’re willing to either put out because you don’t let a free flow of information in.

If you’re controlling what comes in, by definition, you’ve already controlled what comes out.

I don’t give China much credence to that but that doesn’t mean China doesn’t have a concept here. They always have a concept.

How they get there is what we’ll discuss and argue about but think one of the main thrust of China is could they know how important this is? They like to establish a true competitor to the US dollar as a reserve currency. I believe that because they don’t trust the US and there’s a lot to not trust about the US. One of the things we’ll get into I’m sure and going forward this year and what staggers me and makes me less bullish on the United States in that regard is we’re operating at full employment and yet have a trillion dollar a year deficit. That is a problem to me.

Last time we had a full employment economy in 97, 98, 99, we were running budget surpluses. We’re in a whole different atmosphere here and then you follow the arguments that are actually building and I love that they’re making it out to the mainstream thought on the MMP, the Modern Monetary Theorists and how you don’t have to worry about deficits just print out more money.

In that regard, I think the Chinese hold a lot of dollar assets as to others. Any type of reaction from a monetary authority to just print more money should make everybody nervous about holding that asset and because the dollar is the reserved currency of the world, we’re all forced to hold that asset. So I’m not sure about the long answer, I’m not sure about the depreciating of the yuan so I’m gonna hold my powder on that and I need to see other things here and me I’m more concerned right now; yes the Chinese have a massive amount of debt but relative to other things, they’re debt is not great to the US and the US is hemorrhaging debt at a time when they ought not to be. If you’re really a Keynesian, you should accept that premise because Richard, we have a lot of Austrian discussion on these podcasts and I’ve been very proud to do many of them and the Keynesian views, is hey, Economic times are good; you’re supposed to run surpluses at least not massive deficits.

The deficits come from demand stimulus and we certainly don’t need that so I’ll stop there.


Bill: Can I just add one more thing to what Yra said? I read Michael Pettis’s work too and I like a lot of his work. I think the most difficult thing you hit on it is we really don’t know the extent of the debt situation in China and because Google and other groups are not really allowed to get data whether it’s on Chinese banks etc.

I just think there’s such a black hole that is very difficult to analyze this properly. We realize that it’s a lot of debt, we realize the global economy is slowing, yes they wanna get into consumption based economy but what are they trying to build their “economy” on? If it’s layers and layers of agency debt or debt in various industries etc.

The banking system, many people think they need to recapitalize the banking system. I’m in agreement there.

The world is in debt and they’re all playing the same game so it’s gonna be fascinating watch it all unfold.


FRA: And on Europe specifically, Bill what are your thoughts in terms of the evolving central bank policy, trends there, and potential for the financial crisis phase two, if you will, to start out of Europe?


Bill: So I remember going back to the Greek situation which was 2011. I was convinced that Greece would leave and you would start to see the breakup of the European union of course the decisions that they make to essentially keep Greece within the EU and start this process of bail out and more taxes and more (inaudible) on the future livelihood there. Deutsche Bank Company, that we’ve been sure for quite a while now, Deutsche Bank is telling you there are problems, I think, 2 years ago there was a French junk bond issuer that was refinancing debt for 3 years that are negative interest rates all thanks to the ECB, you know, I think they are what 50% of GDP now the size of their balance sheet.

So you know Draghi was listening to himself speak the other day. I just think that they’re going continue to intervene. I don’t see them, you know, tightening policy there and it’ll just be whatever the interventions look like in the future they’re all going to equate to the same things which is loose monetary policy and trying to keep nominal asset prices from declining too much.


FRA: And Yra you’re thoughts on Europe and the potential for financial crisis to begin from there?


Yra: Well Bill, we find great commonality in Europe because the most nefarious man in the world is Mario Draghi. People really don’t understand what he’s done here but building that massive balance sheet has trapped everybody in Europe. I mean i’m in a 100% agreement with you. Europe is a mess and they’re walking down this road of perfidy and it is perfidy because Mario really has no plan. The most honest thing he ever said was you should do whatever it takes to (inaudible) to preserve the euro and in that regard he has really saddled them in a terrible, terrible situation.Of course Merkle was his guardian angel. There is nowhere for them to go.Nowhere! What was last week’s blog about Richard? Mario Draghi’s circus, which this circus was in town. Nothing he said had a bit of honesty to it. He tried to control the narrative and now the narrative is his two words; persistence of conditions that they can control and makes the assessment difficult.Of course it’s difficult. They’ve destroyed the German favours because i’m on the financial repression authority so if you want to see the master of financial repression, take a look at Europe at what they’ve done to German favours because if you’re running inflation in a country, of 1.6/1.7, you got a GDP of over 2% and you have negative interest rate on a 2 year note of 60 basis points, you got a serious problem. While they’re sweeping it all under the rug, the problem is just building, and building, and building. I think that’s the real (inaudible) block to where we’re going here.China is interesting and Trump really his disdain for Merkel and Macron, and here’s a man who doesn’t take those (inaudible) lightly so I would watch his response. The German auto sector is definitely afraid with a 25% tariff and while we’re concentrating on China, we don’t hear much about Europe.I’m very cautious here and the European central bank again has put the world into a very difficult situation and it’s all based on debt and somebody calls it the doom loop because you have the European commercial banks buying sovereign debt. Why? Because its zero risk waiting so i can buy all the Italian bonds i want no matter what you think about them and I get to carry about them in my books with no reserves. Yeah it’s a pretty good game.


Bill: Can I just add one more thing about Europe? I got great points about Germany by the way.I look at what happened in Greece, and you know people forget about Greece. You look at what happened in that country since lot of corruption in the country and of course you know how the euro was created what they did to the Greek economy. Thank you Goldman Sachs. The fact that these new taxes and other regulations were then brought into the Greek economy. It’s throwing in another wet blanket on the fire and I see the same things happening. Look what’s happening in France for example, or look at all the different taxes and so on, they got people protesting and essentially these systems that they’ve created are unwinding in slow motion. It just doesn’t work anymore.


Yra: That’s absolutely right and you know it. (inaudible) they slapped him pretty good.

Give me (inaudible) because I’d rather listen to him. I think he talks more of the truth. Again, it’s not their narratives but it’s the narrative of what’s really going on and they applaud Spain is still 14.5% unemployment. So they’ve got massive problems and a lot of them start with the monetary policy because Mario Draghi did follow Ben Bernanke down the rabbit hole.

You know, one pill makes you smaller, and one pill makes you tall. He took the one that made him tall and he just can’t get out of from that rabbit hole. You will not sit back through it.


FRA: Bill for 2019, what do you see as the biggest risk factors? Market risk, credit risk, geopolitical risk, where do you see those?


Bill: That’s a great question. It’s pretty clear the economy is slowing globally. Many of the (inaudible) figures show that. I think the fed is done raising interest rates. I don’t think the Feds can continue to tighten interest rates. I do agree with Yra that the US and the rest of the world will run these deficits, will have more interventions, fiscal and monetary interventions, probably later this year, and of course credit spreads widen, we already see the beginning of credit spreads widening, the leveraged loan market pretty much shut down the end of last year and commodity prices look rather weak so you could see an interesting contraction unfold this year.

Their not gonna sit idle. Their gonna try to fight it is my guess and so I could see the stock crisis could go down at least 20 % or 30% from here.

I think earnings are gonna be a major disappointment and credit spreads will continue to widen.

So again they are not gonna sit idle, they will immediately intervene, they will basically threaten to go to negative interest rates.

I’ve been saying this for several years, the central banks want to tighten interest rates because they can. The economy is too weak. The economy is weak for all the reason we were discussing earlier; intervention, debt, the size of government, vis-a-vis the real economy, regulation, so I think they’re gonna intervene, I think they will threaten to go to negative interest rates and I wouldn’t be surprised if the deficits go north of a trillion dollars a year here in the US. I could see where the deficits go to $1.5 trillion very easily.


FRA: And Yra your thoughts on the biggest risk factors?


Yra: To me there’s so many of them. I come back to it and Bill was nice enough to give me the push of the edge which is the debt levels and I agree with him. I think that there’s no way that earnings could sustain themselves here with higher interest rate costs and on top of that,

if you get higher wages, it has to eat into profitability so these people who put forth the growth and profit numbers, which you’re not coming off of low profits historically, you’re at basically historically all time high of sustained level profitability which can’t sustain itself if labour is to get a bigger piece of the pie and interest rates take a bigger hit. I just don’t see. Now does that result in geopolitical problems? Not sure. We’re seeing some of it but on a global basis where i see the greatest threat is of course from the prime minister of Turkey, Erdogan who continues to get favourable play and I certainly don’t understand how because he always takes the other side of the United States. The don of Venezuela, Putin, Erdogan, the Chinese, the lineup almost looks like the scene of blazing saddles where all the bad guys are lined up waiting to get signed up. They cant get out from themselves. I make the mid east with Erdogan and whatever he’s really trying to do there, potentially a major, major global risk. There’s so many. I can’t even innumerate which one would be the most because I been to economics. This debt issue is really bothersome to me so i’m gonna go (inaudible) with that.


FRA: Given all this backdrop Bill, where do you see trading opportunities, investment opportunities, in particular, what are your thoughts on the gold euro and gold yen cross rates as well as yield curve steepening or flattening?


Bill: I don’t see again because I believe we don’t have bond markets anymore. I think central banks have distorted the, Jim Grant likes to say there are no more traffic signals right? They’re all flashing the same colours so central banks intervene, they distort the prices, create these false signals that enter the market place. I’ve been bullish on gold since 2002. I (inaudible) they were gonna print a lot of money and they have and they’ll continue to print money.

So gold looks like it’s finally breaking out of a, I’m not a hard core technical analyst but it looks like it’s breaking out of a falling wedge since 2011 which we were up around 1750. So i’m bullish on gold and i’m bullish on gold not just against dollars but against yen and euro.

Whether or not the yield curve stays inverted, it’s hard to say. I think what we’re really betting on is how quickly will the central bank here in the US will cut interest rates.

Yra brings up a good point. You got wages rising so maybe they don’t have the room that they had at this juncture that they had in 08,09, or 2010. Bullish on gold and the other thing that is interesting is watching the FAANG stocks decline. A lot of the movement coming out of 2015 the NASDAQ was just a handful of companies and it looks like the FAANG bubble has burst and so I think that’s gonna be real problem for the broad market as well.


FRA: And you say interest rates falling as you’ve mentioned earlier.


Bill: I think the central bank they talk a good game, you know, Powell has already flip flopped 3 or 4 times from Christmas eve when things were melting down. My guess is that they will try to lower interest rates and/or the government will run a greater deficit if the economy slows drastically in the 2nd half of the year. I’ll add the following. I do, without getting too much off topic, think that the technology wave of decentralization is a something that is very positive catalyst for the global economy but its a tiny tiny piece of the economy today but I do see how that could be a very positive outcome for the global economy. That doesn’t mean we’re gonna dodge the debt bubble or dodge the recession. I just think in the longer term, it’s something to keep an eye on.


FRA: By that do you mean block chains, robotics process automation?


Bill: Yeah I mean internet things, block chains, i sent a lot of time in the space last 5 years. When I look at all of the inefficiencies like just in supply chain for example, you’re talking about a couple of trillions of dollars (inaudible) in inefficiencies and so the movement of money, you know, why is the foreign exchange market 25 times the size of the global economy? The disintermediation of finance is something that I think will change the world but that’s a longer intermediate longer term phenomenon.


FRA: And Yra your thoughts on trading opportunities, investments, and in particular for the gold euro, gold yen, cross rates and the yield curve?


Yra: Well Bill and I never talked but those have been my favourite trades and in fact my biggest trade I took it off this morning with long gold and short the Swiss which has been good because the Swiss was a little unnerving but, you know Richard, I always give the alchemist, it used to be a year, now it’s a decade, now it’s probably a millennium and I’m going back to zero. The Swiss national bank is of course the alchemist of Europe because they get to print Swiss Francs that don’t seem to go down in value anyway and buy global equities. What better is that?! That’s the dream of the MMP (inaudible). Let me go print a billion Swiss francs and go buy a billion dollars worth of Apple stocks. Thank you very much! And that’s what they do and then they’re trying to figure out how they can get out of this hole. The rest of the world will start to mimic them but I believe in all of the gold currencies. The gold dollar has not been great but US rates have been going up and two things and I have this discussion constantly because my phone rings off the hook all the time talking about gold, don’t buy into the inflation nonsense. By that time, gold is too late. Gold is a protection against central banks absolutely realizing that they’ve gone down a path that they have no way out of and that the effects of what they’ve done. That’s what you wanna go for. The inflation will be the ultimate ugly effect but it feels it must have been a bad investment. Oh really? How has the dollar done? Would you rather own gold for the last 50 years or to be in dollars if you’re a foreigner? I would say you’ve been much better off in gold. So the gold has done what it’s supposed to, be a store value. Now my attitude is that, and I’ve done a lot of work on yield curves for 35 years, 40 years already, this is gonna get interesting this year and i’m looking for steepeners because my attitude is with this debt overhang, and yes debt does matter regardless of what Larry Summers, and Jason Furman Monday recent articles in foreign affairs, it does matter and then they have a cost and I say that any money manager who would put their clients in anything longer than a 5 year duration of US debt ought to have reexamined because there not operating as a fiduciary because there’s just too much uncertainty with the US debt situation. I’m not even getting into the entitlement argument. Again, we’re running a trillion dollar deficit at full employment. That’s heresy if you’re a Keynesian. Heresy. So I see those as worthwhile investment. I’m looking at Germany though as we come back to Germany because my question to any German is where do you go to invest? What are you doing with your money? Are you buying 2 year German debt? Is that doing it for you? I don’t think so. The shots yield at negative 60 basis points. You’re better off putting it into your mattresses of course because it will do you better. So real estate in Germany has already reached almost a bubble proportion which is highly unusual for Germans because they don’t leverage themselves. So i’m gonna watch the Dax closely. To me the German assets (inaudible) to them of course is that Trump gets aggressive and really starts pushing for tariffs on the German auto sector. I’m not invested there yet but I’m watching because my attitude is where do I go if i’m a German? I also like Mexico because as I say If the Chinese are serious in what they’ve presented on the issue, they’re really gonna ramp up their imports, Mexico has to be a beneficiary of that so I’m gonna watch closely and again on a relative basis, the pesos cheap and they also pays you an eighth and a quarter at overnight interest rates. I’m not involved yet. I’m waiting for the 200 week moving average and I like Bill, I’m not that good of a technician. I used it to establish my losses and potentially if I see momentum but its not the first place I go to do my work and that covers me in the short term here but again, I look at it with a trader’s eye more than I do with a long term investors eye.


FRA: Wow great insight as always gentlemen!


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