Alfonso Peccatiello: Assets that Will Save You in The Currency Reset
Tom welcomes Alfonso Peccatiello author of the Macro Compass Substack to the show.
Alfonso discusses the main drivers of economic growth and the effects of demographics. The labor force had been growing before the 80s but now with fewer children and older populations, it has plateaued and begun to decline. These changes are long-term and structural.
After 1971 and the scrapping of the gold standard there was a shift back to a fully elastic credit system. Hard assets are no longer required to back the currency. Society wants annual growth higher than one percent and today we use credit to expand the money supply. This can promote growth as it causes people to feel more wealthy which encourages spending.
Alf explains how there are two different forms of money in the system today. One is bank reserves and the other is the real economy. Q.E. expands the central bank balance sheet reserves but these reserves never flow to the real economy. They are used between banks to settle payments. Q.E. creates secondary and tertiary effects that eventually reach the stock markets and affect asset prices.
Reverse Repos operate as a relief valve for excess reserves because the Fed wants to keep bond yields in positive territory. So Repo’s is a facility where banks can park reserves and receive a small yield instead of purchasing bonds.
The main reason that bonds are bought today is due to regulatory requirements. Banks are required to hold bonds which are considered liquid assets. Pension funds also buy long-term bonds as a hedge to mitigate future risk.
He explains the Fed’s approach to maintaining their dual mandate of full employment and price stability. Currently, they are in a very tight spot as inflation is running hot.
The system is built around debt and is ‘working’ according to the establishment. There are no politically acceptable alternatives therefore the existing system is just extended by whatever means necessary.
Lastly, he discusses his approach to protecting his portfolio in this debt-based system.
Talking Points From This Week’s Episode
- Why the long-term drives of economic growth have peaked.
- How the modern unbacked elastic credit system operates.
- The two forms of money and why they are often confused.
- The Fed’s approach to price stability and full employment.
Time Stamp References:
0:00 – Introduction
1:06 – Economic Growth Drivers
4:00 – Technology & Productivity
6:17 – Debt Compensation
9:46 – Q.E. & Asset Prices
14:43 – Reverse Repos
18:43 – Taper Tantrums
22:44 – Real Bond Yields
25:34 – Feds Dual Mandate
29:20 – Can Kicking
34:39 – Risk Positioning
38:30 – Wrap Up
Alfonso Peccatiello is a former head of a twenty-billion-dollar Investment Portfolio and is a passionate global macro investor. He writes The Macro Compass, a financial newsletter providing actionable investment ideas and unique macroeconomic insights to enhance the risk/return of your portfolio.