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Ben Melkman, the founder of Light Sky Macro Hedge Fund, was recently interviewed on Bloomberg and he talked about the world economy and his expectations for asset returns. He expects the Covid-19 pandemic will usher in a world of permanently low-interest rates, huge deficits, sluggish growth, resurgent inflation, and declining U.S. power and influence. He also foresees “glory days” ahead for macro traders. You can find the show notes below.
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In This Talk, You’ll Learn About:
The problems with interest rates staying at zero due to huge budget deficits.
How the stock bull market is based on the FED pulling forward asset price returns
Why he thinks equity returns will be next to zero over the next decade.
The problems with a 60/40 stock-bond portfolio.
What are the social consequences of the US response to COVID?
The vulnerability of the dollar and why it might lose its dominance as a reserve currency.
Episode Notes:
00:05 Welcoming Ben Melkman, founder of Lightsky Macro to Bloomberg Front Row.
01:20 Themes that will dominate the macro landscape over the next few years. The death of central bank independence.
03:00 The problems with interest rates staying at zero due to huge budget deficits.
05:00 The risk of the US going into a Japanese style recession with low interest rates yet falling assets prices and no economic growth.
05:29 The problems with a 60/40 stock-bond portfolio. How bonds are no longer a hedge and are a liability.
06:50 How the stock bull market is based on the FED pulling forward asset price returns from the future to the present through stimulus and low interest rates and how this bodes poorly for future returns.
07:56 If the US can’t maintain a strong growth rate it will call into question the bull market in equities
08:52 Is the world in denial in regards to the bleak future of equity markets? World acceptance and consequences of the Virus, pandemic, pandemic response and slowdown of the economy and policy change.
11:26 Hard realities of government debt: How hard is it for governments to slash spending after COVID?
13:00 Why it’s politically unpalatable for congress to pay more of their budgetary expenditures towards interest payments on debt, hence interest rates staying low for the foreseeable future.
13:12 Why he thinks equity returns will be next to zero over the next decade.
14:50 Vulnerability of the dollar and why it might lose its dominance as a reserve currency.
15:58 What are the social consequences for the US response to COVID?
17:49 Why the US economy reminds him of the US economy in the 1960s going into the 1970s economy with stagflation. In the 1960s the central banks and economists didn’t think inflation wouldn’t spike due to government spending, the 1970s proved them wrong. If you combine lax monetary and lax fiscal policy you very well could see inflation.
18:57 Why it will take time for inflation to appear in the economy.
21:35 Are we seeing the end of American exceptionalism?
23:28 Thinks we will see a boom in macro hedge fund returns due to the volatility caused by central banks.
24:59 Return to the glory days of high macro hedge fund returns.
28:12 What is the most unpleasant surprise he predicts will happen.
