Over the past several days, I’ve fielded a number of reader emails about a discussion, billed as a debate, between Zoltan Pozsar and mentor Perry Mehrling.
Maybe “mentor” isn’t the right word. If not, Zoltan is free to correct me. Over the years, I’ve habitually referred readers to “Bagehot was a Shadow Banker,” a short paper they wrote together, along with Credit Suisse’s James Sweeney, who infrequently appears as a co-author on Pozsar’s notes (or “dispatches” or whatever we’re calling them these days).
The discussion appeared as an episode of Bloomberg’s Odd Lots podcast, hosted by Joe Weisenthal and Tracy Alloway. A few years ago, Alloway accorded Pozsar the kind of respect the ancients reserved for the Delphic Oracle which, considering her unrivaled ability to secure interviews with Zoltan, makes her a modern day Pythia, I suppose. On Sunday, while recapping her latest consultation with the divine, she described Pozsar as having “reached a new level of fame this year” through his widely debated “Bretton Woods III” framework which I’ve generously called a “fairy tale.”
In truth, Pozsar (and he’s hardly alone in this) owes quite a bit of his “fame” to years of dedicated coverage outside the mainstream financial mediasphere. A little over a decade ago, the Financial Times‘s “FT Alphaville” column began mimicking the style and substance of that coverage, only to end up fading into obscurity because you can’t co-opt someone else’s formula and expect it to work for you as well as it did for them. Well, you can, but you’d need to be a very clever, and very diligent individual. Alloway is an FT Alphaville veteran.
I was obliged to listen to the Pozsar / Mehrling podcast, which was actually conducted as a live discussion. As Pozsar himself noted around halfway through, it wasn’t really a debate. He and Mehrling were talking past each other, at best. Mehrling implicitly suggested they were talking about two different things entirely. At one point during the Q&A session, Pozsar grappled with a question about a kind of reverse petrodollar system wherein the US becomes the global leader in natural gas and is thereby in a position of “absorbing” its own dollars. When he tried to pass the baton, Mehrling wondered, “What’s Henry Hub?”
All snark and shade aside, I do recommend readers listen to the podcast (here). Not necessarily Odd Lots in general, but the Pozsar / Mehrling “debate.” It’s well worth the hour. Most market participants feign familiarity with Pozsar and Mehrling without having ever read them in a serious way. Skimming a few paragraphs of Pozsar’s Credit Suisse notes doesn’t confer familiarity. Listening to the two of them is a decent shortcut. At the least, it gives you a sense of the two — their cadence and inclinations. At one point, Mehrling struggles to avoid calling Pozsar a proponent of de-globalization. Laboring as I don’t under any such pretensions to decorum, I didn’t bother avoiding it. In “Zoltan Pozsar Bears Witness,” I wrote that “Pozsar seems, in my opinion, to subconsciously favor China and Russia due to what comes across as a fascination with sea change.” I’m deeply (and unfairly) suspicious of geniuses peddling counter-narrative. It’s a “once bitten” sort of thing.
Believe it or not (and there will be at least two notable “nots“), I didn’t set out to deliver a critique of anyone here. That’s just the way it turns out sometimes when I start editorializing around an echo chamber I helped build but for which I receive no credit because the only thing an arrogant world hates worse than loose ends is success stories that “should’ve” been failures. (Sorry to disappoint.)
The point, rather, was to highlight what, to me anyway, was the single most important thing Pozsar said during the entire 76 minutes. Regular readers know I’m fascinated with the idea that inflation isn’t something central banks can actually control. I’ve written on this exhaustively (I write more on these subjects in a week than Pozsar writes in a year), but the most concise version can be found in “The Charge Fed Critics Miss Is The Most Terrifying Of All,” in which I ventured,
Inflation, as a phenomenon, is independent of central banks and money. It can easily occur in a barter system, for example. In many (most) hypothetical dystopian scenarios, hyperinflation is inevitable for food and energy. We may currently be living out a kind semi-apocalyptic scenario in which logistical challenges related to supply chain disruptions and war mean that some locales (Europe for energy, emerging markets for grain) are experiencing dystopian hyperinflation. The kind of inflation that’s unresponsive to central banks.
That’s only barely hyperbole. We may look up in six months (i.e., once winter runs its course) and discover that it wasn’t hyperbole at all depending on how things play out in Europe.
Pozsar, around 30 minutes into the Odd Lots discussion, said that “We don’t know how to think about inflation.” He then recapped a critical point from one of his missives published earlier this year. To wit, from Pozsar:
My impression talking to clients is everybody thinks about the spike in inflation charts as if it’s another basis. You know we are used to thinking about crisis of bases. Pegged FX rate and a market rate. A cross-currency basis. A LIBOR-OIS. A cash Treasury-futures basis. AAA CDOs versus AAA Treasurys. There’s a basis that creeps in always and it’s always as simple as someone throws balance sheet at it and the basis closes. This crisis of the price level — this inflation crisis — is a very different ballgame. It’s not as simple as raising rates because the world doesn’t work like that. It’s not as simple as doing QT because the world doesn’t work like that.
This was a rare case when someone was able to communicate something more eloquently off-the-cuff, in real-time, than on paper, with no time constraints. Some readers may recall Pozsar’s laborious attempt to convey the same general idea during the early days of the war in Ukraine. Then, it came across as belabored. In person, it was incisive.
As I put it in the linked article above, “the Fed and its many critics have at least one thing in common: They both believe monetary policy can be an effective check on inflation.” They’re wrong in the current circumstances. I’m sure of it. And Pozsar seems pretty sure of it too.
“This notion that the Fed can deliver 2% price stability is probably the reason why FX reserve managers over long periods of time started to diversify away from Bills into two-year Treasurys, five-year Treasurys and 10-year Treasurys because that’s a good store of value,” he said. “We’ll see whether that’s indeed the case or whether we’re going to settle into a period where 2% is not attainable.”
I’d say I couldn’t have said it better myself, but that’d be a lie. Because I have said it better myself. About five-dozen times over the past year. But maybe now that Pozsar said it, it’ll resonate.
In any event, go listen to the podcast. And credit where it’s due: Alloway had the most memorable line. “If you look at the US from a pure commodities perspective, it’s not in a bad place,” she said. Commodities are, of course, at the heart of the Bretton Woods III discussion. She continued: “We’re exporting oil and gas. I mean, I have coal in my basement. It came with the house.”
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