The answers from this weekend’s Q&A:
Q: Any initial thoughts on the economic impact over the next several years of thawing relations with Cuba?
CR: Good question. I think it’s a much bigger economic gain for Cuba than the USA. Cuba’s economy is about the size of New Mexico’s so we’re not talking about huge gains to be made in the grand scheme of things. I’ve read estimates that this could create a few thousand jobs in the USA and boost GDP marginally. But the change in terms could have a massive long-term impact on the Cuban economy as they will have increasing access to all of the technologies and goods and services that have long been kept out of Cuba. I suspect Cuba will be a very very different place in 50 years than it is today.
Q: Seriously, how did you become so awesome? Your logic and avoidance of the trivial and “popular” is inspiring!!
CR: I think you have me mistaken for someone else. I’ve never been described as “awesome”. By Anyone.
Q: Hi Cullen: Love the site, particularly articles like Would u rather be right or would you rather make money…spot on…Just wondering if you have a rational , unemotional view of the macro in 2015, and how it affects your asset allocation going forward….
CR: Well, I don’t know what things will look like in Q2 (my econ modeling is quarterly based), but I don’t see recession risk in Q1 of 2015. So, if you’re familiar with my cyclical approach to asset management then I remain pretty bullish. You can read my brief research note on cyclically adjusted portfolio management here.
Q: I was wondering if you had any thoughts on Russia potentially defaulting and whether that goes against your thinking on sovereigns defaulting? Thanks.
CR: Well, Russia is running into the problem that anyone can run into a world with endogenous money. Remember, we can all issue money, but the problem is getting others to accept it. Russia is finding that it’s difficult to get people to accept their money at high values. So the currency is being devalued relative to other currencies and inflation is going to skyrocket in the coming year. This is happening because Russia’s break-even on oil prices is estimated to be above $60 per barrel so with low oil prices the Russian government has to obtain revenues in some other way or they’re likely to print the money to spend. This isn’t like the ’98 default which I wrote about here. This is a pretty different situation. Russia can print the money they need to meet their debt obligations, but they’re going to be doing so with inflation and currency devaluation resulting. It’s a much bigger problem than oil though. Russia’s economy just isn’t diverse enough. They’re still too dependent on revenues from oil so any time that revenue source runs dry the worries over inflation will jump.
Q: Is it net capital outflow or inflow when we have trading surplus (+)? It is called net lending (+) or net borrowing (-) in NIPA/FOF account. Intuitively, it seems like net capital inflow (?) when we have more exports and get more income from the rest of world.
CR: Right, a net capital outflow is when the country has a trade deficit and is in a net borrower position.
Q: Mish, Kyle Bass, Peter Schiff and I expect hyperinflation in Japan. I think they have reached the point where nobody is buying their bonds and the central bank is forced to monetize. They have to do this because otherwise the government can’t pay for the bonds coming due or the spending that is twice taxes. Governments never default on debt in a currency they can print, they just print. But even defaulting would not solve the problem since they are spending twice what they get in taxes. So they no longer have a choice, they must print like crazy. So high inflation is coming soon to Japan. I think in the next year. Do you think I am right this time? 🙂
CR: You’re going to keep asking this question every year until you’re eventually right, huh? 🙂 I personally don’t see the risk of high inflation in Japan. The economy remains too weak to generate the aggregate demand sufficient for high inflation.