Currency Wars: Lining Up the Dollar Dominoes (w/ Brent Johnson and Lyn Alden)

hi everybody it's brent johnson here from santiago capital in san francisco and i have the pleasure today of speaking with lynn alden of lynn alden investment strategy i first came across lynn i think either late last year or earlier this year on twitter and she always does a great job of putting out fantastic uh charts and graphs and really some data-driven arguments uh when she's trying to make her points and i find her to be uh extremely smart i don't necessarily agree with her on everything but uh you know it's always interesting to talk to people that have a different point of view than you and so i'm really looking forward to talking to you today lynn yeah thanks for having me and i've enjoyed our back and forth a lot and you know it's it's been a a pretty volatile period for the dollar and yet it ultimately remains range bound and it's been you know kind of fun having a back and forth well i think that's really the interesting thing is if you look at the dollar i mean there's a lot of dollar bears out there there's also you know some dollar bulls and i've been pretty vocal about why i think it's going higher there's been a number of people who have been vocal about why they think it's going lower but the reality is it's the same place it was five years ago i mean it's had some breakdowns along the way and it's had some runs higher along the way but essentially it's kind of just flat but i think uh you know one of the things that that uh you've been known for is you've changed your opinion on the dollar a little bit um you're not necessarily a dollar bear or a dollar bull i think short term you're a dollar bear i don't want to put words in your mouth but that's my impression and we can talk about that a little bit but what what i know that in the past you've been bullish the dollar and then i know some things happened last year that made you short-term bearish so i think it'll be fun to kind of talk through some of the things that have happened over the last year and also maybe some of the things we see coming down the pike over the next few years and you know we'll just kind of talk about it back and forth sure sounds good yeah my approach over the past couple years is i i published an annual report that focuses on you know global equity markets including their currencies and for example in 2018 and early 2019 i ranked the dollar as about neutral and i was more bearish on the euro so overall i had a you know a more bullish view on the dollar in the yen compared to the euro and uh we've seen that play out uh pretty well but around the time the repo spike in september 2019 and then you know specifically in early october i kind of shifted more dollar bearish because you went from a tightening monetary policy in the us to a more loosening monetary policy and you know specifically in a rate of change terms we shifted from having among the tightest you know monetary policy in the world we were rising interest rates we were you know as you described as sucking up global liquidity you know but then we started to get some fractures in that we started to get uh interest rate cuts uh and then you know it kind of culminated in that repo spike where we had to shift from quantitative tightening to quantitative easing so since then i've been you know somewhat more structurally bearish on the dollar but my position uh changes a little bit depending on uh kind of multi-month moves like is the balance sheet increasing are they trying to taper things like that that can kind of you know affect the speed of that got it coming into this year the consensus trade by far was you know be long em and be short the dollar and that lasted for about three weeks and it completely reversed and the dollar started running higher ems kind of broke down equity started to break down and then we know we march came and we had the big you know dollar squeeze for lack of a better word um and that's kind of uh you know we have a difference of opinion there i know of why assets were getting sold but the the bottom line is they were getting sold but since then you know the you know the the fed and the other central banks have come in flush the market with liquidity um and going back to the rate of change i think you're right the fed has been the fed has been more aggressive than the other central banks although i would argue on a on a few different measures they're still behind the curve but to your point the rate of change has been in the fed's favor and as a result the dollars pulled back from from that jump it had so i guess one of the questions i have for you is let's say between now and the election what do you foresee and do you think that the fed stays aggressively on top of the dollar or do you think we get a rebound here sometime in q3 i think we've been oversold a little bit in the near term so i wouldn't be surprised to see somewhat of a bounce i think a lot of it might come down to whether or not they can agree on a fiscal bill later this summer because they are trying to taper some of their monetary support at least in the treasury market but of course you know recently we had the announcement of their willingness to buy individual corporate bonds so that kind of countered that a little bit so we'll see kind of a rate of change terms how their balance sheet is stacking up to their peers uh but you know in addition to that monetary side we have some of the fiscal potentially tapering right so we could see an end to the extra unemployment benefits you know the the initial impact from the the helicopter checks everyone got the 1200 checks that you know is wearing off at this point so it'll be interesting to see later this summer if um you know congress and the president can pass anything because if they don't we could see another deflationary crunch we could see another solvency event or they could pass something and kind of keep the party going through the election and it'd be interesting to see how that works out i think that's going to be a big determinant for the dollar yeah you know i think it's really interesting because it's getting you know everybody says the fed is independent and central banks are independent then they should be free from political pressures and i've always kind of thought that was uh incorrect for lack of a better word um it's it's a nice thing to say in reality i i don't think it's the case but i do think it's an interesting uh thing right now because after everything that the fed has done if we do get another deflationary move and um you know like a move down in asset prices or markets and the fed doesn't react and they quote unquote let it go down that could almost be seen as being political to hurt trump and so i think it'll be really interesting to see you know how the central banks act uh over the next three to four months as we kind of run up into the the heat of the election i have a hard time seeing the democrats um you know giving trump what he wants as far as a fiscal stimulus bill in q3 but at the same time they're kind of in a tough spot too because if you know we get a second wave of covid or if you know we continue to have unemployed workers you know that could be painted by you know trump or the republican side as uh you know playing politics as well so i i think it's really interesting between now and the election i would say i won't be shocked at all if we continue to have a range bound between now and the election i don't think that the dollar is going to break down significantly but i can't rule it out either but i i don't think we're going to have a huge move to the upside either um probably stay in this kind of this 95 to 95 99 range that we've had for the last three or four years uh but one thing i want to make sure that we touch on before we go too much further is in march when we kind of had the big move up in the dollar and the sell-off in assets um that was i would say that was caused because of a dollar squeeze so my first question to you is do you agree that there was a dollar shortage in in march and that's kind of what led to the sell-off in assets yeah i agree because you know as you point out there's there's more than 12 trillion in u.s dominated debt overseas and they primarily get that that the dollars to service that debt through trade so when you when we had a large trade shutdown you know we had a lot of them were cut off access from dollars oil prices went down so they had trouble making dollars and so we saw you know a rapid sell-off in risk assets and then it even spilled over into the treasury market so foreigners sold 300 billion dollars worth of treasuries in march and april to get dollars so i think we both agree on that so we both agree that there was a shortage we both agreed that they were selling us denominated assets in order to get the dollars to meet that dollar squeeze or margin calls however you want to turn that i think where we maybe disagree is who initiated the idea of extending the swap lines so they wouldn't have to sell their dollar-based assets i think you have put out some work stating that uh i i don't want to put words in your mouth but it's my impression that you think that um it was initiated by the fed so that they would stop selling treasuries in order in order for the treasury market to remain functioning correctly for lack of a better word and no it was not initiated by the other countries asking for the swap lines do you want to tell me how you feel on that and then we can kind of discuss it back and forth in my view i don't focus heavily on who initiated it it's about who has the incentive to do it and most of my view a lot of people focus on that the fed was kind of um you know providing like a good natured handout or bailout to some of their peers whereas my view is more too too directional right because the the foreign markets didn't want a big liquidity crunch in their markets and they can't print dollars but on the same side the federal reserve didn't want to see just massive selling of risk assets and then even treasuries and if you look at their press releases and their meeting minutes they repeatedly cited uh the dysfunction in the treasure market so we had wide bid ask spreads we had uh very poor liquidity and they cited uh heavy selling pressures especially on the longer end of the curve for a lot of their decisions including you know the international repo they offered they said you know instead of selling them on the open market they can they can loan them to us for dollars and then they also you know when we had that big uh brief spike in yields because there were so many foreigners selling and even you know risk parity funds and other domestic sources selling the federal reserve ramped up their qe to 75 billion a day at the peak to you know try to become the primary buyer and they actually ended up accumulating more treasuries that fed in march and april than the entire foreign sector had accumulated in the past six years just in those two months yeah i mean and i think that kind of goes back to the rate of change thing that you were talking about earlier and so interesting that i actually agree with you i think it's a two-way thing the us definitely does not want interest rate spiking that that's pretty clear um where i think that uh i disagree with a number of people and i don't know if i disagree with you on this or not is that despite the fact that treasuries were the yields were increasing it wasn't just treasury yields that were increasing if you look around the world treasury prices from a number of sovereigns were spiking and you know i think the treasury wanted all markets not just the u.s treasury but i think all the treasuries and all the central banks wanted all markets to calm down and get out of this liquidity crisis for lack of a better word so i think it is a little bit of a two-way street i think it's uh i think for the people who were arguing that the fed had to do this in order so that the the u.s government wouldn't go bankrupt i think it's a little i think i think it's a stretch now i know a lot of people don't agree with me but i think it's a stretch because i think if the u.s government goes bankrupt then france is going bankrupt thailand's going bankrupt australia is going bankrupt china's going bankrupt i don't think that there's any um any scenario under which treasury yields spike and foreign yields fall i'm curious what you think about that i think it it certainly could happen uh but it's not my base case i think uh probably going forward over the next several years uh any monetary sovereign so any country that has the power of their own printing press or you know it's a trickier case in europe because they kind of combine their printing presses but any of these monetary sovereign regions uh i think a lot of them are going to try to lock yields below the inflation rate so uh that's what they did that's what the us for example did back in the 1940s which was the only other time where us government debt as a percentage of gdp got got this high right so i think going forward you know they're already talking about yield curve control and they were talking about it uh even before the coveted crisis back in late 2019 they were already talking about yield curve control and i think that's going to be a pretty common policy worldwide um you know i as a base case i'm expecting treasury yields to remain somewhat higher than their peers but i think all of them are going to remain very low and then over the long term probably maintained below inflation rate yeah i'm pretty sure that's the goal i don't think any central bank wants their yields to be rising yeah well let's talk a little bit we've touched on a little bit but let's get into the swap lines because that's kind of been the primary tool through which the fed has used over the last three or four months to ease the dollar squeeze for lack of a better word right and i think right now the outstanding swap lines are around 350 billion they got up to 450 billion at one point the idea so so my point with the swap lines and then i i've talked about this a lot is that the number of people think that the swap lines are the tool either swap lines or fed repo or reverse repo are the tools by which the fed will bail out the rest of the world and many people have said to me there's no shortage of dollars and if there is a shortage of dollars the fed will provide every dollar that is needed and they will bail out the euro dollar system and including the us dollar system and the the swap lines is the the tool which they've used primarily so far can you talk to me about your view on the swap lines and then let's go back and forth on that a little bit i i want to get your understanding or i i want to understand your view of the of the swap lines and the extent to which you think that they will use them and to the extent to which you think they'll be successful in using them sure so if you look back uh even back in 2008 right which is the first time these tools really came out in earnest uh we had uh the dollar spike during that period now fortunately at the time it spiked from a pretty weak level right so it had a dollar peak earlier earlier in the 2000s it was in a more weaker trend at that point but it had a sharp spike in relation to a similar effect that we saw in 2020 here we had dollar shortage we had a spike we had a rise in the ted spread and so what the federal reserve did is they opened swap lines with several peer central banks major nations and provided dollar liquidity in exchange for their currencies collateral and what we saw is the ted spread went down pretty quickly so the swap lines were effective in that and then the dollar took several more months to work out before that finally went down but at least it arrested it from continuing to go up and it kind of put it in a range-bound state and eventually brought that down uh we saw it again uh you know since then a couple times they briefly used some swap lines in 2012 but it was a much smaller event and then in 2016 they had a dollar spike but they didn't have to use swap lines uh in 2020 you know their first tactic was to bring out the same swap lines they had back in 2008 so we had the ted spread spike we had the dollar spike so we opened the swap lines but then we actually added more countries to the list we more than doubled the list uh this time so they included several major emerging markets you know they they excluded some of our more antagonistic you know uh you know other countries but for many uh friendly nations they open up all these swap lines and uh so we've seen a you know a leveling off as you put it we're below our maximum we've seen a sharp decline in the ted spread again and the dollar went down from its peak of 103. so yeah i think the swap lines so far have been effective but they don't you know they're not meant to be permanent right but they can roll them as much as they want so the current time you know i don't think the situation's necessarily over i do think there's a decent probability that that spike we saw in march in the dollar might have been the top but it's no by no means guaranteed because we have to see what happens later this year if we have you know a little bit more virus uh interactions in the economy or if we see kind of disturbances around the election or uh you know different effects on the swap lines but currently it's so far it's been effective yeah it certainly has and i i think one of the things i want to get across to listeners today and lynn i i know you know this because we we've chatted about a little bit but i think it's really important in order to understand the big picture and to really understand my view is to understand that there are two different dollar systems there's the us domestic dollar system and there's the euro dollar system now for those who don't know euro dollars are dollars that exist outside the united states so that's not euros don't confuse it with the currency euros it's just dollars that exist outside the united states and the euro dollar market is arguably as big and potentially even bigger than the u.s domestic market the problem is is that based on you know fractional reserve banking and money getting loaned into its existence is when the flow of credit stops and reverses and goes the other way that's typically when the central bank has to step in and be the lender of last resort and you know kind of plug this liquidity hole the issue is that there is no entity outside the united states that has the jurisdiction or the authority to print dollars for lack of a better word and and put new dollars into the system to re-collateralize it um and i think that that is the heart of it because you know for those who say that the u.s is going to have to continue to print for the for to keep the us dollar system going i don't know who is going to print the euro for the euro dollar system to keep the euro dollar system going and if you think we're going to have to print a couple trillion domestically i can promise you we're going to have to print a couple more more than a couple trillion internationally to plug that hole and so do you believe that the fed will be able to provide 2 3 5 6 10 whatever the number is trillion via swap lines to the international market i mean ultimately do you think this will be successful i don't think they'll have to do that much because if you look at the total amount of dollar time in a debt in the world right so the bis estimates that the u.s going into this crisis had about 53 billion in debt here on our shores us dollar dominated debt which is easier for us to manage because as you point out we we're the ones that get to print dollars the foreign market according to bis had about 12 trillion or 13 trillion in u.s dollar dominant debt and of course there's a couple other layers we can put on that if you want to you know really look at the full size of it but if we use that as like a kind of a baseline number at least it's at least that big if not larger so they have a much even though it's a very large problem it's a smaller you know it's about a fifth of the size of the amount of dollar dominant debt in the u.s going by that number or you know a little more than a you know about a fifth so the magnitudes to address that are somewhat smaller and i think an important thing to look at is whether it's the solvency crisis or liquidity crisis because for some countries it's more of a solvency crisis whereas for others it's more of a liquidity crisis and one way i look at it is by looking at how much dollar dominated debt does that country have either in their sovereign government or their corporations compared to how much foreign exchange reserves they have and how much overall kind of assets do they have and particularly us dollar dollar denominated assets so if you look at the full scale you know if there's 12 trillion in u.s debt uh diamond debt outside of the country on the other side of that ledger foreigners own about 40 trillion in u.s assets and that includes stocks that includes corporate bonds and that includes about 7 trillion in treasuries and from what we saw in march and what we saw in prior periods they can sell those treasuries and sell those other assets in order to get dollars so for many countries it's not necessarily a solvency crisis because they have more assets in dollars than they have debts and dollars but it creates a sharp liquidity problem if they have to sell those assets both for themselves and for the us now for some countries like turkey chile argentina indonesia mexico they have a lot of dollar diamond deaths even relative to their foreign exchange reserves so they're they face more of a solvency crisis where they don't necessarily have the dollar assets to sell and that's when they have to really look at you know are they going to have to default or is the dollar going to weaken enough to give them more breathing room right so i think whether or not it's kind of a major crisis that we have to do trillions and trillions of swap lines to solve i think it's uh you know kind of a useful approach to kind of look at it country by country and break down how does each country stand and for the most part if you look at europe and japan you know the credit suisse uh you know estimates that their uh net worth total asset the total assets minus liabilities is about 115 trillion dollars now most of that is denominated in euros and yen right so uh and the bis estimates that out of the 12 trillion in uh us uh uh debt like dollar dominated outside of the country only about four trillion of that is in emerging markets which leaves the other 8 trillion mostly in foreign developed markets so you know they have 115 trillion assets uh they own a good chunk of that 40 trillion in dollar denominated assets and then they have about 8 trillion in dollar dominated debts plus you know if we're being more conservative probably a couple other layers of of dollar debt on top of that uh so in my view it's for most countries it's not a solvency crisis it's a liquidity crisis whereas for uh especially smaller emerging markets and a couple of the larger emerging markets it ventures into being a solvency crisis so do you think that these other countries will sell their us dollar assets in order to pay off their us dollar debts i don't think they're going to have to because i my my base case is that the fed will do what they can to prevent that from happening so if the whole system unwinds in a very disorderly way that's you know that's a potential outcome and that harms both u.s markets and foreign markets but uh from what we've seen they're probably going to do whatever they can to provide liquidity to prevent that sort of uh forced sell-off okay so let's pretend for a second and i i will acknowledge that you know you're possibly right maybe the fed can provide enough liquidity in the short term to put off or delay the solvency issue my question to you is let's say that they don't let's take this let's take the hypothetical where the fed doesn't provide the liquidity to the rest of the market uh who do you in what order do you think uh economies come under pressure do you think they all come down together or do you think it's a knock-on effect of dominoes well i think the emerging markets especially the ones that have you know the ones i mentioned the ones that have more more dollar debt than fx reserves they're the ones that are probably first to fall and we actually saw this play out over the past couple years you saw argentina crack we saw turkey crack we started to see chile crack so in order roughly of how kind of insolvent they are is roughly the order they begin cracking in with the us and then some of the other majors that have uh you know far more assets than liabilities they'd be the the kind of last to have these these issues but uh risk assets you know both especially u.s dollar damage ones but really risk assets across the world would have sharp sell-off if they have to sell assets in order to raise dollars okay so i agree so you agree though that we would have some kind of a progression they wouldn't all come down together and the u.s wouldn't necessarily be the first to fall i don't want to i don't want to put words in your mouth i just want to make sure i understand what your argument no yeah the us would not be first there are some emerging markets that would be you know first in line and so if those emerging markets start to fall do you think that there would be a contagion effect where now the middle countries the kind of the mid-market countries for lack of a better word would start to fall uh yes but at that point we'd also have the treasury market most likely seizing up like we saw in march so we'd very quickly have a lot of treasuries being basically put to the fed so the fed would have to ramp up their qe unless they want to have the treasury market remaining illiquid which they can't do and they're also trying to issue a large number of treasuries to fund these fiscal programs and to make up for the tax shortfalls that they're having so uh this would quickly become the fed's problem again because they would have to uh you know make sure that there's liquidity in the treasury market okay so i agree with you i agree with you would be a challenge for the treasury why wouldn't it become an issue for canada's central bank and why wouldn't it become an issue for england central bank and germany's central bank why would it only become an issue for the u.s central bank well it'd be an issue for all of them especially in order of um how much kind of sovereign debt they have because that's the first thing that they you know as a sovereign monetary system they can't let break right so right roughly in terms of debt uh so the ones that have control of their own currency are somewhat more buffered so the u.s canada japan now that the big question is europe because many of them you know they've linked their their printing press together so it would come down to how well they can coordinate so for example i also think there'd be a pretty significant risk in italy and spain for example yeah right but less so in in germany and things like that so so if this happened let's again let's for the sake of assumption this this progression happened right the the em dominoes fall and then some of the bigger countries fall in it eventually works its way up to where you know the fed and the you know ecb and the bank of japan are starting to get uh you know their rates are starting to rise what do you think happens to the dollar in that environment is that an environment where the dollar would rise or do you think the dollar would sell off there oh in that brief moment yeah we'd have what we saw in march we'd have a pretty significant spike in the dollar most likely because that would be the key thing that's kind of uh causing all these risk assets to fall okay so then is it fair to say that because you think that the high might be in for the dollar i think you you said that april or the march high may have been the high in the dollar and that because the fed is kind of the rate of change with the fed is quicker and faster and more powerful than the others that's kind of led to the dollar selling off do you think that the fed will continue to be the most aggressive and and will be able to continue to you know keep the dollar lower or do you think that we are going to have one of these re-escalations at some point so i think over the next several years as a base case that the the feds probably be more aggressive in terms of uh balance sheet expansion than some of these other major countries and this for a lot of reasons you know our country's very uh highly reliant on the services sector for example we have um you know more kind of wealth concentration so our median citizen is somewhat less well-off than the median citizen in japan and europe even though our our average wealth is is in many cases higher so our median is more vulnerable and that's the people that have been the most impacted in this uh kind of environment that we're in so we can kind of think of it as like a feedback loop if they don't do enough fiscal you know our country potentially risks as much or more civil unrest as some of these other countries uh because we have more people that are kind of just they don't have any net worth and and uh have lost income streams so we've also for example if you look back in 2019 the us went into this with a larger deficit as a percentage of gdp than most other countries so germany came into this with a fiscal surplus even some of the more troubled european countries they came in with you know two percent or three percent of gdp and deficits so the us actually went into this already kind of uh basically doing an mmt experiment where we were we were rising our deficits uh you know even at the peak of an economic cycle and just seeing how far we could go so we went into this more structurally uh in a fiscal deficit so as this plays out you know i think they're going to be periods where the u.s falls behind because if we get so far ahead for say that you know like we did this quarter we did so much more aggressive stimulus than a lot of the other countries i think we could see a partial pullback where others catch up a little bit but then i think the u.s is going to continue to kind of pull forward so you touched on two things there and i want to i want to i want to make sure i come back to it uh but before we get completely off the swap line i want to touch on one other thing um let's go back to the scenario where we have a if this doesn't self uh if we don't have a re-emergence of growth and we do have to go back to extending swap lines in greater amounts and we do get kind of this progression or falling of dominoes in an order when these other countries when we extend them liquidity via swap lines right the way it works is we give them dollars and they give us euros or yen or brazilian reals or australia whatever it is right they post their currency so where do those since those countries are also under pressure and they're you know feeling the deflationary pressures where do they get the currency to pledge to the fed well they print it exactly so if they print it and they give us their currencies how is it possible that we can print more than them if they have to print in order to get our dollars if we have to print more to bail out the rest of the world but they also have to print in order to get the dollars how does how do we out print them because we'd be printing what to do support that while also in my view probably printing more than them to support our own economy and one way i look at it is that we have to look at the starting point for which currencies can we say are overvalued or undervalued right so uh and there's a couple of different ways to do that some people prefer to look at charts but uh fundamentally i look at the balance of trade as kind of the key factor so countries that have perpetually strong currency the currencies you know arguably overvalued their import strength is very strong whereas their export competitiveness is weak because their currency's so strong so um the u.s for several decades now has had you know because of our global reserve status we've had very strong import power and we our export competitiveness has declined so our currency is propped up by reserve status and propped up by a dollar shortage so we you know we consume more than we produce we export our supply chains effectively to the rest of the world whereas countries like japan uh you know europe's pretty balanced in this regard their currencies despite problems are not necessarily overvalued they actually have closer to equilibrium between imports and exports so in a situation where liquidity for all currencies becomes very abundant ours is the one from the starting point that's held up by the dollar shortage so uh if that dollar shortage gets relieved like we saw you know back in 2017 to some extent and like we saw you know during the previous period of dollar weakness uh you know in the around the global financial crisis time period uh the dollar can fall relative to those other currencies just to get back to equilibrium especially because now we have more of a political mandate to bring some of our supply chains home which is very hard to do when you have a currency that's so strong that your exports are less competitive well but so you've just explained on the supply side but i think in my opinion you're forgetting the demand side again if you go back to those two systems the euro dollar market and the us domestic market there's a there's a huge non-us dollar market there is not a huge non-us euro market there is not a huge non-japan yen market there's not a huge non-brazil real market and so if if if you unders if you think about the way the swap lines work um this we let's just say that europe gives us you know a trillion dollars of euros and we give them a trillion dollars of dollars they don't take those dollars and go off and pay debt that already exists they take that trillion dollars and they loan it out to make it 10 trillion dollars in more dollar debt so they're reinforcing the non-dollar system or that they're reinforcing and making bigger the euro dollar system so i don't see how if if they're reinforcing the system how is the system ever going to change how will we not just maybe they can push this crisis down the road but how do we not just end up back at this crisis again one way i look at it is that we're getting to the point where it's becoming more structural right so whenever the dollar whenever the dollar gets strong foreigners because the dollar is so strong they're they they're not accumulating fx reserves anymore that tends that we're at least not at the same pace so in the three dollars strong periods we've had ever since the 1970s whenever the dollar gets close to these you know really high peaks foreigners you know they stopped funding the treasure market essentially or at least they sharply slow it down so that happened back in the 1980s that happened again in the early 2000s and that happened again ever since 2015. so they stopped funding the u.s treasury and then the federal government i mean the federal reserve and domestic institutions are forced to basically self-fund u.s deficits so now we're moving into a period where debt is you know we went into this year with 106 federal debt to gdp now so already over 120 just because of all the the clover response so now we're getting a more structural period where if the dollar remains strong and if that cycle perpetuates as you pointed out then it's gonna be very hard for the u.s to rebuild the jobs that we lost right because you know we've already exported most of our manufacturing trains it's going to be very hard to bring them back in such a strong dollar environment you're going to face civil unrest you're going to face a higher and higher uh you know just political tensions political polarization which we've already been seeing uh and we're gonna have similar problems in the rest of the world too especially starting in those in those emerging markets that are most exposed we already saw protests in many emerging markets and then you know we saw it in france so as long as that system continues to that level uh we're going to see basically uh high unemployment and civil unrest but the reason that the u.s is potentially more impacted is because we're the ones that have essentially exported our supply chains and we're heavily reliant on the services sector and we have uh you know left it so that our uh middle class is much harder much harder for them to uh find employment in this environment because you know we have less manufacturing and the virus fortunately or unfortunate has impacted the service sector even more than the manufacturing sector at least outside of certain various cyclical sectors so the us is going to find it increasingly difficult to get back to full employment if they don't weaken the dollar which means you know from my view it's always useful to understand incentives right so when we talk about a dollar shortage we're talking about a shortage in something that is not inherently scarce they can print them as much as they want they can just they can distribute them as much as they want and currencies all throughout the you know history devalue over time and they can devalue different rates but in this current regime as long as the dollar remains as strong the u.s is arguably more pressured and all these countries are going to continue to have large trade surpluses with us why would they continue to have a trade surplus if we go into a massive recession and we can't buy their goods anymore why are they still going to have a a surplus why are their economies not going to come under pressure like if you think about the the who the biggest clients in the world are china and the us are the two biggest markets now if we go into this massive recession and we can no longer buy these goods from other countries how is that not going to impact those countries how are their deficits not going to increase oh they will but it becomes their health quickly right so okay so because they can still to some extent sell to each other and because they make more goods if yeah but when they but when they sell to each other what do they invoice it in what currency do they invoice it in dollars usually right about 45 of global trade is invoiced in u.s dollars so if if we get into it let's say for the let's say the central banks are able to push this problem off for another five years somehow they're able to delay it right whatever happened in march they're able to delay it happening again for five years and over that five years the the us has to fund their own deficits and the fed has to buy all the bonds or whatever however you want to you know determine that and over that same time period we start extending swap lines to other countries because they have liquidity problems and they take those swap lines and they extend dollar debt because that's what a swap line does is it extends dollar debt and it increases dollar debt but over that same time period those foreigners are no longer buying u.s treasuries what happens to their the amount of their reserves versus their amount of u.s debt uh doesn't it starts to increase right so i guess i guess i can't figure out how we ever get out of this problem i can figure out how we can delay it yeah i just can't figure out how we don't eventually run up against it at some point again it's kind of like you know 2008 and nine we had this big crisis and they they papered over it but now here we are again um i can figure out lots of ways they can delay it i just can't figure out how they can solve it and i'm just curious if you if you have a an idea in mind where they could actually solve this no i think that's a great question i think that's what a lot of us are kind of wondering because i can see a range of possibilities but uh there's so much variance for what they could do from a very orderly way to a more disorderly way so for example if we look back over history the u.s gdp used to be you know 30 or 40 percent of the total world gdp but that's declined over time as the rest of the world and especially the emerging world has grown collectively faster than the us so we now represent a much smaller percentage of world gdp so back in the early days of the the current dollar system it made more sense because the us was the largest uh consumer of importer of commodities and we were by far the largest uh economy but as the world has kind of outgrown us to some extent right uh the world is you know we're still the largest individual economy but we're no longer the largest commodity importer and we're no longer as large of a share of the economy as you once were so a simple solution well not simple because it's you know it's going to take a lot of time is to uh do multiple currency oil pricing as a starter or and more broadly than that multi-currency uh commodity pricing and of course there are other solutions down the road they could do uh sdrs for global trade but that requires a whole lot of coordination which in this environment is very challenging but the simpler solution is to basically see you know a multi-polar currency world rather than something that's so heavily focused on one currency and you know because people often ask okay if the dollar is not going to be the global reserve currency who is who's going to take it from us right is it going to be the euro is it going to be china like of course not but the answer because even then there's no there's no longer one country large enough to supply the currency both for themselves and for the whole world to use the whole world to be locked into all commodity pricing in one currency so if they manage to delay it that gives them more time to do multi-currency oil pricing europe could buy oil and euros for example it's possible we could see china or japan being able to buy commodities in their currencies and that's how you can begin to diversify global debts relative to global trade okay so let's you just touched on another part that i think is incredibly important and that's the political part and the geopolitical part of of currencies as well um there's the finance side and there's this number side and then there's the political side right um do you think that the u.s wants to give up the the global reserve currency do you think that the u.s would stand by and quote unquote allow for lack of a better word saudi arabia to start selling a large percent of their oil to china and yuan or europe and euros i think it depends on which portions of the u.s so for example uh this current structure of having a very strong dollar it does uh benefit a very select few but then it harms a lot of the you know a lot of the blue-collar vote in particular which uh you know so that's why even trump himself has wavered back and forth on whether or not he wants a weaker dollar or a stronger dollar so i think at the current time the u.s is trying to have its cake and eat it too it's trying to bring back supply chains you know it wants to at least talk about bringing back supply chains and try to you know bring some of those manufacturing jobs back but at the same time wants to have a global reserve currency right so doing both of those things is extraordinarily challenging there's almost no way to see it happening maybe you have some ideas i'd like to hear them about how they could do both well so yeah i mean i think i think we're getting back to this you know we're talking about moving to a multi-polar currency world but we're also talking about the way we get there is we're extending dollar loans in the euro dollar market to allow them time to do that yeah but but the extension of euro dollar loans is diametrically opposed to move into a poll the multi-polar currency world if you take out dollar loans you need dollar reserves in order to match your revenues with your liabilities so you know if if we're if we're extending dollar loans and the dollar system via swap lines it's in direct contrast to moving towards a multi-polar world and and i don't think and so that's one issue but the other issue is i don't think that the us is ready to give up the world reserve currency and i don't think world reverse currencies are ever uh you know given up i think they're always taken now maybe it's done behind the curtains so not everybody sees it but um there's tremendous advantages to having the global reserve currency and i think it's a little bit of a misnomer to say that you know a strong currency is bad for your economy i think a strong currency is good for the blue collar workers i think if you have a strong currency your purchasing power is higher um i get into a little bit of a conundrum when i talk to some of my friends in the gold world who say you know the u.s can't survive with a strong dollar but they also think we should move to a gold standard well the gold standard is going to be a very strong dollar you know that that would leave the dollar being very strong versus other currencies so um you know i think that there's a way that well i long story short i don't think there's a way out of this mess i don't think that there's a way out of the mess of the us dollar debt both the u.s dollar debt and the euro dollar debt i don't think that there's any way that we won't run up against this roadblock in the world again because i don't think that the world will change behavior until they're forced to change behavior and i don't think that you that the u.s will willingly stand down as the global reserve currency but i do think there is a way and i'm probably not going to say this right and i'm probably going to butcher this a little bit but there was a there was a there's a guy named verafaka the i think it's very is it verifakas the the the greek uh the greek politician who wrote this about the matador where the us would extend these dollar loans and then 10 years later you know they couldn't they couldn't be paid back so they'd go in and they'd harvest you know these countries would go bankrupt or these companies would go bankrupt and then the us would go in and negotiate uh preferable terms again i think that the u.s is going to use the dollar as a weapon over the next four or five years i think it's gonna and i should say i think this is going to end extremely badly for the u.s this is not a game where the u.s ends up a winner i just think that they're going to win longer than everybody else if that's the right way to say it i think that the swap lines will be used as a political tool i think the swap lines will be used as a geopolitical negotiating um carrot for lack of a better word and i think we will end up in this multi-polar world i do agree with you there um and i don't know if it'll be the u.s versus china or u.s versus russia or how it'll actually come down my guess is that it'll be china versus u.s um but i think people are gonna i think countries around the world are gonna have to decide it's gonna kind of going back to that uh george bush line which i hate by the way you know you're either with us or against us and um you know i should also point out that i don't even really like my idea i don't think this is the way it should be i just think it's the way it's going to be um i don't think that the us is going to willingly stand down i think that they are going to become if people think that we've been a bully i think we're going to become more of a bully and i think we're going to use the dollar to our advantage and i think until the rest of the world in mass says you know screw you for lack of a better word as it relates to dollars i don't see a way out of this mess um and i think on a relative basis u.s will do better than the rest of the world because i do think we will try to bring some of these manufacturing businesses back to the united states the strategically important industries back to the united states you know industries that are you know have national security implications back to the united states and i think the treasury will or the the combination of the mmt treasury and the fed will issue however much currencies necessary domestically to rebuild those industries but i think we will deny the liquidity to the rest of the world if they're competing with us in those industries and then this is why i think it all ends badly i think in the short term the us outperforms the rest of the world but i think it all ends badly because i just don't see a way out of this dollar mess i mean it's it's lit it's a trap of the biggest uh i mean it's it's kind of we talked about this one time about the singularity right all these different things are hitting we've got this monetary crisis we've got political crisis we've got social crisis um and it's not just it's definitely in the u.s but it's all over the world you know we've seen it a lot in in europe and the middle east over the last couple of years we're starting to see it and you know in places like hong kong so it's kind of a global thing yeah i think that's definitely a tailor risk to consider is the politization of swap lines and uh you know in general access to the dollar and while trying to forcibly bring our supply chains home one thing i'd point out is that every time you know the harvesting cycle as you as you refer to it as over that long term the us it's not like we reset fully each time so over the over multiple decades uh the u.s net international investment position continues to deteriorate and for for viewers that don't know what that means basically uh you know a net international investment position measures uh how much assets does america own of foreign countries most you know how much do americans own overseas versus how much american assets do foreigners own so if you look back uh you know after world war one world war ii we were a creditor nation so we owned more foreign assets than foreign of our assets and over time especially starting in you know early 1970s that began deteriorating because we we kind of fixed the world to this dollar standard it strengthened the dollar relative you know it strengthened our import power and it weakened our ex export competitiveness so we started developing a more structural trade deficit so we we sent dollars overseas we sent supply chains overseas they reinvested those dollars into the treasury market but also into our stock market our housing market our corporate bond market so uh by 1985 we shifted becoming a debtor nation so foreigners owned more of our assets than we owned of their assets and then by the 2008 crisis our net international position was about negative 10 of our gdp and in the past you know 10 12 years alone that accelerated pretty dramatically now the government currently estimates that our net international investment position is worse than negative 50 of gdp so foreigners owned 40 trillion dollars in u.s assets and we own 29 trillion in foreign assets for an 11 trillion net deficit which is a little over half of our gdp and i've seen some estimates that might decrease decrease that a little bit so it might only be negative 30 percent negative 40 percent uh there's you know somewhat of a range there but uh the official government estimate is worse than negative 50 and so over the long term foreigners hold more and more of our assets and therefore have more and more leverage over us when it comes to uh how much they can damage our treasury market how much they can damage our stock market if they're forced to sell those assets in order to get uh you know dollars and that's why uh you know i view understanding the incentives of the uh very important here because if we try to politicize swap lines uh which is possible uh i think they're gonna find out pretty quickly how damaging that is to us because that's gonna you know foreigners have 40 trillion in basically leverage against us that they can use if we try to uh you know uh sharply increase let's say they do that for a second let's let's just stay on let's take chile for example right or let's take mexico if they sell all their and they they they actually don't have a great uh you know dollar reserve versus dollar liability ratio but let's let's just use any country let's say they sell fifty percent of their us treasuries or seventy five percent of the us treasuries to pay off their dollar debt and now they're left with little dollar reserves how do they operate on the global stage when they no longer have dollars well most of them are still producing cash flows and getting dollars that way so for example japan has has a trade surplus with us europe has a trade surplus with us even china has a trade surplus with us uh so i do like i pointed out there are some emerging markets that are just would but but i guess my point is if if if they're selling all their dollar assets and they're pushing us into this major major recession or depression as a result their trade with us is going to collapse yeah how do they how do they maintain this great trade balance if if their number two or number one customer is no longer trading with them or they've lost 50 of their their trade this is why i think it's important to factor policy response into this because as we saw earlier this year once this starts happening the the response is so large right because if they don't do that we get a massive deflationary shock all throughout the world the us international markets and basically it takes a lot of imagination to assume how restrained politicians would be in such an environment where risk assets are selling off the treasury markets becoming a liquid uh you know and then the federal reserve and the treasury to stand by and say okay we have we have protests in the streets i think yeah we have assets yeah i think we're in total agreement there i i i just have trouble i i i hear your answers and and then the the the data that you cite is correct because i mean i've gone and i've looked it up and i just that that kind of talks to me about what's happened the last five or six years i'm i think the next five or six years are going to be much different in the last five or six years and so i'm trying to figure out how do all the positive things that the the that the international community have continue for the next five or six years even though everything's gonna be bad for the u.s for the next five or six years you see what i'm saying like a lot of people will say to me look what look look look what the you know the the trade surpluses and the net investment positions you know from 2014 or 2012 whatever the number is until now you know the the us has gotten worse and the international community's gotten better but now the u.s all of a sudden for the next five years is going to go into a hole and all these great things that happen to the international community is going to continue to do well i just i i can't i can't get there and i i just don't see how that happens i cannot figure out how the u.s goes into a massive recession and the rest of the world doesn't go with us no i think if that happens we all go into a massive recession as well that's why my base case is that as soon as that begins forming every month that we kind of go further and further into that hole there's more and more policy response by the the treasury and the federal reserve to address that and i think if we're thinking about tail risks that can happen of like if they're just willing to shut those off and just kind of you know play chicken with the rest of the world and we have this big deflation of shock and we see what order we all break in you know one is i think that takes a very large kind of almost like respect for politicians how how restrained they would have to be in that environment which is not crazy right it's not normally a you know kind of a something i'd expect them to have but two we can imagine an opposite snare what if they do a tail risk in the other direction what if they realize uh you know how damaging that is and they try to get ahead of it so for example instead of politicizing swap lines what if they make some of them permanent so for example um uh you know the federal reserve has done all sorts of things in this crisis that people you know are still horrified by like buying junk bond etfs and buying individual corporate bonds and all sorts of things now what if they for example the way that the liquidity swaps work is we give them a dollar loan they give us currencies collateral so if we move to say you know if if the u.s realizes in his best interest to move to a more uh multi-polar currency world right so most currencies have foreign exchange reserves uh now for many countries that's low like maybe five percent of their gdp and for other countries that's very high it can be twenty percent thirty percent forty percent and for some of them it's over 100 but that's rare so if the u.s currently doesn't have almost any foreign exchange reserves are there's less than one percent of our gdp because for the past several decades we have not needed them we are the we are the axiom that the other ones hold so if the us enters a more multi-uh polar currency world one thing they might want to do is establish some foreign exchange reserves and one thing it could do is simply restructure the the currency swaps to to basically be a permanent swap like we give you a trillion dollars you give us a trillion dollars worth of euros uh same for yen and a couple other major currencies and the us basically uses those to establish foreign exchange reserves and they've you know kind of sent out permanent dollars to the rest of the world and i'm not saying that's going to happen i'm saying if we're imagining kind of tail risk scenarios where we politicize swap lines we also should imagine you know kind of opposite scenarios of how this you know if we're trying to imagine how how could it unfold how could it kind of be resolved that's one of the options i i agree that that i think is highly unlikely but i can't rule it out and i think you're right that would be one way again i think that would be that would be so to a certain extent the u.s relinquishing all the advantages of the global reserve currency which i think is again unlikely but you're right i can't rule it out that that would be potentially one way to do it um well let's talk you you you brought up something there um you mentioned what you know let's imagine these these these tail risk scenarios where they go the other way and where they're you know typically central banks and governments are reactive agencies they they're not proactive right they see the crisis they react to it it tides it over for a while till the next crisis and they react to it again but maybe they get maybe they do get proactive right and one of the things that i find interesting right now is the cash that the treasury has in their account at the fed is the biggest it has ever been it's like one and a half trillion dollars now it ain't gonna last because we have you know these huge trillion dollar multi-trillion dollar deficits so it's definitely going to get spent but what i find interesting is that i think part of the reason they had to extend the swap line is because they issued so many treasuries that the treasury sucked up all those you know what is it they sucked up like a trillion dollars of dollar liquidity in the last six months or nine months or something and so now it's in their account and if they had not if they had not extended the swap lines i think the dollar would have shot up even higher because that's typically what happens when the when the treasury issues debt but now what i find interesting is that they've got more cash than they've ever had but they are also scheduled to have like the biggest quarterly treasury issuance in history i believe i think q3 they're supposed to issue another one or two trillion dollars worth of debt i don't have the right number right in front of me but they've already you can see what i'm saying like i'm trying to figure out what's going on here i honestly i don't i don't have the answer i don't know i don't know maybe that maybe they're maybe they are proactively getting ready for a huge fiscal spend you know in q3 or q4 or q1 2021 um do you have any thoughts on that i honestly don't have the answer right now i i don't know i'm trying to figure it out yeah i don't have the answer either but i have looked it up so as you pointed out it's over 1.5 trillion dollars in the tga and historically it's never really gone over 400 billion and even that was pretty high they started to have a higher level so they could deal with like debt ceiling debates and things like that they would have cash on hand and their official target is because if you look at treasury press releases they want to have it down to 800 billion by the end of the fiscal year and within two weeks no i think by the end of the second quarter right i thought it was into the the final quarter which for them is uh their fiscal year yeah uh maybe that's it maybe that's yeah yeah their fiscal year ends uh september 30th so they want to have but that's still 700 billion that they want to draw down and so part of that could come from uh you know ongoing current fiscal programs uh but i i'm assuming that they want to draw that for kind of a late summer fiscal program we've already had you know the trump administration supported another round of fiscal uh the house democrats they they passed that that other very large fiscal attempt that they know wouldn't get through the senate but they passed one and then the senate uh has already talked about kind of a smaller package so i think you know all the different you know stakeholders have different views on what that fiscal is but they seem to be in agreement that there's probably going to be another round of fiscal this year um so it's not a certainty but it's definitely you know i don't think that the i don't think either party wants to be the one to pull away the punch bowl because they know that they'll get blamed for it during the election so i think they're kind of planning to have a lot of that liquidity for that next round of fiscal but i do think they're they might find it challenging to get that down to their 800 billion target by the end of the fiscal year okay so let's say that the let's say that they do that let's say they can just continue to pump out these treasuries right and to your point um you know the foreigners are no longer sterilizing it or whatever so it's largely you know the us domestic market and mainly the treasury you know they go through a few steps but essentially they're monetizing the debt yeah as our as is everyone else so again i don't think it's it's not a unique thing to the united states but you know it is what it is um you know if they continue to issue treasuries at that rate and powell just continues to you know do qe at the rate that he's doing now and he actually said well i don't know if it was yesterday or two did he testify this morning yes well the fed me the fed meeting was like was last week and then i think he testified it was either today or yesterday and he made the call i'm going to paraphrase this but he basically made the comment that if if if if markets recover then we would taper our bond purchases and if they if they don't recover then we'll continue so i guess my point is if he doesn't i mean the fact that he even mentioned the word taper i thought was kind of shocking because they've been just so dovish lately right um but if if they don't increase but we have this massive increase of treasuries it's kind of a net tightening right yeah in in q3 so i think we're it's you know they've got all this cash i'm i don't know i think q3 is going to be super interesting i think it's going to be volatile i don't know if it will be as volatile as q1 but i think it's going to be much more volatile than q2 uh do you have any any thoughts on that i view it the same way so uh as we go uh later in the summer at the end of july some of those uh extra unemployment checks expire unless they're unless they're extended so i think we could we're risking kind of potentially more civil unrest uh unless those are addressed uh and then uh there's kind of there's two main catalysts one is if the fed tries to taper and if we get a lot of fiscal while the fed's tapering that's you know that's dollar bullish that that drains liquidity uh on the other hand if they try to taper fiscal uh and continue taping monetary then we get a protect like a potential deflationary crunch again right so we have kind of a loss of buying power we get another deflationary crunch that could be also a dollar bullish and on the other hand if they do large fiscal and that the fed accommodates by increasing their monetization rate again so they they suck up all that extra issuance and if the tga account tries to draw down to get closer to their seven their 800 billion dollar fiscal year end target we could see a big flush of liquidity and i think that's kind of that's kind of trump's probably dream scenario is to get a big flush liquidity uh you know in the late summer early fall right before the election and that's that's typically bad for the dollar when that happens that's typically the dollar that the dollar typically falls on that on that kind of a spend so i think we could see kind of a kind of a pinball uh you know with a dollar going back and forth depending on which one of those things is happening at any given time we could see for example a period of tightening and then we could see a big flush of the the account so we could see kind of a dollar go up we get you know more and more liquidity uh issues we could see kind of a pullback in equities and then we could get that big tga flush to kind of prop up risk assets and devalue the dollar by a few percentage points going into the election there's a couple different kind of variables and it's important to watch out for the timing okay so we've talked a lot about uh you know the swap lines we've talked a lot about treasury issuance we've talked a little bit about politics um is there anything else that we haven't touched on that you think that that we should focus on sure i guess i have a main question for you is if you were to kind of phrase the the dollar milkshake theory today so uh i won't put words in your mouth but going back a few years when it was proposed it was based on the idea that the the us was basically raising rates while most of the world was not so we were we were monetary tightening we were kind of doing a very aggressive fiscal policy while also monetary tightening we were kind of sucking up dollars sucking up liquidity from the rest of the world now starting in late 2019 when we started to cut rates and then especially when we shifted to uh qe i think the the narrative for the dollar milkshake focused more on the foreign denominated debts so the whole euro dollar market uh is that how you kind of characterize that that is it kind of should be more focused on the the difficulty of unraveling that foreign dollar exposure and is the actual is the is the kind of the tight monetary policy done like how would you how would you phrase the dollar milkshake through today you know as with everything as as uh as events change you need to kind of uh be ready to adapt and change along with them i don't think the milkshake theory has changed all that much although the primary focus has left from interest rates to other to other aspects so you know the dollar milkshake theory basically says the us has a straw that we're going to suck up the liquidity from the rest of the world now the primary driver or the primary characteristic of that straw two or three years ago was higher interest rates and the fact that they weren't just higher but we were raising them and that was far and away the most uh bullish aspect of my of my dollar my strong dollar thesis but it was never the only aspect of the strong dollar thesis it was the predominant one and it was the easiest one to point out and the easiest one to to look at and say hey this is a big advantage but it was never the only one um the other parts of the straw include the the the deepest uh global markets in the world uh the biggest consumer economy we're the number one one the number one or number two client for everybody else in the world uh the dollar payment system over which capital flows around the world is controlled literally controlled by the united states and the fact that we can kick people out of it if we don't want to um the the rule of law now i know a lot of people laugh at me when i say the rule of law in the united states because some people think it doesn't exist and i won't argue that point too much other than to say show me another country where is this more again all this stuff is relative um also you know the fact that we are the uh the global superpower again i don't necessarily like it i don't really like our foreign policy but it is what it is and we enforced our dollar hegemony around the world we we we control the sea lanes um we we the u.s navy is a big part of the u.s dollar being the global reserve currency whether you like it or not and then also the the global denominated debt and the fact that debt until the whole system blows up debt is demand for the currency in which it is issued and i don't until the rest of the world can find another currency or another system which they're willing to leave and go to in mass you know that dollar debt is demand for the dollar and i think all of those things combined create much more demand for the dollar than there is for any other currency and you know this the the the this extension of the swap lines it not only forces the united states to print but it forces other currencies to print as well because the only way they get dollars is by pledging their own currency but if you have a system where both sides are printing and there's demand for one currency and not demand for the other currency then i think that's how you get hyperinflation or high levels of inflation but it's not in the dollar it's in those other currencies that are have been ha that are having to be printed in order to get a currency in demand and they're printing a currency that has little demand especially outside their own borders and so as that happens then i think the dollar goes higher on a relative basis now it might lose in real terms versus gold or some other real assets but that's i i to your to your initial question uh interest rates are still higher in the us than the other major countries around the world so on a relative basis they are still higher so it's still a factor it's not as big a factor as it used to be but i should also point out that it was the other reason that it was never the the interest rates were never the only factor was because i've always been of the belief that we're going to get into a situation where there will be such demand for the us dollar that the us treasury will revert to being the lowest yielding sovereign because other yields around the world will start to rise not because things are getting better and they're growing but because of counterparty risk and people will want to get paid more to own these foreign sovereigns so the idea that the u.s has to have the highest yielding currency in order to for the milkshake to work is has never been the case it was always the initial factor but it was never the entire argument makes sense uh and i think uh probably a decent way to wrap up to make it actionable for viewers is to kind of say you know roughly speaking uh how is if if your thesis plays out uh how do you think investors can best position for it and i'll say you know from my perspective uh if if my view kind of plays out like my base case and we you know the dollar continues to be rage bound or eventually goes down we have uh the us basically forced to provide liquidity uh if we have that kind of that that sort of play out of next several years so in my view uh you know i'm bullish on precious metals uh i'm i'm recently more bullish on bitcoin uh i'm pretty bullish on global equities uh and uh in the us market some of the more industrial equities some of the more like high quality cyclicals and i use treasuries in a somewhat counter-cyclical way so when we have kind of more froth and risk assets i take some chips off the table where we have kind of a sell-off i put some chips back on the table and that's been my approach and so i structure a portfolio in a way that kind of benefits from all currencies devaluing versus gold and versus other kind of hard assets but they can withstand kind of a dollar spike like we saw in march without kind of permanent capital destruction so how would you say that that you're positioned uh you know if your thesis plays out thank you for asking that question the uh because i think it's important to kind of to kind of understand this and that so i i actually do i have two different portfolios i have a long only portfolio where i manage money for clients and separately managed accounts and then i have a fund that's specifically designed to play the milkshake theory uh in the in the separately managed accounts we're largely trying to protect against a lot of the stuff that we see coming down the pike because we think it's for the most part negative for risk assets and in the fund we're actually trying to profit um from from the chaos that we see coming and so i think as an overall you know pie is how i have you know allocating clients and again i customize everything to everybody so all of my clients have different allocations based on their personal needs and wants and stuff but in general i think people will understand that i'm positive on us dollar assets versus the rest of the world now in the short term i do think that we're going to have another rise in the dollar i think that will initially be bad for us dollar assets or at least equities so i think we'll get another down draft in equities the the rise that we've seen in equities over the last two or three months is not the milkshake that this is not the milkshake theory as i foresee it in the in the heart of it um this is largely a liquidity driven rally by all the all the central banks mixed in the milkshake where i think that the dollar and and the dollar's been falling during this this rally of equities as we get further into the crisis that's when i think so i think equities will come down you know between now and the election let's say or early next year but then as we get further into the crisis and i think people will flock to the dollar for a number of the reasons that we've talked about i think that will push u.s asset prices higher um and i think you should also have a allocation of gold i've always said everybody should have an allocation of gold we will get into a situation where dollars in gold are maybe the two most important assets that you can own um and as other currencies fall away and you know people around the world look for safe havens i think the dollars in gold will be the two of the most important assets they will go to i do think that we'll get into a situation where foreigners if they those foreigners and those foreign institutions that have capital to invest who haven't had to sell their us dollar assets in order to fund their us dollar liabilities uh we'll increasingly look at the united states as a place as a relative safe haven now it doesn't mean that it's great but i think if again if i'm a brazilian manager and i can buy coca-cola and it pays me three percent a year and the brazilian real goes down ten percent a year and coca-cola goes up five percent a year i've just made a high you know double-digit return or in the teens and that's not too bad if i'm sitting in sao paulo you know looking at the brazilian market i think we'll see that uh you know on a relatively uh large basis and i think that will push u.s asset prices um higher than people think possible over the next couple years i think we're going to have a full-scale currency crisis i don't think that the swap lines will solve anything other than make the problem bigger and i think we'll eventually hit it and i think when that happens it's going to be really bad for the world and i i i don't like being a negative person um and i i would actually be fine if i turn out to be wrong i just uh i can't figure out a way out of this trap so anyway that's kind of how so long story short i would have gold some short term treasuries maybe even medium term treasuries um i would if you have equities now i'd have them hedged and uh you know if if we get another sell-off then i would be a buyer an aggressive buyer review of u.s equities makes sense yeah that's great talk i think yeah well i think you know i think as wrapping this up um i think you and i largely see a lot of the same issues we've identified a lot of the same issues i think it largely comes down to whether or not the central banks are able to handle the problems and what if they're clever enough or smart enough or creative enough in order to come up with ways to keep it all from unraveling and i think perhaps i'm a little bit less skeptical or more skeptical than you are um but maybe that's not the right way to say it but again i think we've identified a lot of the same issues it's just a matter of you know which way and this is one of the amazing things to me is i mean i i appreciate all the the conversations we've had on twitter i appreciate this conversation today it's always amazing to me that people can look at the exact same information and come to two dramatically different conclusions but you know that's ultimately what makes a market and uh you know i really appreciate your willingness to come on and you know talk about this stuff and not everybody can disagree with a smile on their face some people have a hard time but you seem to be able to do it and i hope i hope whenever we interact you don't uh don't take my disagreements as anything personal yeah same for me i've always enjoyed our interactions and you know i think a lot of people take things too personally and i think that's actually when people get into troubles when they start kind of tying their ego to their investment positions rather than just constantly like looking at objectively and saying okay what's changing uh what's happening now is my thesis still intact do i have to shift it and i think that's kind of what makes for you know kind of good investment outcomes is just always being willing to adapt as new information comes yeah and it's amazing how long these these big macro themes take to play out so you know like you said we've talked the dollar's been going sideways for the most part for five years goal yeah you know gold was down for six years now it's back up uh you know people have been talking about japan's gonna go into hyperinflation and the yen's gonna but it's still where it was it takes it takes a long time for this stuff to play out so uh anyway well it's great talking to you i'm sure we'll be talking again and uh hopefully the real vision listeners have enjoyed this and um have gotten some good value out of it yeah thanks for the chat if you're ready to go beyond the interview make sure you visit realvision.com where you can try real vision plus for 30 days for just one dollar we'll see you next time right here on real vision

Channel: Real Vision Finance

Views: 94,674

Rating: 4.8903522 out of 5

Keywords: Finance, Markets, Economy, Stock Market, Investing, Trading, Education, Financial Literacy, Recession, Interview, Conversation, Strategy, Insight, Analysis, Facts, Data, Fraud, Entertainment, Thesis, Short Seller, Real Vision, Equities, real vision finance, real vision tv, lyn alden, brent johnson, us dollar, dxy, currencies, currency

Id: jJx2LxEB6OA

Length: 73min 15sec (4395 seconds)

Published: Tue Jul 21 2020