Global Macro Podcast #001 | feat. Julian Brigden

[Music] here's my big problem once when i worked at medley advisors we were on a phone call with a senator from texas and it was around the time of enron's collapse we were talking about the executives at edmond and you know what was going to happen and my boss was talking away and we were listening in and this senator just stopped at one point and said you don't understand i don't care what happens to skilling and all these boys i just want them to end up in a big dark hole with a boy called bubba who calls them shirley and at that point it just underlined one thing to me and that is the ultimate power of government to dictate your behavior because i've loved saying to people in the bitcoin space look i think it's a great trade you can trade this thing it's a high beta you know if you wanted to store a value precious metal whatever but the day that it ever becomes a big enough thing that it challenges the ability of government to control their own currency is the day that you are presented with the option of handing your bitcoin over in the same way that you did with gold in the 30s or trying to keep hold of it and if you're caught ending up in a big dark hole with a bloke called bubba who calls you shirley [Music] for me the best part of my podcasting journey has been a chance to refine my own investment framework through a series of conversations with extraordinary investors in every corner of the world in this series i along with my co-host robert carver and maurice siebert want to continue our education by digging deeper into the minds of some of the thought leaders when it comes to how the world economy and global markets really work to try and learn how they think we want to understand the experiences that have shaped them the processes they follow and the historical events that have influenced them we also want to ask questions outside our normal rules-based playground we're not looking for trade ideas or random guesses about an unknown future but rather knowledge accumulated over the course of decades in the markets to try and make us better informed investors and we want to share those conversations with you [Music] our guest today is a die hard global macro advisor who takes the noise out of the markets and make calm out of chaos and i'm sure you will enjoy our conversation with julian brighton of mi2 partners julian thanks so much for joining us today for this conversation as part of our mini-series in the world of global macro where we relax our usual systematic or rules-based framework to provide you with a broader context as to where we are in a global and historical framework and perhaps discover some of the trends that may occur in the global markets in the next few months or even years and ultimately how this will impact all of us as investors and how we should best prepare our portfolios we are super excited to dive into a few different topics in the next hour so not least because you have a strong view on a couple of the key macro themes at the moment and on top of this you're very generous when it comes to sharing your views and analysis on twitter and other platforms like real vision so let me kick it off with kind of like a 30 000 feet question which we've asked all of our guests on this series just to put everything into context and that's a little bit about sort of your big picture view right now not necessarily specifically on an asset class but just big picture what's going on in the world because a lot of people compare what's happening right now to events we've seen in the past whether it's the 30s or the japanese bubble the tech bubble the great financial crisis and of course on top of all of this we have something called a global pandemic which makes it a very unique time in the world right now so i just want to kick it off and hear sort of how you see the world from from where you sit look i'm a big believer in history i do believe that cycles repeat themselves i do think one has to be careful drawing two close analogies in there because i do think the world changes so we come up with new policy tools we come up with new economic structures in terms of say globalization in terms of technology and so things are not always exactly the same but they are frequently quite analogous so if you you know i think one of the things that some people have really underestimated and helped us quite a lot since the lows in the market is when you look at the economics for example around the world i mean this pandemic has been a total train wreck we are not going to come out of this whole but i think people have really underestimated the ability of central banks to play with their new toy in terms of liquidity and the interesting thing is is actually it's not a new toy it's a new toy perhaps for let's say g10 countries to be playing with but actually we wrote a piece back in uh in march and and and reiterated again in april where we drew comparisons to zimbabwe and iran and actually got a few people offended when they we said really what is the fed or what's the ecb or the bank of england or the boj doing any different than these countries have done i mean the best performing equity market of the year up until recently i think was the iranian stock market as oil went negative well what did they do they printed a shed load of cash and you've got a closed economy there's nowhere for that money to go except for in the equity market and it becomes a safe haven you know somewhere you can preserve the value of your cash because at the end of the day an equity is a claim on a tangible asset of one's you know form and so while i think there are economic comparison i think one's got to be a little careful about drawing out price action and saying okay well just because the economics are poor the price action of the assets has to be poor we use the economics and we model the economics to try and trigger the policy response function and we have done this since really 08 because it's really that that's driving markets and so yes there are many comparisons you can draw with the past but they're not always exactly the same yeah i totally agree with that even though i will say on this series we had lynn alton on the show and i think she she made a very compelling case in terms of the comparison to the 30s on the 40s but as we as we hear all the time of course history it doesn't repeat itself but it does rhyme and i think that's exactly what your sentiment is as well and since this is a global macro themed conversation and we will be touching on many different topics i i do think though that you should probably start if you don't mind giving us kind of your view as to why the us dollar plays a key role in all of this and especially when it comes to kind of analyzing and forecasting many of the trends that happens across different asset classes but it's always been my strong view that in a world where the dollar is the reserve currency that essentially dictates the cycle when raul and i launched macroinsiders the first sort of video the teaser video i did was on the importance of the dollar cycle and when you look about it from a from a purely investment perspective and the dollar is the denominator of most global assets so you know if you destroy the value of the denominator then that given that it's a tangible asset let's say you know let's pick something like copper or oil as long as demand doesn't shift anywhere in the world then if you just destroy the value of the of the denominating currency then that asset should rise in that currency's terms may not change in euros it may not change in yen or in sterling but it should rise in dollar terms and that's important as well because even if you're say located in germany like uh you know or managing portfolios say in germany like more it says you may frequently have a dollar benchmark and so even if you're just managing a normal portfolio that the effect of the dollar can have an enormous impact the other thing is is that we've always said that when it comes to the reserve currency and this is particularly since 08 when we've seen this quantitative easing call it really what it is monetary debasement the power of the reserve central bank is disproportionate to other central banks and the comparison we like to say is like look the market likes its drugs okay but the ecb and the boj and the bank of england can really only supply methadone to the fed's heroin as the reserve currency you literally can create reflation and in ultimately inflation if you can debase the value of or lower the value let's say of that reserve currency and so that's why it's so singularly important because it does dictate which asset classes you should be looking at how you should allocate your portfolio within some of those asset classes and that's why we just think it's it's the key thing to watch yeah absolutely rob before you jump in i also maybe wanted to just follow up just again as part of the context for our conversation and maybe as a as a natural follow-up to to that and that is you know so okay so where are we in the us dollar cycle right now in your opinion i think you notice when you look at the dollar cycle since and really we've only had a dollar cycle over the last 50 years i've only had freely floating exchange rates in the last 50 years um dollar cycles seem to be remarkably consistent in both length of time and amplitude in fact you know i'm sort of staring at a chart here in front of me which shows the rate of change of the dollar in percentage terms um and the cycle currently which has been running say from 91 looks almost identical to the cycle that we ran from 76 into 2002 which was the prior dollar high so from a cyclical perspective the dollar is basically should be in the process of peaking and this should be the end of the up leg of the third cycle we've had three 72 to 79 up into the plaza record down then into sakakibara's intervention in dollar yen when he drove dolian up into the 2002 high down into the gfc and now up again so if you look at that cycle that would tell you it should be now and in fact it's slightly overdue and i would say that that was down to one thing and one thing in particular and that was quantitative tightening janet yellen told us that it was going to be like watching paint dry that was plainly not true and if you look at virtually any dollar chart from the immediate second that the fed started to shrink that balance sheet the dollar went one way and if you look at it in twi terms it sort of went from 106 on the broad dollar trade weighted dollar index up to about 118 when they ended qt so it was really very very powerful but that's kind of extended the dollar cycle and then we got the kovid 19 funding squeeze which then again you know further catapulted that classic what we refer to as the napalm run basically when you get at what we refer to as a risk-off dollar rally so risk is falling stocks are falling bonds are rallying emerging markets are getting tired and feathered and the dollar is rising at the same time and because the dollar is rising it really exacerbates that risk off event and we liken it to a napalm run because left to its own devices all you will end up with at the end of the day is a bunch of smoking holes and charred bodies you'll just literally obliterate everything in its path so that was a classic kind of funding squeeze and what was miraculous is the fed came in really aggressively and incredibly quickly and went no stop we know the risk and actual fact they even went as far as co-opting the imf to say well we could do you know dollar funding as well and in in a question in three days we got basically what took them a whole year to do um in terms of the swap lines and then we got this whole repo facility which is a completely new uh concoction so i think what they've done is they've essentially arrested the the napalm run now all we have done is that while we traded it so we bought aussie we bought cable just above 115 you know and all this sort of stuff and they've been great trades all we've really done is just reverse that funding screens what happens here and now really will dictate the cycle because if if you're a trend follower you know and you look at no matter which really trend you look at whether you look at that uh the fed's broad dollar trade weighted index whether you look at bloomberg's dxy whether you look at deutsche bank's dollar try they're all pretty much of a muchness we've had a very strong trend line since 2011. it's consistent it's touched on multiple occasions we got very close to breaking it a few weeks ago it's bounced back from those levels as we got this little bit of risk off kind of wobble even though frankly most of this risk off is a u.s issue because they've been asinine to reopen as quickly as they they have done in some places but the fact of the matter is you've still got this risk off equals dollar rally and so we've sort of come back to those levels now when i look at the dollar there's a couple of things i was a dollar bull and have been a structural dollar bull um since we launched macro insiders like four years ago we i changed very slightly because i just thought fx had become very very boring at the uh at the start of 2019 and we really just didn't play it okay and then i started to get a little bit more interesting because we'd finally got to what i think that cyclical point of the turn and so i my focus turned on to more could we actually be seeing a turn and look i have a lot of sympathy with peers and my colleague raul on the macro insider product when he talks about structural problems and shortfalls with the dollar and why the dollar is very dangerous and why it can do what it does and he's absolutely right i mean the biggest problem that we've got is that the us is not running the size of current account deficit that it needs to do in order to support its status as the reserve currency this is a classic example of what one refers to as triff's dilemma and the reason for that is that we've developed our own domestic oil industry or expanded the size of our domestic oil industry and that has meant that our largest single import item is no longer being imported with the same degree of gusto in size so what's filled that gap has been capital account outflows because you have to supply the world with those dollars the problem with capital account outflows is they're bloody fickle in a world where you can just go click and you can eliminate your brazilian etf holdings you can create this inherent fragility within the system and that's why you can get the sort of napalm run that we just saw and that's why for example in 2019 when we got some of these emerging market tremors you didn't see the whole sector kind of wobble just individual blocks just imploded and they didn't just crumble i mean brazil just didn't crumble a bit it just went overnight it disappeared because it was just reliant on this flux of super hot money to keep it stable i think the good news is is that the fed essentially now through this expanded balance sheet and through these swap lines has essentially mitigated that funding shortfall they've closed the gap between global gdp which has come down but they've closed the gap between global gdp the u.s current account deficit and they've essentially filled that that hole and their money is going to be a lot more sticky because i think they're bloody determined not to allow the dollar to strengthen now that just gives you stability it doesn't dictate what happens next but it is usual if you look at dollar cycles that the end of a dollar cycle occurs with the risk off dollar rally if you look at a broad trade agreed index you get crises you know whether it's the latin american debt crisis in the 80s whether it's the asian crisis in the 90s whether it's china's d-val in 2015-2016 they all pretty much occur at the same level of dollar strength you then get that final push that as i said the risk off dollar rally the napalm run but that typically is the end of the cycle and when i look at the us there's a couple of things that make me a little committed to the idea that this could be the top of the dollar cycle one of them is relative u.s economic weakness even if you believe and i'm not sure that i necessarily do i'm not sure it really matters because the numbers would have come down anyway but even if you believe that u.s unemployment has peaked and that last number of you know just over 14 is actually a real number and not some sort of manipulated number because they i'm not saying they did it in a machiavellian way but it was manipulating the sense of how they can they conducted the survey i was amused in inverted commas when i heard a story saying oh my goodness german unemployment has hit post 2015 highs right well the u.s just here if we believe the number post second world war highs and if you don't post great depression highs the point is is we are starting in an economic hole which is arguably much much deeper than many of our peers and that is a virtue of the fact that we have a super flexible labor market typically you know many economic bulls will see that all equity bulls will see that as a strength at times like this is definitively like an achilles heel because typically unemployment doesn't do these i mean i think if you go back to the late 40s the quickest trough to peak to trough that you saw was a two-year cycle so in other words even if you believe and i don't most of these people are going to get re-employed over time but i think we could have another debate whether that's the question or you know the case or not this thing can just drag out for at least another 18 months so i think the us is going to have a much bigger unemployment problem than many people appreciate i think that's going to necessitate a hell of a lot more spending the second problem that the us has got is that if you chart us domestic oil production in other words this growth of this shale story particularly since 2011 it correlates very very well with relative us industrial production outperformance okay whether you should do that against the eurozone or whatever now we're already seeing that sector shrink and this is the second time that investors have been burned in the shale space the first one being back in 2015 2016. i do not believe that we are going to see a shell industry come back with anywhere close to the same strength and output that we had previously and i think that will weigh quite heavily on u.s relative industrial production i think that's been part responsible and will be responsible for maintaining the interest of collapsing the interest rate differential say to the eurozone which is important in terms of currency evaluations and i think that will not come back very quickly in terms of the interest rate differential i mean currencies generally do over time despite the fact if you look at say 10-year buns 10-year treasury spreads and you put the euro over it you'll see large appearances of divergence but increase most of those were a function of central bank intervention so if you looked at say the euro in 08 it got all the way down to sort of 125 and then they they launched qe1 and then the euro strengthens and the dollar weakens and we go all the way back up to 150 2010 the euro got down to 120 they come out with qe2 and up it goes and gains it and reattaches itself to those interest rate differentials well at the moment those interest rate differentials will tell you 130 for euro dollar the same is true of the relative a current account deficit that would also tell you 130. the budget deficit i think in the u.s is only going one way i don't see that as a positive as i said i think you've got arguably a potentially much weaker economy here than perhaps you will have uh in other countries that budget deficit is already straining the treasury market so if you look at say um treasury dealers primary holdings okay and let's remember one of the reasons that they launched not qe at the end of last year is because we were starting to run into problems with those primary dealers their balance sheets were getting constrained by the fact that they were obliged to take down these auctions well that hasn't helped at all the fact that they've done all this buying because yields have dropped so much so the problem now is you've got a ballooning deficit current account deficit so a budget deficit you've got a large current account deficit you've got a narrowing interest rate differential how are you going to attract this cash to fund these deficits and to my mind the thing that has to give if the yield curve is not going to be allowed to price in the necessary interest rates and we know that they can't do this right we know that they have to introduce some form of explicit or de facto yield curve control well the variable that has to take the strain is the currency if you look at the relative size of the fed's balance sheet and if they're going to have to backstop this treasury market right their balance sheet is already exploded relative to the ecb's and the bojs that's generally been a pretty decent predictor of the value of the currency and that would also tell you a hell of a lot weaker and then i think there's a final factor which people don't appreciate we've talked a lot to clients about what i would recall u.s exceptionalism and u.s exceptionalism we refer to as a self-reinforcing true to use soros's term reflexive cycle whereby as you buy the asset the appreciation of the asset from your purchase actually encourages you to buy more and feed strength so if you think about one of the classic examples was australia from 2009 to 2013. so cast your mind back to the beginning of 2009 the world had imploded then we get the americans come out with qa the dollar starts to fall as the dollar starts to fall um the aussie starts to rise very slightly as the dollar starts fall commodity prices start to stabilize and start to rise then the chinese come out with their big fiscal stimulus that actually gives a buyer to those commodities so what you get is you get this virtual circle where the aussie is rising money is naturally flooding towards australia it's floating towards australia as well because the commodity sector is booming as that's happening the rba goes oh i actually need to raise rates so they raise rates more money flows into the aussie the aussie banks borrow that money they then lend it to their own domestic housing market which overheats the market even more which causes the rba to raise even rates even further and inflows more money so you get this truly reflexive virtuous cycle but as we saw in 2013 that reflexive cycle which is virtuous can turn vicious if you get the wrong the events start to unfold and and it unwinds and i think that's a real risk here in the united states so we've had since really 2011 if you look at the broad trade way to dollar index and you put it against the msci us versus the msci in the rest of the world x the u.s you'll see the cycles pretty much follow so what we've had is a rising dollar which has made foreigners want to own dollar assets so they've looked around and what have they bought they bought high yielding corporate debt because it's been the best stuff that has enabled then the corporates to borrow that money buy back their own stock as they bought back their own stock the equity market's gone up so it's even more sexy to go and invest in the us and the feds raised rates no others are central banks have raised rates right so even more money floods in and you create this very virtuous cycle if the dollar starts to break because now the fed the us isn't that sexy a place to invest the domestic economy really isn't any it's arguably worse than some of its peers now around the world higher unemployment a weakening domestic oil industry the corporations can't buy back as much stock because i it's frowned upon be the debt you know they some of them can't fund themselves in debt um you've got issues now with the banks right the banks you know can't pay dividends they can't do buybacks all these sorts of things this cycle just suddenly starts to change and it doesn't you know it could turn vicious but it can just crumble a little bit at the edges and that generally slowly turns the cycle and to go back to your first question niels if you look at the dollar from 2002 to 2008 it dropped 30 percent in broad trade weighted terms the crb rose threefold so if you want to see the power of the dollar and where it dictates you should put your assets that's a very classic example yeah so that's kind of where i am as i said we've come down to these big long trend lines since 2011 whichever one you want to pick uh as your poison we got close to them the deutsche bank twice literally touched it a few weeks ago and then bounced straight off so we haven't broken yet but i'm kind of thinking you know we will maybe it'll take a couple of months maybe we'll have to see a little bit more weakness maybe we have to see the fed come in and do their real qe because it's been interesting that when you listen to a hawk like loretta mester she came out a few weeks ago and i thought in a very very telling speech said oh the qe we've done so far really isn't qe this was just designed to stabilize the financial markets as the economy starts to recover that's when we will come out with old-fashioned qe and i'm like jesus what's that is that another you know 80 billion a month trillion a year and the answer is almost certainly and it'll be masked as a way to probably control yield curve control come september um to prevent those yields spiking as the u.s treasury is just puking out debt yeah oh absolutely rob what's on your mind today quite a lot i i saw you taking notes rob so yeah well i normally do about half a page of notes for every speaker i'm up to two pages for you already julian so uh okay but i barely know where to start uh i do kind of like the because and i originally trained as an economist myself i do like the fact you can bring everything back to sort of ppp and essentially the idea that ultimately it should come now to interest rate differentials and relative inflation and so on um i'm a bit it's i think it's kind of interesting to look at valuations of of you know equity and bond markets between say you know say u.s and europe um i mean i've always i felt that the u.s equity market is overvalued relative to the you know the uk and european one for quite some time the uk equity market is kind of famously cheap um and you know seems destined to remain so so i can kind of buy the story that everyone's bid up u.s equities just way too much it's reached the point now where we're gonna we're gonna start selling them and buying cheaper stuff elsewhere especially as you say in an economic sense they're not doing so well and i can certainly by the argument that there's going to be a torrent of cheap money coming from the fed and if you just look at the raw numbers you know the fiscal stimulus um the actual raw numbers of fissile stimulus in the us i think is running at something like twice in what we've got in the eu and about three times what we've got in the uk um the area i'm a little bit more skeptical and it maybe it won't affect the fx picture so much but but in terms of the individual markets if i look at the bond markets you know i can still get 65 basis points on the us 10 years which doesn't sound very much until i look across the pond at the 10 basis points i can get here in the uk and the minus 65 basis points that the german government will uh take me for the privilege of lending to them so i'm just wondering how these these evaluations fit together with with the fx you know and look i i i do get that look it'd be definitely if you're european i mean you are basically being fined as we know you know to to put your money into this thing um i think one's got to be a little careful because remember not all of it goes into the sovereign space right so a lot of it ends up going into some of these other names for example i mean we've written quite a lot extensively about how the japanese have been quite big buyers and funders of shale right they were um a lot of these clo uh stuff has been owned by you know the likes of naren chukkin and these sort of guys and so they've actually taken quite a lot of corporate risk on there and i think that is going to come home and roost so it's not necessarily just a pure interest rate differential i think there are some credit concerns in that space and as i said i'm a little worried while we played very aggressively this sort of rebound in the speed of growth that once the dust settles you'll actually find that some of these growth numbers in the u.s are pretty damn poor and some of the underlying spaces are pretty damn poor the other thing i would say is frequently a lot of this stuff is hedged right so you can you can reduce that that 65 basis points or you you pick up from there but look i'm i'm not saying it's going to happen immediately i will say that when i talk to a lot of my big bond clients and you know big real money guys who's the numbers you know of aum just make your mind sort of spin they as i do frequently believe that in a world where you're going to essentially distort the price discovery of a rate differential that fx is where you start expressing your concern so you should shift vol kill vol and they've been big buyers and it's worked incredibly well as we have been advocating as well of countries with large current account relatively large current account services so don't get me wrong i get it you know in a world where you can get some positive carry in the u.s i don't think it's going to disappear overnight but you've got to balance that against the deficit where that's just going to keep going going going going and going and you're not really going to be heavily compensated for that you know if if the curve was allowed to naturally do what it should do and you were saying oh i'm getting two and a half percent okay i'll take that risk well 65 basis points may not be enough to stop a gradual decline [Music] hey jillian yes not a question more more an observation just throwing that in because we're talking about the dollar and i know you're the dollar the dollar bear and raul for instance is that dollar ball one of the things that i've noticed just you know following markets throughout the day is that the short-term correlation between the s p 500 and your u.s dollar has become increasingly negative over the past two weeks i don't think there has been a single day where if the s p 500 is up dollar's down if the s p 500 is down dollar's up and it's kind of like it's kind of like clockwork for the last two weeks and it hasn't been that strongly negatively correlated in in weeks prior it's it's been a much more independent market so there seems to be something going on there i'm not sure why or why that means we like to do something most which i haven't done for a while actually but you remind me i should ask one of my quants to do it and that's you look at the price action of the s p in the overnight session versus the intraday session so for example heavily moving into the end of last year what you'd seen as the dollar strengthened particularly since 2014 is almost all the vast majority of the gains had come in the overnight session right as opposed to the us session and what it was was this that's right u.s exceptionism trade as johnny foreigner said oh look the euro's going down yours oh i've got some dollars what do i do oh let me go and buy some spoos right and you get you get your s p futures on and that's what that did and then that got flushed out horribly as we saw in march where we got that funding squeeze and the euro just exploded right because we were carrying with short euros long s ps so i haven't looked at what's kind of going on with that flow but that might be an interesting factor to watch yeah good point well what i'd like to do is and this may get a little spicy here but let's let's throw in two more currencies into the mix quote-unquote currencies i'm not sure you need to tell us if you think they are currencies gold and bitcoin here we go here we go here we go i was waiting for that rob let's please start with bitcoin okay let me look i'm not an expert on bitcoin and i'll be the first person to admit that i should have taken this thing more seriously where i kind of got interested in bitcoin really was when it was in the bubble formation look like twitter is a bit of fun it's also a bit of advertising you know you don't give too much away but i do love it you can bait people and you can set them and they all go you know you get all this twitter storms that comes through so basically in in 2018 early very very early 2018 we said ah this is a classic bubble this thing is going to burst has all the patterns of the saudi stock market since you know in 2006 the nasdaq in 2000 it's just parabolic in fact one arguably one of the biggest bubbles you've potentially seen oh yeah should have been bitcoin yeah i mean it was just i mean the rate of change on this thing just made some of these other bubbles just look pedestrian frankly so we did we got it kind of into there and then i just sort of moved away because here's my big problem once when i worked at medical advisors we were on a phone call with a senator from texas and it was around the time of enron's collapse we were talking about the executives at enron and you know what was going to happen and my boss was talking away and we were listening in and this senator just stopped at one point and said you don't understand i don't care what happens to skilling and all these boys i just want them to end up in a big dark hole with a boy called bubba who calls them shirley and at that point it just underlined one thing to me and that is the ultimate power of government to dictate your behavior because i've loved saying to people in the bitcoin space look i think it's a great trade you can trade this thing it's a high beta you know if you wanted to store a value precious metal whatever but the day that it ever becomes a big enough thing that it challenges the ability of government to control their own currency is the day that you are presented with the option of handing your bitcoin over in the same way that you did with gold in the 30s or trying to keep hold of it and if you're caught ending up in a big dark hole with a bloke called bubba who calls you shirley and frankly that's why i have never ever advocated it as an investment i think there are alternatives most notably precious metals which i don't think this time will garner the same degree of attention in a weak dollar environment that they will ever be confiscated for want of a better term i think we've seen that bitcoin whether it was facebook's attempt whether it's what the chinese have done bitcoin is perceived by governments and central bank as a threat okay i think if you are really trying to preserve the value of your money sticking in something that could end up getting directly confiscated or end up putting you in a hell of a lot of trouble and i know these guys will say yeah but this is the whole point i can keep it off in this server and it'll all be safe and i'll be like yeah right and how the hell are you going to spend it and what if they catch you and all these sorts of things it just isn't to my mind it's not worth it but look structurally we've loved gold and silver for quite some time now i actually prefer silver we advocated uh in march to buy uh we were long silver from the start of last year from like 12 and a half bucks um we also long gold gdx and you know et cetera et cetera but silver's really performed very well in march we doubled down because the rsi between gold and silver had got to 55-year extremes and silver's outperformed very significantly but i do like them because i think there are protections against this collapse of the dollar and i do like silver because generally it will outperform in a more inflationary stroke reflationary environment in fact if you look at the ratio of gold silver it's pretty much a mirror image of five year break events so it really is an inflation play and that's ultimately where i think we're going to go if i'm right about this dollar so yeah i like them i think they've come gold in particular has come quite a long way i think we need the dollar to take the next leg down but i mean if you look at the chart of silver which i'm just pulling up as we speak if you look at the chart of silver and you take it back all the way to 2002 what you'll see is the high on the dollar occurred which is basically in march of 2002 occurred with the low on silver which was under four and a half bucks and then the high on silver occurred with the low on the dollar which was in uh april of 2011 at 50. so you want a high beat of balls to the wall short dollar trade then it's long silver because you could make it's a 10 bagger 18 and a half to 19 bucks big resistance break that you're off to the low 20s break that and really you're off to the mid 20s break that sky's the limit well let's see if we can't get you to talk about another market now we talked about bitcoin where clearly there's a limited of the free float another area that seems to be getting into the same is things like german government bonds not a lot of free float anymore as far as i can tell and of course i know the us is different right so if the bond community decides that rates are going up maybe the fed can't stop that but in many other countries there's not a lot of free float left in bonds japan we know germany i mean how will yields go up again so to speak i mean i don't think they will okay i think to my mind this is when your real financial repression starts right financial repression doesn't start with you bugging around with you know minus 25 minus 50 basis points at the front end of the curve it starts when you peg the long end and you end up allowing you know nominal gdp or or ideally nominal gdp made up with real gdp but of course nominal gdp has the inflation component and the real component by perhaps allowing inflation to go and let's not forget when the fed ended their experiment with yield curve control in the 50s we had 19 cpi and one and a half percent 10-year yield so i'm afraid that i don't think and i've advocated this to my wealth management clients that the bond market is anywhere where you want to have long-term exposure i think this is where you end up losing inordinate quantities of real money and when i say real inflation-adjusted money for your clients i mean i think everyone knows about the inflation of the 70s but what they forget is the vast majority of the money that was lost in the bond market occurred in the late 60s as inflation went from one and a half to yeah just under six in 1969 bond yields went from two to four to eight real yields fell and in inflation adjusted terms in five years five years you lost a third of your money in the treasury market right duration longer duration exposure courtesy of convexity given this level of bond yields is just going to destroy people if they let it go but i mean maybe they do a little bit i don't think they let it go too fast or maybe you won't lose so much money but you're going to lose it in inflation-adjusted terms i think because they can't allow yields to rise they're just going to sit there and destroy wealth this is how wealth gets redistributed from the wealthy rich old to the young millennials who need pay rises so they don't riot and so they can afford to buy that house to my mind this is the way we're going and if the market doesn't do it efficiently politicians are going to do it for you and you can already see that pattern emerging even here in the united states right we're looking at someone like biden who's talking about all of these policies reversing the trump tax cuts do we get a wealth tax perhaps do we get higher wages definitively we've always you know we've got all these new heroes of covid you know but these are basically people on many cases close to minimum wage right so what does minimum wage go to 20 bucks an hour 25 bucks an hour all of these sorts of things these are all going to be i think highly inflationary in an environment where you're funding it from government spending which should steep and occur but they can't let it happen so they just cap the whole thing and use a bondholder just get obliterated so i hate to say nails i just i love the fixed income market we made lots of money for our clients over the year but the only thing that i want our clients to own now is inflation protection no i mean i completely agree with that and it worries me when i see especially in europe the way that say pension funds are positioned i mean germany i think there's like 80 bonds and 20 something else i mean you know and i mean it is bloody scary because at some point and the other thing i think in all of this is actually you believe in cycles you talk about them i mean there is also certainly a cycle that goes from public to private meaning at some point the equities will become the safe haven and anything linked to a government is going to be trashed really so um which is also why these conversations are important right because i'm not so sure that the i mean there's a lot of wrong information so to be so to say impliedly being fed to two investors correct and also because a lot of us i mean i started out as a bond trader back in the 80s and um i remember when the german when the berlin one uh draw you know fell and that led to some interesting times if you were long bonds and and you've realized that you could lose a hell of a lot of money in bonds in a short space of time so we forget about these things because a lot of people have not experienced this and and the other way to think about it is that a lot of the people who either advise or even trade today in the markets have never seen a real interest rate cycle where interest rates go up correct and i also think as well we've got to understand that there's an awful lot of people i mean this is one of the reasons why i was very keen to join raul when he'd launched real vision which was you know he calls this a democrat right democratization of let's say what the smart money is thinking we forget that the vast majority of people are advised by individuals and institutions whose only real interest is to accumulate assets not to make money what they really want you to do is continuously be invested in the german bond fund or the german pension fund that is 80 fixed income and 20 and they'll constantly talk around this thing as though it's still got some value where in actual fact they lose the site of the bigger cycle and if you can get into these things at the right point then you know you can make your m your guys an inordinate amount of money right an one guy on inaudible come and say after our silver call i paid for my mortgage i don't want to consider for a nanosecond how much money he was putting at risk to enable him to pay for his mortgage which probably wasn't good money management techniques at all but these things can make a material difference to people and that's why i'm happy to appear on programs like yourself because i really think that at a time like this or a massive inflection point i mean i've recalled this a generational inflection point okay in terms of macro and actually in terms of of societal changes right fourth turning people forget you're sitting in the middle of europe there and most is he's managing money for a german firm but i mean you know let's not forget there was this little bloke called martin luther who hung around um as all the catholic priests fled out to their country properties when we had the black death who stayed and helped and guess what that was the cycle high of catholicism that was a relatively big turning point in history pandemics kind of do that 1848 louis the philly fled france and lived under queen victoria's skirt hem until he died in sort of 1870 spanish flu women's votes all of these things this is going to be a really really important inflection point historically and i think in markets because we were coming to this inflection point anyway you know we peaked in interest rates we were already close to zero we have to come up with a new toy to keep the cycle going and i think essentially where we are now we have hit the end of traditional monetary policy monetary policy now is an adjunct to fiscal spending so central banks now basically are just a supporting act to fiscal authorities and i think that just changes the whole world that we've lived in since paul volcker came in in 79. yeah and and rob before you jump in and that is actually one thing we have spoken about on our podcast even before we did the global macro series and that is we are in the middle of the fourth turning if you believe in that uh you know that we say that history doesn't repeat exactly but i mean what they wrote in night i mean the end of the winter the fourth turning yeah these factors were coming and i'm putting together a presentation now and you look at social unrest and you look at these pinpricks that have occurred particularly with these tragic riots and black lives matter protests in the united states i mean this is emblematic of this sort of societal turning that you would get and combine that with the the macro turning point and this is when people really really really need to be careful about their wealth i'm really a bit confused about what to think as i'm both catholic and also started off as an an interest rate options traders so yeah it's pretty depressing isn't it i mean all the free money from risk parity is gone because yes there's no way it's remarkable that the strategy is actually done well yes but people don't realize that essentially the strategy now is walking dead yeah because the underlying philosophy just doesn't work because bonds are never going to act as the hedge again yeah although this is it you've got a breakdown both in terms of the fact that the one of the assets is definitely massively overvalued which is the bond component you've also got the fact that correlation is probably going to break down because yeah in an inflationary environment bonds and equities tend to become more inflated yes so let's go back to the the kind of hypothetical man on the street who's listening to this or woman on the street who's listening to this podcast and wants to know what can i do i mean you've mentioned silver being an asset that is a good inflationary hedge and and i like the fact you've gone beyond the kind of classic of just reaching for gold as the gold standard inflationary how did you excuse the pun yep stocks as an inflationary hedge obviously we could have a long debate about whether they are or not maybe it depends on how volatile the inflation is rather than the actual level as to whether they're a good inflation hedge but are there specific sectors we should be looking at or are there other assets we haven't mentioned that that would be good hedges in this environment one thing that really marks i think inflation is it's a tougher trading environment right it's not uh necessarily an unprofitable one it's a much much tougher one so passive investment i'm afraid is peaked if i'm right this is becomes a where you really do start to earn your money one of the things actually it's been quite interesting talking to wealth managers is just the dearth of good quality quality trading funds out there right i mean i started as a young whippersnapper in my early 20s trading precious metals for philip brothers that then bought salomon and then somehow got management bought out and became part of salmon brothers it just it was it was a bizarre thing but i mean those guys that i started with who were the most aggressive traders in the most volatile market have all gone standing in the lunch line and listening to some guys saying you know how did you do roger pretty well we just bought all of bloody india's and china's excess rice and we sailed off in bulk carriers off the uh off the coast their bloody appalling harvest the price doubled we sailed it back in you know those sorts of days are gone that the sort of balls that it took to those sort of trades have gone so finding people to manage some of this money is going to be actually quite hard it might come down to in this way of something like you know systematic trend following commodity funds actually march start to do pretty well in a ones that can go short as well as long in a bull market so but i do think that's something you've got to have as part of the portfolio we've been advocating even as far as things like some of the agricultural commodities which you've yet to take off um i think it's quite amusing that in kovid those got crushed precious metals didn't last time i looked we were still eating in fact probably some of us eating too much during covert because we had nothing else to do um and yet commodity prices got absolutely a soft monitor process absolute trash so i quite like those um but you only have those as a relatively small part of the potentially as a portfolio i don't think you won't have any long-dated sovereign risk at all in the credit space i think there is really potentially interesting trades or there were until the fed distorted price and this i think is the fundamental problem because if you looked at it and you say okay well look i think we're going into a period of inflation there are two companies out there they both got pretty shitty balance sheet but one has let's say pricing power one has none let's say the one has none is a is a retail chain i can be long one short the other they're both the price is the same now in five years time one will have doubled and one will not exist anymore those are great opportunities for credit managers but it's much harder now given that you've got central banks distorting credit but let's assume they kind of back out of that space a little bit over time i do think there is once again there's opportunities and credit but once again it's going to be a lot harder than just buying the tracker right because everything is just not going to go up i think there are great opportunities for dollar-based investors potentially in emerging markets if the dollar does start to roll but once again you're sort of increasing your exposure to that dollar trade and you're exp you're doubling up on your exposure in sort of the commodity space equities just have to be part of the mix they do have to be part of the mix but you're going to have to manage you're either going to have to accept a hell of a lot higher vol or you're going to have to run some sort of overlay type product to try and somehow manage that risk off thing that theoretically bonds we're going to hedge you for but won't anymore so it's it is a much more difficult environment going forward it is much more active environment going forward and i think that people are going to have to start understanding that paying for performance which we used to do before we just aimlessly bought things that went up is a solution because growth stocks these you know some of these names will not do well in a higher inflationary environment they will they will underperform you know we're still not at the inflation reinflection point i don't think it occurs until some of my models are starting to tick up in sort of october-ish september october some of them start early next year but i think we're it's not really yet that you have to consider it but you're going to get there quite damn quickly final question for me julian yes it's been great but want to be respectful of the time that you've given us today i've watched that great interview between you henry and richard werner on real vision not sure if you've watched it but you did but so what richard werner said is he said the ecb is essentially the only central bank left in the world that is completely and utterly above the law they don't report to anyone and i don't have the feeling that the what i'd like to your opinion on that what about the fed you know the feds you know uh used to be independent at least at what they said but right now it's kind of like you know uh donald trump the president is twisting the arm of mr powell and the the thing kind of like becomes becomes one the fed and the government yes we've discussed this so if you since trump really got in actually we've been playing a cycle which many respects was like the mid to late 60s so you early 60s you've very stable super low uh inflation rate no one back then was running around going uh you know the sky is falling inflation's too low because we didn't have quite the same debt levels and it really was a halcyon period of economic growth and then you got some politically inspired fiscal spending related to the great society in the beginning of the vietnam war you push inflation out of its comfort zone and been i mean literally a flat line twice for five years and the fed's own research said it could have taken a shorter period of two years of higher inflation for inflation expectations to become unanchored to use their parlors and you get quickly into this period where things get out of control and one of the reasons they get out of control is because the fed compromise so back then we also had an independent fed and the chairman uh was a gentleman called william martin now william or bill martin or actually became the longest standing fed president in history and as this spending sort of kicked off the fed initially was quite aggressive at trying to cramp down on that inflation push that you got going into 1966 and then there was a lot of pushback from government wait a second we're fighting a war we're trying to do these things for individuals what are you doing and bill martin went away and he came back and he decided and he coined this fantastic phrase where he said the fed is independent within government rather than independent of government and that basically meant if it is the will of the people to elect this government and this government decides that they want to do it it is not for the fed to fight against the will of the people so i think that's essentially where we are the fed has decided and really very willingly i mean it hasn't taken much for powell to get there that they have a responsibility to support the government if the will of the people which clearly is is for the government to support them and so i think we have a very complicit central bank there's certainly no volcker-esque type tendencies anywhere within this central bank anymore those things were taken out i think in oa taken out to the back of the bike shed and shot through the forehead to me this is setting up and this once again it goes back to these cycles we talked about nails right that you go through these piers where you build up extremes those extremes become unacceptable to voters or to society in general and then you switch the other way and i think we've switched the other way and you've got a central bank that i think fundamentally believes that if inflation ever happens don't worry we will be on top of it but of course that's what they thought in this mid 60s they thought they could run it a little hot to use today's type language and they were bloody wrong because as soon as they tried to do anything to stop it the government came in and said don't you damn well dare think about doing that so i would agree i i don't think the fed's independent i don't think the bank of england's really independent we've already seen the bank of england start funding the ways and means fund this little sort of fudge account that they have on the side right where they can just top it up with electronic cash and they say oh don't worry it's only short term well if the economy doesn't recover robustly that short term will become increasingly longer term short term is all relative right yeah exactly perhaps my final question to you julian is just having done what you do for a long time this classic glow of sort of macro analysis has that become harder to do because we kind of live in a world where we think some of the things at least that we're seeing happening we think this is completely nuts right it's completely crazy or is it really just trying to take out the noise look at the facts look at the cycles and actually it still makes sense there are days you know we wake up and i go geez i could have picked an easier job than trying to front run the global financial markets and get it right because that's ultimately what clients pay for and get it right but i will say i'm somewhat lucky firstly i've got within mi2 four colleagues who have either one exec bank of england he worked with me at medley global advisors i think that's a very important part of my background because i understood firsthand as we were policy consultancy the important of policy central bank or fiscal and i really understood how that started to interplay with markets and i think that's given us a bit of a of a of a a leg up versus some of our client colleagues who or peers who might just look purely at the macro i've always said earlier i look at the macro because the macro dictates the policy response and this has certainly been the mo since really 2008 and it's that policy response to the drives market so it's kind of a two-step process as opposed to that the macro drives markets because that isn't really the case we've also got guys who've managed billion dollar we've got a couple of guys who manage billion dollar portfolios hedge funds so we really are then we take it and we look at the macro that gives us a lien a bias to maybe what the policy response is going to do and then we have guys who said okay if that's what you think this is the trade it's break-evens it's bun treasury spreads it's the euro it's the aussie oh and by the way here's the level breaking today and we should send something out to our clients so i think we are actually moving back into a more macro environment i think we are going to see some differentiation between particularly on the currency side that start to drive relative asset performance i would love to say that i think the bond market is going to come back and we're all going to be able to make a fortune trading curve steepeners and so on and so forth but i'm a little bit more sandwich i think what we're really all going to have to do is we're going to have to dust off some old books about how to trade backwardations contangos and stuff like that in commodity markets which we've all bloody forgotten how to do absolutely well julian thank you so much for spending some of your afternoon with us we really do appreciate this as i'm sure all of our listeners do and by the way make sure to follow and subscribe to julian's work on twitter mi2 partners and global macro insiders as you can tell from today's conversation we're living in a true global macro driven world and it is perhaps more important than ever before to stay well informed from rob mort and me thanks so much for listening and we look forward to being back with you as we continue our global macro mini series in the meantime be well thanks for listening to top traders unplugged if you feel you learned something of value from today's episode the best way to stay updated is to go on over to itunes and subscribe to the show so that you'll be sure to get all the new 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Channel: Top Traders Unplugged

Views: 2,174

Rating: 4.884058 out of 5

Keywords: niels kaastrup larsen, moritz seibert, rob carver, global macro, macro investing, macro trading, usd, COVID, julian brigden, MI2 Partners, FED, Federal Reserve, Yield curve, Fourth Turning, unemployment, financial recession, Bitcoin, global pandemic, market cycles, central banks, Systematic Trading, Quantitive Easing, commodity markets, Silver

Id: 36aK8JchU18

Length: 66min 34sec (3994 seconds)

Published: Tue Aug 18 2020