Transcripts

Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.

Erik:     Joining me now is Hugh Hendry, manager of the Eclectica hedge fund. Hugh, last time you were on the program, several people on Wall Street were starting to say that the market was overdue for a correction or an outright bear market. But you very confidently assured us that things were better than feared, and, so far, you’ve been absolutely right in that call.

            But now the chorus of doomsayers has grown much larger. Jeff Gundlach has been extremely outspoken, saying he’s going to make at least 400% on his S&P puts. Quite a few pundits have suggested that the business cycle is long overdue for a recession. Analogies to 2000 and 2007 are everywhere you look. Even Goldman Sachs Chief, Lloyd Blankfein, recently commented publicly that asset prices have gone up too much for too long.

So, Hugh, is the growing chorus of bears about to be proven right? Or do you think that this global economy still has room to grow, and markets have room to march even higher?

Hugh:  Well, I guess it won’t surprise many that I probably find myself in what feels like a little bit – it’s uncomfortable from the vantage point of managing a macro portfolio to say that I still believe the system is healing. And, yes, I certainly accept that valuations are high, but I can’t really see anything to get in the way (if you will). Now, you mentioned corrections. One can never really dismiss that they are an ever-present with us in financial markets. But, in terms of calling an end to proceedings and looking for a correction greater than 20%, drawdowns in S&P are rare like hen’s teeth. But something severe and something of the order of what we saw, of course, in 2008, and eight years previously, I want to say I just don’t see the setup for that situation presently.

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Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.    

Erik:     We've had so many secular dollar bulls on the program that you, our listeners, have asked us to find a credible secular dollar bear to present a contrasting view. Joining me now is Luke Gromen, founder of Forest for the Trees. And, folks, I think you're going to find that Luke's very bearish secular dollar arguments are as credible as they come.

Luke sent us a fantastic 45-page books of graphs and charts to support this interview, which you're definitely not going to want to miss. Registered users at macrovoices.com will find the download link in your Research Roundup email. If you're not registered yet, just go to macrovoices.com and click on the red button above Luke's photo that says, "Looking for the download."

Luke, before we dive into your chart book, let's start with the high-level executive summary. Why are you bearish on the US dollar? Not just right now, but as a secular trend.

Luke:   Thanks for having me on, Erik. I've been excited to do this interview with you. Why we're bearish on the dollar is because a key driver to the dollar bull market that began in earnest in 3Q14 has been accelerating de-dollarization trends. In other words, the dollar began rising so fast in 3Q14 because it began to lose share of global trade at an accelerating rate in 3Q14, driven by moves led by China and Russia.

Now, ironically, what is in the long run the most fundamentally bearish development for the dollar —loss of share of global trade — was in the near term extremely bullish for the dollar, as were the reduced flow of dollars over a large and persistent bid for dollars from offshore dollar-denominated debt — created what was, in effect, a massive dollar short squeeze that began in earnest in 3Q14. However, as we noted, dollar loss of share is a long-term massively bearish development for the dollar.

And so, the only questions were always, number one, how high would the dollar go? And two, when will the tipping point be reached, where the dollar's share loss in global trade goes from being dollar bullish to dollar bearish?

And, what most dollar bulls don't realize, in our opinion, is that the tipping point was already reached a year ago in 3Q16 when the US Congressional Budget Officer (CBO) said that the US federal deficit as a percent of GDP was going to widen year over year for the first time since 2009. This is a critically important announcement that virtually every analyst totally missed.

You can see why this is so important if you look at Slide 29 in the packet. Since 1969, the US federal deficit as a percent of GDP has peaked and fallen year over year only seven times. Six of those prior peaks were followed by US recessions within 12 to 18 months. The only time the US did not experience a recession, the dollar was significantly devalued at the Plaza Accord in the mid-1980s.

And so last year, in 3Q16, the US CBO gave us the heads-up as an indicator that, for the past 50 years had indicated with 100% accuracy either a US recession or a major dollar devaluation was coming, had just been tripped. And, right on cue (as you can see in Slide 12) in late 2016, US trailing 12-month treasury receipts, or tax receipts, fell year over year for the first time since the recession — something that had never happened outside a US recession — in data on tax receipts that stretches back to at least 1980.

And so, in a nutshell, what the widening in US federal deficits and the ensuing year over year drop in US tax receipts meant was that, for the first time in ours or any dollar bull's career, the US fiscal situation “broke” in response to the stronger dollar and rising rates before a major emerging market crisis broke out.

This has led to a kind of unique situation where a core tenet of the dollar bull's belief system is the dollar will keep rising because the Fed is hiking rates and the US economy's fiscal situation has never broken before emerging market nations or currencies have suffered a crisis. But the data objectively shows the US fiscal situation has already broken before the emerging markets did.

It reminds me a bit of the situation in housing. When you had a core tenet of the housing bull case it was US home prices have never fallen nationally, when they'd already begun to do so.

And so, to directly answer your question, once we saw that widening in the US federal deficit as a percent of GDP for the first time since 2009, we began to become a bit nervous about what was at that point a strong dollar bull viewpoint that we were holding. And then once Trump became elected president, having run on what was at its core a weak dollar platform, and then he and his administration nearly immediately began making extremely dollar-bearish comments, we switched our position from dollar bull to dollar bear.

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Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.    

Erik:     Welcome to Part 1 of MacroVoices Eurodollar University with Alhambra Partners CIO Jeffrey Snider. I’m your host, Erik Townsend. There’s a slide deck to accompany this podcast and we highly recommend that you download it before listening as we’ll be referring to the charts and graphs that it contains throughout this program.

This four-part series came about after listeners to the MacroVoices weekly podcast asked for more in-depth coverage of the Eurodollar system. We’d interviewed Jeffrey Snider from Alhambra Partners several times, and each time Jeffrey had myriad fascinating observations about the signals that he was seeing in the Eurodollars futures market, which enabled him to both make observations and predictions about what was occurring in the global economy.

Our listeners loved Jeff’s interviews. But even the finance professionals in our audience told us they needed a primer on the Eurodollar system, its origins, and its history, in order to be able to better appreciate and understand Jeffrey’s insights about what the Eurodollar market is telling us about today’s economy. So we decided to do a full hour-long show just focusing on the history and structure of the Eurodollar system. But before we knew it, that turned into a four-part series. This is the first installment in that series. So, without further ado, joining me now is Alhambra Partners CIO, Jeffrey Snider.

Jeff, thanks so much for coming back and doing this Eurodollar University with us. Let’s go ahead and look at your slide deck, starting I guess with Slide 3: How Does A Dollar Become A Dollar? What’s on your mind here?

Jeff:     Well, first of all, thanks, Erik and Patrick, for having me back and giving me the opportunity to explain this. One of the most common questions I get is to go into a deeper—whether explanation or even just to detail how these things actually work. You know, the things that we’re taking about is modern money supply and modern money in general. It’s a global system that, quite frankly, nobody seems to have much of a handle on because it’s been languishing in orthodox economics for decades now. And, really, a lot of it takes place in the shadows, far away from where we can actually directly observe what is going on in the monetary system.

So an opportunity to actually explain some of the intricacies and the arcane nature of the way these things actually work is a tremendous opportunity for me, and I think it’ll help a lot of people get a better understanding of how we got to where we are and why we’re stuck in this state.

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Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.

Erik:     Joining me now as this week's featured interview guest is former US Department of Energy Chief of Staff Joe McMonigle, who now heads up the energy research team at Hedgeye.

Joe, I think everybody understands that the key question in today's oil market is whether the rebalancing that OPEC production cuts were supposed to achieve is really happening or if the supply glut is actually still continuing. So let's start with your high-level view first. Is OPEC effectively managing supply or are they really just managing market sentiment?

Joe:      I think, to date, they have been managing sentiment and, of course, engaging in verbal intervention in the market. Yes, they did do this production cut deal a year ago—well, actually last November. They're eight months into that deal now, and it's really had not that much of an impact on the market. I think, originally, when the deal was announced, I think oil bulls really liked the idea and prices were boosted as a result.

But many people, a lot of very savvy oil analysts and forecasters at banks, predicted big inventory draws in the spring that just never materialized. And, of course, the return of higher prices has incurred shale to rise—which, of course, we can get into later because it's sort of a different phenomenon. But, just to really judge the effectiveness of the production cut deal, last Friday oil ended at—or settled at—47 and some change. It was actually a penny lower than it was a year ago.

So, just to judge—obviously, prices in the last couple days have fluctuated a little bit—but, really, if you're looking at where prices were a year ago versus where they are today, I don't think you can really say that the production cut deal has had a lot of influence or has been very effective. And I think as a result the markets started out really impressed, and I think they've been pretty disappointed as we're into month eight now, almost nine months of the deal.

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Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.   

Erik:     Joining me next on the program is Goldmoney.com co-founder, Josh Crumb. And, Josh, I’d really like to get into gold in this interview because we’ve seen so much tape action lately that really had a lot of gold bulls excited.

Before we do that, though, something I find is that everybody in the gold market has a different idea about what gold is, why you have it in the portfolio, and what you’re trying to accomplish from an investment strategy. Some people would tell you that it’s a store of value, some people would say it’s a hedge against financial market collapse. And the gold bugs would tell you that, as soon as the evil cabal of central bankers is done with their manipulation scheme, it’s going to $400,000 an ounce overnight and they’re going to get rich.

So, what is gold? Is it a get-rich asset or is it a stay-rich asset? And how do you use it or see it fitting into a portfolio?

Josh:    That sounds good. Thanks, Erik. Yeah, I think that’s probably the best place to start because we seem to have—I call it at least two bookends of the view of what gold is. In my background I actually worked at Goldman-Sacks on a macro team and looked at commodity markets, including gold. And what we looked at was, really, like most of Wall Street, in a supply and demand model. You know, much like you look at copper, oil.

I had different drivers but, essentially, people were looking at it for year-over-year change in supply and year-over-year change in demand and the level of inventory. This is a very standard model.

But the problem with that sort of linear model is, you look at it as what’s the demand for, say, jewelry, or for coins, or ETF flows? And so, you look at it, but the problem is you have almost all of history’s gold sitting there in inventory—roughly $7 trillion worth of gold as a commodity stock or, as I would view it, as a money stock. Which makes it very different than carrying 30 days of inventory of oil or 60 days of aluminum.

So it’s a very different market. And people really, in the guts of commodity markets, they understand that inventories and spreads drive prices. But then, on the other side of the spectrum, you have this view that the dollar is completely worthless, backed up by nothing, created out of thin air. And, although there’s aspects of that that I probably tend to lean towards with the extraordinary policies in central banking—but that’s also not fully true because there’s a lot of assets that back up the dollar.

Where I’m going with this is I think it’s important to look at gold’s—remove the economic lens and even remove the financial lens for a second, and just look at gold and commodities in nature—what is it that the math of gold shows us over time? Without any models, without any theories, if you look at the data, you see that the production cost—the cost of mining gold, relative to the cost of mining copper or the cost of producing wheat, or all of these different commodities—stays very, very proportional over very, very long periods of time.

And so they have this anchored relative cost function based in scarcity. So, regardless of what your model is, how should we analyze gold, how should we look at gold from a theoretical standpoint, we see that the data shows that gold has this very tight long-term correlation with all other commodities. And so that is where the most important thing—for me looking at it—that proves that gold is a store of value relative to the things that are central for humans. You know, eating, energy.

And so, by one definition, the market shows that gold is a store of value, no matter what. Our job is then to figure out why, next. But the math and the history of gold shows that gold is a store of value for that function.

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