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 are not just one but two of our most popular guests ever to appear on MacroVoices. Raoul Pal is the founder in principle of Global Macro Investor and a co-founder of Real Vision Television. Julian Brigden is the founder of MI2 Partners.

Now, gentlemen, the two of you are both members of a very elite club. You both run institutional advisory services and you’ve reached a pinnacle in your career to the point where you’re able to command a $40,000 annual subscription fee for your advice. Great work if you can get it, so congratulations.

But if there’s anything that I’ve learned in this game it is that contrasting views from more than one expert are worth more than the sum of the parts, because guys at your level are so persuasive that sometimes it’s hard to see the other view. So I just want to let our listeners know that I have asked both of you to try to emphasize any areas where you might disagree or see things differently and try to give us those contrasting views.

Now, to get started, something the three of us share in common is that we have all articulated secular bullish views about the US dollar, both here on Macro Voices as well as on Real Vision Television. But, while the three of us seem to agree (we can pat our heads for that) it seems like Mr. Market is telling us a very different story. At least in the recent short term.

The dollar index is now tenfold big points below its cycle highest from just a few weeks ago. So let’s start there. What’s going on? Did we get it wrong on the secular call? Is this just a bigger than expected temporary pullback? And what can we expect from here with the dollar, as we’re now trading on a 92 handle? Raoul, why don’t we start with your view.

Raoul:     My view, like yours, is bullish dollars. Now, the problem is we’ve only had two dollar bull markets in history, one in the early 80s and one in the late 90s. So we have a very small data sample to look at the behavior of dollar bull markets. But what I did notice is no dollar bull market has had a weekly close down more than 10%. Once it goes more than 10% it’s generally a reversal. So that’s a kind of—not so much a line in the sand but a guideline for me.

Now, we’re very much there now. We’re at 9.5% negative on a weekly basis. So it’s starting to make me concerned. There’s plenty of support levels around here as well. I use DeMark Indicators and they are counting towards a reversal. We know that the market positioning is very high. So for me it’s really crucial that the dollar does hold.

I think the underlying basis for why the dollar bull market should still be in play is still there. But what we need is some sort of change of sentiment within the market, whether it’s either a renewed belief in much faster rate rises in the US or it’s weaker economic growth. The dollar has a kind of smile where it rallies in either/or but falls when we’re in the Goldilocks phase, which we’ve been having recently. So I’m looking at that.

I’m obviously nervous on my view because it has been going against me. And I’ve been in the trade for a long, long time now so, in Euro terms it’s about 148 and a half. So I’m now really finessing the idea does it move further than here?

If we look at the previous dollar bull markets they tend to go much further, so it would tend to suggest there’s maybe another 15 or 20% upside in the dollar over time. I also look at—and something we’ll probably talk about later—the comparison between this dollar bull market and the dollar bull market leading into the 90s is remarkably similar. The pattern almost fits exactly. And that was the period going into 1999 where we had a correction in the dollar.

At that time it went about 8.5% and then it turned around and started rallying as economic growth started falling and rates started easing off a bit. The Europeans at the time were raising rates still. And that whole scenario, we saw actually the dollar go much, much higher. And so that’s what I’m looking for. If I’m wrong, the world’s a different place, and there’s a number of trade opportunities from that. But I still remain a dollar bull but a nervous one.

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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 Chris Whalen, and, Chris, thanks so much for joining us. I want to start with the US dollar because, you know, we’ve had quite a few guests talking up a secular bullish argument on the dollar and, boy, it really all sounds very compelling, but look at the chart. The dollar bulls—the chart is telling us dollar bulls that we’re wrong.

So how do you see this playing out? What do you think is driving the weakness that we’re seeing in the US dollar? And does it represent a secular change in direction, or is this just a natural pullback in an ongoing bull market?

Chris:  Well, you know, it’s hard for analysts to get their hands around the dollar because the old relationships, particularly interest rates and trade balances, which used to give you a good idea of where a currency was going to go don’t seem to matter anymore. So the dollar was rising against major currencies after the financial crisis, and particularly over the last four or five years, in large part because people were fleeing whatever country they were in and going to the perceived safety of the United States.

So Russian oligarchs, members of China’s communist party, they sent trillions of dollars to the United States over the past five years. Much of it went into American real estate. They also like Canada by the way, because both the US and Canada protect property rights, and they have a reasonable degree of confidentiality when it comes to investment flows. So if you’re a communist party cadre in China and you’ve stolen millions of dollars, you want a safe place to hide it.

And so this all, this capital flight contributed to the strength of the dollar, really, apart from the normal considerations of trade deficits and interest rates and everything else. Now it’s kind of reversing because there’s been this narrative on Wall Street, particularly in among the private investment community too. That said, well, you know, places like Brazil, Europe, even Asia, even Japan are all of a sudden attractive.

And so you’ve started to see money flowing out again. Whether it’s going to be maintained or not I don’t know. Because, as I say, the old measures for whether a currency was going to appreciate or depreciate really have lost their validity since 2008.

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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 Dr. Pippa Malmgren, founder of DRPM Group, and colloquially known to the Macrovoices team as the goddess of all things geopolitical pertaining to markets. So Pippa, thanks so much for coming back on the program. It is great to have you. We had your dad on the program. I want to mention to our listeners. If you didn’t listen to that one, you and your dad’s interview together was fantastic. Between the two of you, I think you have advised more U.S. presidents than anyone else I can think of. Just the background and experience that you bring to the table, it was really great. I am really looking forward to this interview as well. Let’s start with Europe. We have heard from Grant Williams the end is nigh, and Brexit was the event, the catalyst that’s going to bring about the complete demise of the European Union over time. It seemed for a while that Europe was falling apart at the seams, and then Macron won the French election. The Euro is rallying. A lot of people say it is all better now. What is the real story? What is your outlook for the European Union both short, medium and long term?

Pippa: I love Grant Williams, so I am very reluctant to cut across him. But I am on the other side of the trade. Europe has big structural problems in the longer run, but in the short run what they have had is a little bit of growth. I think everything is attributing the Macron win to a more settled environment, but really what happened was we got a little bit of growth. We are getting a tiny bit of inflation, and so the markets are a little bit more optimistic. Also, there are a lot of people still trying to figure out does Brexit make Europe stronger or weaker. The argument that it makes them stronger because they lose this break, this country that’s constantly been a pain and not onboad, now they are not there anymore, so Europe can proceed in its Federalist direction much faster and more easily than before, so if you are in favor of that, you go this is a BYE. I like what I see in Europe.

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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 Dr. Ben Hunt, Chief Investment Strategist at Salient Partners. Ben, thanks so much for coming back on the program, I think it’s been almost a year since we had you on. Ben, I think that you are probably as well known for the Epsilon Theory blog as you are for your work at Salient Partners, and you recently penned a very interesting piece, where you see a sea change coming in terms of markets. So, please give us the rundown. We’ve got a link in our research roundup email for people who may be interested in reading that full piece, which is titled, “Tell My Horse”. Why the title, and what is that piece about?

Ben:               Well, thanks for having me back on here Erik, it’s really a pleasure to be back on the podcast here. You’re right, I have been writing for about four years now on the blog Epsilon Theory, and in the most recent article, it’s been the most well received article I’ve put out there on the blog to date, and it is about a sea change that I think is happening, you know, I wrote this about three weeks ago, before I think that a lot of other people picked up on the same thing, but the sea change is simply this- that central banks, particularly our Federal Reserve, are changing course, they’re changing, to use the $10 phrase that economists use, their “reaction function”, and all that means is that they’re now interpreting the world and looking for reasons to tighten rather than seeing the world and looking for reasons to ease on monetary policy. So, they’re taking away the punch bowl, and this is not just the case in the US, where the process has been building and acting for some time now, but it is also starting in Europe, and even in Japan, which has been the most active accommodationist central bank out there for the last couple of years. Even in Japan, they’re talking about talking about how to start tapering or changing the policy, because here’s the thing, what the Fed means by taking away the punch bowl is not just the traditional approach of raising interest rates. That’s the traditional tool that the Fed has- you cut interest rates when times are tough, and you raise interest rates when you’re concerned about inflation or you think you’re at full employment or the like. Well, the Fed is doing all that, I mean, we’ve now raised rates in three quarters, three successive quarters, and they’re signaling they’re going to do it again at some point this year, but more than that, more than simply raising rates, what the Fed is also doing, is they’re starting to shrink the balance sheet that they’ve grown over the last eight years. They’re starting to roll off, they’re starting to reduce the balance sheet that was at the core of the extraordinary measures that our central banks and other central banks have employed over the last eight years to try to juice the global economy, but more importantly than that, they’ve juiced financial assets.

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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 Tian Yang who heads up the research department at VariantPerception. For anyone who’s not connecting the dots VariantPerception of course is Jonathan Tepper's company. We’ve interviewed Jonathan Tepper several months ago in the program.

What I'm really glad to see in the beginning of your chart book and for our listeners if you didn't already get it you definitely want to download the chart book. The link is in your research roundup email if you're not yet registered we told you earlier in the program how to register and get the download.

I see here that you're starting because I think to some people the very name of your company VariantPerception is not even clear talk to us a little bit about the process that you use and how you identify these trading opportunities that are perhaps a step outside of where the herd is going?

Tian:             Yeah absolutely so I think when you look at macro oftentimes specific events will seem very unique when people look back in history, so you've got housing bust, you've got Russian default and so often it's not clear if you can repeat the investment process you had the time.

What we've tried to do at VariantPerception is essentially trying to create a framework that's robust and repeatable. So, we've looked back at the various historical boom and bust cycles and try to figure out what is persistent through time and different kind of political regimes in economic environment such that we can create this framework. So, here we’re heavily influenced by the works of the likes of Kindleberger and Minsky and so forth.

So, what we got out of that is basically what we see here on slides through the presentation. Essentially to us there’s two key cycles that we want to focus on. One is the growth cycle of the economic cycle and the second is the liquidity cycle.

Now obviously lots of people talk about growth cycles and there's lots of different definitions. For us there's really two key things that we want to focus on here, one is where leading economic indicators are taking us so that's a very short term three to six month kind of cycle and then two is we’re looking at very much investment or inventory to sales, so this is giving a sense of longer term where we are in a typical growth cycle.

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