Transcripts

Erik:     Joining me next is the one and only Grant Williams, the author, of course, of “Things That Make You Go Hmmm,” probably one of the most interesting and well-known newsletters in the business. Grant, thanks so much for joining us again.

I want to start, as we always do, with the US dollar, because everything else is priced in that. I know your partner Raoul Pal has been a secular dollar bull, but I think last time we talked to you, you had a different view.

What’s your current outlook for the US dollar? It seems like maybe we’re seeing the Raoul scenario play out, where the secular bull market is going to continue. Certainly the chart’s been looking pretty good for the last couple of weeks.

What do you think?

Grant:  Hi, Erik. Great to speak to you again. Yeah, Raoul and I have differed in the last, I guess, year or so about this. We were very much aligned and I kind of – I went to the dark side and figured that the dollar had run its course, and became, not a bear as such, but I figured we’d seen the highs, and the likely future path was down. Not any kind of crash, but it was going to move lower over time.

And I based that on the fact that (A) it was in everybody’s interest – I mean, everybody’s interest for it to work lower – and (B) I figured that the US finances would actually start to matter at some point. That last point certainly doesn’t seem to be the case.

But in the last few months there certainly have been signs that perhaps the bull market is going to take one more try at going higher. The Fed seems determined to hike. And, as always happens, I think the vast majority of recessions post-1980 have been – sorry, post the US Civil War, according to a chart I saw recently – have all occurred due to one interest hike too many.

So I understand that in the short term the dollar could go higher, and I can see how that could happen. But I still think that over time the dollar is going to move lower, perhaps significantly so. But I don’t expect any kind of crash any time soon.

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Erik:     Joining me next on the program is Convexity Maven founder Harley Bassman. Harley, I think some of our listeners may not be completely aware of your very extensive background in the industry. You were one of the principle designers and creators of the MOVE index, which is essentially the VIX for the bond market, and held some senior roles at Merrill Lynch and PIMCO.

So why don’t we start with a little bit on your background. And particularly how the MOVE index came about.

Harley:            Thank you for your time on the show. The MOVE basically came about a year or so after the VIX. It became obvious that volatility was becoming more and more important in the bond markets. People actually thought of volatility as an asset class to some degree. It’s certainly one of the three main risk vectors. Being duration, credit, and volatility. I view myself as a convexity maven; I focus on volatility and that sort of risk.

Duration is when you get your money back. Credit is if you get your money back. And volatility convexity, how you get it back. It’s a path-dependent risk.

And so creating the MOVE was a way of basically creating a language for people to look at volatility as an index as opposed to a number. And see if it’s high or low relative to where it’s been historically.

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Erik:     MacroVoices Episode 85A was produced on October 20th, 2017. I’m Erik Townsend.

Our Eurodollar University series featuring Alhambra Partners CIO Jeffrey Snider has been extremely popular with listeners. We originally planned to air Parts 3 and 4 over the Holidays. But thanks to some generous donations we’ve received in the last few weeks, we’re able to accelerate the release schedule. This episode contains Eurodollar University Part 3.

Today’s feature interview with Alhambra Partners CIO Jeffrey Snider was pre-recorded back in July of 2017 as Part 3 of our Eurodollar University project. There’s a slide deck to accompany this interview, and we recommend that you download it before listening as we’ll be referring to the charts and graphs it contains throughout this program.

Registered users at macrovoices.com will find the download link in your Research Roundup email. If you’re not yet registered, just go to www.macrovoices.com and look for instructions to register and get the download, above Jeffrey Snider’s photo on our home page.

This four part series came about after listeners to the MacroVoices weekly podcast asked for more in-depth coverage of the Eurodollar system.

In Part 1 we discussed how the Eurodollar system came about, how Milton Friedman demonstrated in a series of articles that fully $30 billion in new US dollar money supply was created by the Eurodollar system in the 1960s, and how this occurred at the stroke of a bookkeeper’s pen without a single penny of actual cash issued by the Treasury or a single ounce of gold bullion to back this $30 billion of new money supply.

In Part 2 we learned about the wholesale component of the Eurodollar system. And we discussed the role that the repurchase market used by banks to secure short-term financing played in expanding the wholesale Eurodollar market.

We discussed why investment banks went on a collateral-buying binge in the early 1990s and how the Fed’s policy change to target the Fed funds rate rather than the money supply was probably influenced by the Fed’s inability to accurately measure the money supply creation that was going on in the wholesale Eurodollar market.

The next subject I discussed with Jeff Snider was the role of the Basel Banking Accords on the development of the Eurodollar system.

So, without further ado, let’s jump right back in where we left off and hear Jeff Snider talk about the Basel Accords. Here is Alhambra Partners CIO, Jeffrey Snider.

Jeff:     The Fed flew by the seat of its pants throughout the 1990s. But, because things seemed to be very good and very well behaved (especially inflation), everybody assumed that the correlation was between the economy (especially inflation) and monetary policy. In other words, Greenspan must have been a maestro for doing whatever it is he did.

And, in fact, Greenspan never actually came out and said exactly what they were doing. All he did was raise and lower the federal funds rate. But nobody could really determine – nor did he specify – exactly how they did that. What caused the Fed to raise the rate 25 basis points one day and then the next meeting perhaps lower it. And, in fact, what we know today is that it was a completely discretionary policy that had absolutely nothing to do with money whatsoever.

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Erik:     Joining me next on the program is petroleum geologist Art Berman. Art prepared a fantastic slide deck to accompany this interview that you’re definitely going to want to download, because we’ll be referring to it throughout most of the interview. 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. On the home page, right next to Art Berman’s picture, look for a red button that says “looking for the download” and click on it.

Art, thanks so much for joining us. Let’s go ahead and start with your slide deck. Starting on Page 2 here, after your title slide. I just love your charts, the way that you are so visual and the way that you describe things. Go ahead and tell us what this chart is about on Page 2.

Art:      All right, Erik, thanks for the compliment on the charts, and it’s great to be back with you. It’s been a while. I’m always glad to talk to you.

I talk a lot about comparative inventory, and I do it because I think it’s really important. You don’t hear a lot about it. You hear people sometimes reference the five-year average etc. But to me this is the main tool that cuts through most if not all of the confusion about why oil prices are doing what they’re doing, and where they might be going.

Slide 2 is just a history of comparative inventory. Again, that’s the current stock levels minus the five-year average. And in this case I’m using crude plus a basket of refined petroleum products which I think are the most diagnostic. So it’s comparative inventory (CI) in blue, versus WTI spot price in gold.

What you can see, looking at this thing, is that there’s an awfully good negative correlation between comparative inventory and WTI spot price. And that’s the reason that it’s important.

The salient features on this chart are that back in mid-February we were not at an all-time high comparative inventory, which is actually back in March-April of 2016, but we were pretty darn high. We were second-highest: 213 million barrels by my count. And we have dropped as of yesterday to 74 million barrels.

That is huge. That’s a 139 million barrel drop over a period of 30-some-odd weeks. And there have been a couple of weeks where it went up a little or went sideways. But that is consistent, that’s a trend. We have to pay attention to it.

What’s also important and interesting is that, typically we see a pretty big price response – again, just looking at this time period since the price collapse in ‘14 – you see a pretty good price response whenever comparative inventory goes down. And it’s really striking how we’ve had the biggest drop in comparative inventory ever, and prices have just kind of hung in there between $45 and $55 a barrel. I’m showing $40 to $50.

And so an astute observer would say, your correlation doesn’t really work. And I would argue that, actually, it does, that an awful lot of those price responses were based on sentiment. And we had some price run-ups, particularly in early ‘16, that proved to be vapor and went away in a big hurry.

So those are the key points in this. And as we get on to the next slide or two, I’ll explain exactly why price is responding exactly as it should. It still is an awfully good negative correlation. It’s just the amplitude has been suppressed, as it should be.

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Erik: Joining me next on the program is CPM Group founder Jeffrey Christian.

Jeff, obviously you're a precious metals guy. We're going to get to gold and silver in just a minute. But I want to start with the US dollar, because obviously everything else is priced in the dollar. We had seen what a lot of people thought was going to be a long-standing secular bull run in the dollar index. In the last several months we've seen a big sell-off and all of a sudden the bears are out. We've gone from record long speculative interest to record short speculative interest.

So is the dollar rally over? Was this just a pullback that's set to continue? What's your outlook for the US dollar?

Jeff: When we look at the dollar, because we don't get involved necessarily in shorter-term trading of the dollar, we look at it more as a macroeconomic fundamental. And we look at it on a longer-term basis. And our view was that the dollar did go through this very large upward ratcheting from 2015 through into 2016, and our view was that the dollar would basically move sideways with a slight upward bias in a relatively volatile fashion from, say, 2017 onward.

So we're not expecting to see the dollar come off. We don't expect to see the dollar continue to decline. We think it's pretty much – if you look at it on a trade-weighted basis on the broad trade-weighted basis index – we think that you're pretty much close to the bottom of it. We don't necessarily see it continuing to rise at the rapid pace that we saw in 2015-2016, but we don't necessarily look for it to go back to the lower levels that it had from, say, 2008 to 2014.

So we're looking for it to move sort of sideways in a volatile fashion with an upward bias.

Erik: A trend that we've heard a lot about lately – although I don't know how much reality versus hype it is – is de-dollarization. And I think there's certainly some truth to this, that a lot of people would like to move away from the dollar. We see China and Japan with less US Treasury holdings than they used to have.

Do you think that this trend of de-dollarization is something that we should take seriously? Do you think that the US dollar's hegemony as the world's reserve currency is in question at all?

Jeff: I think that's a long-term transition. Most central bankers and most economists would like to see the world move to a multipolar currency regime where you don't have a dominant currency. No one necessarily wants their currency to be the dominant currency, except maybe the US government, the dollar. The Chinese clearly don't want the yuan to be the dominant currency in the future. But I think a lot of people would like to see a multipolar currency regime.

They see it as a long-term transition.

And they see it as a long-term transition for a couple of reasons. One reason is that there are so many dollars out there. You have 62% of central bank assets in US dollars. And you have about probably over 70% of private assets in US dollar-denominated assets. So the dollar has such an enormous pool that it's like the old joke, if you owe a bank you own it – there's no ready, quick substitute away from the dollar to anything else. Even to a pool of all the other currencies combined, you can't do it.

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