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- [00:00]
A
Foreign. Hi, guys and welcome to Macro Mondays. I'm Andrea Steino and my typical co host, Mikael Rosenwald. He's enjoying sunny Spain. So I'm joined by Raul Pal, the founder of Real Vision and GMI instead today. Thank you for joining us, Raoul.
- [00:23]
B
Oh, it's great to be here, Andreas. I've been looking forward to this. We've been meaning to do this forever and haven't done it. So now Mickel's gone, it's good. I can take over. Yeah.
- [00:32]
A
And what a day to take over, right? Nasty opening in markets and the dollar is super strong. And as per usual, we want to have a little bit of a laugh in this show, Ral. And a while ago I promised my followers on X to do something if.
- [00:50]
B
You'Re not, you're not there yet. You got between IPS to go €.
- [00:55]
A
So I asked my graphical department to put together a little meme for euro. So let's put it on the screens to see what happens if we breach parody in euro.
- [01:07]
B
Nobody wants this. Literally nobody.
- [01:10]
A
Yeah, and you know, I'm, I live in the euro, at least on the outskirts of the euro zones. All this is basically my attempt of pushing markets away from that parody level. Right. I'm scaring people away from, from selling Euro doll because if we breach parody, I'll open an only fans and oh, God, no one wants that. On a serious note, what's going on with the dollar? What's your take on it?
- [01:36]
B
Well, on the less serious note, we're all saved because Jim Cramer came out this morning and said stocks look awful. So I'm like, that probably means they're going to end up in the green today. So we're all probably saved. The dollar. Look, the dollar is driven by the fears over the new Trump administration and what tariffs mean. And that has pushed the dollar higher and rates higher. And this whole thing is the exact same setup. And you and I have talked about this, of the dollar and rates in 2016, 17, with the same set of Trump outcomes and tariffs and the same policies. It did the same thing. The first thing Trump did when he got into office was say, I want a weaker dollar. And he's already said rates are too high. So they're not stupid. They also know that they've got debt to roll, that they also have trade negotiations to do. So my view is they will use the stronger dollar as a carrot and a stick, which is China. You're going to have to devalue your currency unless you play ball with us. But if you do play ball with us. We will inject liquidity into the dollar system. We will lower the dollar, we will jawbone it lower, and you can then stimulate your economy because the Chinese cannot stimulate right now without risking a breaking of the yuan peg, which they don't want. So I think it's all part of the Trump trade negotiations. And we know that the teams have already been kind of speaking to the Chinese and the Europeans and everybody else. When you go back to Besant, who I know decently well, Scott has made it clear that the dollar is too strong and that he would want a weaker dollar, lower oil, weaker dollar. They want easy financial conditions because they want to win the midterms, and that's a big thing. Then there's the new guy who's coming in. I can't remember. Felix from Blockworks interviewed him, can't remember his name. The, the Economic Council guy. Steve. Steven. Yeah, very interesting interview. And Steven spent half the interview talking about at some point we're going to need a Plaza Accord if this continues, but we are going to have to get the dollar lower. Now, I don't think the Plaza Accord idea is this time around. I think it's probably closer to 2030 that people are just going to go, we can't deal with this dollar. Now. The dollar is structurally strong because the world is 50% in debt, in dollars, and there's a shortage of dollars. The moment the US Takes liquidity out the system, it's a game of musical chairs and it drives the dollar higher so people will bid up for dollars. So that's where we are. We've also, as you talk about a lot, we are waiting for the injection of liquidity that comes as the reverse repo re drains back to zero, then probably the end of QT and then the draining of the tga. Also in the Fed minutes. Sorry, I'm trying to get across a lot here. Also in the Fed minutes, the previous minutes they had talked about that they're not keen to rebuild the TGA immediately afterwards and have a tightening of financial conditions. So what does that mean? I mean, either there's another way around it, or as you possibly suggested, it could mean qe, which sounds ridiculous now, but who knows? The other thing that this financial conditions is doing is pushing down forward growth expectations. And so it starts to make you think Q1, Q2 might be weaker. And that gives the Fed more cover also to cut rates. So lots in that. I don't think it diverges much from your view.
- [05:20]
A
No, not really. I've done Some R and D on the dollar, meaning that I've ripped off and duplicated a chart from Julian Biddle. And I'd like to show that chart on the dollar index after the Trump election in 2016 versus now. And it's almost a picture perfect correlation. And as you alluded to ra, we had Trump out last week saying that interest rates are too high. But he also kind of referred to Biden being the one to blame for it. All right. And, you know, I think that's the main risk to the view right now that Trump plays the blame game and allows himself a little bit more time than in 2017 to bring the dollar down. He can basically blame what Biden did and allow the dollar to be strong for maybe a month or two longer than what we had anticipated. And I guess that's kind of what markets are responding to now that the hopes of the weaker dollar, they've been kind of postponed a few weeks into the future. But I agree on the structural direction.
- [06:22]
B
Let me show you some other charts. I'm going to share some charts. Sorry, Peter, I didn't ask your permission. But you know what? I'm like, I go off at the deep end. Okay, so this is from. From the January gmi. This chart at the top is. Let me just get rid of that. This chart at the top is global M2 last time around versus this time around and global M2 last time around. This time around. It's identical, which is kind of weird. Then we also have beneath it is the chart of the nasdaq, and that's pretty much identical. So we have a repeat in the monetary conditions. Global M2, because the dollar was strong. That's what's pulling back Global M2. It also creates. It caused markets to readjust. When we look at Bitcoin, we can see the phasing. The phasing's out. But when you kind of match up the phasing, what happened? It was the 4th of January. We had a correction like we're having now. And then Bitcoin went up, and once you match the two, you kind of get a very similar pattern. So what we've got is. And also here's the Economic Surprises Index. And the dxy, it's been coming lower. It should drag the dxy, change rate expectations. Julian just put out a tweet this morning about all of that. So everything is here. Fed cuts may change because there's not a lot. 25 basis points priced in. Okay. As a risk reward, there's a decent chance we get something. So it's like all the factors are in play and whether the market sniffs it out or not. I mean, we got another week until whether we get fuller announcements beforehand or we have to wait for inauguration and stuff, I don't know.
- [08:20]
A
I think Scott Besson speaks on Thursday.
- [08:23]
B
Oh, really?
- [08:24]
A
Yeah. It could be an obvious timing to say something. It's the first time that he'll say something in public as far as I'm concerned. Then we obviously have Jay Powell as well. Right. Not sure whether he wants to say a whole lot this week. But anyway, it's kind of a waiting game in many ways. And you're absolutely right. Good old friend Jim Kramer was out this morning saying that we'll have a complete washout. I'm very thankful that he said that because I'm pretty heavily invested in the crypto story myself. So, in any case, I want to show you a chart on bitcoin and it's a very homemade technical chart trying to depict what I consider the consensus around bitcoin right now. We've had a lot of discussions ongoing from technical analysts around the head and shoulders pattern. I know you've also discussed that with, with various pundits within the crypto industry. And to me, it seems like the consensus that we'll have a leg lower towards, say, the 70k to 80k range before we stabilize there and get. Get that second half of the year rally. Do you think that's a feasible technical setup here? Or how do you see the bitcoin story playing out Amidst this strong dollar?
- [09:34]
B
So using the parallel of 2017, I think the bottom is in. I think it happened today. Now, the other outcome would be the outcome you've shown me. But my base case is that using the historical parallel, I think we probably put the low in. I mean, bitcoin's price action was ugly today. Let's wait and see. You know, not that I'm doing. I'm not buying, not selling or doing anything, but it's either your outcome, which is a sharper fall for longer, which is in which case it's fully mirroring the M2 drop, or it does what it did last time, which is it prices in the first part of the M2 drop and then dislocates and it tends to dislocate the rest of the year because there's more speculative flows in the final year, liquidity should come in. So that's my view.
- [10:30]
A
Yeah. And I guess this drop in M2 rally, I've had plenty of questions on it from the audience. It's very dollar driven rather than driven by actual M2 developments, if you know what I mean. It's a conversion thing and I tend to see that as a less strong signal than an actual drop in M2. Right. Yes.
- [10:53]
B
Nobody's withdrawing liquidity except the Fed, which is the dollar issue. Right. And so even though, I mean the Fed have been neutral with liquidity, but the dollar's got stronger. So dollar liquidity in the system is the issue, as you rightly say. Nobody else is withdrawing liquidity, everybody's trying to add liquidity, but the dollar is kind of overwhelms everything right now.
- [11:15]
A
Yeah. And speaking of the US dollar, we've already had a few questions on the good old pound sterling. Raoul, what a nasty trend we have in the cable. Right. And it's been another very weak day.
- [11:30]
B
Pulling out my chart. Yeah.
- [11:33]
A
You don't check the sterling every other day anymore. No, never.
- [11:37]
B
I don't even care about it.
- [11:38]
A
It's your good old home currency. Right. But it looks very nasty and to me it's kind of the picture perfect setup for a liquidity addition in the uk. What we're seeing right now, bond yields are going up and the sterling is going down and it looks like the market has sort of called the bluff on the kyosdalman administration in terms of their fiscal capacity in a sense without the bank of England playing ball on the liquidity side. So I actually think it's a very good trade to, to be short sterling still. It's one of the trades that I hold a high conviction in. But it's also a very con consensus view right now after what's been been ongoing. But what do you make of the Malaysia in the uk? Is it something that's on your radar at all?
- [12:30]
B
It is and isn't. The one thing I am looking at is it has been the canary in the coal mine for the bond market. The UK seems to have the worst liquidity of all of the major bond markets. And if I look at on Bloomberg, the gilt liquidity index, it is now continually trading higher than the, than the Liz Truss, you know, guilt intervention. So it cannot be escaping the central banks that inflation expectations are stable and yet yields are exploding higher. And again right in your wheelhouse, it is telling you, screaming at you there is not enough liquidity now. And understand they're scared because, because they've just gone through that inflation episode and everybody's still angry about it and whatever. So they're reticent to do something. So they're trying to hold on as long as possible before injecting liquidity. But politics will trump all and US politics is the big daddy of it all. And the US needs to add liquidity because they're about to have the debt ceiling shut down and they're going to. And Trump has got to show markets going up, people are happy, all of that. And we know how to do that. It's simple. Just jam the pedal on the accelerator with liquidity and everybody's a winner.
- [14:00]
A
So on the inflation side, Raoul, it's one of the things that we have in the economic calendar this week, right. Both in the US and in the UK we get the inflation numbers from December and as far as I can gather from the inflation markets, we're going to see pretty hard inflation reports from both the UK and the US maybe 0.4 on the month, something like that. And my best guess would be that we get a hotter inflation report than what is penciled in by economists for December. Right. Do you think it's an issue for the central banks that inflation is still above target or will the inflation battle to get back to 2%, will that be secondary to the liquidity considerations a few months from now?
- [14:46]
B
I don't think liquidity affects inflation really. I think they're driven by different things. One is debasement, one is the price of goods and services. And I don't think they're necessarily driven by the same things. A lot of this is also the year on year base effect and the central banks know that as well, which is why they've been saying the Europeans, the US Everybody's kind of like it's going to be a bit wiggly for a while, but overall we still haven't fully deflated all the housing stuff that's back end loaded in cpi. So it's going to be heavier than people expect. Also, we're expecting to see economic growth slow down somewhat. The CECI kind of says we're going to get weaker data. But anything now like the high yields now plays into inflation in 6 months time, 12 months time I lower. So the answer to inflation is having bond yields what they're doing. I still think by the end of this, inflation will undershoot, not overshoot because of the weird dynamics that caused by the pandemic and this lagging of housing and rates being so high for so long. It doesn't affect Microsoft and Apple and Google or whatever, but it sure as hell affects anybody on a variable rate mortgage or anybody who's borrowing money elsewhere in the economy. So it. But it takes Time.
- [16:18]
A
Yeah. And you know I saw a chart from a good guy covering the real estate market in the US on on X a day or two ago and the number of unsold homes is through the roof now. So I think we have a lot of like completed construction coming online now. And yeah, that's another lacked effect in the stickier parts of the US inflation basket. So again it is kind of a waiting game. And unless you're very short term in your persuasion and your trading style, I still think the overwhelming evidence here is that the economic cycle is improving. And that's basically what you need to know right at I don't know, 48 in the ISM the cycle is improving.
- [17:09]
B
So why here's a question for you. Yeah, because we look at this a lot. Why is the ISM been so low for so long? It has been. You know, there's only a few times in history that it spent this long below 52,000. 1, 2, 3. Eventually it came out and like you, all our forward looking indicators say it's going to explode out the blocks eventually. And then I can't remember when the prior time was 1982 or something. So it's only ever done it a couple of times. Do we think it's to do with because rates stayed so long that it's bifurcated the economy between those who don't need interest rates? You know, it's great for Microsoft because they have tons of cash, but it's terrible for the local restaurant business or whatever it is, you know, the construction business that requires it. What's causing it in your mind.
- [18:10]
A
So first of all I think you're onto something with regards to the divergence between Mega Tech and the rest of the listed stocks in the US in relation to the financial conditions that they've seen over the past couple of years. But it's, it's also crystal clear that a lot of US corporates utilize the window of opportunity when the curve was 100% flat back in 21 to increase their duration profiles. Meaning that the ups and downs caused by inflation and subsequent moves in bond yields, they're much slower than what they were in 2020 and 2019 before that. Right. So I think that's kind of why there's a big catch up effect here as soon as the lower bond yields actually kick in. But you know, we haven't seen it yet. So my best guess is still that, you know, in between now and September this year we'll get a 10 index point increase in ISM, something like that. I Think that's a feasible scenario, but it's taken a while because of the duration profile and my best explanation that the duration profile is much longer than it was.
- [19:27]
B
The other thing that a low ism indicates to you is that household earnings and corporate earnings outside of the tech are somewhat stagnant still. Right. So the feedback loop we haven't had yet, even though the economy's been growing up, you know, decent clear, the actual broadening out of economic growth with recycled earnings and profits hasn't really happened. So it's a very late cycle in that respect. And the moment it does, it means that the structure of markets changes. Small caps start doing better, you know, alt season happens in crypto all the same, it's all the same risk curve, you know, junk outperforms. All of this stuff starts happening the moment that happens and we're still not there because of Fed rates, I think.
- [20:20]
A
But let me show you one chart on the spending cycle, Raoul, because something is happening beneath the hood and it's positive. So Brian, we have a chart on the retail sales versus credit card data from the US and the spend trend data that I subscribe to is incredibly bullish. We're talking almost a 10% increase on the year now. And it looks like we're in the very early innings of a cyclical acceleration in spending again. So I'm pretty upbeat now that we'll actually get some kind of revival in the manufacturing cycle as well because spending is obviously services related, but it's also goods related and we've had larger than usual inventories after the pandemic. And now the order, the order books are starting to grow relative to the inventory sizes because of a pickup in spending. So we'll by the way get the retail sales report this Thursday and I think it will look very, very, very good. You know, the trend is incredible now and it, it looks like the very early innings of an acceleration row.
- [21:28]
B
And I agree, you know, everything we look at, I've just been surprised that the ISM has not followed the forward looking indicators yet. But it feels like any month now, as you say, it's going to be up six index points and another six and then before you know it, you're in the mid-50s and then you'll start to see it. And I think, you know, obviously the Trump administration want that too because they can't just be tech stocks that are winning, they want Main street to win as well. And Trump in the end is a property developer. You know, he understands the business cycle as well as any Billy Yeah, he does.
- [22:05]
A
And I guess that's why he's already referring to the high interest rates as an issue. I'd like to conclude with a discussion of what I call the life cycle of liquidity, because.
- [22:18]
B
So I like this chart. It's a good chart.
- [22:20]
A
Yeah. It seems like we agree, Raoul, that, you know, we're not too far off some sort of positive liquidity event. The question is whether we'll get there without some sort of bunt riot in between. And maybe we've already seen that bunt riot in the uk. Right. I think you're right that, you know, it typically is sort of an early warning signal when something happens in the guilt market. And it, it's been a nasty few weeks. Yeah.
- [22:48]
B
Because of the weird structure of the guilt market and, you know, it just makes it less liquid. So it shows you the problems, I think.
- [22:56]
A
Yeah. But in any case, what's crystal clear to me is that the Fed is running out of options to keep liquidity conditions benign unless they actually want to restart some sort of liquidity adding program. Right. They've done technical adjustments to the overnight reverse repo interest rate. They've talked about technical adjustments due to the TGA and stuff like that. That's the stuff you hear from them towards the very end of some sort of life cycle, of a liquidity cycle. Right. So the next step is QE or some sort of light qe. It's just a matter of what happens between now and then. And I think it could be quite bumpy because they want some sort of excuse to restart things.
- [23:43]
B
But do you think. I mean, I think QE's got such a dirty word that they won't use it. So you have to find a way for somebody else to buy the bonds. I always thought it would be Basel Ford that you and I have talked about in Pro Macro or somewhere, because you don't want to say it's going on the central bank balance sheet because it's got such a dirty word now because people just think QE and inflation, which it isn't and it never has been. The Japanese have done QE for a decade and a half and it's never generated inflation. What generated inflation was a pandemic and a supply shock and a demand shock and all of that stuff and direct stimulus, obviously. So I don't know, I don't know how they do it. I think you're right. But they'll invent something else.
- [24:38]
A
Yeah. So here's my, my take on it. And it's, you know, it's been discussed in a few speeches from members of the committee already. So they have this facility called the discount Window. And the discount Window is a lending facility for banks, typically only used during times of stress. They've pondered forcing banks to use the discount window on a running basis to sort of remove the stigma from this facility. And the discount Window is basically a lending facility where a bank posts collateral, for example, a Treasury, and they'll get liquidity in return from central bank in this facility. So let's assume that they just implement some legislation telling banks to hold some, you know, X percent of their insured deposits in this discount window. They'll have to buy bonds and then they'll have to post them at the discount window and they'll get cash in return. I think that's a very neat and smart way to ask the banks to hold some more bonds. They'll post them in collateral and then they'll add liquidity via this lending scheme and no one will get a word of it because it's all officiales. Right. It doesn't even smell like qe. Right. But in an indirect way it is qe. So I think that's doing.
- [26:02]
B
That's one thing I think they'll do on the other side. One of the reasons why bonds have struggled is because China's slow and nobody's buying US Bonds because they're not recycling the dollars, because they got a dollar shortage so they can't buy bonds. The U.S. i think through the back door and I think it's via the Japanese banks, which are the heart of the euro dollar market, that there'll be some swap agreement, some liquidity terms for the Japanese and to say, well, it's to stop the yen, whatever and really is a backdoor way of giving China liquidity because they won't do direct swap lines. So I think that is to play. And then you bring the central bank buyers back in because China needs economic growth, it needs to drive its growth engine. So it buys Treasuries. And as you said, you need the US banking system to buy bonds or you do what other nations have done in the past, which is force the pension system to own more Box.
- [26:58]
A
Yeah, Raoul, we've got a few questions from the audience and Demetrios is asking us, okay, it seems like everyone has turned bearish for Q1. I agree. By the way, it's a very sudden turn. What's the best counter trade here? That's the question. What has taken an unfair beating?
- [27:21]
B
So I don't dare say it. Don't dare say it, but probably deck 20, 25 sofa futures. Something in the short end of the curve that you won't get killed on but becomes slightly asymmetric or even options there. That's probably in global macro land. Not a bad bet. I think trying to find a topping pattern on the dollar is hard but when it happens I think you can press it because it'll probably evaporate fast. And the other easy bet is crypto is the ultimate liquidity instrument. So you should be looking at the dip and I think we put the low in today. But maybe I'm wrong. But either way, if you're looking for some way to express that the market is different because don't forget if, if there is a slowdown, well, crypto will do well because of liquidity. The markets have already sideways traded for a while now. So you know, that's, that's where I am. How about you?
- [28:31]
A
Yeah. So Brian, can you please bring up the chart on what's priced in for the Federal Reserve? I, you know, I tend to agree but I think there is a smart way of playing it where you sort of remove the market beta in a sense to, to interest rates. So we basically have 25 basis points priced in for the rest of the year. That's one cut Ral. It's even less than what the Fed said. But on the other hand the ECB is more or less priced to hike sorry to cut by 25 basis points every single time they meet, at least for the next few meetings. Right. And I think that's an interesting divergence because looking at energy markets right now and looking at food prices right now, the only two things that basically move up from an inflation standpoint, those two components will impact the Euro inflation basket to a much larger extent than the dollar inflation basket. So I actually think there's a tremendous trade in exactly what you're saying. Expecting more cuts in the sulfur curve basically being long the December future for sulfur against being short the same December future for euryers or estus, the Eurozone equivalent. I think that trade is, is tremendous and in all transparency one that I have on because of the divergence or the discrepancy in how important food and energy prices are the inflation B and.
- [30:01]
B
I hear you, but they're very difficult strategies to put on for normal people. Yes, the easiest way to. I haven't looked at the, the cost of options but you know, some of the best trades I've ever done in my entire career have just been buying call spreads on, you know, like deck 25 sofa call spreads. You know, I don't know what they're priced at, but you probably make a good five times your money on a bet like that. And if it goes wrong, you don't lose a lot. So that's the other way of looking at. I get it. If you're professional you might look at the, your eyeball sofa spread, stuff like that. Stuff to be done. If you're not but you want to bet on this, then it feels that just, you know, 25 basis points. It's not a lot.
- [30:48]
A
No, it's really not a lot. And you know, it takes one or two, any figures to get there right or to get the momentum turned again. But it's, it's been a tricky start to the year for those of us wanting a weaker dollar first of all.
- [31:06]
B
Right, yes we do. I think everybody does. The Chinese, the Japanese, the Europeans, the Australians, the uk. I mean everybody wants a weaker dollar. One thing I do know is January's have this lovely habit blowing everybody up before the true Trend establishes in GMI. For I've been writing for 20 years I've never made a trade in January because January always gives a conflicting signal. And so the signal now is oh my God, you know the markets rates. This is terrible. And usually what happens is it completely reverses sometime in Jan or Feb and the market then sets its direction. So I never read into January's. No.
- [31:48]
A
And after all, Raoul, I promise to open an only fans if we breach parity on.
- [31:53]
B
I don't want to see that. I just don't want to see that. I'll be there bidding euros at $1. I just couldn't, I can't bear that.
- [32:04]
A
And if we breach parody, we know that you perverts out there are behind it, right?
- [32:08]
B
That's right. You're coming down to Miami, aren't you?
- [32:13]
A
Yeah, we'll try and fix that.
- [32:15]
B
So yeah, yeah because we're all at the crypto gathering which will be a lot of fun. End of the month. So it's not long actually. So if anybody watching this, you haven't got your tickets yet. I think we'll, we'll pop the link below. I think it's realvision.com forward/crypto gather gathering 2020. I don't know. Okay. Realvision.com CG25 There are very few tickets left. There are no VIP tickets left. Tons of events happening. We'll be announcing the add on events. Stuff like boats and all sorts of stuff going on. Crypto gathering. There's a 400 of us or more going down to Miami to have a lot of fun. So just as an aside, we're trying to get Andreas down there, but he's sounding slippery like a eel right now.
- [33:07]
A
Not at all, Raoul, but and reminder as well from my side, if you want to check out the trade ideas that we put in on our macro books, you can find it in the Macro tier at Real Vision. Plenty of stuff to look at.
- [33:23]
B
Yeah, people don't know this, but steno research plus global macro investors, so myself, Julian Bittle, Mikkel, all of Andreas team, we're, we combine our forces in Real Vision Pro Macro. That's what we do. So we have these conversations all the time. This is on the free tier and out on YouTube and X. But we do all the deep dives, all of the discussions, all of the research, all of that. That's Real Vision Pro Macro. It's something special.
- [33:52]
A
Yeah, it truly is. Well, thank you very much for joining us on Macro Mondays this week.
- [33:57]
B
Next week, please, no onlyfans. Please no onlyfans account. Yeah.
- [34:01]
A
If Mikkel is all by himself in the studio next week, you know what I'll be doing in the meantime. So I think I'll leave it at that for this week. Thank you very much for watching out there. We'll be back next Monday with more from Macro Mondays. My name is Andrea Stino. Thank you for watching.