#65 - Julian Brigden: Macro and Market Outlook

0:05Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry investment and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co-CIO of Evoke Advisors, a leading investment advisory firm. Learn more about our show at insightfulinvestor.org.

0:38Today's guest is Julian Brigden. Julian is the head of research at Macro Intelligence 2 Partners, a firm he co-founded in 2011. Julian and his team focus on independent macroeconomic and market research that consistently seeks to anticipate consensus views, I suppose before they become consensus, and deliver timely insights. with the current global landscape and everything that's going on, I feel like it's an ideal time to hear Julian's perspectives. Welcome, Julian. Thanks for joining us. Thank you, Alex. Let me ask you a quick background question before we dive into all the really interesting things going on in the world.

1:18What would you say originally attracted you to become a global macro strategist? Opportunity, a check. So I was in trading and sales for many, many years, working at various banks across the street. You did well if you change jobs once in a while. So I was at quite a few and sort of worked my way up the totem pole and then stepped out for a while and worked in the sort of research space because I enjoyed that. And I wanted to change the pace and then went back and into the sort of sales side working for a bank. And I was always in fixed income and FX, so bond market and currencies. And then to entice my clients to trade me, I started writing my own thoughts on the market and got a pretty big following, Alex.

2:09And going into the financial crisis made some of my clients a lot of money. And then one of them wrote me a big check and said, go and set up your own business. So I did. So that was almost 15 years ago. How's it been going so far? It's going very well. I do think there are times when I could have picked an easier job than trying to wake up every single morning and be one step ahead of the whole of the global financial market. But it's what gets me up every single morning and what motivates me. So I guess you pay your money and you take your choice. And in that sense, maybe I could do something else.

2:47Obviously, there's a lot going on. But before we dive in, and it may be helpful to set the stage. Would you describe how global economies typically function? If you take a sort of 30 ,000-foot view of the world, we've tended to operate really since the beginning of sort of money in what is referred to as PAC system. So there's sort of a period where you have a dominant power, be that Rome or be that Britain or now the US, where you sort of get this relationship that exists between the sort of dominant power imposing its monetary system, the currency, its legal system, rule of law, its stability, whether onerously in the case of the Roman Empire or more benevolently in the case of the US Empire.

3:43But it sets up this sort of period of, generally speaking, Alex, long periods of stability, long periods of globalization in terms of trade, and benefits for all, mostly to the reserve provider. Most of the benefits flow up to the top of that kind of pyramid. And we've obviously been in a sort of post-war period, we've been post-Second World War period in a period where it's been Pax and Americana. And I think the problem with these systems is not, we've had seven right throughout kind of history and not one has survived the test of time for what for numerous different sort of reasons but you know typically they tend to boil down to this sort of concept of imperial overreach that kind of in the in the imposition of of enforcing this system you know often as i said onerously if you say the roman empire you kind of stretch yourself too far you don't have enough troops, you can't fund the troops, the Visigoths and the Huns end up attacking you and then turn up on the outskirts of Rome and sack Rome, right?

4:52And the whole system sort of collapses. There often comes with financial strains. It often comes with technological changes which challenge your technological dominance. And so they just haven't survived the test of time. And there's also this military tone that exists with it, this element which exists to it, which, as I said, either is forcefully imposing the rules or benevolently imposing rules. But it's very important that role, particularly, let's say, in the current system, the US has provided a military shield security to its allies. And in return, they've been willing to work in a US dominated system, which is what the US set up after the Second World War.

5:41And all those benefits have derived from that. And in terms of financial flow, it's basically boiled down to the point that foreigners are prepared to fund our spending, our excessive spending, in return for us providing that protection. And in that sense, we've hit this tipping point, I think. I mean, I don't want to get overly complicated, but in economic terms, it's referred to as kind of Triffin's dilemma when you are the reserve currency. But essentially, the costs to the reserve provider, in this case, the US, of providing that currency and keeping it stable and keeping it strong, begin to outweigh the perceived benefits.

6:24I will say perceived benefits, because I'm not sure that we're going to be right, that the costs are higher than the potential benefits we can gain. And so this leads to a reassessment within the reserve provider. And that's certainly, I think, what the Trump administration is manifesting in terms of their policy. So I think we are in danger. I think, firstly, we're definitively changing the rules. I think that is going to have very significant consequences. And I think also we are potentially changing the rules and changing our approach to such a degree that it potentially threatens, at an embryonic stage, Pax Americana.

7:11Look, I will say this, Alex. For most of any trending market, macro is marginally important, but it isn't the driver. macro really comes into its importance at inflection points. And I think we are at a post possibly a sort of 80 year inflection point. So like a post Second World War inflection point, but at a bare minimum, a sort of 40 year inflection point, 30, 40 year inflection point. And so I don't think macro has been any more significant than it is now. Okay, so we're going to get into all of that. But I just wanted to lay the foundation. So we're going to talk about some terms that maybe not all the listeners are familiar with.

8:00So I think most people know what a fiscal deficit is when you spend more than you earn. But would you briefly explain what a trade surplus or deficit is and a current account surplus and deficit? So this is literally a function of the trade and services that flow in and out of a country. Think of it as a ledger, right? What we export goes on one side, what we import comes on the other. That's the trade deficit. Then you have the components of that. So there's a current account deficit and the capital account deficit, and those have to balance. So if we spend more than we or if we import more than we export, Alex, right, somehow that has to be paid for.

8:42It has to be paid for by foreigners. We cannot, if we're importing from, let's make a simple environment, let's say there's only China and the US in the world, right? So we export, you know, a dollar's worth of product to China, but we import two dollars worth. Okay. How do we fund that extra dollar? Because it comes in in renminbi, right? We're buying for something in renminbi, in Chinese currency. And the way that we typically do it is that we either borrow from the Chinese that dollar, or the Chinese buy something else in the US or invest it. And so typically what they do, and the way that certainly we've been doing it most recently in the US is they buy US assets, in the sense of they either buy tangible assets like land or factories, that sort of thing, or buildings, or they buy treasuries or equities.

9:45So that's how you have to balance that equation. You can't run a trade deficit or account account deficit without that offsetting flow because you can't fund it. So that's where we find ourselves. We've been running a significant and ever-increasing current account deficit. On an annualized basis, it's running roughly at$1.2 trillion. That's about 4 % of GDP. Now, that may not sound too onerous, but if any of you are familiar with, any of your listeners are familiar with emerging markets, if you go back and you look at history of Brazil, for example, whenever their current account deficit hit 4 % of GDP, their currency got eviscerated.

10:31I mean, and I mean, Alex, eviscerated, like 75 % loss of value. So we are basically living beyond our means. We are not putting that money into particularly productive things. I like to use the analogy. we're sending a bunch of US influencers to Santorini so they can stand on a cliff and take a picture for the other influencers and ruin it for everyone else. And in return, we are selling the family jewels to do that. So we're selling the foreigners in video stock, I don't know whether I call the treasury quite the family jewel, not a very good view of treasuries as an investment. But that's essentially what we've been doing.

11:18So the headline is about the massive fiscal deficit. The government is spending so much more than it's earning. And as a result, we have this growing debt burden, which is clearly unsustainable long term, although it's been going on for a long time. So what causes that tipping point? I believe that there's an ongoing somewhat mechanical cycle, not to get too technical, but George Soros, some of your listeners may have or viewers may have heard of, very, very famous macro hedge fund investor. He came up with this term called reflexivity. And he came up with this term to explain to economists why markets are not always in equilibrium.

12:00So the assumption, if any of you have ever studied economics is, oh, markets are always in equilibrium. That's a given. Well, they're not. And Soros came up with an explanation where he said, If in the process of purchasing an asset, a stock, let's say, by purchasing the stock, it actually improves the fundamentals that drive the valuation of that stock, you can create this kind of virtuous circle. You buy more and more stock, the fundamentals get better and better through that process. You can create this virtuous cycle. But he called it reflexive because it depends on continuing purchases of the stock.

12:37And if at some point this thing reverses, then things can kind of go wrong. So I think this cycle really depends. I think it is reflexive. I think, as I said, it's depending on purchasing. I think it's somewhat mechanical. So I think it really depends on three key metrics, Alex. The first metrics is that foreigners have funded us in their own currency. They have sold their currency and bought US dollars. They have an FX exposure, currency exposure to the US. So if the dollar were to fall in value significantly, the value of the assets that they own in the US to fund our spending drops. in their currency.

13:26So if one day the euro value, let's say, or the yen value of the S &P deteriorated materially, the risk is that they sell those assets and they take the money home. Okay. So the dollar is very important. Secondly, the US has to outperform in terms of asset performance. So if one day we wake up and we say, oh, I don't really want to own NVIDIA, I want to own European defense stocks, or I want to own Brazilian mining stocks, then the money goes home. And as the money comes home, it gets sucked out of US assets, and US assets start to underperform, and you start to change the cycle around the other way.

14:08And thirdly, and this is where the mechanics come in, the US economy needs to continue to run a large current account and budget deficit. Because if one day we solve those, if the Trump administration gets what it wants and we don't have a trade deficit, then foreigners, there's no need for us to suck that money in. So foreigners will sell their US assets and take that money home. So it's not difficult to envisage a situation, Alex, given the policies of this administration, which I'm not saying are wrong. I think in many respects, They're absolutely right. I've just said to my clients, it just has consequences beyond the ultimate aim, right?

14:51That if you started to see the Trump administration drive a weaker dollar, if we went into a recession as a result, maybe of doge, right? Or if through the imposition of tariff restrictions or whatever you want to call it on chip exports, which we just got again announced again last night, that NVIDIA stock drops or US semi-stocks drop or whatever, that we ended up with the US equity market correction. this virtuous circle, which I think has been running certainly since 2014, but arguably since 2011, which is built up an inordinate, an inordinate, Alex, amount of inflows into the US, could turn from virtuous to vicious.

15:47And because it's reflexive, it will become self-reinforcing. So basically, you have this self-feeding cycle that starts, and it keeps going until something breaks the cycle, causes it to reverse, and then it accelerates in the other direction. Yeah. And look, I mean, we've seen these cycles before. I don't want people to go away and slit their wrists. I will warn people that typically in the inflection point in the cycle, the cycle is what I would call nasty. So US stocks typically correct down, and they take everything down. It's just they correct the most because that's where the money is. Eventually, though, we get to a point where typically the Fed is eased enough, the dollar is starting to weaken, which in itself is a reflationary thing.

16:40It's just in that phase, Alex, which, for example, we saw, as I'm sure, or as a RIA you're very aware of, from 2002 to 2008, that was not a bad time to be in the US. It's not like we were all standing around in soup lines. It was still quite a profitable time to be around. We make you money. Everyone was generally happy. It was just a crappy time to be in US in assets. They underperformed the rest of the world. There were far better things to be invested in. And it certainly was a bad time to be in the assets that we're all heavily invested in. So tech, consumer discretionary, healthcare, financials, those are absolutely the worst performing assets to be in.

17:26But there were plenty of ways to make money. It's just we aren't in those trades at the moment. So could AI save us? meaning that the productivity enhancements can help us grow our way out of our debt problems and offset some of these macroeconomic risks. There's definitely ways to do this. I mean, if we get AI, we can run a, and if it really starts to kick in materially, I still think it's a little further out in terms of the impact on productivity. I keep hearing people say, productivity is rising. Well, it isn't in official stats. It's continuing to fall. It's very moribund if you look at the official stats.

18:09Productivity would enable us to run higher nominal GDP, but with hopefully stronger underlying real growth. So that would help us definitely grow out of the debt crisis, but in the nice way. I mean, because there's two ways you can do it. We can inflate our way out of it. So we just run very high nominal GDP. Because the trick is, as long as your nominal GDP is above the cost of your debt, your debt never becomes a big problem on paper in an enclosed world, all those sorts of things that economists will throw in there as an offset and condition. But that's the way you could do it. You can do it, obviously, with more rapid real growth, which is what we want.

18:57Or you can just do it by running very, very high inflation. So productivity would enable you to run higher real growth, and that would in itself be positive. I don't think, though, that it necessarily saves the US. I mean, I just, I think we have to go through a period where we actually start to focus on the debt. And I think that the Trump administration has logically decided to address the deficits. I think we were truly on a path of utter unsustainability where we would have inevitably hit a tipping point where I think the trust in US assets as a store of wealth would have been questioned. and you know we've you know some of your viewers may have been familiar with uh what happened in the uk with the so-called blitz trust moment where the bank of england had to intervene basically to stabilize the uk bond market because the government was spending too much money and i think the us is flying dangerously close to those sorts of levels and so i think the trump administration is right to focus on that i think i certainly know Treasury Secretary is very focused on that.

20:27What I would say is that that doesn't have consequences. When you have a government that is spending 6.5 % of GDP year in, year out, adding to GDP, if you were to eliminate that tomorrow, we'd have a worse recession than the global financial crisis. right so we have become highly highly addicted to debt and overspending and so i think we need to go through this purge we need to go through this clear out period i think it's absolutely necessary i'm glad someone seems to be taking it seriously i say seems because it's they're still spending a lot of money but uh it's going to have consequences ladies and gentlemen it's going to be a painful adjustment process.

21:16Would you tell us about the Mar-a-Lago Accord and its feasibility and also how it compares historically to prior accords like Plaza and Brentwoods? Yeah. So one of the rumored proposals of the Trump administration, I say rumored because it was written, the Mar-a-Lago Accord is part of a paper written by this gentleman called Stephen Mirren. And Stephen wrote it back in November of last year, and he was just a smart research guy at a hedge fund called Hudson Capital, Hudson Bay Capital. So subsequently, he's ended up working for the Trump administration as the head of National Economic Advisors Board, which is the board that advises the administration on economics.

22:03and we're starting to see senses, Alex, fingerprints out there that kind of suggest that this is something that is being ruminated. Now, what Stephen wrote, and you can find it out there, is a very, very in-depth, clever piece of research that looks about how to go about resetting global trade relationships so that we try and get rid of this 4 % of GDP trade deficit the US is running and put things on a more sustainable path. And one, there are a number of elements. One of them, and at its core, really what they're trying to do is lower the value of the dollar. Now, I want to stress, I'm not talking about the dollar losing its reserve state.

22:53It's quite the opposite. They want to actually strengthen the fundamentals behind the dollar to ensure that it remains the reserve currency. It just means they want a lower value versus other currencies for now. And certainly, I think there were some other proposals in there about forcing allies to assume some of the burden of the cost of their own defense via accepting lower or no yields on their treasury holdings, et cetera, et cetera. But there's lots of sort of detail. But essentially, at its core, this is something to try and reset trade. get a weaker dollar. And in that sense, certainly that element is actually not unusual.

23:36If you look at, we've only had freely floating exchange rates since the very early 1970s. And in actual fact, we've had, this would be if this were to happen, the third time that a Republican president has employed this tactic of kind of forcing a currency deal on the rest of the world. The first one was when we entered into the era of freely focusing exchange rates. The US had been, we'd had a fixed exchange rate mechanism that was called Bretton Woods that existed since the Second World War. We got to the late 1970s, it wasn't working. The US was spending too much money. It was putting internal stresses on the system.

24:18Back then, it was related to Vietnam and various other guns and butter, Johnson administration, and kind of a similar thing. We were living beyond our means. We needed kind of a weaker dollar to reset things. And Nixon imposed some tariffs, it was referred to as the Nixon shock, on the Japanese and the Germans to force them to the table to accept a weaker dollar as part of the unwinded brainwaves. Then in the mid-'80s, I think the Republican president that many of older Republicans would hold out as the paragon of virtue, Ronald Reagan, did kind of the same thing just ahead of the Plaza Accord, where we saw another big correction in the dollar.

25:01And so in that sense, what is being proposed is not at face value that unusual. It's actually standard kind of operating procedure for a Republican president. It just has consequences, Alex. And from an investor perspective, that's what you've got to be aware of and position your portfolio accordingly. Do you sense that the world is gradually dividing into two distinct blocks, forcing countries to two sides, both economically and geopolitically? I think that's been going on for a while. I mean, we started to write in 2018 that we were reaching the peak of what had been dubbed chimerica. So this sort of symbiotic relationship between China and the US.

25:49And we said, no, it's all over. It's pretty much peaked. And it's going to deteriorate from here on out. And while people now accept that as a given, it certainly was not the case back in 2018, where everyone, if you remember, was rushing to buy Chinese stocks and to open up relationships with Chinese and export Cadillacs and God knows what else to the Chinese. And that was the beginning of this division. I think that itself is a manifestation of a rise of popularism, as I said, in this sort of concept of Triffin's dilemma that it was no longer working for Americans, this sort of hyper, let's call it hyper-globalization, where as a result, and really, here's the thing that I don't think a lot of market participants realize.

26:42I think a lot of people look at what has gone on in the States and in most developed industrial countries since, call it the late 80s. And they look at the demise of manufacturing and the growth of Chinese or Asian or Eastern European or Mexican manufacturing, and they say, those guys are the bad guys. Well, certainly, they're the beneficiaries. But who made the decision. The decision to outsource US, European, UK manufacturing was made by the C-suite. And the decision was made to improve shareholder value, aka management's personal returns, because they're paid in equity. And these, in a way, are the villains.

27:37This is why when And someone like Scott Bessent says, the Treasury Secretary, we think Wall Street's done pretty well. Right? It's time for Main Street to do better, because those are the decisions that have divided us. But that, I think, is leading to this next stage of this decision. And we've reached this tipping point, which is, can America continue to spend and provide the military defense that goes with and contain China and stop China, but still contain Russia and do all these things? And I think the answer looks increasingly to be no. Essentially, we've reached this point where we've reached imperial overreach, right?

28:23We can no longer stick our fingers in every single hole in the die, right? We're going to have to rely on others to do that. And that is fine. It just comes with material consequences. And I think when I look at the world, I hate to say it, I think we, you know, and I've got many friends who are involved in this space. when you look around the world, if we become increasingly isolationist, it will create a more unsafe world. It will create a less wealthy world. I'm not sure it will necessarily benefit us because, remember, we're going to be leaving large tracts of the world with the vast majority of the population to be dominated by China and not dominated by us.

29:14Maybe there's a billion people, if you're lucky, in the developed world. So is that going to be our marketplace? Well, good luck if you're Apple or Tesla or even Google getting compound results in that kind of world. So you touched on this earlier. You talked about a potential inflection point going back 40 years. And I think that's an interesting time period because most investors, if they've been around a long time, that's their frame of reference. And so do you feel that there are some longstanding market relationships that may be very different in the next decade or longer that somebody who's been investing for 40 years or within that timeframe may feel like there's a relationship?

30:00I think if you've been investing for 40 years, you've seen these before, right? But I'm pretty old and I haven't been investing quite for 40 years. And there are days when I certainly wake up and feel like I've been investing for 100 years every single day. But I was certainly around and copus mensis enough to sort of understand. I mean, I already started in like 87. But in the 40-year thing, I'm talking the last time we saw a currency accord. And I do think the dollar is, and I do want to stress to you, as a retail investor, So getting the trend in the dollar right, as certainly as a US investor, will determine all your gains.

30:41If you get the dollar wrong, you will be invested in the wrong sectors, you will be invested in the wrong countries, and you will be invested in the wrong assets. Okay. Now, in terms of trends, I would say that certainly, to assume that we continue the trends of the last, as I said, I think these trends really started in 2014, but arguably in 2011. So if you think that we continue along the path of the post, let's say, global financial world where U.S. assets continue to just inexorably outperform, where we continue to suck in ever greater percentage of global savings. I mean, at the moment, the US demands just to keep the relative performance where it is in the equity space.

31:36So US against the rest of the world demands that it takes 70 cents of every one dollar that goes into global equities. Right. 70 cents. So what's that going to grow to? 80? 90? 100? right i mean so no one's going to buy any any assets uh you know abroad there's going to be nothing worth investing in anywhere else i mean those math mathematics just doesn't work like that right so i think as i said i think this relationship depends on an ongoing strong dollar which the trump administration doesn't want ongoing u.s asset outperformance which i think is questionable. I think we're breaking some relationships that have been in place over this decade, 15-year period.