Is This the End of the US Exceptionalism Trade?

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1:17Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, U.S. exceptionalist. To my mind, the big question for investors is we've had this 15-year-plus run of where it's like the only game in town has been you invest in the U.S. You did not get paid for diversification. Arguably, you didn't even get paid for diversification within the U.S. because you should have just been in tech stocks the entire time. But I really feel like this is the moment where people are asking, like, is this one trade that's worked out so well? Is it coming to an end?

1:57You know what I really like? I like talking about U.S. exceptionalism in markets because no one immediately starts debating like the definition of U.S. exceptionalism. That drives me crazy. Right. Because in the broader realm of just politics or society or life, is the U.S. excited? But in markets, it's unambiguous. In markets, it's unambiguous that U.S. assets have just been where you want to be for a long time. So not only have U.S. equities outperformed recently, but they've really come to dominate the market as a whole, like as a proportion of the market. So the entire world, you know, even with U.S.

2:34stocks falling recently, the entire world basically still has an overweight on America. The world is overweight. No, I mean, it's true. And if you're a global manager and your benchmark is the MSCI, AWS or whatever, you know, it's still in large part of U.S. trade. By the way, I was looking at the Bank of America fund manager survey today, which is one of my favorites. And after two straight years of long MAG7 being identified by fund managers as the perceived most crowded trade in this most recent month was gold, which was really interesting. Oh, so it's finally changed. That was the thing because for years and years and years, everyone was like, oh, fangs, big tech, so crowded.

3:13like and the suggestion was don't even bother buying because the valuation is just so eye watering at the moment but in actuality if you wanted to not not even outperform but like meet your benchmark that was the only trade was buy tech this is the true pain trade right because it's like everybody is long tech everybody is overweight tech how could you make money buying tech and yet you still had to buy tech just to keep up and so now there's the question is the pain trade reversed because after so many people are so into tech and so into the U.S., can they actually make the risk and take the move of like, you know what, I'm going to overweight Germany or I'm going to buy Chinese stocks or whatever it is.

3:53And these are, I think, this is the moment where like you have to get this call right. And this is the call of the moment. And you haven't really had to do that before. Now things are getting interesting. Right. We all know the backdrop of all this. So we don't really have to do that in the intro. But And I'm very excited about our guest. We're still here in London. We are going to be speaking with Ozan Terman. He is the vice chair of Global Macro at Deutsche Bank. And he talks and thinks about all of these questions with his clients all the time. So we're going to get a slice of what he's thinking about.

4:24Ozan, thank you so much. Great to be here with you in person. Wonderful to be here. Honestly, I'm a big fan. I listen to you guys all the time. My clients and friends are big fans. So it's great to be here in my hometown. This is very important to us. when guests say this on the episode. We hate when they say it before the recording starts. It's like, that was a total waste. Do you agree with the premise that I set up that this is essentially the big question that everyone has to grapple with right now in markets? Without a doubt and quite tiringly. Sorry to exhaust it. We're exhausted too. I mean, even we're very exhausted after the Liberation Day, but even before all that, We were exhausted from how wrong the whole Gen 2, Gen 20 consensus went Everybody and their brother were believing S &P would go anywhere between 7 ,000 to 6 ,500 Tiva, US 10-year would go to 5 % It kind of did, but for all the wrong reasons And then Euro-dollar, right?

5:24Everybody who's saying parity, believe me Politely, deep inside, they were believing 0.95 That dollar CNH would go to 8 I can go on and on and why, right? First of all, this U.S. exceptionalism, we can go into tech as well, but first and foremost, it was about fiscal expansion. U.S. was the one, the big one, printing the most, especially after Omricon. And on top, yes, the Magnificent Seven, the wonderful Silicon Valley story and the belief that Germany, Europe and China, for different reasons, would never match the same fiscal ambitions. All these three things I mentioned are completely turned on their head.

6:09From deep seek to Germany's one, in fact, 1.1 trillion, to China holding on to their currency and choosing more fiscal, all the consensus trades and views are thrown into the water. It is true. In January, we recorded that episode with the ECB's chief economist, And it was basically about all the challenges facing Europe. And then like two months later, European stocks are surging. Everyone's getting very excited about that market. I have what I imagine might be a difficult question, but maybe it's not for you. How much of this has to do with things being really bad in the States versus things actually going well in Europe?

6:52I really like that question. It's not a difficult question, actually. It's a key question. at the very beginning of the year, it was more about the rest of the world doing much better than expected. Germany's step is a huge step. After the election, I held a micro dinner in Frankfurt, as you do, and both our big cheeses and some of our key clients really did not see this coming. Maybe 300 billion, maybe 400 billion, mainly on defense after the shock in Munich, but infrastructure, health, education was hardly mentioned. something like 1.1 trillion. My head of rate trading was throwing that out as an idea, which was quickly pushed back.

7:31Then the Hamburg local elections happened, and right away, Merz came up with that number. And before the new parliament sets in, sometimes these words, hyperboles are used too much, but that was a historic step. On top, China, deep seek, that was a big, big development. I mean, I was jumping up and down on my Bloomberg on Saturday and Sunday of that weekend. Whatever you want to believe. I mean, maybe they'll do it for five, maybe they do it for 50. They definitely don't do it for 2 billion or 1 trillion, right? So DeepSeek will change the world for Magnificent Seven and all of us consumers. But then to trace his question, recently it's becoming more about US hurting itself, US hurting its soft power, US creating a confidence crisis in a way.

8:17With full respect to Scott Besant, who's been a dear client friend as well, who's been to some of my New York Mac readiners, when he says what Mac 7 goes through, a quote, has got nothing to do with mega, it's more about a deep seek issue, I would kindly disagree with that. Of course, deep seek, as I told you, has got many factors to do with it, but tariffs, much more than people expected, ended up shooting US on its own leg. Is DeepSeek about DeepSeek or is it a metonym for the rise of competitive Chinese tech? I think more for the latter. But my friends that I do trust in beyond the market mine yours from the start believe that it was real.

9:04Some things it did much better than ChatGBT. And I think U.S. since it has given me my education as well. The first reaction to it was the U.S. I know this is for real. It may help all of us. Let's compete. So in that sense It was good for humanity as well But yes, that was the first step in this year In which China said, hey, I'm here Then the second big step was last Wednesday I mean, Joe and Tracy, last Wednesday Unfortunately, five, six hours before this When I woke up to see the China fix To see if they devalued big or not And when I was leaving to see they haven't Then I looked at US 10-year, as you do And Eurodollar And then I didn't unfortunately sleep I didn't sleep that night either.

9:46I was on my couch updating my Bloomberg app on my phone, just looking at 10-year U.S. 10-year. Imagine if we did this one week before, because U.S. 10-year had gone to$4.55, and at the same time, dollar was weakening. So even that Sunday, three days ago, I kind of knew this was the vibe. Some people were really worried about it, but I didn't see. I didn't see in two days dollar melting like that. And at the same time, U.S. long end being basically lost 10 and 30 years. That is my terroir. I grew up in emerging markets. My first responsibility was emerging markets. Again, no hyperbole. That was emerging markets like trading.

10:26That stage, you know, I almost wanted to shout out responsibility, like almost like an emcee to the market. Somebody needs to blink. Somebody needs to come. I thought it could be Fed. And right that afternoon, President blinked for the first time. Yeah. You know what else was very emerging markets-y that week? You know, having policymakers calling for rate cuts when the dollar was falling and yields were going up. Like, that is classic EM, right? Well, I was thinking that if we were classic EM, wouldn't the IMF people be calling for rate hikes and not rate cuts in that environment? Would they say, oh, you know, you need an independent central bank that is committed to orthodoxy.

11:07You got to hike in these environments. That, my friend, you guys are in London. We're honored. That, unfortunately, is the trust moment. We went through that in this island just three years ago. But even then, at the height of the panic, when quite justifiably some were calling for a hike, Bank of England instead chose QE. At that time as well, people said, oh, that may be inflationary at the end, et cetera, but that ended up calming things down. I do believe First of all Last week If President Didn't blink And 10 year and 30 year Continue to sell off With the dollar selling off EM style I think Fed would have come Definitely And the QT I mean that's We can talk about that I think they will do that Right away in May anyway But I think they would do QE As well Not cut I think Powell really doesn't want to cut Because of all the Inflation growth Dynamics But they would have done that And I don't agree with Some of my dear client friends Who say even QE Inflationary wouldn't long-hand react to that even more.

12:07Maybe they are kindly talking their book. If we go through that kind of episode, a QE may calm things down. But Trump blinked two or three times. So I'm not too sure. Famous last words. We'll go through that Fed QE stage. Now there's a big, big, big debate already in the market, even though my dear friends are tired and wounded. Do you play for the next leg to come? One more quote-unquote attack towards 450 and higher in US 10-year, much more importantly 5 % and higher in 30-year? Or do recession worries and growth worries always outweigh? Is it now when worries peak, is it now time to receive?

12:53I kind of have a lean towards this, the latter. And it has won by 25 base points as I speak. So something may have become.

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14:16Easy Cater, your business tool for food. To learn more, visit easycater.com slash podcast. One of the reasons we wanted to talk to you is because you are constantly speaking and arguing over these trading ideas with your clients. And I guess I'm curious about... I like the arguing. Yes. I guess I'm curious, is anyone buying the Trump administration argument that like, okay, we're taking some short-term pain in exchange for longer-term, better economic growth? Is that something that people are actually positioning for? Is that resonating at all with your clients? Again, very good question. Up until mid-February, end of February, A lot of them did.

14:58Now we don't think about it, but you're at 1.13, 1.15. Back then, to talk even 1.10 euro was like, come on, calm down, etc. Because people did believe tariffs have to be inflationary. Market is not believing. Market is not pricing it. That's why it's not happening, etc., etc. Then credibility started to become an issue. When you start with Canada and Mexico, and you don't mention China that much, Then you decide to do something on Canada and Mexico, even though market and most economies are revolting. You immediately step back. Delayed for one month. You start losing credibility. Then people start relaxing about the Liberation Day.

15:37You come up with this big sign with very, let's say, creative way of calculating it. And you hit China and Asia the most. Then people say there's a credibility issue. Actually, this reminds me because you and I met for coffee in New York City like three or four weeks ago. And I think one of the comments at the time, and now that this seems like ancient history, but the thinking at the time was like, oh, it's interesting. Trump is hammering Canada and Mexico a lot more rhetorically than he has China. Maybe he's going to go easy on China. And I had forgotten that that was actually in the discourse even like three weeks ago.

16:14I do remember our conversation as well. And you made me think too Because when I said I still believe Like Look I think for this year This Yours US exceptionalism trade Is here to stay It's not just a one quarter thing Because that I heard a lot as well Ozan Good call We like your blue mega hat But this is just one month This is just two months This is just three months Yeah Now it's 115 etc But then you told me Look China They're doing a lot better In EV and solar They're starting to do better In tech In fiscal So maybe we are not that exceptional After all you had told me And then also on that going easy on China He was trying to hide his cards Then he went seventh gear But China is playing a good one If a lot of people Back to that Wednesday when we didn't sleep A lot of people fear that either that Wednesday Or that Thursday China would devalue big To be fair to both my research and trading Perry, Malika We really believe that people shouldn't exaggerate They would hold the ground and it was to their advantage to choose fiscal more.

17:19So far, so right. And that also proving making things quite difficult for the president. Like even this morning, right? I opened up, okay, it's more colorful for Tracy and Joe. Not wonderful, but S &P down 70, Nasdaq down 350. And then as I was walking to the tube, China may talk to you guys if you show respect. Immediately S &P really 70 points. By the way, for listeners, we are recording this Wednesday, April 16th. It is 10.58 London time, 5.58 New York City time. We always have to get these in our market conversations. Yeah, I think it's so funny we actually have to include the exact time now, which we didn't have to do before.

17:59We used to just do dates. I like that. Before ECB, before Powell speaks in Chicago. Yeah, exactly. Well, okay, so on the tech front, one thing I don't get is so much of the American exceptionalism trade has been about AI enthusiasm. and this idea that America has a head start and no real competitors, at least up until the unleashing slash arrival of DeepSeek. In Europe, we still haven't really seen a real contender in the AI space. I think that's fair to say. And there has been this long running disappointment that Europe is just not where other places like the U.S. and China are when it comes to cutting edge technology.

18:39That hasn't changed as far as I can tell, but it seems like investors are kind of willing to overlook that. Or maybe they think that U.S. isolationist political policy and the idea that Europe is going to have to come together to fight Russia and, you know, make up for a less active U.S. Maybe that's going to be the thing that sparks technological advance. A bit of both. I think, first of all, especially Germany, but Europe can reinvent itself. That's going to take a little bit of time. In the meantime, things like our NVIDIA, so things like LVMH, RMS have to carry us, which didn't happen yesterday because of what's going on with China.

19:19So it will need time. At the moment, Europe does AI, but does the chips, like the part of the chips that helps the ASMLs and TSMCs of the world. Germany doesn't necessarily have its own ASML. But at the same time, this is a country, at least a country, Germany, but overall continent that has shown that it can reinvent itself. It's not going to happen in two, three months. But all these for the pause, all these unforced errors America is making is giving the old continent some time. Europe is arguably now the leading, I mean, clearly the most advanced place in the world for aerospace technology.

20:03And we had those headlines today or sorry, yesterday about China halting deliveries of Boeing. Already Boeing was falling behind Airbus largely due to operational problems. There is clearly still some just sort of like classical industrial might on the continent. Much of it aerospace, probably, you know, engines, other parts that feel like areas for potential further growth. Agreed. Look, I go back and forth between three categories, two categories really. Category one is, you know, after having a great four months, I'll be wrong. U.S. exceptionalism will be fully back. This was all a joke. America, America.

20:44Yeah. Category two, for reasons like you outlined, Europe, European industrialism, China will continue to lead the pack. To be honest, it's going much better than I would have thought. This much outperformance didn't happen since 1980, etc. It's going to continue the theme. And category three, USA Inc., America will take everything down. It will be such a serious confidence and market crisis that with all the respect to European aerospace, this, that, the Danish... True global recession. No place to hide. I go back and forth. I mean, how can you not? You go back and forth these three or two categories.

21:22My gut feel and reasoning still is that category two, the broad team of 2025 will win. Because why? I think the president will continue to blink. And also, I have a backstop now. I do believe if things get very ugly, 5 % and more U.S. 30 are ugly in U.S., Fed will come with QE at least. Collins, last Friday, she gave a hint. She said, the one more word, we are ambitious, whatever the word is. She didn't just say watching. She was the first one to give most investors belief that they could come with more steps. And then Waller. I know that now Waller, people are half joking about, is he really saying it or is he lobbying for the job?

22:05Is he interviewing? Yeah, yeah. But I think he does believe it. He's a respected man. And he did hint that cuts can be front loaded if things get uglier. So first of all, I believe blinks will continue from the White House. But even if they don't, I think we have the backing of the Fed. You know, I mentioned in the intro this idea that the world is sort of de facto overweight, the U.S., just because of the market size and its weighting in a bunch of different benchmarks. Does that provide like some cushion for U.S. equities selling off? Like the fact that you do have index investors, passive investors that have to be hugging a certain benchmark, which happens to be filled with a lot of American equities.

22:50Completely agreed. Exactly. Tracy, in a simple way of putting it, I was discussing with a senior colleague yesterday. This is great because let's go right into that reallocation, the big team, right? If big players were really in the big sense of the word with a big R reallocating away from the US, there would be a lot of circuit breakers in S &P. I don't want to sound, but that is, you know, it would be, I'm not sure how S &P would open tomorrow morning. So there's a difference between even these big real money, silver wealth funds trading in their own time zone and making much bigger, much longer data decisions.

23:30So I think this latter, it's more we do want headlines, especially us emerging markets, FX people. We do get excited. But true, true, true big reallocation, I don't think we're there yet. That being said, there are trades. It's not just my wonderful hedge fund friends, fast money, getting, what's the word Trump used, queasy. It's beyond. Yippee. It's more serious than that. Yeah. No, Tracy wrote a great note about that yesterday or the day before I can't track. It was like real money, real money actually moving away. You know, everyone looks for analogies to past experiences. And it's like, is this like great financial crisis?

24:15Is there like a run element? Is this like COVID where it's a supply shock element? And is this like the Liz Truss moment where – I don't really like the term because I don't like insulting people, but you hear that term more on risk premium exist. The other – when you describe, OK, what if the Fed comes into backstop, another possibility is a Brexit analogy in which there's not an immediate crisis really. It's just the start of a slow degradation of the economy. It sounds like when you're in that number two spot where it's like, OK, there's some blinking going on. There's some Fed backstopping going on that it's maybe that is the analogy perhaps that we should be thinking.

24:58Spot on. I mean, soft power is being eroded. My alma mater. I'm biased on the issue about Harvard headlines. Right. That doesn't help the global perception, whatever your politics is. So in that sense, in fact, when I was trying to get some sympathy from some clients, forwarding around the Harvard headlines, one of them did say, immediate answer, U.S.'s Brexit moment. Yeah. To your point. So for it to get more serious, uglier and GFC like that, than that, is the big word. DM credit. DM credit. That needs to shake for it to become, you know, God forbid, more 08 or 09 like. What's the trade? Because we can all sit here and talk about these big macro themes like American exceptionalism.

25:44But given some of the restrictions on large investors and given the reality of trading in certain markets like Chinese assets, what exactly do you do here? I think, look, first of all, I do believe 48.50 in S &P may have been a base, a floor. Even if I'm wrong on that, if we go down towards that very fast, more Fed blinking and QE will come very fast. So I think we'll bounce very, very fast. I will forget that I was wrong. I continue to believe Europe and China has a lot of fiscal room. So I feel at the moment quite confident that DAX, MDACs, the medium caps and China Tech will continue to way outperform US.

26:29On race, we had started discussing with Joe. I do have sympathy that receivers from here on the long end will work. That may be a big trade actually. Talking about despite tiredness and wounds, a crowded trade, steepeners. Still crowded. Because on paper, it does make sense. For different reasons, for US and Europe. But short-hand may stay lower and long-hand may get sold off more. On that one, I think flatteners at certain stages may give pain to people. ECB, for example. Okay, she will cut tomorrow. But I don't think There's so many unknowns Right? How the tariff negotiations Will go etc On June She will not blink She will not give you the hint That this will continue on June And if people start getting worried About the June skip There you go That's not going to help Your steepener Our official call is that Terminal rate in Europe Is all the way down to 1.5 My excellent chief economist Mark Wall Does get pushback from that In Spain's and Italy's Of the world Even before the recent developments And even before Euro went to 1.13 Soft dollar, look, we're talking big levels on euro, on yen, on Swiss, on gold.

27:49But my bias is still to sell any dollar rallies. So we're talking about that Wednesday night when dollar was selling off. Morning, Wednesday morning. Last Wednesday morning. Actually, for me, it was Tuesday night. I mean, it sort of depends. Your Tuesday night. It was my Tuesday night. We all know what you're talking about, so it's fine. Lucky are you. Yeah, yeah. That was the Tuesday night. I didn't get any sleep. There was that day. And as you said, this is EM-style trading, right? When you see all three, equities, treasuries, and the dollar going down. If we were actually talking about the U.S.