Downgrades, Debt, and Digital Gold | Andreas Steno Larsen ft Mikkel Rosenvold | Macro Mondays

0:00Hey guys, before starting this show, I just want to take a minute to talk about our good friends over at Bitwise, the$10 billion global crypto crypto asset manager. On this show, we talk a lot about all the big stories. What's driving markets? What does the data tell us? What are you people missing? And as you already know, crypto is playing a much bigger role in macro. So it's becoming more and more important to really understand the stories driving crypto. Why is Bitcoin going up? Why is Bitcoin going down? What are the institutions doing? What are people missing? That's why Bitwise launched the weekly CIO memo, a quick summary each week of what's really moving crypto markets.

0:34It's written by their CEO, Matt Hogan. And that's one of the best in business at bridging the worlds of traditional finance and crypto. It's really a great read. It's clear, it's bold, and it's very thoughtful. I highly recommend it to anyone who wants to do the latest insights and hardest takes in the crypto world. So head on over to bitwiseinvestments.com slash CIO memo. That's bitwiseinvestments.com slash CIO memo. Check it out for yourselves. Always, of course, carefully consider the extreme risks associated with crypto. Hi, everyone. I'm Raoul Pal, the CEO and co-founder of Real Vision. Here at Real Vision, we're committed to give you the best knowledge, tools, and network to help you succeed in your financial future.

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1:26Hello, everyone, and welcome to another edition of Macro Monday. sending to you live here from sunny and quite warm Copenhagen, Andreas. Welcome to the show, Andreas. My name is Mikkel Rosenwald, your host as usual. Andreas, you've done the shirt like you're living in the south of France. Markets are looking quite nice over the past week. Bitcoin even running. What's not to like recently? The temperature in this sauna is not to like. So we'll keep it short today because otherwise we'll be, it will be a Midwest Miss Wet t-shirt contest in here. So I don't think any of you will like that. But, you know, Mikkel, I had quite a tumultuous weekend, actually, watching markets, because I think like two minutes to the closing bell on Friday, we obviously got this downgrade of the U.S.

2:12Treasury debt from Moody's. The last one of the big three rating agencies to downgrade U.S. debt. And, you know, even though it's not super newsworthy, we've actually gotten quite the reaction to this downgrade in bond markets. And yeah, we have a pretty big test upcoming now, whether the market is able to cope with this pressure in bond space. So yeah, we'll get back to the ramifications for cross assets. We will. So remember, this is our weekly sneak peek into the research and analysis that we do, both on our own website and on Real Vision. You can get full access to our research at Real Vision's Pro Tier.

2:50That's the new tier combining the old Pro Macro and Pro Crypto tiers. So you're going to get all of it. and most likely, Andreas, at least today, we are going to be talking a lot of crypto as well. It is macro. Macro is crypto. Crypto is macro, I think. So that's where we're headed. Lots more stuff to come this week as well. We have a live insider talk on Thursday at 11 a.m. ET with you, Andreas, Roald Pell, and Kevin Kelly. I'm going to be hosting that. And then, as usual, our weekly reports, and we don't mention this enough, but this is obviously where you go to all the written stuff. if you'd like to dive into all our research.

3:25We have the Steno Signals, the weekly editorial sort of every Monday. Out today. Out today, yeah. Fresh out of the presser. Tomorrow, we've got the drill where we look at geopolitics, energy space, commodities. We've got the weekly roundup of what we told hedge funds, including our trading portfolio updates. And we have loads more. We have a Roles in Focus article. We have various articles across the weeks when we go to... And a new cover show. Maybe we'll do a macro meets micro. And that's all I'd say. You've been using that for a long time. Yeah, but basically... As a potential name for your OnlyFans account.

4:05Yeah. But I can promise you that I'm not opening up an OnlyFans account. At least not for now. We need$1 of breach parity on the low side to get there. And we're 10-15 % away now. So, thank God in many ways that I can do macro meets micro in a more serious way. Absolutely. So remember, if you have any questions, please post them to us, whether watching on YouTube, Twitter, or Real Vision. We'll get to as many as we can along the way, or maybe we'll pick them up on Thursday where we have a bit more time to dive into all this. Perhaps as a last thing before we dive into stuff, Andreas, our usual little disclaimer here.

4:45While we aim to be very, very actionable and we think we are quite solid in our analysis, our trade ideas might be. Sometimes it may be good, sometimes it may be shit.

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5:59There we go. Good old Gennaro. Good old Gennaro. Okay, Andres. With that out of the way, before we get to Moody's and all that stuff, I want to start on a bit more of a heavy note, at least for Donald Trump. Donald Trump went to the Middle East, and it seemed like he was in his right element there. Having great meetings, enjoyed himself. The weather was nice. His reception was nice. Be greeting in nice palaces, probably eating well and getting this out of it. I mean, I just... By eating well, do you mean McDonald's? Yeah. Okay. Fair enough. I mean, it seems like we'll get back to these investments.

6:35It seems like to me that as an American president, when you call Europe, you get all sorts of legal stuff returned. I mean, you go, oh, we can make deals on this, but we have to consider these rules and blah, blah, blah. When you call the Middle East, you get a number. You get a number of billion dollars in investments. And that's exactly what Donald Trump got. I just took this from the White House website. The UAE, 1.4 trillion. Qatar, 1.2 trillion. Saudi Arabia, 600 billion. Okay, Mikkel. What are these numbers? Call me very skeptical because, you know, take the example of the UAE. They've committed 1.4 trillion in investment.

7:14I think over the next 10 years, that's at least, I mean, if it was over the next year, it would be even more bizarre. But we're talking about a country with a GDP that is roughly a quarter of that size. So, you know, depending on your assumptions for the GDP growth in the United Arab Emirates over the next 10 years, we're talking about an investment equaling, say, 20, 30 % of their GDP every single year. Not going to fucking happen. No. But I mean, you know, maybe they've put in some stuff that is already agreed upon and stuff like that in there. In any case, you know, it was a big success, this trip, in my opinion.

8:00And you can get back to the geopolitical ramifications of it in a second. And even though I'm skeptical seeing these numbers, the direction of travel is pretty clear that you actually get some inbound investments from these countries by visiting them. Yeah, if you add up all these numbers, it would add to quite a significant GDP growth in the US, probably 3-5%, depending on the time period. So that's not going to happen. But anyway. Hi, Raoul here. Listen, I think we've got until 2030 before the economic singularity arrives. Now, it might not be the exact date, but it's around then. So we have about six years to figure out how to unfuck our future.

8:38I've put together a report to help you called Prepare for 2030. It's going to help you take the first steps in that journey to make sure you're secure past 2030. So just click on the link below and start your journey now. I completely agree with you. This also solidifies the geopolitical attraction and power that's been drawn into the Middle East to the Gulf region. Middle East has always been a center of geopolitical attention, but that's always been for all the wrong reasons. This is a new global arena of power emerging in this region. They have their hands deep into every conflict in the region from Myanmar to Sudan.

9:20And these days, you don't go to Geneva or Vienna to do peace deals. You go to Riyadh or Doha. So it's... Or Istanbul. Or Istanbul, yeah, absolutely. Turkey could have been part of this as well. they don't have to paint dollars, they paint other stuff. But very, very, very interesting. As far as Europeans, probably the most interesting thing is the prospect of a Qatar-Turkey, speaking of Istanbul, a Qatar-Turkey gas line that would circumvent the Russian supply into Europe. We wrote in detail in that in last week's The Drill. That's still future stuff, but very interesting. But Andreas, let's get back to the Moody's story here.

10:03We have a chart coming up here at the latest downgrade from Fitch in 2023. How that played out in markets. Yeah, so it was kind of a coincidence that I was sitting in front of the screens on Friday evening, European time. It was like five minutes to five p.m. Eastern time on Friday. Five minutes before the closing bell of all the future markets. And then we suddenly got this Moody's downgrade and Bunk Yields responded. I've never seen futures trading like that, like five minutes to the closing bell. So it was quite a bizarre price action unfolding. So I obviously had a look at what happened in 2023 when we had this downgrade from Fitch.

10:44It was obviously a big deal more than a decade back when we got the first downgrade from the S &P. But when we got the downgrade in 2023, it was less of an event. And to be honest, I consider this less of an event again this time because, you know, with two out of the three big agencies already downgrading the U.S. Treasury debt, it's not really newsworthy that the third one finally gets to that conclusion as well. And we know that they have a very backward looking process, right? So in that sense, it's not really something to spend too much time on. But the issue is that this downgrade arrives amidst what you could label a credibility crisis for U.S.

11:28treasuries already, right? So I think that's why we see a response from markets to this headline from Friday. Even though it's not like you see a mechanical process as soon as you get a downgrade of U.S. treasury debt. because central banks, sovereign wealth funds, most pension funds, they've basically excluded U.S. treasuries from any ratings-related ramifications because they know that it is the most pristine collateral seen on earth and it will remain the collateral period, even after this downgrade on Friday. But what you have here is obviously what happened back in August 23. and the light blue is the bond yield.

12:14So we had a trend upwards. It was already trending before the downgrade from Fitch. And then Bitcoin kind of moved back and forth a little bit. It wasn't really a big event for risk markets, maybe to some extent a larger event for equities. What we've seen so far today, at least from the get-go of the session, very early Asian hours and European hours, was kind of the same. but from the opening bell at Wall Street we've actually seen buying I'm not following it live on the screens right now but we saw buying from the opening bell and then it seems like the US crowd is buying the dip and I get why and I'll show one chart why that is Mikkel maybe two charts from now first yeah so Mikkel if you move to the chart on Bitcoin versus bond yields I think it's the next one this one this is very very very telling So the green colored area towards the bottom of the panel here shows the correlation between Bitcoin and long bond yields.

13:17And back in 23, notice that we had a negative correlation between the two most of the time, meaning that if bond yields went up, Bitcoin went down. While we have almost a perfect positive correlation now, meaning higher bond yields equal to higher Bitcoin prices. And that is counterintuitive in a sense, because if Bitcoin is truly a risk asset, you would expect a higher bond yield to punish the future return of Bitcoin from a discounting perspective. But that's not really happening at the moment. And I think it is related to the credibility crisis of the US Treasury market and not least the US dollar, the fiat market, right?

14:01So for now, you can almost construe this as good news for Bitcoin and some other high beta risk assets that we've seen this downgrade on Friday. But it will be a huge litmus test this week, whether I'm right on that. Because if Bitcoin starts rallying on a downgrade of the US Treasury debt, we're really talking about Bitcoin passing the litmus test of being digital gold in many ways. So, you know, I'm personally in the camp that we will see new all-time highs between now and mid-dew. So why not? I think it will be very interesting. We can just flick to this, Andreas. Let's just talk about that.

14:44Seems like Bitcoin moved close to breaking all-time highs. Yeah. A little bit of resistance. What's your expectations here for the next days? Well, you know, we had a Sunday attempt at breaking to new highs and it was rejected. And there is clearly someone trying to defend this, maybe due to a large barrier in terms of levels up there around 106k. And, you know, it's very natural that we see several attempts of breaking into new uncharted territory. It's the same thing happened when we traded at 10k, for example. It takes a few attempts to get there. But once we break, well, there's thin air above, right?

15:34It is basically uncharted territory, very practically speaking. So, you know, who knows when exactly this breaks. It's typically when no one expects it to break. And, you know, the feedback that I've gotten over this weekend, trying to pitch the idea or entertain the idea that we would break to new all-time highs is that we need a setback or a breather before it happens. So I'm actually not overly convinced that the market is right on that. So let's see over the next 48 hours. I think it makes sense to be invested in a break towards all-time highs. That's what I'm saying. I know a lot of you guys out there are following this very, very closely.

16:15So let's get back to the bond yields and the effects on the US economy. We have a question from Gabriel here. Hello, gentlemen. And do you expect the DXY to keep falling, boosting global M2 and lifting the ISM to 56, 58 levels? And would that raise the odds of a market top in Q1 26? A couple of questions in one here. Yeah. So at first glance this morning, it was another bad story for the US dollar. And the market is actually not overly short, the US dollar, especially when you look at the positioning among speculators such as hedge funds. So I think there is room to the downside for the DXY still.

16:55We're not talking massive downside, but maybe 5-6 % from here. And, you know, judging from the typical relationship between the US dollar and, for example, GlobalM2, but also just the direct relationship between the dollar and Bitcoin, we have a couple of really, really solid months ahead of us. I can show a chart on that exact relationship on the Bitcoin versus the US dollar. because, you know, typically what happens is that the dollar weakens in advance of Bitcoin strength. And we've seen that exact same thing this year. Judging from this very simple correlation between the dollar one quarter ahead of the Bitcoin, we'll see a peak in August.

17:38Very specific. Yeah. And, you know, we'll have, you know, drawdowns along the way. but I think this is a pretty decent strategic timeline to look at. Like from now on until August, it looks bullish. Could the dollar weaken even more, prolonging this bull cycle into 2026? I'm a little bit skeptical, but let's see whether it weakens another 5 % to 6 % from here. For now, I think Q4 will be a bit trickier from an investment perspective. also since we probably need a solution to the debt ceiling by the early parts of Q3. And typically that means a lot more issuance, liquidity withdrawals, and so on and so forth.

18:25So, yeah, let's stick to what we know. And what we know is that the cycle looks good until August. Yeah, that's a decent time horizon. Let me just get back a little bit to the downgrade and rising bond yields here. When does this become a problem for Donald Trump and his proposed tax bill? Because some people also linked the movements in the bond markets, both to the downgrade, but also to the proposed tax bill. How do you see that? Is there a potential of the tax bill being pulled off the table here? Because back in April, it seemed to be that once the terrorist debate, the terrorist crisis, if you call it that, once it reached bond markets, things started to get serious for Donald Trump.

19:07Yeah. So in all honesty, I would have probably one or two weeks ago, I would have said, yes, there is some sort of, you know, practical obstacles for the administration in relation to bond yields here. But having listened to Scott Bessent over the weekend, he gave an interview at CNBC. It really felt like he was throwing in the towel on this whole notion that they wanted to balance the budget. And he explicitly stated that he's going to solve the debt crisis by outgrowing debt. So, you know, ultimately, to me, it sounds like they're still pushing ahead with this tax cut agenda, despite the bond market not really liking it.

19:58We obviously have a case study from the fall of 2022, as far as I remember, with Liz Truss in the UK trying to pass an unfunded tax bill as well. And the bond market responded in a very fierce way and ultimately she had to leave office. That's obviously not going to happen here, but maybe the scope of the tax bill will be shaped by the bond market reaction to this. But I think they're very, very serious about this big, beautiful deal. However, I was just saying that I'm trying to learn myself that this is a big U-turn administration as well. We've seen that thus far. I mean, they've gone from wanting to cut the deficit to now outgrowing the deficit.

20:43They've gone from complete all our trade war in China to trying to get it all boxed in before June 8th. So I think, yeah, it's a flexible approach to policy decisions at least. Yeah. So a great question coming in from David, by the way, Michael, in relation to this discourse. Are there any currency crosses versus the dollar that you prefer as a dollar short? So, you know, I think dollar versus Asia is what you need to really look at. Because we had this story out Wednesday last week, I think it was, that the negotiations between South Korea and the US were mostly centered around the exchange right now.

21:27We've seen a pretty decent move in the Korean won versus the US dollar. I think that's one way of playing it. You could also argue that the Japanese yen is a solid vehicle to bet on this. So Asian FX is too expensive versus the dollar. if the US administration are to seriously try to reach their efforts in relation to the trade deficit. So I think that's where you need to look. Then we had a story, I think, on Thursday, suggesting that FX regimes were not part of the negotiations. But it was a headline. And when you actually read the content of the article, It's just stated that the snake solar salesman, Howard Lutnick, was not allowed to talk about FX regimes with counterparts.

22:24It was only with Scott Besson in the room. So Howard Lutnick, he's got like a partial mandate, you could argue, right? You can discuss trade, but nothing with FX. That's not for you, Howard. That's for Scott. So I think it's just plain wrong that foreign exchange is not part of the discussions. They're a part of the discussion when Scott Besson is present. When the grown-ups are talking. Okay, a couple more questions here from Mike. How can the private money supply grow so high despite such high yields? Well, okay, this is actually a really interesting question, and I almost feel tempted to spend the last 10 minutes discussing it.

23:07Because it actually relates to some of the charts that we've prepared, Raquel. take a look at the case of Japan as the first step in this discussion Japan had a U-curve of approximately zero all the way out to 30 years over the past decades and the private banking system was essentially non-existent from a growth perspective the only money growth you saw was from the central bank and why is that? well the yield curve is basically the mother of private credit creation. And I can testify to this as a former bank treasurer in a bank in Europe, because we also had a very, very flat yield curve in Europe for a decade.

23:57And it's much better now that we have a steeper yield curve in Europe. So why is it? Well, a bank business model is pretty simple by the end of the day, you borrow at the very front of the yield curve at low yields, and then you lend that out further out the curve at higher bond yields. So you need a curve that is shaped like this, high long bond yields, low short bond yields to make money as a bank. So if the yield curve is flat as a pancake, a bank will not be tempted to increase its credit book. While if it's steep, it's a much better business case because you typically borrow at like a three-month rate or an overnight rate, and you can lend that out.

24:37I know that we've seen regulation on this, but, you know, top down, that is basically how a bank works. So take a look at how bank stocks have performed in Japan, Europe, and elsewhere amidst this rally in long-end bond yields. Bank stocks love it because it allows them to create credit. and, you know, go watch the State of the Union speech I gave at Real Vision last Wednesday. I spent maybe 20 minutes discussing the credit creation in various parts of the US economy and we do actually see quite the acceleration of the private credit creation because the yield curve allows for a better business model for banks now.

25:21So I think this is, you know, the ultimate conclusion after a decade of yield curve control and flat U-curves and all of that. If you run a flat U-curve regime, the public sector ends up being the sole responsible entity in relation to credit growth. And that's not a good idea. So I actually think that those days are gone. Maybe we'll get the Fed involved in the long end if the move is too rapid, but they're not going to push it down to zero. I think they've concluded now that it was a bad idea. So at what point do these yields become a concern for risk assets? Another question from Mike. Yeah.

26:14Well, I think, let me put it like this. I think the rate of change is more important than the nominal level, especially for large caps. Small caps are very sensitive to this because they typically run a capital structure that is more indebted. And if you look at the Max 7s, for example, they're very cash rich. The debt that they may have on their books is very long duration and profile. And that's the case for many large caps. So we've seen cash hoarding, meaning that they actually earn more money when yields go up. And we've seen a widening of their duration profile since 2020, meaning that they're not really impacted yet.

26:56So I actually think net a lot of companies are actually good off when bond yields increase right now, which is in sharp contrast to the pre-2022 environment. So I think there's a big discrepancy between how small and mid caps and very large caps will respond to such an environment. The interest rate sensitivity is currently very low among the largest companies in the US. And yeah, at least for what it's worth, when I looked at the phone before going on air here, it actually seemed like the US equity market was buying the dip despite this turmoil in the long end of the EU curve. Okay, I want to round off the show with something completely different here.

27:36We might have time for one more question as well.