Macro Mondays: What Happens If Trump's Dollar Playbook FAILS? ft. Raoul Pal & Andreas Steno Larsen

0:28Have you ever wanted to trade bitcoin but haven't dared try? and much more. Explore equity indices, energy, metals, forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus500. With over 20 years of experience, Plus500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus500. It's trading with a plus. Hi, everyone. I'm Raoul Pal, the CEO and co-founder of Real Vision.

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1:27Hi, guys, and welcome to Macro Mondays. I'm Andreas Seno, and my typical co-host, Mikkel Rosenwald, he's enjoying sunny Spain, so I'm joined by Raul Pau, the founder of Real Vision and GMI instead today. Thank you for joining us, Raul. 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 Mikkel's gone. It's good. I can take over. Yeah, 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, Raoul. And a while ago, I promised my followers on X to do something.

2:09You're not there yet. You've got two tips to go. Euro dollar. So I asked my graphical department to put together a little meme for you, Raoul. So let's put it on the screens. to see what happens if we breach parity in Eurodollar. Nobody wants this. Literally nobody. Yeah. And, you know, I live in the Eurozone, at least on the outskirts of the Eurozone. This is basically my attempt of pushing markets away from that parity level, right? I'm scaring people away from selling Eurodollar through one. Because if we breach parity, I'll open an OnlyFans. And, oh, God, no one wants that. Raoul, on a serious note, what's going on with the dollar?

2:53What's your take on it? 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.

3:40The 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. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks. Feel ready? You can move to real money with as little as$100 once your account is approved. And the great thing is that in addition to crypto, Plus500 gives you access to a wide range of instruments.

4:15S &P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, forex, and beyond. With a simple and intuitive platform, you could trade anytime, anywhere. Experience the fast, accessible futures trading you've been waiting for with Plus 500. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading in futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. So they're not stupid. They also know that they've got debt to roll, that they also have trade negotiations to do.

4:56So 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.

5:36When 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. You know, 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. I can't remember his name. The economic council guy. Steve... Stephen Buran? Yeah. Very interesting interview. And it seems to have 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.

6:14Now, 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.

6:54Also, 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.

7:34So lots in that. I don't think it diverges much from your view. 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. I'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. No, not really. I've done some R &D on the dollar, meaning that I've ripped off and duplicated a chart from Julian Biddle.

8:15And 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, Raul, 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.

8:59And 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. 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 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.

9:42Then 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 cause markets to readjust um 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 fourth of jam, 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.

10:29It'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 now like 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've got another week until whether we get fuller announcements beforehand or we have to wait for the inauguration and stuff. I don't know. I think Scott Besson speaks on Thursday. Oh, really? Yeah, it could be an obvious timing to say something.

11:13It'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. A good old friend, Jim Cramer, 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.

11:49We've had a lot of discussions ongoing from technical analysts around the head and shoulders pattern. I know you've also discussed that 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 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? So using the parallel of 2017, I think the bottom is in. I think it happened today. Have you ever wanted to trade Bitcoin but haven't dared try?

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13:30Now, 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, not 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 opinion Yeah and I guess this drop in M2, Raoul 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.

14:30It's a conversion thing. And I tend to see that as a less strong signal than an actual drop in M2, right? Yes, 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. Yeah. And speaking of the US dollar, we've already had a few questions on the good old pound sterling, Raoul.

15:11What a nasty trend we have in the cable, right? And it's been another very weak day. Pulling out my char, one sec. Yeah. You don't check the sterling every other day anymore, Raoul? No, never. I don't even care about it. You good old home currency, right? But it looks very nasty. And to me, it's kind of the picture perfect setup for a liquidity edition 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 Kyrgyz Stalman administration in terms of their fiscal capacity, in a sense, without the Bank of England playing ball on the liquidity side.

15:58So I actually think it's a very good trade to be short. Sterling still is one of the trades that I hold a high conviction in. But it's also a very consensus view right now after what's been ongoing. But what do you make of the malaise in the UK? Is it something that's on your radar at all? 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 on Bloomberg, the gilt liquidity index, it is now continually trading higher than the LizTrust gilt intervention.

16:41So 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, understand, they're scared because

17:06they'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 So on the inflation side, Raul, it's one of the things that we have in the economic calendar this week, right?

17:52Both 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 in the month, something like that. And my best guess would be that we get a harder 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, you know, will the inflation battle, the battle to get back to 2%, will that be secondary to the liquidity considerations a few months from now?

18:33I don't think liquidity affects inflation, really. I think they're driven by different things. You know, 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.

19:20The SESI kind of says we're going to get weaker data. But anything now, like the high yields now, plays into inflation in six 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 are 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.

20:02But it takes time. Yeah. And, you know, I saw a chart from a good guy covering the real estate market in the US 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 lagged 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, you know, that's basically what you need to know, right?

20:50We're at, I don't know, 48 in the ISM. The cycle is improving. So why, here's a question for you. Yeah. Because we look at this a lot. why has the ISM been so low for so long? It has been, you know, there's only a few times in history that it's spent this long below 50. 2001, 2003, 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 what 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?

21:42You 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? So first of all, I think you're onto something with regards to the divergence between Megatech 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 also crystal clear that a lot of US corporates utilized 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?

22:40So 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. 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.

23:23So the feedback loop we haven't had yet. Even though the economy has been growing up decent clip, 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, 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. But let me show you one chart on the spending cycle, Raul, because something is happening beneath it and it's positive.

24:12So 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 books are starting to grow relative to the inventory sizes because of a pickup in spending.

25:02So we'll, by the way, get the retail sales report this Thursday. and I think it will look very, very good. You know, the trend is incredible now. And it looks like the very early innings of an acceleration now. 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, there are 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.

25:41They 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 anybody. Yeah, he does. 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... I like this chart. It's a good chart. Yeah. It seems like we agree, Raul, that we're not too far off some sort of positive liquidity event. The question is whether we'll get there without some sort of bond riot in between. And maybe we've already seen that bond riot in the UK, right?

26:25I think you're right that, you know, it typically is sort of an early warning signal when something happens in the gilt market and it's been a nasty few weeks. Yeah, because of the weird structure of the gilt market and it just makes it less liquid. So it shows you the problems, I think. 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.

27:10That's the stuff you hear from them towards the very end of some sort of life cycle of a liquidity cycle. So the next step is QE or some sort of live 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 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 4 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 you know 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.

28:25Yeah, so here's 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.

29:21They'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 officialese, right? It doesn't even smell like QE, right? But in an indirect way, it is QE. So I think that's what they'll do. 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. Nobody's buying U.S.