Dollar on the Cusp vs. Euphoria in Risk

Published on: June 15th, 2020

In this month’s In Focus, Julian sets the long-term framework for a USD decline that will have secular implications for reflation, relative growth, US exceptionalism and ultimately the reserve currency status of the USD. Shorter-term, a black cloud threatens euphoric price action in equities. Time for some defensive action.

Comments

  • GP
    Geoff P.
    16 June 2020 @ 17:23
    Julian, I'm mulling over your thoughts (excellent points; thank you). However, I'm struggling to come up with a positive backdrop from a relative standpoint on US vs Europe (I get the US vs EM theory). I understand your point on rate differentials (an undeniable pull), but as far as achieving meaningful growth, they're going to need credit. Even if we gloss over the lack of innovation, horrid demographic issues, and regulatory constraints for corporate profits, how do they overcome the mess that is their banking system? How do you get sustainable economic growth without credit? Thanks
    • MP
      Matthew P.
      16 June 2020 @ 20:44
      Geoff, I think all of your points are valid, but they were also valid in 2017 when EAFE outperformed SPX by 6%+. If Julian's correct on the FX call, dollar debasement is a hell of a drug..
    • GP
      Geoff P.
      16 June 2020 @ 22:47
      Right, but look at European bank stocks which lead the euro higher in 2017. Moreover, look at how quickly both rallies faded. I think the narrative around European growth is going to be below 2017s hope phase (again see European banks). The euro downtrend started in 2008 (a banking crisis). The US largely recovered from that, Europe got worse. Interestingly Julians target on the eurusd is right around the top of that downward regression channel from those highs. I'm curious to know if this is a counter trend bounce play to the top of the range (where rate differential et al will be enough to pull the euro up) or if he sees some kind of secular shift that I'm missing.
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 17:58
      Hi Geoff, If it was just about macro I would agree with you, although no matter how bad macro gets there is still such a thing as a price which is too low. But its not just about macro. Europe is a major exporter of capital. European pension funds are doing their best to maintain returns, so they have exported capital all over the world looking for yield. If they decided to repatriate it, it could drive a long period of Euro appreciation from lows. With regard to the availability of credit, its possible that they will create a system where national central bank governments or even the ECB underwrite bank provision of credit. Which is pretty much the current situation. Whats to stop them just expanding it?
    • GP
      Geoff P.
      17 June 2020 @ 19:04
      Thanks Harry. What would you imagine the biggest factors that might prompt a repatriation of European capital? Obviously an expectation for higher equities in Europe would be one (not sure why someone might have this view). While JB highlights the rate differentials picking up, most sovereigns are still negative over there. Maybe even more simply the idea that the US has run as far as it can? Book the gains and call it a day? Curious... thanks.
    • HM
      Harry M. | Real Vision
      21 June 2020 @ 20:01
      Biggest factor that might prompt a repatriation of capital? Well a Fed or UST signalling that it was interested in a weaker dollar might do it. Some kidn of Plaza style meeting where the interests of EM were taken into account as well. And of course it would probably need to be a coordinated effort, where the US took the lead with more aggressive fiscal, but expected other countries to do their bit as well. Are we there yet? No. But are we in a place where Fund managers might start to reconsider their asset allocation given the carry advantage of dollars is now much lower than it was? Possibly.
  • GB
    Gold B.
    19 June 2020 @ 14:22
    Anybody else catch the Blackadder reference on Page 10? If the Fed is as successful as Baldrick with his Cunning Plans, then good luck with Yield Curve Control ! Nice one Julian :)
  • DA
    Daryan A.
    18 June 2020 @ 13:03
    Is anybody playing this EUR.USD trade using options? If so what time frame? I also keep vacillating between straight 1.125 calls, back spread calls (which gaps 112.5-114.5) and bull run spreads trying to get the best asymmetry. I am long dollar but see the short term case of USD weakness vs EUR on the pure policy timing basis. Would much appreciate anyone willing to share their insight on this trade.
    • HM
      Harry M. | Real Vision
      19 June 2020 @ 11:53
      I am. I am long of Sep 1.12 calls. I am actually looking hard at it right now, cos I wonder whether it will continue to work. I think its one where I will raise the stop, cos the EU policymakers can always surprise us by misjudging how much they need to do. I dont know if I would enter it at this level if it was a new trade. I think I would look to see if it breaks another resistance level before adding to it or initiating as a new trade now.
  • SN
    SAT N.
    16 June 2020 @ 23:27
    Thanks JB. Thought provoking and helpful counter narrative to Raoul's view. But, instead of one making a bull/bear case of USD, I wonder if one should be simultaneously considering both bull and bear probability for each of the issues that you went through (oil, YCC, etc.,), and then come up with an aggregated probability for USD. Otherwise, I fear that the analysis could be too biased in one direction. To support this, let me try to use the same facts and data you presented and argue for stronger USD. 1. I guess Julian's core argument hinges on the assumption that Fed is powerful enough to address fundamental structural issues, and that it can cause inflation when it wants. If that is true, why hasn't it managed to push inflation up past 2% in the 10+ years of QE? Why has Japanese CB not succeeded in getting Japan out of deflation in the last 25+ years? Why do CBs fear deflation more than inflation in general? 2. US unemployment > German unemployment Isn't unemployment deflationary? Given there is more unemployment in US, there will be less demand and more deflation in US. Less demand means US current account deficit will decrease. So USD stronger than EURO? > US shale JB's entire thesis is based on a core assumption that Fed and US gov will throw the kitchen sink at the deflation problem, and inflate away. If that is true, won't they bailout shale in the process and keep up its production? Also, say they successfully weaken USD. Then, Oil in USD terms will increase. That should also help shale, no? > Primary dealers holding US treasuries It looks like the primary dealers made a truck load of profit hoarding US treasuries since the middle of 2018. They probably know better? I don't see how holding US treasuries has been a burden on primary dealers over the last two years. > YCC If Fed will soon do YCC, isn't that a bullish case for buying bonds now? > US Exceptionalism Why would Fed provide swap lines if there is a chance that it is detrimental to US exceptionalism? > Bottomline Why do you expect the current Napalm run to be shorter than 1980s USD rally? Covid global demand (and supply) shock is unpredecedented. I'm not sure how much we can rely on these past patterns to guide us into the future. > EURO If one is going to make a case for weaker USD vs EUR/Yen, isn't it important to consider the structural issues that exist in the other currency market as well? This article didn't tackle any issues in Europe or Japan, and argue why those problems are lesser than those faced by US. Everyone is printing and spending as we speak.
    • GP
      Geoff P.
      17 June 2020 @ 11:02
      There are some good points in there. If I may, 1. The Fed by itself cannot create inflation (QE is not printing money regardless of what Powell said on 60m). They support the banks and the banks create the inflation. Banks have bottlenecks though. They require capital, a loose regulatory environment and people willing to borrow. The Fed and Treasury can however act together to devalue the dollar. Will they? 2. I think the theory here is that lower unemployment equates to a stronger economy. A stronger economy will attract capital and buoy the currency. Deflation due to a bad US economy will hurt domestic assets. Of course there would need to be a separate argument for how Europe withstands a bad US economy. 3. I think Julian is right. Shale has proven to be completely un-investable. Can the argument be made that it's in the country's best interest to be an oil producing nation? Not in a world where green is the new christianity. 4. This is an interesting situation. PDs are the link between Treasury issuance, QE and REPO. To understand the nuance here is to understand a key concept. A PD can finance Ts at REPO and withstand a decent backup in rates (pocketing the carry). They have immediate access to the Fed and could off load any underwater securities to them in a QE purchase (are the purchase prices transparent?). Their profits go directly to the banks they're tied to. Is this a backdoor Fed sponsored profit center for bank during a rather mooted yield curve? I have no idea. At face value it seems they are having trouble finding buyers since they are in the business of market making Ts and not making carry bets on interest rates.... but things change. idk 5. Doubtful. YCC doesn't mean pegging at zero. It simply means pegging at something (probably with a bit of steepness to ensure bank profitability) at each interval. 6. Reserve currency problems. Not necessarily detrimental in my opinion.
    • SN
      SAT N.
      17 June 2020 @ 13:26
      Thanks for the response, Geoff. I agree to many of your scenarios -- they have a good probability of materializing. My intention earlier was to simply point out there is some probability for opposite scenarios to pan out as well. To you point -- 1. Agree. 2. Unemployment Unemployment is higher in US than Germany, because of stricter labor laws in Germany, not necessarily because of stronger economic fundamentals. One could make a case that US economy (with flexible labor force) is more efficient in trimming labor force when demand goes down. 3. Shale I see the arguments against shale. In terms of probabilities, I'm not at all bullish on shale, in the short to medium term. But, if Julian's view plays out, there will be significant inflation, and it is quite likely that oil will get above $60 per barrel. May even get to $75-$100. At those price points, shale can come back purely on economics, even without bailouts. And that can boost US industrial production. I guess it is a question of how long-term one wants to chart out the future. 4. Treasuries at primary dealers (PDs). Sometimes I feel confident that I understood the mechanics of QE, Repo, and PDs role in all of that. But, then, IDK :). Primary dealers are commercial banks, whose only goal is to make profit. They are sharks, and their proximity to Treasury/Fed gives them the most information and cheap access to USDs. Hard for me to understand why they would willingly buy USTs if they are struggling to sell them. 5. YCC I agree about yield need not get pegged at zero. At least, we know for sure Fed is not even thinking about thinking to raise (short end) rates until 2022. So downside risk is close to zero. ---- Going back (1). Most of the hard economic data that can be seen today is deflationary. https://www.investing.com/economic-calendar/ So, it all boils down to whether the Fed and Treasury can collude to create inflation? Fed alone can't. They can't spend, by law. They can only buy already issued debt (QE). Even with QE, it is unclear if the commercial banks can use the dollars that the Fed paid for the debt they purchased. Apparently, it gets held in Fed's reserve account and cannot be drawn out. According to Richard Werner, only ~3% of money is criculation is created by CBs. Rest are created by banks by issuing new credit. Treasury, of course, can spend by creating new debt (USTs). That is clearly inflationary. Question is how much and how soon can they do it. If stock market stays where it is now or goes higher, I'm skeptical if US congress would be as swift as it was in March/April in passing the laws. So my take is, the Conguress and the Fed is likely to do more stimulus and inflate. But they won't do it, unless they see more pain the market. So there is higher probability that pain comes first, IMO.
    • GP
      Geoff P.
      17 June 2020 @ 13:51
      On 2, my point was all else equal a lower unemployment figure translates to a better overall economy as the economic participants have income to spend (it says nothing of the profitability of the corporates and how that translates to market prices). So yes I agree with your point about efficiencies etc. 3, while I can agree on principle, finding the capital might be tough. As soon as you introduce more production you get lower prices. I would assume any would be shale investors might be on to that by now. But then who knows, people still throw money at structurally unprofitable tech cos. 4, the primary function of a PD is to be the market maker for treasuries. On the footnote to 1. "...it is unclear if the commercial banks can use the dollars that the Fed paid for the debt they purchased." It actually is clear. Banks are never reserve constrained, only capital constrained. That is to say a bank will never not make a loan because they don't have enough reserves. They will make the loan (assuming they have the capital and it meets underwriting standards, etc.) and go to the fed funds market and borrow reserves. This is why the Fed funds market exists. "Apparently, it gets held in Fed's reserve account and cannot be drawn out" It can't be lent out, but it can be drawn out. If you go to the bank for example and withdraw cash, that comes from bank reserves. "Treasury, of course, can spend by creating new debt (USTs). That is clearly inflationary." Not clearly, the productivity of the spending has to exceed the cost of the debt. Otherwise it is in fact deflationary. If the Fed and treasury decides to cancel said debt, that's another matter (yes, inflationary). In short, so many questions... so much new territory. It's hard to draw historical reference during this ostensibly new era of risk factors. The rules of the game are changing almost daily.
    • GP
      Geoff P.
      17 June 2020 @ 13:59
      I should clarify. >>"Apparently, it gets held in Fed's reserve account and cannot be drawn out" It can't be lent out, but it can be drawn out. If you go to the bank for example and withdraw cash, that comes from bank reserves. Reserves aren't lent out (leaked) into the real economy. That is banks don't lend their reserves to retail customers. Reserves obviously get lent all the time in the fed funds market.
    • HM
      Harry M. | Real Vision
      18 June 2020 @ 11:49
      Geoff has done a great job answering these (excellent) questions. FWLIW, here are some of my thoughts as well to augment. 1) Fed efforts to fight deflation have not been very effective in forcing CPI higher (bunch of possible reasons), but they have been very effective in supporting asset prices. In fact the Feds ability to create inflation appears to have been declining as private sector debt has increased (at its prompting). So where back in 1998 you might have gotten 1 “unit” of inflation per each unit of asset price “support”, now it looks like you get 1 unit of inflation per 10 units of asset price support. Strikingly, that has not deterred the Fed from its strategy. Much like me pressing F9 repeatedly when a spreadsheet doesn’t work, the Fed only seems to have a few tricks up its sleeve. JBs bet seems to be that the Fed can support asset prices, even if it cant create inflation. And given asset prices are denominated in a “unit” the Fed can produce simply by pressing F9 on a keyboard, I can see Julian’s point. 2) Yes, unemployment is very deflationary. Which is precisely why the US authorities will eventually pivot to meaningful fiscal policy, and when they do, I have every faith in their eventual success in creating inflation. Especially considering the Fed will have put so much money in the system by then – effectively transferring a lot of debt onto its own balance sheet. Markets will smell those risks coming before they arrive. In fact, what we are hearing about the Biden campaign behind the scenes suggest that day could come well before people think it will. Dollars are expensive now, and a strong dollar does nothing to help US or international reflation. I would imagine Larry Summers is already planning the “Plaza” style G7 meeting when he (sorry Biden) announces the managed depreciation of the dollar. The point is not that this will definitely come to pass, but rather there are bearish scenarios for the dollar as well as bullish scenarios. And its definitely not cheap. 3) Shale. Yes, it might well be bailed out. Which would be sad for US consumers/taxpayers and the world. Bailing it out won’t make it economically viable at sub $50 oil. But it will make investment in global oil production unattractive. Current bond investors might get some of their money back. Stockholders wont. 4) Primary dealers have a huge proportion of their capital tied up in UST trading. And now yields are much lower. At the time, the dealers didn’t want all that money tied up in USTs. Luckily for them the Fed bailed them out. So going forward what return on regulatory capital will they need going forward from their UST inventory and at the current levels of carry? Net Interest Margins are generally considered a function of the steepness of the curve. That doesn’t bode well for banks. 5) At the short end YCC is in the price. At the long end are you sure you want to own it before they implement an extension of YCC to the long end? That said, if stocks come down the long end of the curve is likely to do well. And tactically, stocks look expensive and are no longer making progress on the upside. No risk-reward in them at this level. 6) US Exceptionalism – the attractiveness of the US dollar as a reserve currency (the exorbitant privilege) is partly a function of the ability of foreigners to use dollars as a borrowing currency without going bankrupt. So providing swap lines is not detrimental to US exceptionalism. 7) Why should the Napalm run be shorter? Yup that’s the bottom line! Might be shorter cos the Fed has lived this once before and has the playbook written down. They printed (Pressed F9) 3 trillion very quickly. They can print up another 3trillion just as quick. Then the only question is distributional. Is there as much embedded dollar debt? Yeah probably at least as much. So much of it is simply an assessment of the Feds reaction function. The problem is just as big. It might require multiple iterations of the same cycle. Deflation gets the upper hand, risk assets fall, Fed injects money to tune of 10% of GDP. Markets stabilize. So, it may not be done but no guarantee we revisit lows. But I think this is the $64k question.
    • SN
      SAT N.
      18 June 2020 @ 19:22
      Thanks a lot Harry and Geoff. Very helpful! I agree and I see that one could make a case for . > It might require multiple iterations of the same cycle. Deflation gets the upper hand, risk assets fall, Fed injects money to tune of 10% of GDP. Agree. This is quite probable, and in line with the view that there has to be pain for Fed to act more. But, I'd like to understand Fed's powers and limitations a bit more. Please indulge me for a bit. > Fed efforts to fight deflation have not been very effective in forcing CPI higher (bunch of > possible reasons), but they have been very effective in supporting asset prices. I agree. I have tried to understand why this has been the case. What I understand is the following. Fed can only buy debt, including junk debt. It can't spend, so it doesn't increase $ in the system. Hence, no inflation in CPI. So how come assets inflate? Jeff Snider calls Fed's activities a con game. It is not as powerful or central to financial system, as we are made to believe. According to Werner, only 3% of $ supply is created by CBs. Rest is bank issued credit. Given this, asset price inflate, not directly because Fed is buying some form of debt. Instead, it is because market is made to believe that Fed's actions are very significant (Fed's put), and market partcipants are tricked into buying without caring for fundamentals, inflating the assets. Becomes a self fulfilling prophecy. But, at some point, earnings and income has to matter. This smoke-and-mirror trick of Fed would fail then. I guess it is hard to know when that will be. But, eventually, it has to happen, no? When it does, it should result in deflation. The resulting pain, causes Congress (and G7) to amend laws ("Plaza" style) to initiate MMT and large scale fiscal spending, when inflation (not just asset) becomes a reality. So, it feels like the timeline below has a high probability of panning out: 1. Fed's smoke-and-mirror trick induced asset inflation -> 2. Plummeting earnings/income changes market sentiment. Fed's smoke-and-mirror trick fails. Deflation -> 3. MMT. All round inflation. Dollar falls. We are probably close to the end of (1). Can we skip (2)? I believe the answer to this question is where JB and Raoul's views diverge. JB says yes. Raoul says no. Can "Plaza" style significant policy change happen without pain? Given the political polarization today, and with the election coming up, I think the probability of such laws getting enacted seems low quite low, IMO. Most likely, these laws would benefit the top 1%. How would the authorities be able to justify it to the masses? They need to let the masses see the pain first.
    • HM
      Harry M. | Real Vision
      18 June 2020 @ 19:53
      "So how come assets inflate? Jeff Snider calls Fed's activities a con game. It is not as powerful or central to financial system, as we are made to believe. According to Werner, only 3% of $ supply is created by CBs. Rest is bank issued credit. Given this, asset price inflate, not directly because Fed is buying some form of debt. Instead, it is because market is made to believe that Fed's actions are very significant (Fed's put), and market partcipants are tricked into buying without caring for fundamentals, inflating the assets. Becomes a self fulfilling prophecy." So here is what I would say. Usually the private sector (mostly banks) creates most of the money in the system. The private sector is subject to the Fed's banking supervision rules which constrain how much money it can produce. For the private sector, balance sheet expansion given a set amount of equity generally enhances profitability. Total money in the system eventually finds its way into either the asset markets or banking system. It has to. However total money in the system is critically dependent on the velocity of money. So we can have the Fed put in a bunch of reserves but total money supply declines because of lower velocity. Well, rinse and repeat, the Fed can just offset any shift in velocity with additional Fed money. So on the supply of money side there is no constraint. The real constraint is the total debt position of the private sector. Cos if they private sector has to pay back its borrowing it can run into a solvency constraint. If you make $100k a year, then there comes a point where you cant borrow more regardless of how low (but positive) interest rates go). You just cant pay it back. That's what happened in Japan. Individuals just didnt want to borrow money cos they couldnt pay it back and there was nothing profitable to do with it. Its a "pushing on a string" moment. Even then, governments can still pull us out of the deflationary spiral with traditional keynesian fiscal policy. Just spend more than your revenue and the private sector will find itself with more cash and declining debt. The government will be "insolvent" but who cares? (hint, government bond holders).
    • HM
      Harry M. | Real Vision
      18 June 2020 @ 19:57
      "So, it feels like the timeline below has a high probability of panning out: 1. Fed's smoke-and-mirror trick induced asset inflation -> 2. Plummeting earnings/income changes market sentiment. Fed's smoke-and-mirror trick fails. Deflation -> 3. MMT. All round inflation. Dollar falls. We are probably close to the end of (1). Can we skip (2)? I believe the answer to this question is where JB and Raoul's views diverge. JB says yes. Raoul says no. Can "Plaza" style significant policy change happen without pain? Given the political polarization today, and with the election coming up, I think the probability of such laws getting enacted seems low quite low, IMO. Most likely, these laws would benefit the top 1%. How would the authorities be able to justify it to the masses? They need to let the masses see the pain first." Absolutely. And this is a political question. How much pain will it take to persuade people to skip 2? Well I think you will need some stock market pain. But the Fed has shown that it has no tolerance for pain at all! Re Plaza, you are right, there will be pain. But whose pain, and will the guys who make the decisions care? We are in a tough place. Usually when you are in a tough place like this, its the middle class who get hammered. They have some skin in the game but not enough to get their money offshore and out of harms way!
    • GP
      Geoff P.
      18 June 2020 @ 21:46
      This is a good discussion. "So how come assets inflate?" The mechanics to this are complex. I'm very familiar with traditional fed roles, but I've been out of the game and don't know the finer details of how exactly funds flow from the Fed to ETF / Corp bond holders etc. Is the PD still the middleman there? It's not as clear cut to me as what banks can and can't do with reserves. The Fed (as I understand it) can only buy bonds on the secondary market. Whoever held these bonds previously received cash (either from the PD that secured the bond or from the Fed itself if there is no middleman) and needs a new place to invest. This is a bit fuzzy for me so bear with me. What I do know is that the Fed is an active market participant and is competing on the demand side. This means freed up capital that has to go somewhere else. So QE is real money competing for assets (more demand = higher prices), but not for adding capital upon which banks can multiply (the Fed swaps cash (reserves) for an asset (the bond) so no capital is created for the bank). There are leveraged aspects to this as well since QE shores up bank balance sheets ((think margin not loans) but there are counter regulatory measures imposed by Basil III and Dodd Frank). Then you get the psychological aspect of QE. "Money printing, dollar going to zero, buy assets." All this leads to higher prices which attracts capital chasing higher prices. All this seems to work as long as there is some promise of future growth (which low rates and QE appear to provide). The resulting multiple expansion can be explained away with rates at zero. Look up ubiquitous asset pricing models to see the impact of zero (or heaving forbid, negative) rates. This is on top of the continued passive flows from 401k, etc.
  • RH
    Rob H.
    16 June 2020 @ 22:52
    Hi Julian, I purchased some good dividend payers as you suggested near the bottom in March to my surprise I have 50% gains in a few of them and they are paying 7% plus dividends yet I don't want to get back all my capital gains so I added some TLT and a little TMF as a kicker during the last bond sell-off. It seems to be working well so far, do you see anything wrong with that hedge? I figure there is not much downside since they are not going to raise rates, yet if they do YCC as you suggest what would that do to these hedges?
    • HM
      Harry M. | Real Vision
      18 June 2020 @ 11:19
      If I can answer for JB, TLT is less of a hedge than last year but its still a hedge. Probably wont fully offset losses if stocks come down. But it will mitigate losses. The very long end of the yield curve will not be fully protected from a sell off if/when they implement YCC.
  • DB
    Dan B.
    16 June 2020 @ 21:37
    Hey - I’m a little confused On the euro usd trade. Is this a longer term view, expecting some USD strength in the short term ?
    • HM
      Harry M. | Real Vision
      18 June 2020 @ 11:16
      EUR has broken out of its down trend. How far it goes is another question. But it certainly got stress tested on the downside and rejected it. So I think for now JB is calling for further EUR appreciation. Lets see whether disappointment with what the Eurozone politicians have in store for their citizens and investors breaks that EUR rally.
  • SS
    Scott S.
    16 June 2020 @ 07:16
    With Raoul and Julian giving completely opposing advice, I'm not sure what the value of this service is? I am interested in actionable advice and I am left feeling completely confused after listening to each of them. So is the best strategy to buy straddle or strangle options combinations on USD and just bet on increasing FX volatility?
    • PO
      Paul O.
      16 June 2020 @ 09:09
      I feel quite the opposite - I think that I've learned more from their dialectic than I would have from their consensus. If nothing else, it seems to me that 'bifurcation' is a sign o' the times, which is captured by their polar views on the dollar and currency debasement. I also think it has forced Julian and Raoul to really examine their biases and inferences more keenly, thereby offering deeper lessons over more ground for macro insiders subs in the aggregate. To me, I feel more prepared for whichever view emerges the victor. I’ll also learn from how the other pivots in response. It’s a win either way.
    • NG
      Nikita G.
      16 June 2020 @ 10:07
      The purpose of the service is to get access to some of the best macro thinkers out there and to understand the way they develop and utilise their investment frameworks. At the end of the day, it is still up to you to distill the information and make a decision about which arguments have more strength. Honestly, if you really wanted just to follow someone's recs without questioning it, there are dozens of services and investment management firms that are going to make decisions for you, no?
    • GP
      Geoff P.
      16 June 2020 @ 11:48
      I think if you pay attention, the discord / agreement proxy is in fact a huge value add. To be sure, we're not paying for buy and sell recs alone. We're paying for top level research that it would cost us a great deal to replicate. We're paying to see how seasoned pros with an invaluable rolodex use this information to create a frame work. We get a seat at an esoteric table. The information alone is worth the price of admission. The fact that they're willing to hold our hands and make some actual buy and sell recs is just a bonus IMHO. Just as COVID was hitting, their unanimous position was a big tell to put size on. There was a lot of money made during that downdraft. Also, one of my biggest gains on the upswing was the casual mention of MGP by Julian. Very timely introduction. The dollar discord is highlighting the tug of war in the market right now. Understanding both sides is incredibly valuable. If you don't know which is right, if neither can persuade you, sit out. There is a lot of money to be made elsewhere. It's also possible to play both sides if you get creative, but that requires a somewhat deep level of understanding of the various instruments out there and how to use/size them. Just my unsolicited 2c
    • SS
      Shanthi S.
      16 June 2020 @ 12:49
      I agree with the others that the opposing views are a major value add, but also agree with you and am working on a couple of straddles myself. Seems sensible given the uncertainty.
    • HS
      Haythim S.
      16 June 2020 @ 14:22
      I agree with the others that the opposing views are a major value add, These are unprecedented times and even the best macro guys will have different views to what could happen next !
    • SM
      Shantanu M.
      16 June 2020 @ 15:54
      I agree with Scott here, for discord and opposing views I can watch the RV and YouTube videos, listen to podcasts etc. There are dozens of smart people talking all this. When I pay 3500, I want actionable advice which has conviction behind it. Taking both sides of the trade at the same time makes no sense whatsoever.
    • SN
      SAT N.
      16 June 2020 @ 23:33
      Real world outcomes don't have 0 or 1 probability. So I find it really useful to hear a case for both bull and bear. One can use that information and draw your own conclusion. Helps avoid confirmation bias.
    • JL
      Jack L.
      17 June 2020 @ 15:28
      Also agree that hearing opposing viewpoints is a real value-add. My subscrip to RV Pro is at least as much about me learning how to conceptualize and analyze market structure and tactical opptys as it is about executing specific trades delivered to me on a silver platter.
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 16:14
      I think other people have outlined both the advantages and the disadvantages of this service. I dont have much to add. To specifically address Scott's question, if neither argument strikes you as telling, then dont put on bets which are highly dependent on the dollars direction. No one has to take on bets they dont like (except for Tesla for some reason - I find myself compelled to bet against it. I only wish I knew why.) Problem is the dollar is central to a lot of trades. But perhaps the way to use this is to stare hard at the charts, and pick levels that you think would signify a major break out.?
    • GP
      Geoff P.
      17 June 2020 @ 16:34
      "except for Tesla for some reason" That's hilarious Harry. Cause it's so true. The hardest 'no brainer' trade ever.
    • SN
      SAT N.
      18 June 2020 @ 00:45
      "except for Tesla for some reason" :). Now there are too many such temptations to resist. NKLA.
  • JM
    John M.
    16 June 2020 @ 18:21
    Hey Julian great job laying out this argument. What I am struggling with is the timing - I.e. does the dollar squeeze have a little more left? If SPX falls, would that not drive the dollar back up? If the dollar rises it feels like XME will underperform? So how much should we just wait in case the dollar breaks back higher?
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 18:01
      Really a question for the technicians. I dont really know, but its certainly made surprising progress recently and I think a further EUR appreciation would be very inconvenient for a bunch of investors. The dollar squeeze might well have more life left in it, but my guess is for that to happen we would need further signs of weakness in the real economy. So the current spike in Cv19 cases in the South might prove a catalyst for that.
  • MG
    Miguel G.
    16 June 2020 @ 13:09
    Julian, if your dollar debasement case over the coming years is correct wouldn't the energy industry along with other commodity based industries be the places we should look to invest. Your point on the shale not reaching previous highs kind of threw me off because if were to assume a dramatically lower dollar shouldn't that come push oil prices higher, increasing profits for energy names. Im just trying to figure out what sectors you think perform best in a weak dollar environment outside of miners and metals.
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 17:22
      Shale is a call option on oil itself. Its effective break-even oil prices is probably above $50 regardless of what the shale players say. However many shale plays you pick may not even survive the next two years. In some ways I would be tempted to bet on the oil majors as they are in pole position to pick up cheap shale related assets from the current weak owners. Your core observation is correct. But if you want to bet on higher energy, or raw materials why not bet on the underlying commodity? Similarly you could pick up cheap oil related bonds, like state oil cos in Mex and Brazil.
  • HH
    Hugh H.
    16 June 2020 @ 12:02
    As a spx alternative, I was wondering if Raoul's bond positions work as well?
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 16:16
      Great question. 1) Its not a perfect hedge. But what is? 2) It may be a better trade in the sense of offering positive carry, but it wont be zero cost. 3) Perhaps a call option on bonds would work better for some guys. It might be cheaper in theta and carry terms than a put on stocks.
  • JW
    JW2 W.
    16 June 2020 @ 06:19
    Silver in the form of SLV has been under the 16.50 for a while now. If Julian uses SLV he should have been stopped out. My own view is to stay long Silver, but it looks like it needs a lower stop.
    • Dv
      Daniel v.
      16 June 2020 @ 08:13
      It's the Silver Spot price. Currently around 17.50
    • JW
      JW2 W.
      16 June 2020 @ 12:48
      ....that explains it...thanks for clearing that up... :-)
    • HS
      Haythim S.
      16 June 2020 @ 14:23
      Thanks for the clarification. I had the same question
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 16:08
      Exactly. Its the spot price. I think JB recommended pulling stops higher a few days back. FWLTW
  • BK
    Brian K.
    16 June 2020 @ 01:22
    Great charts and article. For newer subscribers, would it be possible to get the dollar cycle video mentioned? Thanks.
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 15:59
      https://www.realvision.com/whats-next-for-the-dollar
  • KM
    Kirill M.
    16 June 2020 @ 01:48
    Thank you, Julian! Could somebody advise what US Exceptionalism means in the context of finance please?
    • JW
      JW2 W.
      16 June 2020 @ 06:14
      I believe he means the USD as the world's reserve currency.
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 15:59
      Yes, the worlds reserve currency, but also the recent tendency for capital to flow into the US because its the only advanced economy which can sustain positive interest rates (until recently at least). So the US has benefited from a virtuous cycle of higher returns attracting global capital, which boosts US equities and further gooses asset market returns. Until it doesn't...
  • PB
    Paolo B.
    15 June 2020 @ 21:42
    also, would there be a benefit in using a put on RSP (ETF for equally weighted S&P)? It seems it gets down more dramatically in a downturn, for its different weights vs SPY. Just curious to know, even though I would likely stick to the better known SPY
    • WM
      Wolfgang M.
      16 June 2020 @ 13:44
      Would prefer that as well, but spreads and liquidity for RSP puts are horrible
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 15:55
      I think you have thought about this far more than I have Paolo. I should be asking your advice on this question.
  • TK
    Tadej K.
    15 June 2020 @ 21:11
    Macro Insiders... long dollar to the roof and just in case short dollar to the floor. Effective hedging of the product's reputation. Excuse me. I have a bit sour taste today after reversal in USD. And my portfolio is (unfortunately) in Raoul's camp.
    • SM
      Shantanu M.
      16 June 2020 @ 06:06
      I agree, in trading “If you are early, you are wrong”. So I don’t buy this shorter term vs longer term explanation.
    • SS
      Shanthi S.
      16 June 2020 @ 06:46
      That's a little cynical don't you think? The world is at or approaching an historic inflection point... No one, not a single soul, knows for sure what's coming next. IMO, the differing viewpoints are the best thing about MI, as neither call for blind obedience, but together they force you to think about how to protect yourself and hopefully profit from whatever happens in the future.
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 15:54
      Time frames gentlemen. I trade with a 3m-6m time frame. Except in Tesla, where for some reason I insist on shorting it which means I often cut my positions in a day or so. The dollar is expensive but that doesn't mean it will go down any time soon. If the situation is sufficiently dire Raoul will be right, unless the Fed does a heck of a lot of work. But in this forum you have two opinions expressed. They don't always line up perfectly. That gives you both an opportunity and a problem. Who to believe and how much to back that view? Ultimately you would not do something you totally disagree with, or at least I like to think you wouldn't. As Raoul says, its probably most useful when the views come together after a period of divergence.
  • SS
    Steve S.
    15 June 2020 @ 20:32
    Hi Julian and RV community, I can't seem to find the correct ticker on Saxobank. Also the SPX puts I see are all European. Can we use SPY puts instead with 250 strike?
    • PB
      Paolo B.
      15 June 2020 @ 21:35
      Same question here, can we use SPY at 250 strike price? 30th Sept expiration?
    • WM
      Wolfgang M.
      16 June 2020 @ 18:57
      Yes, you can just use SPY instead. It's basically SPX in 1/10th size chunks and with just regular trading hours (while those of SPX are extended quite a bit).
    • HM
      Harry M. | Real Vision
      17 June 2020 @ 15:46
      Yes of course. Will be marginally more expensive (at a guess) but very slightly so.
  • MJ
    Matthew J.
    16 June 2020 @ 03:15
    Any thoughts on preference to buy puts on SPX index vs ESU0 E mini futures? ES seems approx half the size and price of the SPX index for similar contracts and half profits. Anyone have experience here? Back in March I played Raoul's SPX put trade on SPX index.
  • BR
    Brian R.
    15 June 2020 @ 21:47
    thanks Julian, always very valuable info and I look forward to it every time, cheers
  • SS
    Steve S.
    15 June 2020 @ 20:15
    Hi Julian, Whats the expiry for SPX Puts? Is it September 18th?
    • SS
      Steve S.
      15 June 2020 @ 20:20
      Just saw it, sorry.