>>ASHBENNINGTON: Welcome to Real Vision Daily Briefing. I'm Ash Bennington. Raoul, it's been a minute as the kids say, it's great to be back with you on this show. Especially, I might say it's macro time, it's Raoul Pal time.
>>RAOULPAL: It's suddenly got all a bit macro all of a sudden which is good. Julian Brigden and I, who write Macro Insiders and Real Vision Pro, we were talking about, God, it's boring, nothing happens. In macro, we always say, it's like waiting for the bus. You wait forever and then 14 buses come at once.
>>ASHBENNINGTON: Raoul, let's walk through this. I've actually been watching your Twitter feed very closely. You had an incredibly interesting tweet storm yesterday about the dollar being key to everything. In fact, let me just read this first tweet, "the dollar is always the key macro variable. When it moves, it moves everything. If the dollar rises sharply back to the middle of the range, it kills the inflation narrative for now, the real guts of the inflation debate is more likely next year's story". Raoul, this is everything that's happening in markets right now. Its inflation, its rates, its jobs, what's you're thinking on the dollar?
>>RAOULPAL: Now, I talked to Ed about this last week, that I was thinking that inflation was likely to undershoot most people's very inflationary targets and that the bond market was telling us something. I always talk about this, the bond market speaks the truth, because the job of the bond market is to closely analyzed and forecast where the economy's going. There's narrative, which is oh, my God, inflation is everywhere. The bond market was telling us differently, that inflation actually peaked out a while ago.
>>Then suddenly, the dollar exploded this week. It's something I've been talking about for a while that the dollar got to the bottom of the range. Analysts' forecasts were 100% across the street for the negative dollar. I've been saying that never works. When they're all one way, it usually goes the other. At the bottom of the range, it ground out a bottom and then suddenly exploded higher. On this confusing narrative, I think everyone's going to get really confused in this transition because there's the Fed saying, well, in two years' time, we might think about possibly thinking about maybe raising rates.
>>At that scenario, suddenly, the dollar explodes and the markets got a bit wobbly and everyone thinks it's because rates are going up. Yeah, but that's not what the bond market is telling you. The bond markets are saying, well, if you do that, day fellows, you're going to destroy the economy. Therefore, the bond market's saying, actually, we're going to start flattening the curve, and we're going to see yields come off. I want to show some charts just to talk through this narrative a bit further. I'll try sharing the screen now.
>>Here is the chart of the DXY. That's the dollar index. The dollar index had tried to make a new low but failed. I've been following things like the Demark indicators, and they were saying the dollar had bottomed. When everybody was saying the dollar is about to break lower, it's going to be a catastrophe, I'm like, I'm not sure about this. The dollar is the key macro variable because everything is priced in dollars.
>>If the dollar goes up, then commodities go down. It's the inverse because of this denominator, which is the US dollar. Don't confuse that with this denominator stuff I've been talking about, the Fed balance sheet, that's a different thing, that's about fiat currency. Just in straightforward terms, when the dollar goes up, commodities start coming down. The dollar looks like it's forming this inverse head and shoulders.
>>More dramatically, if you want to see it the other way around, here's the Euro. It's a huge head and shoulders top. If the Euro breaks this 116, 117 level, chances are it's going to 110. What does that mean? That means basically, the reflation trade's about to get unwound. A stronger dollar means weaker commodity prices. It's happening in lumber. It's happening in ags. It's not happening in oil. Copper, potentially it's happening. But usually, if the dollar starts moving sharply, commodities come off and the inflation narrative changes.
>>Also 10 Year bond yields, you saw they spiked a while ago back in March, and they've been coming off since. Now, we're starting to get to the key level, which is about 1.40% on that 10 Year. If we break that trendline, then the likelihood is we start going back towards the lows. Now, I think I talked to Ed about this last week, is every single post-recession period since 1962, bond yields have had a sharp squeeze as everybody has tried to price in inflation. They're always too early.
>>Usually, this is just the rebound effects. Then stimulus from whether it's the central bank cutting rates, or QE, or fiscal stimulus from the government tends to falter. The central bank in every circumstance has come on and cut rates two more times, at least, after the recession finished, and bond yields fall. I've been waiting for this setup, and it's looking that it's starting to happen.
>>The other thing that most people don't realize is that the dollar tends to go up when bond yields fall, not what people think, which is when bond yields rise. The reason being is the dollar is a safe haven. If things look like the world is slowing down, then we tend to see money flow into dollars. That increase in the price of the dollar, as I said, lowers inflation. They work in a feedback loop that drives the dollar higher and drives rates lower, very typical.
>>See, what's actually going on is the forward-looking indicator, which is again I showed this last week, which is China's credit impulse, which is a good driver of the Chinese business cycle has been coming off sharply. Chinese economic data has turned negative and the US business cycle, and the world business cycle tends to follow suit soon after. It's saying, and that's typical again, after the recession, you get the initial sugar rush, and then everything comes down, and growth slows back down again. That's usually when the central banks go, oh, my God, or the government goes, oh, my God, and they start stimulating more.
>>We've got this slowdown to come in the second half of the year that the markets are not expecting. The year-on-year comparisons for CPI as well will automatically mean CPI comes down from 5% to let's say 2.5%. Everything's going to feel like it's less inflationary and we won't know what the true growth forecast is, or where growth is going to lie. That's the story for next year. This year, it's going to be probably, oh, my God, we've got this wrong, the economy's not so strong. The government will use that as an opportunity, so all the governments will to run through more fiscal. They're just waiting for the opportunity to do it, and that will probably mean more QE.
>>That is the key part of what's happening right now in markets. Let me get rid of this screen. I've got some more charts to show you later. I think the narrative has changed. We're in a transition phase where people think it's reflecting the fact that the Fed are going to raise rates in two years' time. That's nonsense. I can't remember one of the Fed governors is on tape just now saying, the Fed always overanticipates at this point in the cycle. The reality is I think we've got a slowdown coming and this reflation trade is going to be proven to be well too early. The commodity super cycle may be in play, but that's next year's story. I think this year's story, slowdown, more stimulus. You're on mute, Ash.
>>ASHBENNINGTON: Just to connect to the new cycle for people who aren't following this closely, we saw in the middle of the week on Wednesday, the Fed was unexpectedly hawkish by market expectations, meaning they signaled rates would be rising faster and sooner than people believe. But out in 2023, if you look at the dot plot, if you believe that that is indicative of future policy action, which is always a question, Treasury prices declined, yields rose, particularly in the five to seven-year maturity range, the 10 was up about 10 basis points, breakevens on inflation declined. What's so interesting, Raoul, about your thesis is that this brings it more into a bigger picture framework to look at what is happening in the future.
>>RAOULPAL: What's interesting, Ash, is these yields went up for precisely one day and then collapsed to a new low. Today and yesterday, yields plummeted. That is not normal behavior here. It's telling us something is different is going on than the prevailing narrative in markets. It tells you that the Fed are not going to raise rates, or if they do, it's going to curtail inflation, but they're only talking about two years' time.
>>Are they going to start tapering? Probably not. They will start to try to think about tapering, and the rate of change of the Fed's balance sheet slowing down dramatically, but my guess is they'll have to pick it up in due course, and that affects all asset prices. The stock market is now like, I don't like this change. I don't like this dollar moving fast because that's the big daddy. If the big daddy is upset, it spooks everybody else.
>>Volatility is contagious. If the big daddy, which is the dollar, the denominator of everything, is screaming higher, the equity market's like, whoa, I don't know what this means. I already had a call with a friend of mine who runs a giant hedge fund, he's like, we're having to bloody take down risk and hedge because this dollar thing is blowing up all our trades, because everybody's in this reflation bet. That was the value versus growth bet as well. That was basically this point in the cycle value outperforms.
>>Now, if we go to a looser monetary policy environment again, and slower growth, it means tech stocks start to outperform again, and we saw that yesterday and the day before, things like Ark stopped really performing again as the equity market starts shifting its inflation narrative as well. It's going to move equity markets. It's going to probably create volatility. If this carries on, and there's head and shoulders in the dollar break, the equity market is going to have a puke, a VAR shock.
>>Then what we'll find is rates will come lower, because it offsets the fact that what's the equity markets doing. The dollar is lowering the rate of inflation that's brings bond yields down. The Fed start going, oh, well, sorry, we didn't mean about raising rates, what we actually meant was we need to make sure everything's alright. Commodity prices fall because of what's going on, that lowers the inflation narrative.
>>Things like gold and Bitcoin, which really do well when the printing presses start up again, properly, i.e., the rate of change starts increasing, they will start picking up then. Meanwhile, they get caught out in the crosshairs. Gold, for example, gets hit by a stronger dollar because it's priced in dollars, but it also benefits from weaker bond market so it's somewhere in this cross winds. Bitcoin's also the same.
>>As the narrative shifts, and remember, macro narratives take time, they're not instantaneous things, because you need economic data to start coming in weaker. When that happens, we'll likely see gold and Bitcoin explode higher again, along with probably tech stocks, maybe after a selloff first.
>>ASHBENNINGTON: Well, while macro narratives take time, Raoul, what you're discussing right now, you can see it on the tape. If you look at the 10 Year yield, you can see it trading going into Wednesday at about 149 on a yield basis. 149 basis points shoots up, as you said, about eight basis points on the news. Then it just rolls over 144. It's extraordinary to see that this is really reflected in the real time data on US Treasuries.
>>RAOULPAL: That's right. I've always said, pay attention to the bond market. The bond market was telling us something different, then suddenly, the dollar picked it up. Equity is always like, well, what's going on? Oh, shit, macro. Equity is always the last to figure out macro. I think the macro-outlook is changing, and the market's wrongly positioned for it. Don't forget, we went into this with the biggest ever short position in the history of the dollar and one of the biggest ever short positions in the history of the bond markets.
>>That's the magnitude. Everyone's record long copper, everyone's record long all parts of this inflation trade. They're now talking to their risk managers, going, we're going to have to cut. Now, it's happened so quick that they haven't cut risks, but this goes on next week or the week after, you'll see the equity markets reflect this volatility as well. I love these macro knock on effects. It's where we make all our money trading macro, is understanding these kinds of linkages and when things change.
>>ASHBENNINGTON: We can see that in the price action today on US equities. The Dow off worst today, I think since October, off it looks like about 1.6%, down 533 points to 33,290 today.
>>RAOULPAL: The Dow is down 1.6%. Then the NASDAQ is only down 80 basis points. It's telling you again, there's this preference now of growth over value for this same reason. Again, most of the market is missing why this is. I think it's to do with the Fed, I said on Twitter. It's the opposite of that. It's saying if the Fed does this, that's a huge mistake.
>>ASHBENNINGTON: It's almost about thinking through and pricing in the reaction functions here. You're talking about a weaker H2, second half of 2021, a correction in commodity prices and a rising dollar.
>>RAOULPAL: Exactly right. That's exactly right. It's the knock-on effects is where you get to make the money because the dollar moves so fast, you won't get a chance to do anything unless you're positioned for an advance. Now, the big question is, does this follow through? Does those head and shoulders break? If it does, we've got a much bigger macro move to come and there's some fun to be had, because it creates volatility so we can trade around that. We can make some money out of bonds and stuff like that.
>>Bond markets are not going to be a home run with yields at 1.4%. You can make some money, that's not a big trade. The dollar is pretty interesting when it moves this fast, because it's a low volatility bet that's moving very fast, so that's a good risk reward.
>>ASHBENNINGTON: Yeah, three-tenths of 1% I think is the average daily move in the DXY.
>>RAOULPAL: Yes. Over the last three days, it's moved, it's 50 basis points today, about 100 basis points yesterday and 70 basis points before that, double or triple the normal move.
>>ASHBENNINGTON: Particularly for people who are US equity market investors, those kinds of moves in currencies are extremely rare. We see them obviously frequently in US equity indices, but in currencies, very rare, particularly around the dollar.
>>RAOULPAL: Exactly right. If you think about it, if an average move in the equity markets up or down 1%, which is actually not less these days, this is the equivalent of a 3% move, three days running in the S&P basically, something like that. That would be a cheeky 10% off the S&P in three days. That's the kind of VAR shock going on, but because the dollar has so many linkages, Bitcoin can move up and down, but it has very little linkages. The dollar has all the linkages, and that's why it creates a bit of havoc.
>>That's why I've always called it the dollar wrecking ball. If it goes up too fast, it creates havoc everywhere. If it goes down too fast, it does the same thing. My actual view is that the central banks do not want the dollar to go much higher. There's a general dollar shortage in the world because so many people rely on dollar funding and that issue always comes when weakness comes, people grab for dollars, and this game of musical chairs is not enough. I don't think any of the central banks want the dollar to break higher, that would be above 100, 105. If it did that, that would be a real problem for the world, we go back into recession.
>>I think they don't mind going back into that range, the dollar index currently is about 92.3. I think the middle of the range is 96 to 98. That's acceptable. It just depends how fast it does it. If it's doing it very fast, that creates the problems.
>>ASHBENNINGTON: The other thing that's so interesting to me is on the narrative side, the historical view you bring to this framework, talking about how after recessions, and there are always inflation fears. They usually ease and then the Fed cuts again.
>>RAOULPAL: Always. I haven't got the charts here, but I've got a chart of bond yields since 1962, and after every recession, or towards the end of every recession, yields spike, because of this same inflation is going to be back, they've hyperstimulated, oh my God. Then yields plummet because the stimulus starts rolling off and the sugar rush of the year, and your comparisons change. Bond yields go to new lows, almost always, almost 100% of the time, not 100% but nearly 100%.
>>Also, I had a monthly DeMark signal on yields that has 100% track record of calling, again, a major reversal in yields. It all adds up that something really significant might be playing out in front of our eyes.
>>ASHBENNINGTON: The other thing that I thought was really interesting that you mentioned on Twitter was the notion of the potential for fiscal stimulus and potentially very large fiscal stimulus to join in on this side, this time also with a monetary stimulus with the Fed.
>>RAOULPAL: Yes, because I think that we have an unknown structural unemployment issue with the labor force participation rate endlessly falling, and it's something I talked about with Ed last week, is the inflation, we don't know what the natural rate of unemployment is now, because of the restructuring of Main Street with many retails closing down, etc., and a restructuring of the economy post-COVID. If that's the case, then governments are going to have to find ways of helping those people.
>>Governments have been looking for an ability to use fiscal stimulus to both, A, win votes because they're politicians but B, to drive the green agenda and to overhaul the global infrastructure. The real issue is, is because global GDP trend rate keeps falling, so they need to try and change the structure of the global economy, but debt and demographics keep getting in the way. They're going to spend a lot of money. To me, it's much like the post-World War II era, when we had massive fiscal stimulus to try and retool the global economy. It wasn't actually that inflationary in the end.
>>What it did do was actually create tons of innovation and growth. I think that's what's the outcome here. There's going to be a huge transition for the global economy, and that the ECB, the Fed, the BOJ, everybody's looking for an excuse to hit the fiscal stimulus button, and the central banks