The Imperial Circle: A Second Coming – Live with Brent Johnson and Jon Turek

Published on
February 27th, 2020
40 minutes

FX: The $5-Trillion Behemoth – Live with Dave Floyd and Brent Donnelly

The Imperial Circle: A Second Coming – Live with Brent Johnson and Jon Turek

Live ·
Featuring Jonathan Turek

Published on: February 27th, 2020 • Duration: 40 minutes

The overarching macroeconomic theme of today is clear: Long U.S. equities, bonds and the almighty USD. However, it appears that market participants are inadvertently ignoring a key element here. That is, the interconnected nature of these variables and how they contribute to a vicious feed back loop. A savings glut, largely concentrated in Asia, has flooded US markets, fueling a USD rally which in turn has contributed to lower global GDP. It gets complicated after this… for this reason, we are bringing you Brent Johnson of Santiago Capital, widely known for his Dollar Milkshake theory and Jon Turek who has written extensively on the subject to illuminate us in this week’s live conversation. Please find Jon Turek's full report here:



  • SB
    Stephen B.
    30 March 2020 @ 18:09
    I am wondering whether the UK and the pound, post Brexit, can become the new demand impulse? Undoing forty years of strangling EU regulation plus a trade deal with the US and/or China could do it.
  • SM
    Sam M.
    29 February 2020 @ 05:41
    I had to google the paper on global trade and the dollar ( as I thought the quote describing the link between a strong dollar and GDP growth was indecipherable: "The BIS has shown it, that when the dollar appreciates it kind of has a very-- it tightens financial conditions because supply chains are-- especially longer ones-- are much-- you know, they have-- they're very credit-intensive because they're expanded. And Gita Gopinath, who is now at the IMF, when she was at Harvard did very good work that showed that a 1% rise in the dollar actually contracts global trade by 0.6%. " I haven't read the 66 page article (yet) and the summary didn't explain the supply chain issue. To me the paper makes the point that the USD has an outsized impact on bilateral trade because exporters tend to not change their export prices in local currency and a lot of the currencies are tied to the USD. I am living this as one of my businesses imports from China (USD) into Australia (AUD) and as our currency is crushed we are asked to pay the supplier in USD. Clearly the RMB needs to depreciate versus the USD such that the RMB/AUD rates is otherwise unchanged and if it does not then of course we in Australia will import much less and global trade is affected .... d'oh. Anyone could have told you this ... but for our tax money I am happy to know it is 0.6%. But what is the argument being made about credit-intensive supply chains and the USD? Is the argument based on the company selling (effectively) in USD but having local currency costs? or something else. I don't understand how there is so much "thumbs up" when the entire interview stands on this third leg of a stool and the blog and transcript are difficult to decipher (there was no word limit on the blog to lay this out simply and I don't think most people subscribing have enough experience to understand the argument).
    • SM
      Sam M.
      29 February 2020 @ 08:02
      I didn't sign up to RV (day 1 subscriber) to read/listen to an undergraduate economics student - (I don't think Jon is Ronald Coase and I don't see a Nobel Prize coming his way for the blog but let's see how this post ages). I think the transcripts are incredibly useful as you can cut through the general warm feeling you might have that someone is saying something you agree with and you can re-read what they actually said. I am having to do this more and more on RV which I think is a bad sign for where the business is heading. YMMV but I am to be convinced. I am obviously not drinking the cool aid that everyone else is drinking.
    • GS
      George S.
      29 February 2020 @ 17:41
      Sam M. what if you didn't know his background but listened just to the content?
    • DS
      David S.
      29 February 2020 @ 20:32
      sam, m. - Your comments are interesting and the very reason we have a content section. Thanks. In my opinion RVTV should be bringing us interviews from all over the spectrum of opinions and from ages. We are in charge of understanding the argument and seeing if it will improve our understanding. Thanks to you Mr. Turek will read the information that you discuss and it may help him understand your point. We are all in this together. DLS
    • SB
      Stephen B.
      30 March 2020 @ 16:48
      I used to do a lot of international trade back in the 1970's and 80's, before the world was so dollar centric. Purchases, for instance, such as buying machinery made in Japan for a new refinery in Peru - or steel made in Germany for a mining project in South Africa. Back then, it was possible (if not normal) to write contracts in local currency (and often multiple local currencies) with use of the US$ generally restricted to items sourced from the US. The tension between seller and buyer was always, however, which party took Forex risk, particularly on the more complex, longer term contracts. Progressively, it became possible to buy hedges from banks, further and further into the future, with the US$ the deepest such market. Slowly but surely, buyers and sellers shifted the Forex risk over to the banks (and their hedging operations) and the US$ in international trade became king.
  • GS
    Gregorius S.
    3 March 2020 @ 09:08
    Absolutely agree about your comments from Asian savings glut. Market has been expecting GPIF to ↑ foreign bond allocations as they now FX hedged foreign bonds are classified as domestic bonds. Up until this Coronavirus scare, EUR XCCY basis has been the tightess it's been for awhile. As a result we've seen EUR FX hedged bonds become quite attractive for Japanese investors.
  • VS
    Victor S. | Contributor
    2 March 2020 @ 12:46
    Brent I’m a fan but your 100% wrong on the $. Why ? Listen to trump . Before the election he has the Marxist/socialist congress that hate his POLICIES . THEREBY he will push the dollar down for gdp growth , fed funds 50-75 bps by Nov 6th
  • JS
    J S.
    29 February 2020 @ 22:20
    Thank you both. In your opinion, which has had a bigger influence on equity prices. The also reflexive mechanism of indexation and passive strategies and/or this imperial circle / USD shortage? Thank you.
  • AA
    Aymman A.
    29 February 2020 @ 21:24
    The first Imperial Circle was completely in line with the Mundel Fleming model of exchange rates. Regan had a loose fiscal policy with his Star Wars defense spending and Volker had his tight monetary policy. The Dollar rose to ridiculous levels. Similar thing happened in 2016. The Fed started tightening policy and Trump loosened fiscal policy with tax cuts. Dollar strengthened. I just don’t see that happening now for the next 12 months. Congress will not allow Trump to give a tax cut, stimulate the economy and improve his chances of winning in November. Fed has no choice but to ease. This policy mix is dollar negative. I completely agree with your paper that there is a structural reason for the dollar to be strong. Global savings have to find a home and they do that in the US bond market. The Chinese are trying to solve this problem of finding a home for savings by the One Belt One Road project in Asia, Africa and Europe. Other Asian countries do not have this choice - hence the flow into US Corporate bond markets. But this is NOT the Imperial Circle that Soros described in his Alchemy of Finance. The developing policy mix supports a weak dollar according to the Mundel Fleming model which the Imperial Circle was based on. Will the structural need for dollars overcome the cyclical dollar negative factors. I do not know, but the two forces are different. There is the third factor. In extreme crisis there is the dollar smile - the dollar becomes a safe haven currency. Would appreciate a reply from Brent or Jon Turek about these three SEPERATE forces - structural, cyclical and crisis acting on the dollar.
  • MC
    Mike C.
    29 February 2020 @ 04:25
    Great interview thanks Brent. Your US$ milkshake theory and Jeff Sniders Euro$ University theory are the best macro FX concepts out there. Would be great to have you both together on RV.
  • ZW
    ZH W.
    28 February 2020 @ 10:30
    Last year of university? Seriously? Damn my life is a failure. Kudos to both Jon and Brent. Fantastic analysis.
  • DS
    David S.
    27 February 2020 @ 20:48
    Great interview. Hope to see Mr. Turek back soon. The amount of fiat currency today is vastly in excess of the currency needed to fund current productive investments especially with the internet of things. This balance, which is controlled by market interest rates, is a primary assumption of capitalism. The Wall Street’s meltdown in 2008 resulted in CBs generating vast amounts of fiat currency around the world to try to hold markets together. This huge imbalance has caused P/E inflation in the stock market and bond rates going to the lower bound. I do not know how to bring investment capital available into equilibrium with productive capital investment available without raising interest rates. This simple solution to return to capitalism will tear international markets apart. Vast fiat/imaginary fortunes will be lost. The invisible hand of capitalism, however, cannot allocate capital at zero interest rates productively. Not raising interest rates at least on a slow, incremental, regularly scheduled basis will destroy fiat/imaginary fortunes eventually also. To rebalance myself, I think I will take a walk on the beach and go out to dinner tonight. We are still lucky to be alive. DLS
    • DS
      David S.
      27 February 2020 @ 23:54
      Using the football analogy: 1. Valuing stocks and bonds before derivatives would be the players on the field. 2. It was still football when all the fans started to trade derivatives in stands on what might happen on the field. 3. With a of return of zero and the risk being the possibility of the original capital or less being returned on the investment, it seems like the 50,000 fans in the stands are now on the field with the players. The original game of football can no longer be played. With zero rates, the game can not longer be capitalism. I know this is really off the wall, but I am having trouble figuring out what game is being played. As some of you know I am just watching from the sidelines. DLS
    • SM
      Sam M.
      28 February 2020 @ 01:51
      Keynes described the situation when capital is no longer scarce in 1936 (Chapter 24 GT, 1936) - "[t]he demand for capital is strictly limited in the sense that it would not be difficult to increase the stock of capital up to a point where its marginal efficiency had fallen to a very low figure. ... [This] would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital." I would argue this is where we are now. We have a sufficient capital stock such that it is no longer scarce. Keynes predicted the return on capital in this situation will reduce such that it only "just cover[s the] labour costs of production plus an allowance for risk and the costs of skill and supervision."
    • DS
      David S.
      28 February 2020 @ 08:56
      sam. m. - Thank you very much for your comment. It is interesting, but not surprising that Keynes described the situation we are in now. They were great thinkers of what might happen. I still do not know what to do, but I feel better knowing that brighter minds predicted the situation. A million thanks. DLS
  • GS
    George S.
    27 February 2020 @ 21:57
    Fantastic piece. The points Jon made about Taiwan made my jaw drop to the floor.
  • MR
    Michel R. | Real Vision
    27 February 2020 @ 21:56
    Hi All, here is a link to Jon Tuerk's report that was referenced throughout the talk:
  • JK
    James K.
    27 February 2020 @ 19:17
    Thanks guys that was great! A lot to digest.