RAOUL PAL: Everybody tells me the US economy is nothing to worry about. Everybody tells me the yield curve being as low as it is not a concern. It's different this time. The global economy is a big issue for the US. All the data is very clear. Europe is pretty much in a recession now. Germany is certainly in recession. All of the work that I do strongly suggests to me that this weakness has not finished.
Back in August 2018, I published an expert view on Real Vision called "Macro Is Back." And my thought process at the time was that the global economy was weakening and the Fed had over-tightened. That was not a very popular view at the time and still probably remains not a popular view. But for me, the signs were super clear.
What I could see is that the rate of change of LIBOR had gone up exponentially. And that rate of change actually drives the business cycle. So it's not about the actual level of rates, but the change in rates. And that was an important point that I think the market hadn't noticed.
From that, I was seeing that, particularly in the US economy, things were changing in the margin, particularly in big-ticket items, things that required financing, be it recreational vehicles, car sales, durable goods orders, and a number of other things. We could see that these big-ticket items were struggling as people were struggling with the increase in interest rates.
My view then was, OK, this could have some knock-on effects, and the global economy looks like it's weakening. We had trade wars that were starting to reverberate around the world. And I thought, OK, this is something that is incredibly macro, and opportunities should arise from it.
I distilled it all down to one bet. I said, if there's one bet that expresses my view that the global economy is slowing and that the US economy is slowing and the trade wars are going to be relatively disinflationary for the world and that inflation itself was slowing and that the Fed had gone too far and the participants were overly short the bond market, then buying calls or just buying bonds in the US was the best trade in the world.
A little bit later, I wrote a piece for Macro Insiders which became pretty well-known. And I coined the phrase "buy bonds, wear diamonds." Now what that means is if you buy bonds, you're going to be wearing diamonds, 'cause you're going to be making so much money. That's an old market expression from the '80s, in fact. And I thought it was particularly useful to explain the singularity of that opportunity.
The bond trade was one of the best trades I'd ever seen. I'd been pounding the table in Global Macro Investor, Macro Insiders, and on Real Vision to say, listen, this is the best trade in the world. What was interesting is so few people believed in my story that people fought me tooth and nail. And eventually, luckily, it worked out. The bond market rallied extraordinarily.
So eurodollar futures, which I had been a big part of, and the TLT and US 10-year bonds and US two-year bonds, the whole lot rallied. For Global Macro Investor, I was long, Australian bonds, I was long, UK interest rate futures, I was long, German bunds-- you know, that whole trade was a really big trade for me.
So now we come into the year, and that trade continued into February and into March. And now suddenly, in the last few days, we've seen a reversal. So where are we now? That's the key thing we need to look at and where the opportunities may lie for the future. Again, I do note that almost everybody has the opposing view to me.
I spend an enormous amount of time-- I've just written Global Macro Investor today over the weekend-- and I spent a lot of time going through all of the charts. And from what I can see is the trends that were there last year are still in place. So we're still seeing slowdowns in car sales, in housing, in recreational vehicles, in durable goods, in retail sales. In fact, it's everywhere across the US economy. We're seeing it in the ECRI, which is the business cycle index. That is still weakening. We're seeing incredible falls in exports and imports all across Asia as trade wars and a slowing China take hold.
So all the data is very clear. Europe is pretty much in a recession now. Germany is certainly in recession. The PMI has been in freefall. The bond market has been rallying like mad. But again, people don't really want to add two and two together. So most participants are now saying, yeah, but the US is going to be fine, because the last GDP print was about 3%. It looks like Q1 is actually going to come in somewhere closer to 0.
But again, much like many other Q1 prints driven by the oil inventory cycle and the shut down of the refineries, everybody is now looking through it and saying, well, Q2 and Q3, they're going to go back up to 2.5% or so, and everything is fine. That's the bet the market wants to take. That's why the bond market is selling off. We saw a little bit of positive news out of China. The PMI nudged higher, and everyone said, oh my god, this is amazing. But is that narrative correct, or am I correct?
Now I'm always terrified when I stick my neck out like this, because I can always be wrong. But all of the work that I do strongly suggests to me that this weakness has not finished, that the yield curve, as I talked about back in August, is essentially inverted. And it's inverted because of the ultra-low rates.
And I've just done some work again for GMI on this. And I think the curve inverted in the ultra-low rates environment at around 65 basis points. So it's been inverted for a while. It means a recession is coming sooner than people expect. All of the evidence I can see suggests that this correction in the bond market is just the narrative of those who are more economically positive than I am at this phase.
I'm kind of indifferent whether we go to recession or not. What I am really looking for is that the Fed are going to start being much more bullish for interest rates than they have been. So they've moved to neutral. And now we're starting to hear the noise about a cut. I think that is what I'm looking for next as the narrative shifts towards a cut. And then we'll start also removing QT.
So these things, I think, are coming. And I think this pullback in the bond market and the euro dollar market really is going to be an opportunity to add to that trade. This is really the first meaningful pullback we've had in quite some time. And the move we've had has been extraordinary. It's been incredibly profitable for those of us who've been long bonds.
So I think, in the bond trade, we should be looking to add. I think really, having traded these kind of bond moves for a very long time-- I mean, I traded this exact thing back in 2000, 2001, and also 2007, 2008-- for me, I know that these pullbacks don't last long. They last a matter of days. And before you know it, the bond market's rallying yet again.
You can see from the chart of two-year bonds, from this head and shoulders top, now, it wouldn't surprise me if two-year bonds try and test that head and shoulders neckline again. And that would be a great entry level to start adding more two-year bonds to our trade. We're also roughly at the same kind of level in 10-year bonds. And we're starting to get into the zone where we want to add 10-year bonds.
Also, month end means there's quite a few sellers around as people are rebalancing portfolios to buy equities and sell bonds, 'cause bonds have been such the out-performer. So anyway, so we're getting very close to the levels that you want to add. And any economic weakness in the bond market is going to take off again, and yields are going to plummet. So we're getting right close to that opportunity point again.
There's almost no way the US can isolate itself from the weakness around the world. And people are holding out hope that China is going to save the situation by their stimulus. But if you look at their stimulus, it is hyper-targeted on creating liquidity internally within China. That may allow their stock market to rally. That's OK. But there is relatively little spillover effects on the global economy. This is not a Chinese stimulus there to save the world, much like they did in 2016. So I don't see a world savior, so in which case, the trends should continue.
You see, the global economy is a big issue for the US. If you look at the volume of world trade, the volume of world trade is falling. It's gone negative. It's telling you there's a really big issue. As I said, all of the export and import numbers across Asia have gone negative. That's much like what happened in 2015. But right now, we've not seen that massive fall in the oil or the massive rise in the dollar that we saw then. I think some of that is to come.
The other thing is the world PMI. World PMI is going to cross 50 soon. It's telling us that the risk of the world going into a full recession is extremely high. You see, in a global recession, capital flows to safety. The safest place in the global economy right now is the US bond market and the US dollar. And that's why global growth matters in this story.
So what is the next phase? So I think the next phase here is the opportunity for a big dollar rally. My narrative has now shifted. It's gone from, buy bonds, wear diamonds, and it's now become, buy bonds and dollars. I think that is the narrative for 2019, and it's really against the consensus narrative that's in the markets.
Almost nobody believes that the dollar can rally. Everybody thinks that interest rate cuts are bearish for the dollar. Almost everybody I know is bearish the dollar. Most people I know are bullish growth. Most people think that my bond bet is wrong. Even though it has moved so far, so fast, and the Fed have confirmed my signals, nobody wants to believe it.
And that makes me incredibly interested. The chart in itself of the dollar looks great to me. If I look at the DYX chart, all it needs to do is clear 98. Once it clears 98, I think it'll go to 100, 110, maybe even 120. I think there's a huge move to come. And I've explained at depth on Real Vision why that's the case. It's all to do with this dollar shortage.
Also, if you think about it, what else are you going to buy? Are you going to buy the euro now? I don't think so. Do you want to buy the pound? Well, even if something happens in Brexit, it's going to be a trade. But no way you want to allocate large amounts of capital for an extended period of time, because the UK economy is not good. Do you want to allocate it to Asia? Well, that doesn't feel right either.
So you don't have, really, many places to put your money. And let's face it, the US stock market has been an incredibly good performer. US corporations are really the best in the world right now. The technological revolution in the US is really quite astounding.
So I'm not yet bearish on the stock market. I've tried to have a short here and there to test the market, because the business cycle has rolled over. But I do think that the dollar trade is better, because even if the stock market continues higher, it's going to pump in capital from abroad. The Europeans need to put money to work in the US. The UK needs to put money to work in the US. The Japanese need to put money to work in the US. Everybody needs to put money to work in the US, be it the bond market or the equity market. And so that makes me think the dollar breaks higher.
Now what's great is we don't have to do anything until the DYX breaks 98. Once we do that, we can start with a DXY itself, maybe UUP, which is the ETF. We can buy some of that. We could buy calls on it if we are more risk-averse. Volatility is incredibly cheap in currency volatility terms. So we could do that. Or we could wait for that break and then start adding short euros, short pound, short Aussie, short emerging markets.
I think all of those trades are to come. I like to start with a simple trade, get a feel for the market, and then start adding into it. I'm also particularly interested in the ADXY. If you look at the big chart of the ADXY-- this is the Asian DXY, it's a basket of Asian currencies-- you can see this enormous head and shoulders top. It looks like we're topping out here.
If these emerging market or Asian currencies start to fall from here, we really are setting up into a nasty situation, where we could see an enormous fall in Asian currencies. And that would be part of this dollar-rallying narrative. And I think that's really important when you look at these long-term charts to understand the potential of where some of this can go.
I can also look at the Australian dollar. The Australian dollar, at some point, looks like it's going to break lower just by looking at the chart. And the same is true for the British pound. It looks like it wants to head towards parity. So I think the next phase here is to buy more bonds and then buy dollars. I think we buy them on the break of 98.
Now it does feel terrifying for me, because all I read on Twitter, all I get is research saying, the dollar's going to go lower. Everybody tells me the US economy is nothing to worry about. Everybody tells me the yield curve being as low as it is not a concern. It's different this time. Everybody tells me a recession is coming in 2020 or 2021.
And I'm going to go back to my chart of LIBOR inverted, the rate of change against the ECRI, which I use as the business cycle indicator. It's telling me that the business cycle is going to continue to weaken in a straight line into 2020 and that the trough is more likely to be in 2020 as opposed to a start of a recession.
I think the recession risk is really for this year and not for another year. And I think this is where I can try and get an edge. Obviously, I can be wrong. And that's why I'm terrified, because sticking your neck out always makes me nervous. But being away from consensus is where all the value is to be made. So good luck. Let's see how it all plays out. Buy bonds and dollars.