Teddy Vallee on the Dollar, Hard Assets, and the Real Rate Rotation

Published on
December 1st, 2020
Duration
53 minutes


Teddy Vallee on the Dollar, Hard Assets, and the Real Rate Rotation

The Interview ·
Featuring Teddy Vallee and Jack Farley

Published on: December 1st, 2020 • Duration: 53 minutes

Teddy Vallee, founder and CIO of Pervalle Global, joins Real Vision's Jack Farley to share his strategic outlook for assets such as the U.S. dollar, technology and energy stocks, gold, and bitcoin. Vallee explains why he believes that real rates for U.S. Treasury bonds will increase, and he describes why this view makes him believe there could be a capital exodus from technology into energy equities, as well as making bitcoin and gold less attractive to hold for the short-term, although he remains bullish on these two assets over the long-term. Filmed on November 24, 2020. Key learnings: Real rates on U.S. Treasuries will likely rise. Long-term the U.S. dollar will encounter problems, but Vallee spots short-term tactical opportunity as Treasury issuance will create liquidity negative conditions over the next two-to-three months. Vallee is very positive on energy, Latin America, EM debt, as well as commodities relative to U.S. tech and bonds.

Comments

Transcript

  • SG
    Sashi G.
    23 December 2020 @ 09:36
    @Jack Farley, could speak a bit slower.
    • JF
      Jack F. | Real Vision
      5 January 2021 @ 20:00
      I can try! Always appreciate the feedback
  • SG
    Sashi G.
    23 December 2020 @ 10:12
    Lot of information but I found the interview itself all over the place. In the sense that we had the investment case stated and with caveats at the same time and spoke across the dollar, commodities, EM, rates, liquidity ... so it kind of went blurring by for me. Glad others found it very useful and came out with some takeaways
  • SG
    Sashi G.
    23 December 2020 @ 09:42
    Watching this a month from the filming, Ted expected a rally but it did exactly the opposite, coming to 6 year lows. He gave himself a safe backstop by saying if it breaks the lows, then his thesis is wrong. No doubt investment thesis can always go wrong, but he gave an elaborate construct and immediately said this could go wrong if this happens. Just makes me remember that everyone has an opinion in the markets, but you really need to have your own.
  • TZ
    Tibor Z.
    5 December 2020 @ 17:32
    Higher real rates mean commodities lower. Interesting. Yet he is long commodities like oil, gold, silver. Maybe I misunderstood something?
    • TZ
      Tibor Z.
      5 December 2020 @ 17:35
      And Raoul is on the "rates lower for the US, even negative" camp. So the complete opposite!
    • TW
      Todd W.
      6 December 2020 @ 00:53
      Real Rates = Nominal Rates / Inflation Rate. What he is saying is that he believes there will be inflation in the long run and there is short run risk of deflation. If inflation in commodities occurs, the price of todays returns will be less than the cost of returns in todays USD value. The easiest way to imagine an iron ore mining company. Today my overhead/debt payments are 100k a year, and revenues are 130k then my earnings are 30k which I pay in dividends. BUT if steel increase by 50% next year, then my debts are the same 100k but my revenue just increased 50% to 195k. That means that my new earnings for dividends are now 95k increasing 300%.
    • NL
      Nikola L.
      6 December 2020 @ 22:34
      He thinks gold may go down. When he refers to commodities, I think he refers to copper, nickel, zinc.. base metals. Teddy might be right, but I can’t see how real rates can go higher by a lot when the world has all this enormous debt. My position is nominal rates to rise but real rates to stay flat or slightly negative. I base my view on assumption that CBs and Governments world over will try to eliminate most debt via inflation and simple fact (well, I hope this is a fact) that no one can afford to pay higher real rates. There is too much debt.
  • JJ
    Jonathan J.
    4 December 2020 @ 03:44
    I’d drop quite a bit of cash if I could somehow get Dr Lacey Hunt & Teddy out to dinner together and just be a fly on the wall nearby. 2 incredible minds.
  • JJ
    Jonathan J.
    4 December 2020 @ 03:38
    Teddy is 1 of my favorite follows on FinTwit & his interviews are always packed w/ raw knowledge & info.
  • RH
    Ron H.
    3 December 2020 @ 05:33
    Beware of basing views of inflation (and real rates) purely around the TIPS market. There would seem to be "a lot" of noise in that signal. Danielle DiMartino Booth put out a chart a couple months back that showed the FED increasing its ownership of the TIPS market from, I think, 8% to nearly 20% this year.
  • PG
    Philippe G.
    2 December 2020 @ 20:06
    Fantastic - Teddy V. always delivers coherent commentary and analysis!
  • GS
    Greg S.
    2 December 2020 @ 18:41
    Highest conviction trade is real rates. It would have been nice to spend more time (i.e. some time) on the other half of that equation. Inflation "Expectations". Why won't break evens explode higher if people have seen the late 60's/early 70's inflation b/c of dual deficits?
  • VP
    Veselin P.
    1 December 2020 @ 17:40
    This video deserves more positive comments!
    • JM
      John M.
      1 December 2020 @ 18:11
      Absolutely. His past calls have been very good.
    • TP
      Timothy P.
      1 December 2020 @ 18:21
      I found it amusing that he kept looking off camera, it seemed like he was at a meeting that he really didn't care for and was trying to slog through it. Just a first impression.
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 18:32
      Funny observation, Timothy. Teddy is a busy man and I'm sure he gets a lot of pings. I was not offended!
    • SP
      Scott P.
      2 December 2020 @ 01:16
      Timothy - he is probably looking at the charts being referenced on a 2nd screen
    • GD
      Graham D.
      2 December 2020 @ 08:38
      I listened to it on audio only and I definitely didn’t think Teddy was disengaged. Quite the opposite
  • TR
    Thomas R.
    2 December 2020 @ 07:58
    Great work, Teddy. Very valuable. And you have been right on the money previously. So I will certainly add your outlook to my own arsenal af scenarios. I am already overweight energy, materials and some in Latin American, but will increase the latter. And a really good interview, once again, Jack. I really appreciate that you don't have to showcase your ego by letting the interview become a too esoteric conversation between two peers..... and that you on the contrary repeatedly stop to ask your guest to define and explain concepts and terms. I am geeting more out of this. The bit with the real rates could call for an entire programme though to really hit the points home. Otherwise, great job! Cheers, Thomas
  • DD
    Dmitry D.
    1 December 2020 @ 15:49
    I have now seen it mentioned multiple times that the present value of an annuity goes to infinity as rates approach zero, but that is simply not the case, unless we are talking about a perpetuity. As rates go to zero, present value of future cashflows is simply equal to their sum (without any discounting) so for the valuation to be infinite, future cashflows must be infinite (not sure if this is a particularly prudent assumption to make). What does breakdown is the terminal value component, but surely those running the valuation models are smart enough to see it and make adjustments.
    • AM
      Alonso M.
      1 December 2020 @ 16:24
      My take...Wall Street is generally lazy. It assumes the monetary conditions that currently exist will remain in place in perpetuity, and it values securities accordingly. The problem seems to be that the current monetary conditions are very extreme, so extrapolating them into perpetuity requires a this time is different mentality. I enjoyed the interview.
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 17:23
      Hi Dmitry, thanks for bringing this up. I think I've been a bit unclear. The standard formula for a DCF is as follows: DCF= CF1/(1+r) + CF2/(1+r)^2 + CFn/(1+r)^n with practical formula replacing the infinite series with a terminal value: DCF = CF1/(1+r) + CF2/(1+r)^2 + CF3(1+r)^3 + CF4(1+r)^4 + CF5(1+r)^5 + (CF6(1+g))/(r-g) where (CF6(1+g))/(r-g) is the Terminal value. So since (r-g) is the denominator, with g being the growth rate of the earnings, and r being the discount rate (composed of the risk free rate plus a risk premium) the closer g gets to r, the more astronomical the valuation is. I did not mean to suggest that Zoom is worth a quadrillion dollars - or will approach anywhere close to that. Just was trying to explain how valuations inflate as Treasury yields (the risk-free rate) go near zero. Thanks, Jack
    • JM
      John M.
      1 December 2020 @ 17:58
      "...conditions that currently exist will remain in place in perpetuity..." but in reality that has never been the case. Everything changes.
    • DD
      Dmitry D.
      1 December 2020 @ 20:42
      Thanks for replying, Jack. I do know how the textbook formula works, my comment was more about disbelief that it would continue to be applied in conditions where it clearly breaks down. I have a hard time imagining fund analysts crunching the numbers and coming to a realisation that 200x earnings or 50x sales seems reasonable at zero rates. From all the explanations I have seen Mike Green's seems the most plausible by far.
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 22:45
      Fair point, Dmitry. Just curious, what is Mike Green's explanation? I have seen a ton of his interviews (as i'm sure you have) but am interested in what you think his specific view on this is
    • DD
      Dmitry D.
      2 December 2020 @ 06:49
      Shift into passive as well as overt momentum strategies in a market that keeps getting less liquid as active managers are getting squeezed out.
  • DA
    David A.
    1 December 2020 @ 16:43
    This interview deserves a wider audience. Increasingly I am finding the interviews with lesser known figures (particularly those who actually manage money) to be best content on Real Vision. Some of the big names attract lots of views but are full of dogmatic certainty and hubris, presumably because once they were once correct (Nouriel Roubini, Hugh Hendry and, dare I say it, Kiril Sokolov).
    • DD
      Dmitry D.
      2 December 2020 @ 06:43
      From what I've seen, Teddy is an established star around here, don't think many people miss his interviews.
  • MD
    Matt D.
    2 December 2020 @ 04:04
    Great interview Jack. I always learn something from your interviews. Thanks Teddy - super clear and bringing it back to time-frames is excellent. Cheers.
  • VB
    Vincent B.
    2 December 2020 @ 03:12
    Good interview, but not onboard with the conclusions from the QE - Treasury vs. DXY chart. When the treasury issues a bond, you are right, the dealers are obliged to bid for it, but we are ignoring the most important factor here: the price! If they didn't want them, primary dealers wouldn't bid such high prices for them. More treasuries = more collateral = more credit/money = lower dollar. Dealers have been outbidding one another and hoarding treasuries, knowing that they will get better and better offers for them in the secondary market. It follows that opposed to conventional wisdom, the Fed buys treasuries through the QE program, lowering the yield and making it more profitable to stick the capital into excess reserves instead, and collect IOER, effectively taking liquidity out of the system, as capital held in the Fed reserve accounts is not used to by the banks to provide liquidity to the market. QE hasn't worked in 2 decades in Japan, nor in over 1 decade in the US (no inflation, lower yields). That's because printing money is not actually "printing money", but more complex than that, and most likely not with the desired effects on the dollar; it has been too strong = (treasury) collateral shortage.
  • OA
    Oliver A.
    2 December 2020 @ 00:04
    I'm going to need Jack and Nick to explain the 'real rates going up thesis' like I'm a 3rd grader.
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:23
      Stay tuned, Oliver
    • KK
      Kenneth K.
      2 December 2020 @ 02:30
      Yes pleaseeee can we get Stevan Van to cover this! Thanks..
  • RB
    Richard B.
    2 December 2020 @ 02:18
    Raoul thesis is (correct me if he has changed his mind) is demographics and super debt cycle , excess capacity in most industrial goods are grossly deflationary. Fed is trapped it cant afford to allow real rates to rise given debt levels, asset price elevations, pension liabilities, insolvency wave etc etc..thus YCC is inevitable. Albeit he thinks usd strengthens, which seems counter intuitive
  • SA
    Said A.
    2 December 2020 @ 01:19
    thankful for this macro surgery
  • TE
    Tito E.
    1 December 2020 @ 09:50
    Real macro
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:27
      real rates, real macro 😉
  • JF
    Jordi F.
    1 December 2020 @ 11:53
    When was this filmed? Because when Teddy talks about the need to revaluate his dollar thesis if the recent lows break, I guess he is referring to the 92 level in the DXY which broke just last week
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 12:15
      Hi Jordi, we filmed this interview on November 24, so last Tuesday. DXY was at 92.5 then
    • JF
      Jordi F.
      1 December 2020 @ 13:19
      Thanks for clarifying jack!
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:27
      Anytime!
  • MG
    Miguel G.
    1 December 2020 @ 14:56
    Love when Teddy's on real vision. His views are always clear and concise. Most importantly hes really good at delivering the complex in a simple manner.
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:26
      I could not agree more
  • MA
    Muhammad A.
    1 December 2020 @ 19:30
    Is it just me or are others not seeing comments on the app for the past few weeks?
    • PB
      Patrick B.
      1 December 2020 @ 23:45
      Same for me... Not sure what the issue is...
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:26
      Hi Muhammad and Patrick, sorry to hear that, our tech team is working on a fix now.
  • SS
    Sunny S.
    1 December 2020 @ 21:10
    Jack Thanks for being responsive to comments. Love your enthusiasm and this is a good interview and content.
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:25
      Of course - always helps to have a "sunny" disposition :) Glad you liked it - and thank you for the nice note!
  • WM
    William M.
    1 December 2020 @ 21:37
    Excellent interview guys! Jack you're already a pro at this, bravo!
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:24
      Not sure I deserve that but thank you, William!
  • NF
    Neal F.
    1 December 2020 @ 21:20
    Nice interview by both.
    • JF
      Jack F. | Real Vision
      2 December 2020 @ 00:23
      Glad you liked it, Neal!
  • CY
    Chris Y.
    2 December 2020 @ 00:17
    How are foreign purchases of treasuries factored into Teddy's model of treasury issuance less QE? I agree that if foreign investors are not buying the surplus then that would be dollar bullish as we saw from 2015-2019, but if foreigners are buying the surplus then I imagine this would impact the accuracy of such a model when viewed in isolation?
  • SS
    Sunny S.
    1 December 2020 @ 21:10
    Jack Thanks for being responsive to comments. Love your enthusiasm and this is a good interview and content.
  • SW
    Steve W.
    1 December 2020 @ 20:50
    as long as the dollar holds recent lows otherwise we're wrong = it hasn't, they're wrong?
  • SS
    Shanthi S.
    1 December 2020 @ 20:40
    Effing fantastic. Teddy is brilliant and Jack was spectacular! Best interview I’ve seen in a while.
  • mw
    michael w.
    1 December 2020 @ 20:27
    DXY needs to hold 91
  • LL
    Lexi L.
    1 December 2020 @ 18:52
    Jack, I loved this interview! Every time I had a question, you asked it, and the skillful methods you used to tease out clarifications of concepts was fantastic. Just an outstanding macro outlook from Teddy. Great interview!
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 19:28
      Thanks for the kind words, Lexi. Teddy is an outstanding macro thinker who is very clear and concise - so he made my job easy
  • SH
    Saito H.
    1 December 2020 @ 17:29
    Am I missing anything here thinking there's something wrong/flipped with the QE - Treasury Issuance vs DXY showing on the chart? Teddy mentioned it's supposed to be Treasury Issuance - QE being a leading indicator of the DXY direction. Can anyone help clarify this please?
    • JF
      Jack F. | Real Vision
      1 December 2020 @ 18:30
      Yes for sure. It's QE - Treasury Issuance, which ends up being a negative number and results in a flipped y-axis on the left hand side. So Treasury Issuance - QE would just be the same but positive, with a y-axis that's not flipped. I think QE - Treasury Issuance makes more sense though because it portrays the liquidity being drawn out of the system by those two valves
    • SH
      Saito H.
      1 December 2020 @ 18:50
      Thank you for the precise clarification, Jack. That clears out my confusions now!
    • SH
      Saito H.
      1 December 2020 @ 18:55
      Also Jack, real vision might want to change the subtitle there where it puts incorrectly "and it's not negative". I think that's where viewers could get confused.
  • JF
    Jack F. | Real Vision
    1 December 2020 @ 18:53
    Hi all, if you want to see all the charts from this interview, I posted them in the Real Vision Exchange: https://exchange.realvision.com/post/entire-chart-deck-from-my-interview-with-teddy-vallee-hi-all-here-are-all-t--5fc690c1b71ebd62be5c90a6
  • SB
    Stewart B.
    1 December 2020 @ 12:57
    Great interview. I did write a lot more but the page reloaded automatically to the next video so I lost all of my text. It is a very poorly thought out feature.
    • TP
      Timothy P.
      1 December 2020 @ 18:20
      I really hate that too. If they're going to have an "autoplay" feature, at least give the user a chance to opt-out. In my case, the next video page loads but doesn't auto-start, which makes zero sense to me. I've given up trying to make sense of RV's design choices.
  • GG
    Gary G.
    1 December 2020 @ 06:43
    Awesome!