The Highest Quality Macro Trades and the Impending End of U.S. Outperformance (RE-RELEASE)

Published on
December 31st, 2020
84 minutes

The Highest Quality Macro Trades and the Impending End of U.S. Outperformance (RE-RELEASE)

The Interview ·
Featuring Ben Melkman and Raoul Pal

Published on: December 31st, 2020 • Duration: 84 minutes

Ben Melkman, CEO and founder of Light Sky Macro, returns to discuss the biggest macro themes and trades on the horizon with Real Vision CEO and co-founder, Raoul Pal. In this wide-ranging discussion, they examine everything from COVID and the effects of its handling by the U.S. and Europe to the probability of fiscal union in Europe as well as the potential outcomes of the U.S. election. Melkman and Pal agree that the combination of unprecedented fiscal and monetary policy has to have unwanted consequences somewhere and that this likely will play out in FX markets. Conversely, Melkman pushes back on Raoul's dollar shortage thesis, arguing that the dollar is in store for a rough 2020 and makes the case for the end of U.S. equity outperformance sooner rather than later. Filmed on Wednesday, July 1, 2020.



  • SM
    Sam M.
    6 January 2021 @ 11:28
    I am an Australian and actually worked at the RBA (unlike the interviewee). There are hundreds of people that fit that profile. Lots of them would understand they can agree to buy a bond at 0% for a long maturity. Other people are idiots.
  • RS
    Robert S.
    4 January 2021 @ 03:29
    I wish you guys would have a glossary of some of these abbreviations you use under here so we can follow the discussion. What is TGA?
    • SM
      Sam M.
      6 January 2021 @ 11:14
      My guess (I worked in banking in Austalia) is that TGA = Treasury General Account (and the people that refer to it have NFI) .. NFI = No Fucking Idea
  • CK
    Clifton K.
    4 January 2021 @ 23:21
    Can someone explain to me why a reserve currency central bank's solvency matters? This is a major assumption in Ben's logic and I find it to be strange. 1.) the fed rebates interest income back to the treasury 2) PV effects of raising rates on their holdings has no effect because there are no capital requirements on the fed. Like OK the dollar should lose a bit of value relative to the other reserve currencies relative to how much they ease.... but that has little to do with "solvency."
    • SM
      Sam M.
      6 January 2021 @ 11:12
      What time in the video?
  • MA
    Matthew A.
    2 January 2021 @ 17:42
    Question why does moving from dominant global supply chain to local supply chain necessitate inflation? Yes moving to a global supply chain has brought prices down over the years but one could argue that with the advent of autonomous/advanced manufacturing are we really going to see prices go up again?
    • JL
      J L.
      4 January 2021 @ 04:51
      Timeframe mismatch. Advanced / autonomous manufacturing rollouts could take another two to four years, at least, to have a significant deflationary impact on production cost. The inflationary impact of broken or dismantled supply chains that have to be painstakingly reassembled even as demand surges back, however, could be more immediate -- reverberating in a six to twelve month timeframe and persisting for a few years afterward.
  • df
    diamantino f.
    3 January 2021 @ 17:30
    RV please bring Ben back as a 2021 start, would be great to have his view post election and with current COVID outcome
  • KZ
    Konrad Z.
    1 January 2021 @ 18:49
    Again, why gold performs well under strong deflation? I have read that in multiple sources but dont get why exactly. Is it because all other assets fall and people run to safety and that leave only gold when treasuries are not an option?
    • JL
      J L.
      1 January 2021 @ 20:18
      Gold can perform well in deflation because of the policy reaction function. Via policy the supply of fiat currency is increased as prices decline and corporate profits contract. If the deflation is strong enough, the policy reaction function could become so aggressive that treasuries will be deemed unattractive via concerns over exploding debt and deficit levels (along with an increase in the fiat currency supply). It is also possible in this scenario that treasury prices rise but gold prices rise even more, as a large number of insitutions go into treasuries but a sufficient number choose gold as the alternative. Gold miners can also do well in deflation because their corporate profit margins can expand even as most other businesses see their profit margins shrink. In a deflationary period, a gold miner can see the price of their product (gold) hold constant or rise, even as the gold miner's input costs -- primarily energy and labor -- fall lower and lower, which increases profits. In 2020 this dynamic was somewhat dampened by a transition to Bitcoin. To some extent Bitcoin is drinking gold's milkshake, though both can certainly rise with a big enough policy reaction response.
    • JL
      J L.
      1 January 2021 @ 20:30
      p.s. Gold also performs well in deflationary periods because of negative real yields on interest rates. This is once again a function of policy: When long-term interest rates are below the expected long-term rate of inflation, the real interest rate is negative. Imagine owning a 10-year treasury bond with a 1% yield when long-term inflation expectations are 2% -- that is a recipe for losing 1% per year to inflation. In a world where real long-term interest rates are negative (as they are now), it is more attractive to hold an asset with a zero interest rate than a negative one, as zero means you are maintaining value and negative means you are losing it (e.g. treasuries slowly eroding value as gold holds firm). It is also the case that, as an economy recovers, inflation expectations can rise faster than interest rates, widening the gap. So if inflation rates go to, say, six percent and yields are stuck at two percent, negative real yields would be minus four percent. The caveat for 2021 is that it isn't safe to assume the environment will continue to be deflationary. It might not be, particularly if the dollar keeps falling, commodity prices keep rising, and the top third of the U.S. economy (which powers most of the consumer spending) goes into a post-COVID recovery boom.
    • KZ
      Konrad Z.
      2 January 2021 @ 19:42
      Do you think btc could entirely eat gold’s gains in a deflationary environment?
    • JL
      J L.
      3 January 2021 @ 15:31
      Re BTC eating gold's gains -- it depends on the environment. But yes, it is possible. There are scenarios where the buying impulse for gold is moderate to weak -- enough to push gold higher in normal circumstances, but not enough to overcome an aggressive outflow at the margins as existing portfolio holders of gold sell a portion of that gold to allocate to BTC instead. In a severely deflationary environment, however, it is more likely that both would go up.
  • JL
    J L.
    1 January 2021 @ 20:09
    As this was recorded July 1st, it is notable Melkman was pound-the-table bearish on the U.S. dollar, and bullish on the euro, for logical reasons (for ex. see transcript excerpt below). He was exactly right, and all of the plumbing-focused, fiscal-blind dollar bull types (including Raoul to some extent) were dead wrong. That dollar-bearish, euro-bullish perspective was a very big call -- and STILL has major implications moving forward, so it is worthwhile to point out. For those who still insist, against the charts, on being USD bullish, note that: 1) It is all about the fiscal: Stimulus creates dollars, and the US has not been shy in creating dollars, even as the Fed bought $2.4TR in treasuries in 2020, which means they swapped them for dollars) 2) It is all about increasing velocity via post-vaccine recovery igniting stagnant reserves: As M&A picks up in 2021 and the top third of the US economy goes into optimistic post-vaccine mood, banks will lubricate deals powered by strong balance sheets and even more dollars will flow 3) it is all about rebalancing: The world's reserve managers, e.g. central banks and institutions, are historically overweight US dollars, and it will take a long time, and a lot of selling, to get them to a more normal weighting 4) It is all about the charts: Look at a long-term dollar index chart. If you don't see the monster bearish implications there, you can't consider yourself a legitimate user of price-based inputs. Dollar. Bulls. Are. WRONG. Relevant Melkman excerpt (again, he got it right -- in July!): "The world is much too long dollars and overweight dollars at a time when the US is way more isolationist... The world's changing in a way that would argue that those holders should find alternative ways of transacting and alternative ways of investing and so that trade of diversifying away from dollars is something that I think-- certainly to any of your listeners, from a personal trainer, necessarily on a leverage mark to market basis, that, I can absolutely be wrong on the next month, two months, three months, but on any relevant horizon, I think the dollar is in big, big trouble here."
    • KZ
      Konrad Z.
      2 January 2021 @ 19:39
      The fed didnt swap treasuries for dollars but for “bank reserves” which cannot circulate only fascilitate potential lending
    • JL
      J L.
      3 January 2021 @ 15:24
      @ Konrad Z That isn't how it works. "Bank reserves" are just cash. When the Federal Reserve sets a minimum level of bank reserves, it represents an amount of cash, as a percentage of customer deposits, that the bank has to have sequestered in its vaults or directly on deposit with the Fed. The Fed can also cut the reserve requirement to zero, which it did in March of 2020.
  • JJ
    Jeff J.
    3 January 2021 @ 03:48
    Disappointed this was recorded back in July. I wasnt a member back then and would not know if it's a re-release. Didnt see where it was. Still great thoughts and perspectives. Ben Melkman. This is two interviews that I've seen with him now. Pretty damn hard to get any more brilliant. But, for as brilliant as he is, we all still have our own crosses to bear. I just cant look at this guy and not see Ron Jeremy on some kind of super duper intelligence pill. Sorry Ben.
  • WZ
    Wei Z.
    2 January 2021 @ 10:07
    Is Singapore in the same group as Norway, given how it has funded its covid response with its reserves? Why or why not?
  • SP
    Saxon P.
    2 January 2021 @ 08:33
    Would be keen to see a follow up interview in Q1 21 with the election and senate finalised and the new year under way.
  • JL
    J L.
    1 January 2021 @ 20:22
    For those who want more Melkman, he did an excellent 30 minute interview with Ben Schatzker of Bloomberg in mid-August 2020 -- and once again his views were on point. Link: Descrip: "Ben Melkman, founder of Light Sky Macro, expects the Covid-19 pandemic will usher in a world of permanently low interest rates, huge deficits, sluggish growth, resurgent inflation, and declining U.S. power and influence. He also foresees "glory days" ahead for macro traders."
  • IB
    Ian B.
    1 January 2021 @ 13:00
    Please put original recording date up on the top corner of the screen and make it clear if it’s a re-release. It was an interesting video but I agree with others that it is of limited value at this point.
    • MK
      Michael K.
      1 January 2021 @ 19:39
      The recording date is listed in the text description
  • RC
    Romesh C.
    1 January 2021 @ 10:41
    Great interview. Started off slowly (and a bit wishy-washy I thought), which may explain some of the negative comments here, but worthy seeing it through... the insights on NOK, USD outlook and euro end game were outstanding. Additionally it was great to see an interview where RP and BM had a proper debate on a number of topics and I thought BM really held his own.
  • JK
    James K.
    31 December 2020 @ 21:23
    just a bit disappointing that this is 6m out - the election is a moot point now
    • JK
      James K.
      31 December 2020 @ 21:35
      ooh, re-release not sure i see much value in that though
    • JK
      John K.
      31 December 2020 @ 22:22
      Right, its a July 1st interview but given how fast things are moving it seems more dated. The election which was on everyones mind in teh summer early fall is now behind us and all the crazy predictions surrounding it did not occur. Also, even though the discussion is uber positive Gold even Raoul has sold all his gold and bought more Bitcoin. All that aside it was an interesting discussion but where they are presnting reasons to buy gold I personally am now inserting the word Bitcoin instead.
    • TW
      Tim W.
      1 January 2021 @ 01:40
      I watched it then and now. Election aside, I thought it was as germane today as it was the day it was posted.
  • TW
    Tim W.
    1 January 2021 @ 01:39
    Time for more Ben Melkman! He is truly an intellectual artist. I wonder about those souls who didn't think this was an outstanding conversation.
  • ND
    Nicolas D.
    1 January 2021 @ 01:22
    Old news...
  • JC
    John C.
    1 January 2021 @ 00:01
    Treasury general account: what is the balance of this account now? Still around 1.4T? or did the Mnuch dump the funds into the market?
  • BP
    Bakulesh P.
    31 December 2020 @ 20:11
    Lot of hot air from this guy. Nothing of deep substance. Sad wasted time. RV can do much better