[00:01:13]Julian Brigden: Yeah, in my dreams.

[00:01:17]Adam Butler: …overall market superhero, here to share his experience and wisdom and, what is been going on so far this year and how this is likely to play out over the remainder of the year and into the future. Julian, with that, welcome sir.

[00:01:39]Richard Laterman: Welcome. Good to have you here.

[00:01:40]Julian Brigden: Gentlemen. Thank you for having me on the show.

[00:01:43]Adam Butler: Richard too. My, compatriot. Welcome Richard, and thanks for joining me.

[00:01:49]Richard Laterman: Thanks, Adam. Julian it has been an interesting start to the year, to say the least. How would you describe events that have taken place so far, and how do you see the state of the global macro space right now as it pertains to the major asset classes, you see the glaring mis-pricings and asymmetries?

[00:02:16]Julian Brigden: Look, I, the first thing I would start off by saying is, global macro is one of those disciplines, which most of the time, most people do not really need to pay that much attention to, because it does not move much, so quickly. Clearly, we get political interference and truly tangential historical events, which I think is what we are seeing. Clearly it can change quite a lot and it can come to its fore, and we think we have been heading into one of these inflection points for a while.

So in the middle of last year, and I think it is important to stress, this is not a timing call, but you need, when you have institutional clients, like we do, big institutional clients, one of your jobs is to talk about bigger picture themes, get share of mind, and then, as you hone it and hone it, that sort of thesis, you get to a point where you can say, okay, here is the trade and it is today, slot the thing.

And so really in the middle of last year we started to talk about what we thought was the reflexive nature of U.S. exceptionalism. So there is—and I will say I think—narrative. I think there is actually very little that is truly exceptional when it comes to the U.S. unless you call spending money like a drunken sailor exceptional. I think what we have ended up with is this cycle, which really started with a vengeance in 2014 when the dollar started to diverge and really appreciate when Europe and Japan moved into negative interest rates, and the U.S. actually ended Quantitative Easing.

And this wall of global money went piling into U.S. assets looking desperately for some sort of return. So money goes piling into U.S. corporate bonds because European corporate bonds were yielding nothing as the European Central Bank (ECB) is going into negative interest rates. And U.S. corporations took that money and started to buy back stock. And then U.S. stocks start to outperform and the dollar is rising at the same time.

So foreigners are making this sort of two for one trade, this classic unhedged long-dollars, this is all great. And then it drives these sort of three economic effects. You get a, what we call hyper-financialization, so this incredibly tight relationship between the employment market and the labor market. So, sorry, between the equity market and the labor market. So as the equity market starts to rise, employment rises.

Secondly, you get a wealth effect, which is enormous, because the top 10 percent in the U.S. are basically 50 percent of all consumption now. You get this growing current account deficit, which sucks in more money. So you get this sort of effect, and you suck in and you suck in suck in more money.

So we had this cycle where the whole world has piled in money to fund our egregious spending here in the U.S., running, 7 percent of current account, of fiscal deficit, and a 4 percent current account deficit. And that has, those are all things that have, that you can be in part or certainly in the current account basis, have to be all funded by finance.

So all the money sitting here. So what we were looking for was a catalyst to start to change that around, and the Trump administration’s election was that catalyst. We thought that people were being overly simplistic in terms of their read of what the Trump administration really meant, and we wrote the day after the election, this piece called Assumption Confirmation in Reality.

And we said, we are going to go through three phases. We are going to assume that it is Trump 1.0 again. So we are just going to go and buy stocks, sell bonds, buy dollars. Then we are going to get to the middle of December and we will start to run out of a little bit of oomph. But then all the soft data, all those animal spirits will go, woo, it is great. Fantastic. And they will get to the inauguration. And when it gets to the inauguration, we are in for a shock because they really mean what they want to do on tariffs. They really mean about what they want when they say Wall Street has had it too good. Now it is Main Street’s turn.

And none of these things are structurally necessarily so bullish for the U.S. equity market. And in particular what worried U.S. as well was this idea about the dollar, because the dollar, gentlemen, is the underpinning, is one of the key underpinnings of U.S. exceptionalism. And with foreigners sitting on a whopping—these numbers guys are bloody mind blowing—26 trillion dollars of net investments in the U.S., right, up from basically 55 percent in the last five years, right, that if you start to weaken the dollar, and in other words weaken their returns, because a lot of this is not Foreign Exchange (FX) hedged, the risk is you are going to send the money home.

That was our bet that, as people realize what the agenda was of the Trump administration. Now we can have a debate as to whether that agenda is still the agenda, right? But you were basically supposed to be short U.S. stocks, short bonds at some point, and short the dollar going into the start of the year, not the other way around.

So in our alpha capture book, we have had a really excellent start to the year, we have killed it. And that is we are. And I think the question now is this sort of twofold question is, has Trump pivoted? Are we going back to kind, oh we thought we were going to try and address these fundamental issues, but we looked over the precipice as to what those would actually entail. We will lose the midterms and ah, forget it.

And so we are just going back to good time Trump, spend a lot of money, right? Do not address any of the fundamental issues. Backtrack on trade. I was only kidding.

And then, if that is the case, whether that is enough to keep this game going, this U.S. exceptionalism game, this sucking in of foreign money to fund extension of overvalued assets, or you have just done so much damage now that you cannot put Humpty Dumpty back together again.

[00:08:36]Adam Butler: I think there has also been some actions by non-U.S. players, that may have caught markets a little bit by surprise and amplified the effects that the tariffs might have had in isolation.

For example, the fiscal expansion unlock in Europe, and in particular in Germany, and their declared intentions and forging into law, huge fiscal expansion, over the next five or 10 years. Unprecedented post-war expansion in Germany, and also Germany’s implicit encouragement for the rest of Europe to unleash their own fiscal space, and China reacting with their own major fiscal and banking and credit unlock. So you had other jurisdictions who are powering up their economies from a fiscal standpoint, while the U.S. for a while seemed like it was going to be suppressing its own growth and capital favoritism agenda, right?

[00:10:02]Julian Brigden: So you are absolutely right, Adam. But in a way, they all come back to this Trump administration. Europe is only powering up its defense spending because the Trump administration has withdrawn the military protection of the umbrella, right? I, this is something that we can discuss, I think is hugely profound, when essentially, the U.S. is saying we have hit what historically, if you look at any Pax system is called peak imperial overreach. You have basically reached the limit of the, your ability to maintain the empire, right? So the U.S. has basically told us they cannot afford to defend Europe anymore.

Now, whether you can argue it from, it is not right that we do, it makes absolutely no difference. They are just not going to do it, and that is going to have inordinate consequences because Europe is going to have to increase its spending, and then you have to raise the question, where is that money going to come from to do that? Is it their piggy bank? And then on the China thing, look, we have arguably picked, we have told the Chinese, to quote Steven Miran, that they are our greatest adversary, as though they did not know that already.

And the problem there is they are also the world’s largest provider of savings by an inordinate percentage. They are basically 28 percent of global disposable savings, and we just told them, you are our greatest adversary. Why? Why would they be investing in the U.S. anymore? I would not, seeing the FT story where they talked about not putting any more money into private equity, and they were a big player in private equity.

We have seen talk of other sovereign funds in Asia being less interested to buy, U.S. assets. I know of one who has, who said to one of my clients, they are not increasing their assets in the U.S. at all. And of this against a backdrop where we are continuing to spend money like it is gone out of fashion, right? And just think it is our unalienable right to run these deficits. We will see.

[00:12:22]Richard Laterman: Doesn’t it also make sense to consider that the U.S. stock market outperformance versus the rest of the world has been enormous, partly because of U.S. growth, the strength of the U.S. economy, but also partly due to say, non-fundamental reasons, whether the buybacks, whether the rise of passive investing, that is one of the other proximate causes that has been pointed as having contributed to that we saw after a top 2022. We saw 20-plus percentage increases in the S&P in ’23, and then in ’24. Isn’t it somewhat inexorable that there would, there was going to be a change in leadership across the different stock markets and the different jurisdiction in terms of growth.

And I pair that with this idea of U.S. exceptionalism that you pointed out, that is no more. The Pax America and the unipolar moment is kind of a blip in history. We have typically had, at least in modern history, multi-polar, global, if you will, and the U.S. is, has now decided it seems to retrench, partly because it sees an exhaustion in the U.S. versus the rest of world.

[00:13:47]Julian Brigden: You have hit, basically what you are talking about is we have hit what an economic terms is referred to as Triffin’s Dilemma.

[00:13:54]Richard Laterman: Right.

[00:13:54]Julian Brigden: So Triffin’s Dilemma is a point that only, and is an issue that only applies to the reserve provider, where the perceived benefits, or the actual benefits of being the reserve provider, outweigh the perceived costs or actual costs, and are no longer compatible with domestic policy.

So I think all of those are absolutely true. You can, whether you can argue, that the costs or the benefits are really less, I think we are going to find out over the next few years that we may have underestimated the benefits that we derived from that. And that is going to come as an incredibly painful reality check for the U.S. But that is the fact.

Now at historically, when you go back and look at PAX systems and there have been seven through history, when you hit this tipping point, then that is it, peak empire, peak hegemonic power, peak reserve currency status, and you move slowly into the next phase, which you, to your point, you typically, is a process where you get this sort of multi-pole in the world for a bit. It is very unstable. And then we come out with the next PAX provider.

But if we are going into that point, then it is got, the consequences are enormous. Europe has, I am not really concerned about who is right and who is wrong in this debate, whereas if you are a Republican in the U.S. you will say, it cost us a lot of money to defend Europe. True.

But if you are a European, we have foregone a lot of consumption to funnel our savings back into the U.S. so that you can afford the defense. A Korean client of mine said, think that this is just a one-way street. But in Korea we live in little apartments and in America you live in big houses with swimming pools. So maybe it is about time that we siphon less of our savings back to you, and we live in bigger houses.

This is gonna come as an inordinate bloody shock to the U.S. and, to your point around this, and this I think is a structural factor, right? This is not going away.

I mean, Adam you were just raising the point. You are talking about trillions of dollars of multi-year defense spending. If we are going back to 5 percent of gross domestic product (GDP), right, defense spending, apart from the huge duration, deluge, you are gonna end up in global bond markets, right? Which is going to displace money from elsewhere.

Europe is going to have to do things to get money back into Europe to fund these things, right? So it is either going to have to offer, to buy European defense bonds. And then where does that money come from? My guess it will come out of the treasury market, because that is where a lot of the money is. European stocks become more attractive. Where is that money going to come from? U.S. stocks, because that is where all the money is, right? So you put this together, and then you look at this sort of, what I think is this reflexive nature of that, and you link that together with indexation.

And I think, Mike Green has done a lot of work, and I do not know if you have probably had him on the show talking about sort of self-reinforcing nature of indexation, but he is talking about the micro. What I am really talking about here is the macro self-reinforcing nature of this sucking money into the U.S. But it is dependent gentlemen on that ongoing dollar strength, right? That ongoing dollar strength, because if the dollar is weak, right? And at the beginning of the year, a European investor watched if they were unhedged in the S&P, they watched their total value of their portfolio drop 25 percent in six weeks. In six weeks, okay? If the dollar starts to materially weaken, which is what is something that the Trump administration wants, that money is going to leave. Okay?

Secondly, if U.S. assets start to underperform, which they will generally do in a weak dollar environment, right? I, Morgan Stanley came out with something today, and I am sorry I have got great respect for some of their work, but that was the most asinine piece of research that I have read, and it is that classic stuff that is aimed at Americans and not the rest of the world. Oh, the S&P is going to go up, because it will be good for corporate earnings, but the dollar is going down a lot, is a conversation I have with my wealth managers, my, the guys who manage my pension fund, and I am like, your job is what it says on the Tin – Wealth Manager, right? Your job is not dollar U.S. Retirement Fund. It is Wealth manager.

So if I am up 20 percent in five years time on my S&Ps, but the, you know, the dollar is down 50 percent and you have done a crappy job, because my global purchasing power is down, right? So you are U.S. assets because you get a weak dollar, typically other assets outperform, right? Growth typically massively underperforms. In a weak dollar environment you buy value, and the U.S. equity markets are very value, growth focused markets.

Secondly, price earnings (PEs) tend to decline when the dollar goes down because that foreign money is what has bid up PEs. At the same time, we have gone right back to the PEs of the dot com bubble and it is no surprise that the dollar was on the highs at the dot com bubble. And you look at PEs from 1995-2000, 2002, and they just went up along with the dollar.

Then thirdly, if we go into a recession, the current account deficit is gonna shrink and the money is going to go home. If they shrink the current account deficit because, all the tariffs and so on and so forth, we do not need the money here.

And this is, this concept I think is something that I have really struggled to understand, why I get different sponsors from foreign clients and American clients. Foreign clients will go, it is just mechanics. If you shrink the current account deficit, less money from the rest of the world has to flow into what is referred to as the capital account surplus to balance it. And so U.S. assets will underperform. It is not a controversial statement, it is not a political statement, it is just bloody mathematics.

Now when you pose that to Americans, depending on, some degree their politics, I think some degree self-interest, I, they do not want to acknowledge that, right?
Professionals understand it, but they even, they do not want to acknowledge that because they will say things, yeah, but we will end up with a strong economy, right? If we get the trade deficit down, if we get the fiscal deficit down, if we bolster manufacturing in the U.S., if we raise middle class incomes, all of which are highly laudable, long-term aims, do not get me wrong, we are gonna end up with this stronger economy, they say, and so equity should be strong. And the answer is, absolutely not. They are absolutely nothing to do with each other.

Korea has a large current account surplus, an arguably strong, far less of a divergence between the rich and the poor, right? All of those things. Big manufacturing sector, et cetera, et cetera. I cannot say that the last time that anyone talked about buy right, buying Korean stocks.

Their kids.

[00:22:08]Adam Butler: Yeah. Look across the world at any surplus country and their equity market has been in a quasi-depression for 15 years. And it is the deficit countries that where the equity markets, primarily U.S. being the primary deficit country, where the equity markets have thrived. And I do think it is important to recognize that you can have, some of the driver of the decline in asset prices can be just driven by actual current, I am sorry, capital account dynamics.

There can be just, and I think, you were describing that, where just foreign investors are either putting foreign savings into U.S. assets at a declining rate, or are physically removing U.S. assets and moving them to other jurisdictions.

Those are two more aggressive versions of the same dynamic.

[00:23:10]Julian Brigden: You can just have a situation where the assets just disappear.

[00:23:15]Adam Butler: But it is, but I agree it is a mathematical accounting identity. But what I am saying is some of it can be driven by current account action, and some of it can be driven by capital account action. It has to add up mechanically, but the, there is a bid and an offer in there on both sides. And I think there is, yeah, I think it is gonna be driven on both by a little bit of chicken and egg situation.

[00:23:35]Julian Brigden: It does not, I think, for example, I think in 2008, I think a large part of the crisis that actually happened, which was a different setup, right? This is where the dollar went up and not down in a risk-off environment is because actually foreign assets were more expensive, relatively, had outperformed U.S. assets up to the highs.

[00:23:56]Adam Butler: Massively. Yep.

[00:23:57]Julian Brigden: Outperformed. And so all the money was sitting abroad. And then what happened was the U.S. current account deficit started to shrink quite early in like 2006, 2007 as Shale came on board, and as that shrunk, that tightened dollar liquidity in the rest of the world. And so we got this risk off event and I think, so you are absolutely right, chicken and egg. Which one goes first? Is it a capital account that drives the current account? In other words, foreigners just pull their money and they just won’t vendor finance the U.S..

[00:24:29]Adam Butler: Exactly. Yeah.

[00:24:30]Julian Brigden: They won’t fund little Johnny to go, the millennial influencer from Iowa to go to Santorini and stand on the cliff with 500 other American influencers and ruin it for everyone else who wants to go there.
So…

[00:24:47]Richard Laterman: But this is a good reminder, Julian, of the cyclical nature of these capital markets that we study so carefully, and the fact that whether it is one catalyst or another, whether it was the Trump election and his tariff tantrum, or something else, there had been a major imbalance in some of these asset class performance. But I am curious.

[00:25:08]Julian Brigden: Looking for that tipping point, that trigger.

[00:25:11] Richard Laterman: That is right. If it wasn’t this, it might have been something else, but at the end of the day, I am curious. We have seen the S&P round trip, Treasuries are somewhat stable depending on the maturity, but it hasn’t been cataclysmic. I guess the long end has started to weaken again. Yes. Yeah. Yet being the operative word there for sure. But the U.S. dollar definitely has been big loser so far. So what are equity markets missing from a signaling mechanism, actually perform the way you would expect?

[00:25:46]Julian Brigden: Arguably nothing, right? Equities are underperforming, certainly in Euro terms, right? They are already underperforming. If you look at European equities against the S&P in dollar terms, they have broken out of a massive long-term trend line. I will see if, let us see if this thing works, where we try and share a chart.

[00:26:10]Adam Butler: We are sharing a chart. Yep.

[00:26:10]Julian Brigden: Okay. Hold on one second. So this is the log chart of the FZ, which…

[00:26:10]Adam Butler: Are you.

[00:26:10]Julian Brigden: Hold on. Present, Share screen. Share screen window. Let us see if it is this one. Okay. So this is Euro stocks ETFs. So it listed in the U.S. in dollars. So ethics neutral against the S&P. Now this is a log chart going back to 2007, and we blew through that trend line in March. We took out basically the best part of a 20 year trend line. So to me, this is done.

I was really hoping for a retest to pick up more, just think this trend is reversing and it does not really matter what, whether it is gonna be driven by currency, which will leave the phase to outperform, or gonna be driven by U.S. assets correcting lower, and or sitting here, as European assets rally for the next five years.

And, Richard to go to your point, these are cycles, right? We see these cycles. I do not know if I flip to another chart. Dollar cycles are the norm, right? They are, absolutely. I think I have got so many charts, chaps. I can find it.

[00:27:30]Adam Butler: It is remarkable the degree of U.S. equity outperformance relative to rest of world, just absolutely stopped.

[00:27:38]Julian Brigden: It…

[00:27:38]Richard Laterman: How long it lasted.

[00:27:40]Adam Butler: Yeah. How long and how persistent and how just the…

[00:27:44]Julian Brigden: Yeah. So they look, here is the dollar going back to 1972, right? So we get a 50 percent correction. You cannot see it because the chart does not start. We get a 50 percent correction in 1972, then we get a 60-plus percent rally, then we get a 43 percent decline, then we get a 40 percent rally, then we get a 38 percent decline, then we get a 50 percent rally. So why not another 30, 40 percent decline? That is, I am not talking about, I think this has been very important to say.

I am not talking about the demise of the dollar as the reserve currency or anything silly like that. Simply talking about a decline in the value, the exchange rate. In fact, I think the ambition of the Trump administration is, at the end of this, to have an inherently stronger dollar, right? If we keep spending money like we are, the dollar is going to be a piece of toilet paper. And I think that is where, it just does not preclude a decline in the value of the dollar, but that is an important variable in global markets. In fact, it is really the probably most important macro variable. If you get the trend of the dollar right, you are pretty much gonna get your asset allocation right.

[00:29:12]Richard Laterman: And obviously prices are set at the margin, so regardless of the volume that we would expect at the end of this journey of assets to flow out of the U.S. as prices are being set at the margin, marginal appetite for the global reserve asset and currency seem to be diminishing. But to go to your earlier point and, on the reflexive nature of things, you have China, you have Japan, you have so many emerging economies or just global economies holding U.S. Treasuries as a foreign reserve asset. Do we expect these countries to light the reserves on fire and start divesting? Because we also understand that as they move towards the exit, we would potentially cause a huge shift in Treasury pricing.

[00:30:11]Julian Brigden: The…

[00:30:12]Richard Laterman: How do you see that dynamic?

[00:30:13]Julian Brigden: So I think you have got to really split this between sovereigns and private investors, because sovereigns do not really hedge, right? They do not, we have seen a diversification of sovereigns into gold. There is no question, right? Saw the SMB, which is a great trade. We will see how it pans out, but probably be a better trade than Treasuries, move into U.S. equities for their reserves. We have seen essentially the Norges fund do the same and other entities.

But when it comes to their sort of core Treasury holdings, they are supposed to be reserve stabilization funds, basically, or sort of currency stabilization funds, and they are not really going to hedge those. You know, they might not increase them very much. They might decrease the duration of them, might, which is why, Stephen Marin is trying to propose that he forced countries to come and buy a hundred year bonds that yield nothing. Good luck with that because that is a default. But I do not think it is that.

I think what you are seeing is in particular, is this right here, right now, I think you are seeing this big equity float of global equity money that has come into the U.S., which rarely, I was in Europe joking with clients that, and I was in currencies for most of my professional career, as opposed to this amateur stuff that I do these days, but so when I actually sat on the trading desk of a bank, I was in FX and there were times, there were whole decades where we never spoke to an equity fund, and then something would go wrong.

Like for example, the ERM crisis in the early nineties in Europe, and you would be, I was sitting at Lehman at the time, and I was getting these phone calls from these U.S. funds in Boston or New York going, yeah, so we got this, all these Italian stocks, and we did not do very well last year because of the lira. And you are like, oh, we can help you with a hedge on that one. Ching.

But the point is, these equity guys generally do not hedge. I think we are seeing some of them hedge now, but I bet you they are having to discover who their contacts are at the major bank, on the FX desk. And some U.S. equity investors will not hedge.

So in those guys who will not, and particularly the general public tends not to, those guys just hit the bid if the currency moves too far and undermines the value of their U.S. stock holdings in their own currencies.

[00:33:05]Richard Laterman: So what countries, what jurisdictions, have capital markets with enough depth and breadth, enough volume to absorb a portion of this wall of liquidity were it to decide, find a new home.

[00:33:22]Julian Brigden: So this is an interesting question, so I get this one a lot, but there is no alternative. Okay.

[00:33:30]Richard Laterman: Be creative.

[00:33:31]Julian Brigden: There was arguably, you could argue in 2008, there was no alternative to having your money in the rest of the world when foreign stocks were three standard deviations more expensive than U.S. stocks, right? Guess what? All of a sudden everybody wants to trade European stocks, then liquidity is going to improve, right? Number one.

Secondly, this sort of gives you this sense of that we have discovered here in the U.S., this concept of perpetual economic motion, and it is cycle free. And even more and more money can only come into the U.S. right? And last year, Bridgewater had this great stat where they said, 70 cents of every dollar went into U.S., of every dollar that went into global equities went into the U.S.. So what is it going to go to 80, 90? So what happens when it goes to a hundred, right? Do we just go, okay, that is it. It just stays here forever and we never have a, the answer is at the moment there is not many markets that are as liquid.

But what we will discover is we can hedge the currency quite quickly and quite easily, right? So if you are that Swedish Pension Fund and you have not hedged Swedish kroner, and your long a lot of U.S. tech stocks, you are going to first probably do the currency. You might buy a put on the NASDAQ to protect you as you start to civvy up the kind of position. So there is ways of doing it.

I am not suggesting it is going to be clean, but as I was saying to Adam, I think people forget, in this process people lose a lot of money, right? So there is less money to rotate because the money is gone. You need to use that great South Park analogy.

[00:35:23]Richard Laterman: And it is.

[00:35:25]Julian Brigden: It is, it is just true. If stocks go down 30 percent and no one hits the bid, then the amount of money that has to get transferred is down 30 percent, right? Because the money was never there.

[00:35:38]Richard Laterman: No doubt. And what role do you see, gold obviously has had this massive rally and is now, in the, in the center of the Overton window of where people see an alternative. What else are you looking at as alternative, from an asset class standpoint? Do you look at other precious metals? Do you look at energy? Do you think about that problem? Is there a role for crypto in any of this?

[00:36:07]Julian Brigden: Look, there is potentially a role for crypto. I have structural concerns about crypto. We could address those if you want to. But, I am still quite concerned that crypto is a very highly correlated, risk-on risk-off asset, right? So to me, I am not convinced that it is, if we were to see a major correction in U.S. stocks, not saying, but let us say, that crypto really outperforms. I just do not know whether that is the case. Still think it is owned by a lot of people who own Nvidia stock and this sort of stuff. And it is owned by the market now, so it is subject to risk-off or var events.

I think that gold is a little unique. I do want to own all of those other assets that you talked about. I want to own emerging markets. I want to own overseas stocks. I want to own commodities outside gold. But here is the problem. Typically when you are in a capital rotation event, which I think we are right out of the U.S. and into other things, right? The initial phase is what I refer to as a nasty correction.

So if you think about, when you see huge divergences, there are one or two ways that these divergences can normalize. You can get a nasty divergence normalization where the expensive asset just craps out, right? That is it, right? So the S&P just drops, foreign assets outperform. But it is rare that in those scenarios, they absolutely rise.

So if you look at 2000-2002, silver massively outperformed the S&P. It still got drilled, right? You still lost money if you were outright long silver, right? So what you really are waiting for is the nice rotation phase. And the nice rotation phase is typically when the Fed starts to cut rates and you get that nice warm fuzzy release of weak dollar liquidity like that. The grease that oils the machinery of global finance is the dollar still, and it will remain as far as I am concerned for a while.

But when it is, when it drops in value for the right reasons, right, because the Fed is cutting, maybe they are doing QE again, who knows? Then you are getting that nice liquidity flooding into other assets, and that is when everything rises. So your stocks will bounce, but less than emerging markets, less particularly in the dollar into account, right? That is when I really want to own them, and I do not think we are there yet because we have not seen that capitulation at all. At all.

[00:39:08]Richard Laterman: Liquidation. We have not really seen liquidation. So at the end of the day, I think what you are describing is, and, it is something that we have observed here at ReSolve as well. Initial phase, you sell first, ask questions later. Anything that has a bid gets whacked. People are just raising cash because of the uncertainty of the scenario that is unfolding before their eyes. The second phase is once you start to put that money to work, and then you start to see which jurisdictions, which asset classes are going to be favored. So in view, once we haven’t even really seen that first phase, we have not really seen capitulation.

There is this old adage that you have to see some kind of critical events, some major bankruptcy. It is typically the case that we see something like that taking place before we see…

[00:39:54]Julian Brigden: You.

[00:39:54]Richard Laterman: …someone cries.

[00:39:55]Julian Brigden: Yeah. Someone cries on call. Maybe it is the U.S. Treasury market, but we will see. Hope not.

[00:40:00]Richard Laterman: Right.

[00:40:00]JulianBrigden: Could be. But yes, that is typically the case when you can truly own assets outright, and go to the beach for the next five years.

[00:40:14]Richard Laterman: So commodities, emerging markets, and then to a lesser extent, some of these other esoteric asset classes that are still, you have some doubts whether a….

[00:40:25]Julian Brigden: I, problem that I have got with crypto, which is really what you are raising, as I said, I think it is very heavily correlated to NASDAQ and (B), let us play a little game, right? And I am not saying this is where we are getting. So let us say I believe we are in a structural bond bear market, right?
A completely structural, it is driven by demographics. There is nothing we can do to stop it, right?

So basically unless we do Yield Curve Control (YCC) yields are basically up and to the right for the next 25 years, right? And my work suggests somewhere between un-hindered, U.S. Treasury yields are going to be eight to 10 percent at that point, right, by 2050. I suspect we cannot do that, we cannot live with that.

So at some point going to end up with a, we could end up with a crisis, right, let us say, where yields are too high. Let us say the deficit is, or the interest on the deficit is running at $2 trillion, which would, all that would take is the Congressional Budget Office (CBO) being more realistic of where the funding costs of the deficit are going to come from, right? If we are funding at 4.5, the deficit isn’t $1 trillion, it is $2 trillion a year, right? The long end of the bond market becomes unhinged, and the Fed comes in and does yield curve control or Quantitative Easing (QE), then the dollar gets hit, right? Inflation spikes even further because the dollar gets hit.

U.S. assets are underperforming in that situation and possibly even selling off, depending on where you are in that cycle of foreigners divesting, and then they have to do really something quite nasty. And the last time we were in a structural bear market, it was the late, was really the sort of post-Second World War period into 1980s, and the world looked different, gentlemen.

We did not have, let us say, fair free open markets. We had capital controls, exchange controls, prices and incomes policies where governments literally told you what you could get paid, and how much prices were going up because that was such a painful environment, right, that governments had to intercede.

Let us envisage that we are heading towards that environment and crypto and the dollar is getting trashed, and crypto is 200,000, 300,000, could be an amazing trade. Here is the problem. If you have to get to the point to put capital controls on and exchange controls to stop money fleeing the U.S. or some other economy, you have to close down crypto because it is designed to avoid those restrictions.

And so you have to turn around to American citizens and say, you can keep your crypto, but you cannot transfer outside the U.S. dollar system or outside the U.S., or you close the thing completely, right? So that ability for you to let that liquidity leave the U.S., they have to lock down. Now, whether that means banning crypto or just banning it to only working, U.S. asset, U.S. crypto for U.S. markets, I do not know. But I think that could become quite a difficult event, right? And I am just, that is where I worry about crypto and what that does.

[00:43:56]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast, and we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non-correlated to traditional equity and bond portfolios. So we actually manage private and public funds as well as bespoke, separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So if you do want to see that theory that we have been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:44:38]Adam Butler: With the U.S. debt, the size that it is, and I think we had maybe three weeks where the market began to contemplate the vanishingly small possibility that we may see a reduction in deficits this year, before it became obvious that we were just going to double down again on deficits, with tax cuts and other features. Why isn’t the basement inflation cascade that you described the base case?

[00:45:25]Julian Brigden: I do not know, because I try and be optimistic. I think I will say it probably is the best case. It is a question of timing.

So you cannot constantly think about that, right? Because if, let us say, the bond market does hold-in, right? I think it has got some inordinate challenges ahead, and U.S. equities go to 6,500, and we keep playing this, and the world does fund it for another year, then you are wrong. It does not, if you are thinking structurally for 20 years, it does not matter.

It is like I have said to my wealth clients, If you have got a client who thinks they have, you have got a house in the Amalfi coast as an American, and they want to go and retire there, right, because they are Italian or European or whatever, then make sure they have got a pot of cash that is sitting outside the U.S. ready to do that, because in 10 years time, they may not be able to take the money out. There is a difference between that trading timeframe and that sort of structural thinking timeframe. But to agree, I do not see how we get out of this apart from acute financial repression.

[00:46:48]Adam Butler: Even in the event of a recession or some type of major global growth shock where you get some relief on the inflation front for a short time, the fiscal stabilizers kick in, you have got much larger deficits to fund coming out of it. We are already at near record non-war deficits. What, as you look across at Japan, the Japanese bond market, obviously there has been some attention over there, right? Rightly, what is playing out there as, and is that a canary that we can learn some lessons from?

[00:47:30]Julian Brigden: Really good. It is a, that is a really good question and I really hate it when people say, and that is a really good question because everyone seems to start their response with that. But that actually is a good question, Adam, because that was on actually our morning debate this morning, internally.

And so the reason why that is an important question is historically, Japanese money flows are absolutely pivotal to what happens in global markets because they are very large savers, and they start to shift, that is important. I think historically, this would be a very bad sign, this unhinging of the long end of the Japanese bond market.

I think it is important, but I am less immediately concerned, and let me explain why. The problem that you have got in Japan is that you have got a Bank of Japan (BOJ), which is just not raising rates enough to protect long-term investors. You look at Japanese inflation, it is 3.5 percent. Rates are pathetically low compared to that, and what is been priced into the JGB curve in, as with the BOJ saying, we are going to continue to raise rates. You have got this very little priced into the sort of front belly, front end of the JGB curve.

So you are really not being protected by the BOJ when it comes to the long end. In addition, have a really screwy political setup at the moment with basically a minority government, which is just having to hand out the TV to you, and the TV to you, and the TV to you trade, to keep the government together with spending promises, and that is obviously a problem. But that set up is what it is.

Now if I thought that Japanese private money was all of a sudden going to say, oh, I am really enticed by 4 percent long-term 30 year yields in Japan, going to sell my U.S. Treasuries and buy those, I would be more worried. I just do not think Japanese investors want to buy, like most private investors are waking up to the reality, I just do not want to buy duration, period, end of story.

So I do not know whether we are gonna see that switch flow. So they sell us to buy Japan. I think if the BOJ were to get religion and to start to raise rates more aggressively, that might be.

[00:50:09]Adam Butler: So walk me through that process, because one thing I have always felt that is gets too little attention is that the last time there was a massive rate-rising cycle was in the 1970s when, late 1970s when, and early eighties when debt to GDP in most developed countries was in the 50, 60 percent range. And now we are in the U.S. what are we, 190 percent. In Japan, it is 300 percent.

[00:50:47]Julian Brigden: Yeah.

[00:50:50]Adam Butler: I hear people say that the BOJ needs to get ahead of it by raising rates. So they raise rates, they rise, they increase the funding rate for Japanese spending. Now most Japanese bonds are owned by either the BOJ or the postal bank or whatever it is called, right in Japan. And it is the same in the States.

If it is, it is very different to raise rates to disincentivize the private sector from lending and investing, when you have got very low deficits relative to the size of the economy. When the deficits are 200 percent of the economy, are you sympathetic to the view that maybe raising rates actually may be counterproductive and may actually amplify the inflation channel?

[00:51:51]Julian Brigden: So you are, you are, look, you are dealing in a much more complex set of, chess game here. You are playing three dimensional chess here, essentially. I am quite, mastered the nine dimensional chess that the president is supposed to play. But anyway, the three dimensional chess, or the two dimensional, three dimensional chess, I think, you do start to run into problems. So you are absolutely right.

Is there a sweet spot where the BOJ can raise rates? Now, I think in Japan it is a little different than net savers, right? So you actually boost income somewhat by raising rates, that you do enough that holds in bond market and prevents that point where you get that kind of accelerative meltdown in the long end, where the risk is then that you have to do something which then weakens the currency, which pushes up inflation. You have to come in and do yield curve control or YCC again, and then the currency lurch is lower. So I think you can end up in that quite nasty, vicious, and then the debt servicing gets wrong and it just, it gets very messy.

[00:53:04]Adam Butler: The other angle in Japan too, right, is that a big reason why people have not been as concerned about Japanese yen debt is because they have such large dollar reserves. But if there is a concern that the value of the dollar reserves are going to decline at the same time that Japan enters an inflationary cycle at 200 percent debt to GDP, I feel like the BOJ is in a box. Raising rates stimulates an economy that is already overheated.

[00:53:37]Julian Brigden: They also own a lot of their own debt. They eat what they kill as a current account surplus country.

[00:53:43]Adam Butler: But, in that respect, you are raising rates. That amplifies the extent to which higher rates feeds back into stimulus in the economy, right? You are raising rates.

[00:53:53]Julian Brigden: To some degree. Yes. Look, it is, I, the way I liken this is the higher your debt goes, to the GDP deficits, whatever, that essentially you are trying to walk a tightrope, right? But you are doing it at higher and higher and higher level. So maybe that this is that, I think it was a French or a Swiss guy that walked across Niagara Falls or walked between the Twin Towers before that tragic event, 9/11. That is what you are trying to do.

[00:54:27]Adam Butler: And you have fewer degrees of freedom available to you to solve the…

[00:54:32]Julian Brigden: Yes. It is a really precarious setup. But I think Japan, in a way, is luckier than the U.S., because she is not dependent as much on the kindness of strangers. We have to be very careful as the reserve provider, that this is how reserve systems end, because you lose that faith.

I think, I wrote, a couple of months ago, and I expect to get a few months ago, I expect to get a lot more pushback on this, could be reaching peak packs of Americana. And the analogy that we used was the late sixties in the U.K., which may seem bizarre because the U.K. had not been the reserve currency for quite some time. But what was interesting is, coming out of the second World War, the U.K. was on the winning side. It had an enormous military, had a, it was a global power, but it was bankrupt. It had all these sort of vestiges of empire, but it just could not fund them.

So in 1968, the U.K. government bites the bullet and they make this announcement that they are pulling all U.K. military forces east of Suez, which means that we left the Pacific Ocean and the Indian Ocean unpatrolled by the Royal Navy. The problem was, is that three of the biggest holders of Sterling Reserves and they hold, held basically all their reserves in the, what was called the Sterling area, India, Canada, and New Zealand.

And so as they started to diverge, because they were no longer getting that military protection, and they would have to chummy up to the U.S., that money starts to leave, and this is where this unique impact of that reserve status comes into play, because as a reserve provider, you have been used to, for a long time, having subsidized current bond markets, essentially. And you have been used to having that usually quite strong currency or stronger than typically is. And so, as those start to adjust, you tend to get higher inflation.

You tend to get higher funding costs, which if you are in a weak fiscal situation, which the U.K. was, just exacerbate. And I think people forget how quickly things can spiral out of control, where your deficits are getting more outta control. Your public spending is getting more stressed. You are less able to provide that military coverage. You are less, you’re crowding out, that classic term, which we have not heard since the seventies, but I suspect is coming back, where government, you got the need to fund government, basically squeezes out the room available for the private sector to fund itself, right? And so, you crowd out private investment, so your capital expenditure is low, so your productivity is low.

So for an extended period of time, the U.K., basically went through a period where its inflation was higher than its peers. Its currency was weaker than its peers and its growth, to a, lower than its peers. And so the end result was, and this may, some of your younger viewers, even in the U.K., the U.K. in the end had to go cap in hand to the International Monetary Fund (IMF) for a bailout, right? So I think this look, do not get me wrong, I think the Japan thing is important, I think, but I think there is some dynamics there that are different to when you make that comparison to the U.S., because the U.S. is the reserve currency and that means the whole world owns your assets. That is how the reserve works.

[00:58:15]Adam Butler: But it is a critical difference too between the 1968 British situation and the current situation is, that we, they were operating under a fixed exchange regime, right? So you do not really get crowding out in a floating exchange regime because, the central banks and treasuries have a lot more flexibility about how they decide to fund it, right?

[00:58:44]Julian Brigden: Okay, so yes, but you are talking about essentially get to a point, we just talked about what is the base case essentially the, you pushed yields to a point where it is unsustainable, and we are questioning the solvency of the U.S. government. And that is a point called fiscal dominance, that the central bank then has to cross this Rubicon and it is a Rubicon, it is something they will not do lightly.

[00:59:20]Adam Butler: Yep.

[00:59:20]Julian Brigden: It is an abandonment of independent central banking, right? They hand the keys to government, because they move from targeting inflation employment to solving for the solvency of their boss. And I think we can get there, but that then triggers a whole, all of those other things that we talked about, right, where you end up with a significantly weaker dollar, arguably right, unless you are doing it in parallel with everyone else. Significantly weaker dollar, higher inflation. So you, to the same places as, the U.K. had under a more fixed exchange rate basis. It just takes you a little.

[01:00:08]Adam Butler: Yeah. And the mechanics are a little bit different, but I, yeah, I generally agree. Speaking of funding the deficit, what do you make, and also, I was laughing earlier, when we were talking about oiling the machinery. Speaking of oiling the machinery, what do you make of the way that the Saudis and the Emiratis have been oiling Trump’s machinery over the last few weeks in the ways…

[01:00:37]Julian Brigden: I am not, but I am not going there. If you believe about those tapes from Moscow, the, look, I look, clearly the President wants to achieve certain set of a certain outcome. Conceptually, let us, I am worried he is walked back, right? We have seen that pivot, at least the objective is at face value to strengthen U.S. manufacturing and to strengthen the inherent economic underpinnings of growth of the U.S. economy. And so those investments are important. Are they playing to an ego? Absolutely. Will they happen? We will see. Will they fund them out of U.S. Treasury holdings that they have, right? They are just gonna get a big tax break on them. So it is maybe not the worst thing.

Net is this. Suddenly we are going to spend, Kuwaitis going to divert half a trillion dollars of money from their U.S., from their European bond holdings, and go and build a data center or whatever the heck, I track of, everyone was promising to do. Are they just going to say, we are just going to take that half a trillion we have got sitting in existing U.S. assets, and we will direct it to that? I suspect it is the latter, not the…

[01:02:08]Adam Butler: A latter. Yeah. Yeah.

[01:02:10]Julian Brigden: So.

[01:02:10]Richard Laterman: All right.

[01:02:11]Julian Brigden: Are we better off? We will create some manufacturing jobs, which is great, but if we lose half a trillion dollars from the Treasury market, when we pretty clear we bloody need it,…

[01:02:25]Adam Butler: Yeah.

[01:02:25]Richard Laterman: I do not know. To what extent do you follow the non-economic elements of geopolitics, but do you think that there might be a defense element to this, in the sense that they are trying to bring a lot of these other Arab nations into the Abraham Accords, and perhaps there is an element to this where you are trying to tighten economic ties, order to this, the diplomatic element of it.

[01:02:58]Julian Brigden: So look, I, like I said before, typically at this point Triffin’s Dilemma, you, that is it, right? Peak Imperial Power and so on and so forth. Now, the U.S. does not want that to happen. They want to try and maintain that status. I am not convinced they can totally, but there are definitely areas of focus.

So the U.S. made it pretty clear after they have stuck it to the Europeans or they read the riot act to the Europeans and said, we are not here, right? Last weekend, U.S. NATO ambassadors said we are starting talks now as to when we are withdrawing troops from Europe, right? So that is ongoing. They are out of Europe right.

I think part of that reorg, Southeast Asia, clearly, greatest adversary, China. You got to keep those forces, build those forces up, arguably, and the Gulf, right? So I think there are, there is a change in the mix. So yes, absolutely, I think we are reemphasizing those areas that we want to place our emphasis.

[01:04:15]Richard Laterman: And to be clear, when you say the U.S. wants to retain their Hegemonic exceptional status, that is more on the economic front, and Treasuries as reserve currency, reserve asset, less so on these geopolitical and defense unipolarity because they, your point there, retrenching from Europe, they are trying to, I think one of the few bipartisan agreements is that, from an electoral standpoint, no one wants more wars.

And so there is this element of, the U.S. needs to spend so much treasure, and so much blood in order to be the global sheriff, and that seems to be, in Trump’s agenda that the U.S. will no longer be that player, and everybody else needs to step up. So…

[01:05:11]Julian Brigden: So the tragic historical reality of that is when you tend to move to a unipolar world, there are inherently more unstable, you end up spilling more blood. But I guess, a multipolar, yeah, sorry, it becomes increasingly unstable.

There is an interesting video going around on TikTok about George Bush in 2011, to talk about exactly that thing, and the concerns he has about isolation tendencies in the U.S., and pulling back, and so on and so forth. And that being, if you look back at the twenties, that was just a bloody mistake, okay?

But that, to go back to your original point about wanting to maintain that peak reserve status and so on and so forth, and that letting that military thing go, reorientate when those things are inexorably linked, right, there is, you cannot divide those. We are able to be the largest military because we have the funding to be the largest military. The U.K. was able to be the largest military heading into the Second World War, coming out of the First World, but heading into the First World War, the Royal Navy was three times, was as large as the next three navys put together.

That was the value proposition if you want. And so this is, they are inexorably linked. So if the U.S. is saying, which it appears to be, that we are not the global policemen anymore, certainly not when it comes to Europe and other bits of the world, that we are not that interested. Yeah. We are interested in the Gulf. Yeah. We are interested in the Middle East, sorry, in the Far East, in Asia, okay? But then you are moving to that increasingly multipolar world, because Europe has to become its own pole, cannot be covered by that umbrella anymore.

Then the implications for the flow of funds that have been coming from Europe back into the U.S., are inordinately profound, particularly since in the last five years, Europe has been by far the largest funder of U.S. exceptionalism, AKA exceptional spending, right?

[01:07:41]Richard Laterman: We could be seeing though a substitution effect here, where the Gulf countries step up. Yet to be seen whether these headlines actually pan out, and all these investments materialize. But it seems like you can, you definitely cannot be the global sheriff without being the global reserve currency, and have the global reserve asset, but it seems like the opposite could be true. You might still retain some hegemonic status financially on a global status, but retrench from the global stage, the sheriff, and perhaps, do you disagree?

[01:08:17]Julian Brigden: I don’t.

[01:08:17]Richard Laterman: Okay.

[01:08:18]Julian Brigden: I do not think you can. I think, do not get me wrong, the U.S. equity market could remain the biggest equity market for a very long time. All of these sorts of things.

[01:08:26]Adam Butler: Nature abhors a vacuum.

[01:08:27]Julian Brigden: Yeah. I mean, I, but I do not believe that is the case, right? I think if we, truly the risk is, we truly are and we are not, but the risk is we go through this period where we go through this adjustment phase, right, where even if it is just Europe that just, we adjust to, financially, right? The consequences of that are enormous, because, where we are starting from, look, if we were trying to rewrite the, right the ship and we were not sitting at U.S. equities versus the rest of the world, at four standard deviations from the mean, using, basically, years worth of data.

And just to put that into perspective, ladies and gents, you know, you are talking about that event should occur, and I am being generous here because I am assuming both ends of the barbell, not just one tail, two, in one day every 43 years. If we were not starting at the extremes, if we were not starting with foreigners having net holding of U.S., excess of 26 trillion dollars, would think this process could be a lot smoother?

[01:09:42]Richard Laterman: It’s the extreme position that we find ourselves in today that…

[01:09:47]Julian Brigden: We have.

[01:09:47]Richard Laterman: Even if at the margin, even if the margin…

[01:09:49]Julian Brigden: Yeah. We have adopted an extreme political approach. Maybe we are trying to cool that down a little bit, right?

[01:09:58]Richard Laterman: All right.

[01:09:58]Julian Brigden: It’s extreme. We went into this, assuming that we held all the cards right, and our attitude was very much like, F U right, to the whole world. And it is possible that we may hold some of the strongest cards, but to assume that we hold all the cards, when basically the rest of the world is our banker, I think that is, that is a little dangerous. And I think, I truly, I have got a lot of respect for certain people who work in the administration, and I think they truly thought that they could take the pain upfront, and that we would get a little adjustment period.

Maybe we would get a correction in stocks. Maybe we would end up with a slight recession, but come like of Q3, Q4 of this year, be emerging into reindustrialization, and strong capital expenditure growth, and a rebound in equities, and we would have got yields lower. So, housing would be recovering and we would be able to roll out, return out some of our debt. I truly think that is what they thought.

And then what they discovered was, if you look, if you undermine the dollar and everyone is long U.S. assets, then bond yields do not necessarily fall. They rise. And I think that is the thing that has really thrown them a curve ball. And I think now they are going like, maybe we just punt this to the next, the classic U.S. thing, where really we only have six to nine months where we can do anything before we have to consider the next election.

[01:11:42]Adam Butler: I forget, who was it? It, was it Kissinger that said that, America always does the right thing once they have explored all of their options.

[01:11:49]Richard Laterman: I think Churchill, but.

[01:11:51]Julian Brigden: Yeah. Exactly. Churchill. But look, it is, that is where I think we are. I think we are just at the beginning of, I think this is, and I was on the phone to a big real money account, a number of, a couple of, two or three months ago, and I said, it was this classic sort of Zoom call where there is 30 people on the Zoom call and me, and I was looking at it and it was this, there was one older person, 38, 40 maybe, and then this sort of United Nations are pretty young things, super bright kids who have obviously got a Yale and Harvard and blah, blah, blah, blah, blah.

I got off this call and I said, if I can leave you with one thing, is that while most of you have probably only been in the market since the global financial crisis, so you have only ever seen stocks go up, you have only U.S. stocks outperform. You have only ever seen the dollar go up. What the Trump administration is trying to do, I think you may look back 30 years time at the end of your career, and you may say this was a period in history, like this was truly a transformative event.

And in that scenario, what you do not do is assume that you buy something at one standard deviation, divergence from the mean. You back up the truck at two because this could go to a five or a six or a seven standard deviation divergence, and we could just be at a major total reset period, right, where for the next five to eight years, we end up with a weak dollar, and U.S. assets underperform in foreign currency terms.

And that is important, guys, right? Even if you are sitting here just going, I am a U.S. investor, I do not care. You will, because your purchasing power deteriorates. And if you are a wealthy individual, you do not really want to be going to, not being able to afford to go to Europe, right, or buy French wine or buy that German car, right? You know, so these things are important, but that is what I think. I think we are at one of those periods in history. Could they, are backing off and could they punch it for nine months? Maybe. Maybe.

But it just looks to me like we have broken Humpty Dumpty. The money is beginning to hedge up its dollar exposure. The foreign money hedge up its dollar exposure, the margins, get back to benchmark in U.S. assets. But that dollar is really important, because if they, even if they just get back to benchmark and they are not hedged, they are going to find out they are going to be losing money.

And that is when you start to go under benchmark or you get redemptions in retirement funds from Europeans who go, what I am down in my Nvidia holdings in Euros, right? These things I think are just huge.

I just think we are at this point like, I am not gonna look back at the end of my career because I will be dead. At some point, I think people will look back at this and say, wow, this was one of those periods in history.

[01:15:15]Richard Laterman: Because we have not yet had the proper liquidation phase of this transition, as we were discussing a moment ago, How, where are the biggest vulnerabilities, from an asset class perspective? You see it, it sounds like possibly the Treasury market, but maybe U.S. bonds as a whole. But I find it hard to believe that they would capitulate and undergo a massive bear market without U.S. equities also suffering.

So are those the two major asset classes that you see suffering the most in this liquidation? And where would be the opportunities in the second phase once the sell off happens, and opportunities start to arise from an allocation?

[01:16:01]Julian Brigden: I think U.S. asset underperformance, I think right in other currencies, I think that is what I see. I see U.S. bonds, you are absolutely right. Do I think, U.S. 10 year yields are getting 7 percent? No. Do they go to 5.5, entirely possible. I think that is actually, there is a neck line on 10 year Treasuries right here. And if we break through that, I think it is, 5.25 is the target, so another a 75 basis points.

I think U.S. equities underperform in euro terms, in yen terms, in gold terms, in everything else, right? And so to me, I want to be, since I want to preserve my overall net purchasing power, wealth, I want to sell U.S. assets, right, that our dollar, that do well when the dollar is strong, right? And historically, that is, if you look at it on a sectoral basis, it is obviously the broad U.S. equity market, but it is healthcare, financials, consumer discretionaries, are the worst performing sectors if you go and look at them from 2002 to 2008 when the dollar was weak, right? The best performing sectors are the stuff that no one really owns,; tends to be precious metal miners, minings, metals, minerals, energy, right?

[01:17:29]Richard Laterman: Related sectors.

[01:17:30]Julian Brigden: Related. And then, emerging markets typically do quite well at, as I said, at that point the Fed starts to cut, and that nice liquidity goes into the…

[01:17:38]Richard Laterman: Also a commodity play. When you think about it…

[01:17:41]Julian Brigden: I mean it is very much a weak dollar cycle play. I would, when I was doing Real Vision with Raol, we used to joke if you can get the dollar right, then you just go and buy emerging markets and commodities and go and sit on the beach for five years.

[01:17:59]Adam Butler: That was the ’02-’07 playbook.

[01:18:02]Julian Brigden: Absolutely. Absolutely. And I think it is possible we end up in that environment again. I just do not think it is yet, I still think we are in that, if I go, is this the nice bit or the nasty bit of that capital rotation? I am still that we are in that nasty phase, so I think you have to be bloody careful.

[01:18:23]Richard Laterman: What are the catalysts that you are looking for for the nasty bit to ensue?

[01:18:29]Julian Brigden: Look, it could be, if I worry that, as I said, we have pivoted from this sort of Trump 2.0 agenda, this highly laudable agenda to onshore, the lot of the middle class, reduce the twin deficits, to much more of a 1.0, eh, who cares? I am a, I am just a good guy. Stocks go…

In that situation, you pivot from being worried about the immediate worries around the U.S. equity market, right? In nominal terms, not in foreign currency terms, but media concerns around that, to being worried about the Treasury market, right? You cannot have a country that just continues to spend like we do, where there is unquestionably inflation pressures coming through from tariffs, where we have 4 percent and change unemployment, and think that we are going to accelerate growth without inflation.

That is just a joke, right? An absolute joke. We have never successfully reaccelerated growth from the current levels of unemployment, without inflation. We tried it in the late sixties. It was a bloody disaster. It was the beginning of the trend that laid us through into the seventies inflation, that started in really 1965, the foothills of that trade.

So I think that is where I, right here, right now, I am focused on that Treasury market and the dollar, because the dollar, if we are seeing another leg lower in the dollar, and we saw a big move in dollar … overnight, it looks like dollar stock is going lower. Again, I am worried dollar knock is breaking lower. So dollar against to Norwegian kroner, I am watching dollar/CAD, huge exposure to U.S. assets, and I think it is the next Taiwan where these guys, where the Maple Hs, they are called the big real money accounts in Canada, I bet they have not hedged anything, and, they have got 12 percent of GDP and U.S. assets. I think good luck, they try and start hedging all that stuff.

So think I am looking at the Treasury market, and I am looking at the dollar, because the dollar will just, if the dollar starts to weaken, maybe U.S. equities hold up here, and they do not go down in dollar terms. But like I said, I do not wanna sit here in five years time and have a U.S. equity market that is at, 7,000 and yet the dollar is 50 percent lower.

[01:21:18]Adam Butler: Yeah, in Canada too, you have got a accelerating crack in home prices and impending, potential major capital call where people with a lot of home-based wealth who are a little bit over-leveraged and also have, you know, retirement properties in the U.S. are going to be forced to liquidate and bring that capital home. You have also got a cracking housing market in the U.S. on just unbelievable unaffordability at these top borrowing rates.

[01:21:55]Julian Brigden: They probably own a lot of that stuff.

[01:21:57]Adam Butler: Yep.

[01:21:58]Julian Brigden: In Florida and stuff on overbuilt, I…

[01:22:01]Adam Butler: Yeah.

[01:22:01]Richard Laterman: Yeah. Canada in particular, unlike the U.S. you have to refinance every five years. You are not allowed to lock your rate for 25, 30 years like you do in the U.S., which is mind boggling to both Americans and Canadians when they, that the other current, other country has.

[01:22:19]Julian Brigden: The way this bond market is going in the U.S. we are going to be doing the same thing. You are not gonna get a mortgage beyond five years if this thing keeps going because you are not gonna be able to afford it.

[01:22:28]Adam Butler: Yeah. and then of course, we have got the Japanese. I think the Japanese bond market is gonna be interesting to watch too, here in…

[01:22:38]Julian Brigden: I think there is, we are in a, I have been saying since 2016. Covid, obviously was the exception but the demographics asset purchases. So those people who are working and saving to their retirement, right, peaked in 2016. That was the low in global bond yields. That is when we absent Covid, that was the low in global bond yields.

And you could mask it with QE and yield curve control for a few years. But the structural trend from here on out is, as people of my age, you start to retire, right? Is to go, okay, I will just start living off my income, my savings, right? And so you just divest those savings, and that is when assets go down. They do not go up. And that is going to create a lot of problems for a world which is going into it.

If we were going into it with debt to GDP ratios of 20 percent or stuff like that, then we would be like, yeah, government can fill the gap. They can, they can do this. That is the nature of Sod’s Law, right? It is going to…

[01:23:52]Richard Laterman: Anything else?

[01:23:53]Julian Brigden: Though, great for macro.

[01:23:56]Richard Laterman: Any other asset?

[01:23:57]Julian Brigden: My retirement.

[01:24:01]Richard Laterman: That we have not touched on across the major jurisdictions or asset classes that are fly under the radar that you have spotted as potential asymmetric opportunities.

[01:24:14]Julian Brigden: So I quite, I have been toying around with some of these Latin American currencies and the market, the equity markets in those currencies are quite, I do quite like those. I am watching things like, one of my clients asked me, what is your bottom drawer trade? And I was like, I really want to own Vale, the Brazilian mining Company, in Brazilian real right.

[01:24:40]Richard Laterman: I have not heard that in a while. Holy, I am from Brazil originally.

[01:24:44]Julian Brigden: Yeah, so I wanna own that and, I have been toying around with Japanese banks. I think those look pretty cheap in dollar, in yen terms. I will take the currency risk, because I want to see that. And so I, think those are it. I really want to buy silver. I am like, I am gagging, I am so gagging to buy silver, but I cannot because I still think we are in that nasty rotation phase. And it is quite hard even, me, to sit there with a short S&P position against it.

[01:25:27]Richard Laterman: Yeah. Okay.

[01:25:29]Julian Brigden: I think, look, the only other thing I would say is I, what is gonna determine the next leg down I think, is at what point we get that capitulation trade. Most of this rally that we have seen in U.S. stocks has been either systematic vol, sellers, risk parity guys re-leveraging, CTAs getting long, and then U.S. retail, right, so the…

[01:25:59]Adam Butler: Is has started to look abroad, start buying EV and emerging. Oh, I was going to…

[01:26:06]Julian Brigden: …heritage, right? Sacrilege, right? I do not know, in heresy, right? I do not know whether that is, I hadn’t, I know that they, there was something this morning that they have lightened up a little bit on some of their positions. So I, look, until those guys capitulate, that is to me, the big capitulation event.

Do not, we targeted, we were short stocks in November, December, and advertised and advocated that to our retail clients. It was quite hard to construct it from a professional institutional perspective, because just the risk/rewards were quite tough to do, but we advocated 5,000 as our sort of initial targets, and we got down to those levels. We advocated closing that.

Now, I did not go long, but I did not go long because I just, I write research and I cannot all of a sudden go, I am short, I am long, I am short, I am long, I am short, I am long. But within our trading, with our alpha capture book that we run, we can do stuff like that.

And so we are now looking at, to build up the short dollar position again, the short Treasury position again, the short stock position again, but cautious that we will, and we will build into those.

[01:27:30]Adam Butler: Phenomenal. As usual, an unbelievably informative chat.

[01:27:37]Julian Brigden: Thank you.

[01:27:37]Richard Laterman: Yeah, this….

[01:27:37]Adam Butler: Julian. Thanks man.

[01:27:39]Julian Brigden: Pleasure.

[01:27:42]Adam Butler: Again, for those who tuned in a little late, this is the great Julian Brigden, founder and president at MI2 Partners and it is always great to have you on Julian. Thanks again. And,

[01:27:57]Julian Brigden: Richard, now it has been a pleasure.

[01:27:59]Richard Laterman: Look.

[01:28:00]Adam Butler: All right,

[01:28:00]Richard Laterman: One. Thanks.

[01:28:02]Rodrigo Gordillo: I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we are asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends if you find what we are doing useful.