“The Dollar Gets Annihilated” | Julian Brigden & Jonny Matthews on Fiscal Dominance, Secular Bond Bear Market, and Outlook on Rates & Tariffs
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We've got a very special conversation with Julian Brigden and veteran macro trader, Johnny Matthews. This is originally recorded for Julian's research service, MacroCapture, a trusted research partner for Monetary Matters. We aired this for MacroCapture clients first and are now releasing this to Monetary Matters feed several days later.

Monetary Matters listeners can get discounted access to MacroCapture by clicking the link in the description and using code MM10 for annual membership and MM10Q for quarterly membership. Let's get into it. The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. Thank you. Let's close this door.

We've got a very special conversation today. I'm joined by Julian Brigden of MI2 Partners and Johnny Matthews of Super Macro, both veterans of Macro. They know each other and we've got a lot to talk about. This conversation actually is going to be for MacroCapture, Julian Brigden's research product, and later we'll release it to the

the Monetary Matters broad audience. And for people who want to get 10% discount to MacroCapture, they can click the link in the description. Julian, Johnny, it is so good to have you both here. How are you thinking about this macro situation? Julian, let's start with you. This is a very interesting time, Jack. So we...

Came into the beginning of the year all very enthusiastic about U.S. assets and U.S. equities in particular on this assumption that we were going to have the repeat of the first Trump term in office. So bullish for stocks, bearish for bonds, bullish for the dollar. Call that Trump 1.0.

We'd been warning our clients for a time that the actual agenda of the Trump administration, or certainly the 2.0 Trump administration, was far less bullish for US stocks than people understood. And so we had this sort of swoon as we saw tariffs with this objective of right-sizing the trade deficit, addressing the wealth discrepancy in the middle class and sort of Wall Street, that sort of stuff. And then...

Now we're at this point where a lot of people believe that we're switching back to 1.0, that we've got this latest acronym that's doing the rounds in the equity market, TACO.

Trump always chickens out. And this idea that essentially we stared over the precipice of an equity market that was down 20% and he just can't take the pain. So now we're switching back to deficit spending, good time, Trump 1.0. And so I think that's where we stand, Jack. I think my personal view and what I'm hearing from my policy contacts is it's not as clear cut as that.

Once we get this budget out of the way, that we could switch back to those, or we probably will switch back to that trade agenda. Right here, right now, we're playing the sort of good time Trump. And...

If Trump 2.0 was bad for stocks, Trump 1.0 is bad for bonds. And so we keep playing between these two. So we've gone from selling stocks to now selling bonds again because we've got an uncontrolled fiscal deficit. We don't care about that. Even Elon Musk came out today and said, yeah, you know, I'm a bit not happy about this budget because it's unwinding what we tried to do with Doge. And he's absolutely right.

And, you know, so I think we're in this game where we're trying to figure out which way this cycle is going to break. I think the US ends up being the big loser because I think you're just creating more and more uncertainty, Jack. And I think in a world which I fundamentally believe the world is

massively overweight US assets. I think this is going to be problematic, certainly for the dollar, which is one of our bigger plays. Johnny, how are you thinking about this? I was more optimistic at the start of this year because Trump came into power with an incredible economic inheritance. GDP growth, 3%, consistently quarter after quarter, full employment, record high household wealth, inflation coming down to target,

and just tremendous economic momentum. And if it ain't broke, don't fix it. So I thought, I was hopeful that perhaps he'd do something more pragmatic, maybe a kind of 10% tariff rate across the board, which the market could have accepted. I think the economy would have been okay with that. And it would have raised a healthy amount of revenue to perhaps close the deficit, go some way to closing the deficit.

But instead, what we've had is tremendous economic uncertainty created by these tariffs that have been these ridiculous tariff levels that were put in place and then rolled back when the market threw its toys out the pram. And we've had that. We've had two episodes of that.

And now as far as businesses are concerned, I think it's very difficult to do any proper capex investment planning or to put in place sensible hiring plans because you just don't know what the eventual tariff rate will be. And not only that, whatever it is, if it's just some kind of crazy level, the next president could easily just rip it all up anyway. It's very difficult for businesses to make long term plans.

That said, that said, you know, if the tariffs stay roughly as they are, with the 10% baseline tariff, 30% on China, 25% on aluminium and steel products, that's a blended average effective tariff rate of around 16%. And like I was saying, and it's not just my estimate, I underestimated, but Fed estimates that

you can trace around 10% of total consumption to imported products. So that makes the math quite easy. If you've got a 16% average effective tariff rate, it's affecting 10% of consumption. That will lift prices by 1.6%. The economy can cope with that. If it's just a 1.6% price hike, the economy can cope and survive.

What he can't cope with is the uncertainty. I think the on and off tariff, the ridiculous tariff threats. And as soon as things start to settle down, Trump throws in another hand grenade, blows everything up and sets things off again. So I think the next two or three months will be critical to determining how this year plays out. I'm optimistic, but a bit pessimistic.

you know, with significant concerns. Right now it's 10% is the baseline tariff, 30% on China, 25% on aluminium and steel products. That I think we can cope with if you assume that you can trace just 10% of total consumption to imported products. Now you think it's a higher percentage. Fed studies show it's 10 or 11%.

If it's that kind of percentage, you're talking 10% of total consumption and a 16% average effective tariff rate, that would put the price level up by 1.6 percentage points. I agree. That's not going to kill. No, but that's like, you know, add that to a bond market which trades like a piece of fucking bog paper, right? And...

You know, it does. I'm in agreement with you there. I think we're sliding inexorably into fiscal dominance. And when they try and step in and cap this out, the dollar gets fucking annihilated. I think we need to be clear. Foreigners' exposure, Johnny, is off the fucking charts. Yeah, I mean, let's be clear when you're talking about fiscal dominance. And I agree here.

And it's not just the US, it's the UK as well, and of course Japan. Fiscal dominance is where the treasuries issue shorter and shorter term paper because it's cheaper and the central bank keeps interest rates low to keep the borrowing costs down. And you end up the way emerging markets end up that try this kind of trick. It's okay for a short period and then the market realizes and nobody wants to hold the long term paper.

And I think there is a danger. We're seeing the yield curves at the long end becoming unanchored, especially in Japan. And it's feeding through to gilts and treasuries. Look, I think the Japanese market has got some very specific issues there, right? We know there's no fiscal rectitude there. They've got a government, it's a coalition government. They're contemplating tax cuts heading into the upper house elections. You know, exactly the wrong thing that they should be doing. They've got a central bank that is not protecting tax.

bond investors. There's just no buying interest, Johnny, to your point. No, no, I agree. And the BOJ owns half of all the GPs. The setup's not vastly dissimilar to the US. We've got no fiscal rectitude. We have a central bank that is contemplating cuts where they probably should be contemplating hikes. It depends. I think to your point, Julian, if you're right that the tariffs really go through the roof on China,

We are going to get quite a significant economic hit, in which case unemployment will go up. And as soon as the labor market starts to crack, they'll ease again. They'll ease again. I agree. So Julian, you're hearing some bigger numbers from your policy contacts about higher tariffs, which the 90 day exemption is going to end in July and then later for China. But let's just say that we have what you call Trump 1.0, where it's quite stimulative and

not very intense. So the stock market will like that. You say the bond market won't like that. That's what we've been seeing in the market. So in that more benign scenario, Johnny laid out his forecast of prices going up a little over 1%. How are you assessing the economic and market impacts of a Trump 1.0? The risk point in that situation, Jack, is the bond market. That's the nerve that you can tweak

I would agree with Johnny. I think it's inflationary. You know exactly how much we will see. I am hearing higher numbers potentially as the end game on this. I think it's important unless we really are just giving up and rolling back any of the president's long term objectives, all of which I think are highly important.

laudable. I think we could argue about the execution, but improving a lot of the US middle class, bringing back manufacturing, ultimately strengthening the US economy are all positives. But I do see them as inflationary. I think you can see it in some of the PMI indicators that I think you've seen

from US corporations, although they've all gone under the radar now, that they all intend to raise prices. I don't think there's a magnanimous bone or charitable bone in the US corporate body. They are going to do exactly what they did during COVID, where they essentially shoved their sticky little fist right down consumers' throats.

into their back pocket and took all the money out. I think they're going to do exactly the same this time. I think they're going to try and pass all of those pricing pieces on. The evidence from the 2017 tariffs was exactly that, that it was either borne by in US corporate margins or by the US consumer. And as Johnny said, these tariffs are going to end up as much bigger. So I think you have to look at that inflation threat. I'd probably put it a little bit higher, probably around

1.5% to 2% on core inflation. I think that's going to make it extraordinarily hard for the Fed to cut. I think when you look out at 2026, and if we do avoid really a hit to demand or an equity sell-off, then I think you can forget those rate cuts that are priced in for next year. My bigger concern comes around the long end of the bond market. And I do think that there are

This is a market that globally, to Johnny's point, is becoming increasingly dysfunctional. I think that global investors are finally waking up to something that we've been talking about really since 2016. Obviously, it got interrupted by COVID. We are in a structural bond bear market.

There is just a global insufficiency of savings. Most of those savings are controlled in other parts of the world. If you run a deficit, you're not saving. The US is spectacularly not saving and funding itself. And

That's just going to add to the problems I think the US faces in particular. It is alienating as, quote, their biggest adversary, China. And China is the biggest provider of global savings. Secondly,

the biggest exporter of capital is Germany. And you just told them that you're removing Pax Americana from Europe. You are apparently going to start withdrawing troops out from Europe at the end of this year. And I just think this leaves the US potentially scrambling around for funding at the long end of the bull market. Don't get me wrong, Japan's

got huge problems too. Their central bank is not defending bond investors. They're running rates way too easy. The Bank of England's got issues too. The only advantage that the UK has got is in a first-past-the-post system, they can impose, they can force

fiscal discipline to some degree. And that's just utterly absent in the US and Japan at the moment. So I think in that 1.0 scenario, Jack, it's the bond market

that is the only grown up in the room. And they will keep, as one of my colleagues likes to say, the beatings will continue until morale improves, until they basically enforce some discipline on the equity market. And Julia, your case that Trump 1.0, aka milder tariffs, is worse for the bond market. I think you're also saying that it's

more inflationary. So it's a little paradoxical because it was super high tariffs. It actually stops being inflationary and inflation could go down because no one's buying from China. Yes, exactly. Whereas a 30% tariff, people are still buying. They're just paying higher prices. So you think that the more mild Trump scenario is actually more inflationary. We can't forget as well, we got 4% unemployment and we've just killed immigration. So we've never expanded economic growth

with 4% unemployment and not gone straight back into inflation. When you re-accelerate growth, you're typically coming out of a recession and you've got 6%, 7%, 8%, 9% unemployment, not 4%. I mean, maybe AI will kick in, but it bloody better. Otherwise, we're going to run straight into higher wages instantly in 26. So it sounds like a note of agreement between you two is that you're both a little more worried about inflation than a recession, right, Johnny?

Absolutely. And actually more worried about the outlook for the fixed income markets, especially at the long end. We were, I don't think we captured this in the recording before we started, we were talking about fiscal dominance and the fact that these treasuries of Japan, of the UK and of the US, they are now shortening the maturity, the average maturity of the bonds that they're issuing.

Certainly the debt management office of the UK is over the next few months is going to shorten the average maturity. We know the US is issuing more bills than they previously used to. And in Japan, they're having discussions about reducing the amount of super long dated JGBs they're going to issue. But I want to put this in context. I want to put this in context because

15 years ago, we were all freaking out about Italy, about how Italy could leave the exit of the European Union. Their debt was unsustainable. Debt to GDP was out of control. Italy currently has a triple B plus rating. And let's put this into perspective. Italy's debt to GDP is 135% currently. The US, 125%. Italy's deficit, 3.4% last year.

US 6% and headed higher. Italy's bonds trade on a yield almost 100 basis points below US Treasuries. The 10-year Italy is 3.5%, something like that. And so the US has a problem where not only is the stock of debt much higher,

That stock was originally issued two years ago. The average interest rate on the outstanding stock of Treasury debt was 1.5%, 2%. Now the average interest rate is over 3% and creeping higher. As those bonds mature, the US is issuing new bonds with a four coupon.

And I've got a chart which hopefully we can show it, which has got lots of colors, but if you look at the red bars, they're the lowest bars. Yeah, I hope they come out in the same color and nobody's colorblind out there, but you can see the interest costs are going to eat up an ever larger share of fiscal outlays. On top of that, you have the major healthcare programs that are going to eat up an additional amount.

And if you squint, you can see the green bars at the top, which are discretionary spending categories, are taking a smaller and smaller percentage of total fiscal outlays. And this is the problem. The mandatory outlays in the U.S. are going to continue to increase. The fiscal police and the Republican Party have just gone AWOL. And now...

As Julian says, it's down to the bond markets to exert some discipline. I think people's investors expectations are anchored by that period after the financial crisis where growth was slow, inflation was super low, fixed income yields were super low.

expectations are anchored by that period. There is a cohort of traders who have known nothing else, super low bond yields. And so now when these yields get up towards 5%, oh, it's a great buying opportunity. But I think if, and it wouldn't surprise me, it would not surprise me at all, if growth holds up and inflation picks up and the Fed

doesn't cut, they may not even cut at all this year. But certainly, as far as I'm concerned, the first cut will not be before September, it may be December. And there is certainly a risk that we are now in a much higher interest rate regime. So both of you are pretty bearish on fixed income. You talked about, Johnny, the Fed funds rate, that's obviously the shorter part of the curve. Julian, talk to us about your views on the bond market. And okay, we get you're bearish, but are we going to take that

bear market in bonds to the next level? Because really the bear market in bonds was from 2021 to the fall/winter of 2022. That was the real move. And since then, we've huddled in this zone where if yields get to 3.85%, you sell bonds. And if they get to 5%, you buy them. Now at the 10-year is around 4.5%. Are you predicting we get to the next leg higher or we just go to that top end of the range once again? I think there's a couple of determinants here, Jack.

So I do think for those of you who have ever done it, maybe no one in the US has ever done it. If you've driven a car with a clutch, right, you're balancing the clutch and the accelerator here. And if stocks keep going up, then bonds have to take the pressure and vice versa. Right. So if we get a big correction in the equity market, maybe we can take some pressure off the bond market. We certainly can. So I think in terms of right here, right now, as I said, I'm most concerned about the bond market doesn't look like the equity market at all.

is backing off. And I think that raises that concern as to who's the adult in the room. Now, do we go to, are you essentially saying, are we going to six? And the answer is, I suspect not. I could see us going to five and a quarter is one of the technical targets that I've got in 10-year yields. I think that would be enough to hurt the equity market.

It certainly won't be doing many favours to the housing market at that point. And I think it's, so I think at that point we'll have to decide what happens, because I think there it will be down to policymakers, right? If they, I wouldn't be surprised to see potentially more intervention at that point.

Johnny's talked about dominance being the sort of being forced to issue a shorter duration in the bond market. But there's also another element where you can actually force the central bank to actually step in. And we saw that with the Liz Trust moment in the UK where the Bank of England was forced actually, he was tightening liquidity at the time, was forced to loosen liquidity. So you could, conceptually, if things got bad enough,

force the Fed's hand and force them to do either yield curve control or to do QE. I don't know whether five and a quarter is enough for that, but bad shit starts to happen, Jack, when you go, you start to slide down this route, right? You can, you put in all the best will in the world, push your bond yields up, the Fed comes in, they try to do something with liquidity to prevent an accident in the equity market or in general,

Then all of a sudden the dollar goes because they've printed again. You can create a very messy cycle quite quickly. So I'm not saying we're going there. I think as we move up to five and a quarter, if we do not get this equity back off in the autumn, as we get tougher on tariffs again, right?

I think there are lots of risks. I think there are really a lot of risks to US assets here in an environment where the whole world is long US assets still.

back to the show. Julian, you just make your bear case on US dollar assets. I've heard it before, macro capture clients have heard it before, but just for Johnny, and then I want to get Johnny's reaction and then you can ask each other questions. Yeah. So I think essentially we've been in this virtuous cycle that we refer to as US exceptions and really since kicked off a little bit in sort of 2011, but really accelerated in 2014. So in 2014, the dollar started to rise very aggressively as Europe and Japan moved into negative interest rates.

and the US actually tightened policy slightly. And the whole world just basically went, there's my money because it's the only place I'm going to be able to get a yield or a return. So that goes piling into dollars that then goes, gets invested into US assets.

US stocks and bonds start to outperform. And that has a sort of three pronged effect on the economy. So the first thing that happens is it actually boosts employment because we have this very screwed up relationship here in the US where basically the equity market leads the labor market by about six months. So as stocks rise, CEOs higher. It's very simple, right? And the second effect it has on the wealth effect. So you do this booming

Consumption, because the top 10% of consumers now are responsible for 48% of total consumption.

And then the third effect that it has is it tends to lead to a widening current account deficit and to some degree budget deficit would be running at the same time. And that the current account deficit certainly has to be funded all by foreigners. And currently it's running at 4% of GDP. So every single year they have to lend us 4% of GDP so that we can keep spending like drunken sailors.

Okay, so that you can go on a holiday to Greece, Jack, as we discovered you're about to do, right? How do they do that? They buy more and more assets. And that's exactly what they've done. And since that current account deficit since 2020, right, it's been going off since 2014. But it took a, this cycle took a material acceleration in 2020, because the current account deficit went from 400 billion a year to 1.2 trillion a year, so 4% of GDP.

And when you look at the inflection as to how that step up has been funded, it's been funded increasingly from Europe into equities. There's a story running in Bloomberg about Asia, $7.5 trillion exposure to US assets. But Asia actually has been very conservative at increasing their exposure since 2020. It's only gone up like a trillion. Europe has exploded.

Okay, exploded. So now you have a situation where the whole world now owns a net, I think it's 26 trillion of US assets, 15 trillion increase since 2020. These are inordinate numbers, Jack. Most of that is on FX hedged. So think of it, you're a European, you are long the mag seven,

unhedged in dollars. So what could possibly go wrong? The Trump administration could force the dollar down. So you lose in euro terms. You'll sell your assets and the money will go home. Number two, US assets, US stocks could turn out to be a bubble. Let's say this AI thing is a bubble.

your stocks go down, the money goes home. Or thirdly, we push the economy into recession, either because bond yields go up or because of the tariff impact or whatever, the current account deficit will naturally shrink in that situation and the money will go home. So we're starting this adjustment process, as I said, this objective of the Trump administration to get down that current account deficit to rebalance the trade situation.

Mechanically, that is just going to lead, if they deliver on that, to less money coming into the US, mechanically, right? Even if we end up with a structurally stronger economy, if the current account deficit shrinks, the capital account surplus, which is those foreigners funding that excess spending, shrinks too, so they buy fewer US assets. And unless Americans step up their savings rates,

US assets start to underperform and eventually the money will go home. And I think we're just starting from such extremes, Jack. I mean, absolute extreme outperformance of US assets that we can mess about here for another six months, nine months. But I just really struggle.

with the geopolitics that have been delivered by the Trump administration and what that I think is going to do structurally to the world, that unless we are on full row back, back to Trump 1.0, which will keep this game going, as I said, for another six months until the bond market blows up, that essentially we are at that tipping point when it comes to structurally being overweight US assets, which as I said, is a trade of a decade. I just want to make a couple of points. First of all,

as far as the US is concerned, productivity growth has really outstripped Europe and most parts of the world. It's been absolutely astonishing over the last four years. So in a way, the equity markets, perhaps you could say they're right to have outperformed the way they have. And as far as the trade deficit is concerned,

It's not that bad. It has been higher. It's something like 3% of GDP now. It has been as high as 6%, 4%. Okay, it's 4% now. You're right. It was 6%. It was 6% at the dot-com bubble high. Yeah. Right. Okay. We've had worse periods. Without having to absolutely slam on the brakes, this could be brought under better control. But I take your point that ultimately, if you're running a massive company,

trade deficit you end up with foreigners owning all your treasuries or some kind of us assets and ultimately you're in a situation where you've bought a load of stuff from abroad and the foreigners now own your equity market your fixed income market your real estate whatever and you're left with nothing and i think that is the objective of and the point of the stephen miran makes the

head of the Council of Economic Advisers, how you go about correcting things, I'm not sure. I think Trump's approach is taking a sledgehammer to a nut here. You don't need to do that. And as far as the dollar is concerned, as far as the dollar is concerned, I don't think it's the dirtiest shirt in the dirty laundry basket, if that's an expression. Other countries are other countries' currencies.

are almost equally bad. I don't think the UK is in such great shape. That Liz Trust moment a while ago, the long-dated bond yields are higher now than they were then. So we're not in great shape either. And we're struggling to get our fiscal deficit under control. I think we're at the point in the UK where

You can't really tax people that much more. You've got to start trimming back. You've got to start doing some spending cuts rather than just keeping increasing the tax rate. Johnny, do I take it from this that you're not a dollar bear? You're a dollar dollar still? I'm more of a fiat currency bear in

I'm that too mate, definitely. Yeah, so I don't know that you should pick on the dollar as being the worst thing there. And I think it's supportive of precious metals. It is in a way supportive of the equity markets. Because equity markets provide you some kind of protection from your currency being devalued, completely devalued. And that is why I think this year for the equity market is going to be more of the same where

the equity market ends up going nowhere, but with a lot of volatility as not an ideal place to invest because you're just going to get a lot of volatility and not fantastic returns.

And I'm not predicting the doom and gloom, the end of the world. But to your point, Julian, where 5%, 5% or 5.25% on the 10-year is capping yields. I think, of course, it has been within a trading range over the last year, which has made it difficult for macro funds. If you look at the performance of macro hedge funds, it's not great so far this year.

macro traders, myself included, we like to get on a big trend, a big new theme and really push it and press it for all it's worth. So I think we're looking for something that will trigger a breakout in the fixed income markets one way or another, either through the top end of the range or through the bottom end of the range. If somehow the economy goes into

a recession, if the tariffs get put up too high and it crushes demand, we go into a recession, then it's an opportunity to get the 10 year down below 4%. Or vice versa, perhaps if the tariffs are set just right and inflation really picks up, we have this gaping fiscal deficit, then that's an opportunity to get the yields beyond, well beyond 5%. And at the moment, the jury is still out. And I think for me, I've got quite light positions because

It's very easy to get chopped to pieces here. No, I would agree with you. I think the last few weeks have been quite brutal. We had a decent start to the year on our Alpha Capture stuff, and then the last couple of weeks have been quite brutal. I think where I would disagree, I think, is just on the dollar. I think the big thing for me, Johnny, is this just very large unhead exposure that the world has got. And I think in January and February, they discovered...

equity clients discovered FX again in the sort of way that I haven't seen, frankly, since the ERM crisis in Europe in the early 90s, where I was sitting on an FX desk back then. And I remember we basically ripped the eyes out of equity clients in the days that you could for the next two years because they were calling up and going, I need to do this trade in Mark Lira. Which side of the spread am I trading on? Thank you. We don't talk about market abuse anymore.

You're not allowed to do that. You weren't back then, it was great. I think people are discovering the risks inherent in being unhedged and overweight US assets, especially in the environment where the dollar was supposed to go when equities came off. And of course, it went down because the risk asset that we were all long was US equities, right? Not the other way around. So I do, I think the dollar is, and I also think the administration won't

to try and reduce the value of the dollar because they want to reduce this constant recycling of money that's been going in. And I think you probably agree with me that from a macro perspective, there's really not much more important than if the dollar does the dollar cycle and it's determined where you put your money, whether you put it into commodities, emerging markets or whether you go piling it into US growth stocks. And so I think to my mind, I honestly think if we if the Trump administration

three years from now could have a US equity market that had gone nowhere in dollar terms, a US bond yields that were down, right? But for foreigners, a US equity market that was down 30 or 40% because the currency declined, they would be very happy. But as I've said to my US money, wealth managers, right? Your job is in the name wealth management,

So you've just lost me 30 to 40% of my net worth if you have sat investing in US stocks that whole time. And I know a lot of people listening in will be in the US and they'll feel comfortable that, oh, look, the S&P is back to almost to the highs.

in a sort of currency normalized way, you've just underperformed 20%, 25% almost, Euro, right? The thing that I'm not sure about is which currency will be the dominant currency. I can see a slower process where the US loses some of its strength in favor of Euro, maybe Sterling.

but what i don't see happening is for this move away from the us as the reserve currency because oh no i don't i think you know this is yeah this is just the idea that the renminbi might take its place or some other kind of they've got to run a current account deficit and they run a great big current account services it's more than that you've got to have a fair judiciary with respect for property rights and the rule of law democracy helps

all these kind of things otherwise you've just got no chance of becoming the reserve currency so i think china russia all these countries not a chance in the foreseeable future and so then you're stuck with the problem i i can see that the euro can take a much more dominant role as in reserve managers portfolios

And against my better judgment, I've been surprised at recent statistics out of the UK. We seem to be doing okay. I find it quite staggering with the, honestly, I really, the increase in payroll taxes that have just, it's the equivalent of about a 13% increase in the amount of payroll taxes that employers have to pay in the UK. And I thought that would pretty much

put a really put a cap on labor demand and really slow pay growth but the most recent set of statistics show we're doing okay here in the UK things are picking up yeah I would say I'm definitely in your camp I don't see anyone replacing the dollar as the reserve currency I think could we move

over time to a sort of more multipolar kind of world where you hold a few more euros. If you're in Asia, you do hold some more renminbi. You do own maybe some more gold. You do own some Bitcoin, all that sort of stuff. But I'm not in that camp. Just because you're in the strong the dollar remains a reserve camp, I do want to stress to people, really nothing to do with does it fluctuate in value.

We've seen major cycles in the dollar in the past and major cycles are typically 40 to 50% declines. We saw 50% after Plaza, after the end of Bretton Woods, we saw 48% after Plaza, we saw 38% after the dot-com bubble. And that's what I think. We've been long overdue a dollar cycle. And when I look at just extreme positioning,

where I think the whole world is here with their money at a level which we've never seen before, Johnny, never seen before. I think that vulnerability is inherent. Could we kick the can down the road for another six months? Sure. But I think if you are not sitting contemplating how to, as a US citizen,

where you're going to retire here how to basically hedge your dollar exposure and out and make your and preserve the value of your wealth if the dollar declines 30 to 40 percent then you're not thinking logically because that's what the government wants right they want to make it that this Jack is your last trip to Greece mate because in three years time when you look at it you'll be like

Julian, that's a great point that the dollar being the reserve currency, the relevance of the dollar is very different from the level of the dollar. And you cited 1985, five years after that, 2000, 2008, all periods where the dollar was still the reserve currency and the dollar weakened a lot. Sorry, Johnny, you want to say something? Yeah. I mean, I go to the US quite a lot, quite frequently, and I'm always staggered at the cost of just a cup of coffee.

cup of coffee as a Starbucks really honestly and then you guys want a 20 tip on it as well yeah exactly but um I I think you know I don't think it's difficult the trading currencies it's difficult we like to get on a momentum trade and it's been there's been several occasions where we thought in the past few years where or certainly where I've thought we're going to see a strengthening in the Euro or strengthening in sterling and then it's faded

I think Julian's right. This could be it, but not in a one big sudden move. It could take quite some time for this thing to gather pace. And I do want to emphasize that the yen is also a currency where I think

there could be problems. I've put a chart, I sent you a revised chart pack, Jack. We'll put it up if you want, Johnny. We can't see it now, but we'll put it up for our audience. Yeah. Yeah. The final chart, if you can show that, this is the blue bars are the different countries' policy rates, and the red bars are CPI inflation in each country. And at the moment, Japan is on a par with the UK with a CPI rate of 3.5%. But

What you'll see if you glance at these bars, in every country except for Japan, the policy rate is way above the current inflation rate. And Japan has a policy rate of half a percent. The only country with a lower policy rate is Switzerland, where they have zero inflation. There's no inflation there at all.

And this is part of the reason why the log into the JGB curve is just becoming completely unanchored because you have this case of fiscal dominance effectively. The central bank is scared shitless about raising rates.

and what it will do to the government finances. But by not doing anything, it's already having the opposite impact. So I think the BOJ, they've got a choice. They can either hike rates, just grasp the nettle, or what they could do is just reinstate QE, just go in to support the non-market.

And then, yeah, exactly. Then you can really kiss the end goodnight. Yeah, but what's our fearless leader going to do on this side of the pond if Dolly ends at 180? Yeah, that's a very fair point. I think they're really caught between a rock and a hard place, mate. I mean, I really, really think they are caught between a rock and a hard place. Because I totally agree with you, they...

They talk tough, the BOJ, right? But the bond market doesn't believe them. Because when you look at three-year JGB yields, right, they've said we're going to raise 25 basis points every six months. And then you look at three-year JGB yields or four-year JGB yields and you're like, really? It's not priced in. And so clearly the bond market doesn't believe them. And that's why you're right. The long end is...

We wouldn't touch it with a barge pole. The three-year yield, the short-term interest rates in Japan, the short-term government bonds are not efficiently pricing in a hawkish JGP. And as a result, the long end, which is a result of inflation over the long time, that's why the long end is going crazy and that the 40-year is now above 3%. Plus, you've got this situation where the debt to GDP is north of 200%.

The Bank of Japan owns more than half of all the JGB's issuance and the BOJ is trying to reduce its presence, its dominant position in the JGB market without any success because

The liquidity is dried up in the long end of the curve. As Julian says, nobody wants to touch it now. And it's doing crazy price moves now. It's just, it's all over the place. It's very difficult. The only, Johnny, if I may, the only difference I would say, and I just want to point out to you, I agree with, look, Japan's in a dire state. The only difference between the U.S.,

and to a certain extent the UK as well, and Japan, is that Japan isn't as reliant on foreigners to fund those deficits because she runs a current account surplus, albeit smaller than it used to historically was. The UK and the US are actually much more vulnerable in the sense because we are beholden to the kindness of strangers.

The problem kind of cures itself if you fix the fiscal deficit. So people have, listen, I'm not saying, I'm not saying. How big is your if mate? Can you fit it on the screen? It's a huge if it's not going to happen, but if you bring the fiscal deficit right down and the money that's leaking abroad would be reduced. It's as simple as that. We won't be importing so much foreign stuff and therefore the foreigners won't be buying as much stuff.

Then US assets underperform, right? Yeah. Yeah. Perhaps that's what it takes. Some proper fiscal tightening, which is not on the horizon, but that is what it would take, I think, to bring the current account under control. Just one question about something, Johnny, earlier you said the Bank of Japan could return to quantitative easing and that would weaken the yen against the dollar. So yen up to 180 against the dollar. And of course, all things being equal, that's right. But

I think when the Bank of Japan started quantitative easing a while back, the yen actually strengthened. And I guess the thing is, the cause of the QE was the incredible weak economy and deflation, which caused the stronger yen. How are you analyzing the fundamental macro conditions in Japan? I know you've done a lot of work on this. I've just seen from your charts that the wage inflation in Japan is quite...

quite high and rising. And that's a good thing. They've been stagnant wages for many decades. But just how are you assessing the inflationary pressure in the Japanese economy and the underlying macro factors in Japan? First of all, I think everyone's employed in Japan. Everyone's got a job. They work for the government or the unemployment rate is about 2%. There's just no unemployment. Nobody goes without a job there. And

That was fine when inflation was super low, where they were struggling to get inflation above zero. Now we're in a situation where they've got conventional level of inflation, which is actually amongst the highest in the G10 now. And yet they've still got a policy rate of half a percent. The latest wage increase that the unions managed to achieve in the spring wage negotiations was the highest they've had in three decades. It's something like 5.4%.

So we haven't yet seen that in the official labor market data, but between April and July, that should start feeding through. So you've got unemployment at about 2%, wage growth that will start to be reflected in the official numbers once these wage agreements feed through the data. And it should support services inflation and continue putting upward pressure on CPI inflation.

At the moment, of course, there's some idiosyncratic factors in there. I think the price of rice has doubled in the past year. So food price inflation is very high. But offsetting that, energy inflation has been pretty low. Energy prices are down year over year. Base effects will reverse soon and energy prices will start to increase again. So there's a lot of inflation. I think we'll have more of a tailwind later on this year.

and give the BOJ more of a headache. And don't forget the core inflation, which is excluding fresh food only, it includes energy, it excludes fresh food. That core rate that is targeted by the BOJ has been above their 2% target for over three years. So, Jonny, you're outlining a situation which I think is quite interesting because I think it could have come to a lot of places around the world. So you've got essentially

central banks and policymakers trying to balance a number of spinning plates, right? Deficits which are out of control, which make it quite hard for you to raise rates to stabilize currencies or to offset those inflationary pressures. Inflationary pressures which are building globally. Investors that are waking up to the reality of that. And I'm

In the world that I envisage in that situation, the solutions are basically exactly what we started off saying. You retreat to issuing increasingly at the short end. You essentially abandon the long end. You have really no choice to do it. You can play some games to force investors to get involved. Financial repression. But I was going to say, but essentially you're running a world where

you are being financially repressed. And that is the way that all of these governments ultimately get themselves out of that. And by that, we mean essentially that nominal GDP, so inflation plus real growth, runs above the interest rate that you pay on your debt. Now in Japan, that's very extreme as you outlined at the moment.

In the US, it's not as extreme, but you've got to envisage that's where we're going, right? Yeah. And the other component of that is you have to either incentivize or force the institutions to buy the government bonds. Yeah. And, you know, that's...

I think the UK changed the pension regulations to force pensions to hold a much bigger proportion in the UK, a much bigger proportion of gilts in their portfolios, which did them, you know, but they were seriously underfunded. Now they're back on side, these pension funds. But look, in the US, there is this discussion of easing the supplementary leverage ratio in the big banks. The idea there is to get them to hold much bigger quantities of treasuries.

i'm not so sure that's going to work because i don't i don't think i don't think the big banks you know after s s p p s p b blew up i don't think the big banks really want to hold big

bigger portfolio there just isn't the carry in there why would they want to if the treasuries you know the 10-year treasury is yielding 4.4 percent and overnight rates of 4. you know whatever two percent or whatever what's the point of holding it jack you i can see you itching go on yeah yeah

So both of you have spent a lot of time on a macro trading floor where you'd be borrowing at the risk-free rate, 4.3%, whatever, to buy a 10-year treasury, 4.5%. Only 20 basis points of carry, Johnny, you say. But the commercial banks can borrow at way cheaper, well below the Fed. Some insurance companies can borrow if they have a...

underwriting profit they can borrow basically at negative interest rates. So tell us, okay, just for the audience. So financial repression is basically getting people to buy government debts, holding yields below inflation or nominal growth. For a central bank, that's easier, easy somewhat to do that they just buy the debt or they have a program. But for banks, private citizens, you have to encourage them. So one way to do that is to have regulation to make it easier to buy risk-free debt, treasury debt, agency debt,

So there's risk-based capital ratios. The supplementary leverage ratio is just total amount of risk. The risk waiting for treasuries is zero, but then there's a super, like even taking the riskiest stuff, this is how much leverage you can be. Scott Besson and President Trump want to get,

get rid of the or widen the supplementary leverage ratio. So to make it easier, so JP Morgan and Bank of America can buy more treasury debt. Why don't you think it's going to work, Johnny? Because I just don't think they want to. I don't think the financial incentives are there for them to do that. There isn't enough carry in the trade. And why take the risk? Why take the duration risk? If you look at

What caused the implosion of Silicon Valley Bank was simply that they had deposits that they were paying nothing on that they put into treasuries that were yielding at the time only 2%.

But they're happy to take that carry. They're paying borrowing for nothing and lending to the treasury market at 2%. And then when the yield on those treasuries went up to 2.5% or whatever it did at the time, that was it. It was game over for that bank. The mark-to-market losses overwhelmed it. And the depositors wanted their money back. There was no way out. That's an extreme case of what can happen. And it's highly unlikely that J.P. Morgan would do that. By the same token, J.P. Morgan asked these big banks,

There's no incentive for them to load the balance sheet with treasuries, even if they get a zero risk weighting, which is what the modifications to the SLR would do. There just isn't the financial incentive for them to do it. And just getting back to your point, just as an example of financial repression, if you look at the UK after the Second World War, we were completely skint. The country was on its arse.

debt to GDP I think at the time was something, correct me if I'm wrong here, something like 250%. - Yeah, it was horrible. - It was absolutely horrible. And the only way out of this situation is really to have your nominal growth higher above the coupons that you're paying on your guilds. And basically,

through financial repression, through coercion and regulations and whatever, get the private sector to buy your guilt, your long-term debt at a non-economic yields. Yeah, but it's not a good, it's not a positive, it's not a positive for your currency, Johnny. It's a negative for your currency. Absolutely. And you can, I think people are better educated now about what kind of games governments can play. And I don't think,

It's not that easy to get away with it. You might get away with it for a year or two, and then that's it. Julian, are you more optimistic that regulatory reform in the US but around the globe could be successful in inducing banks and insurance companies, other financial companies, private citizens to hold treasuries? And if Johnny is right, that 4.5% on the US treasury 10-year is not enough for JP Morgan. What about your level of 5.25%?

I'm not. Look, when I look at the supplementary leverage ratio, do I really think it's going to bring a lot of buying into the US treasury market? And the answer is no. I think if you look at classic examples, we know that Bank of America is sitting on very large, unrealized losses. They're held in a mark to, into their constant maturity, but they don't have to mark these things to market. But as a result, they are a weaker bank than JP Morgan. Because if tomorrow, somehow they had a collateral loss

call for whatever reason, right? The value of the assets that they hold, even if they're in this pretend and extend mark to make believe kind of book makes absolutely the actual value. If they had to take the bid, the value of the assets is lower. So I do not think that they're going to take that risk. I think we've just found out that the Japanese life insurance companies, the reason we hit an air pocket in the JGB market recently was because

into the end of Japanese year end, which is the end of March. There was actually a lot of buying of long dated duration assets by the Japanese life insurance companies, because they have to match, there's a new rule that has to make them match assets and liabilities in terms of duration length. So if you have a young kid who's gonna retire in 30 years, you have to match that off with the liability.

With an asset, that's your liability. You have to match it with a long dated asset. So they have to match it. So that led to quite a lot of buying into year end. Subsequently, they have just stepped back. But it came to light that just that buying that they did recently, the mark to market on that has cost them $60 billion.

because of the blow up in the JGB market, right? So to Johnny's point, A, you're not compensating me for taking that risk, right? And B, I can get that because I can get the return elsewhere. And I don't want to take those losses because ultimately, I don't want to tie capital up for 30 bloody years as JP Morgan because...

even if i because four percent four and a half percent five percent that's not enough to do that right so i i don't think that's going to do anything to encourage you now could we if we come out with a stable coin right if we come out with stable coins could you get africa to suddenly start piling money into dollar stable coins yeah maybe

If and then that money overnight just gets deposited into the treasury market, maybe. But here's the thing. Retail punters aren't idiots. And my best man just went to South Africa on a trip and he had to spend. That was like a two thousand pound cash bill that he incurred. So when he asked, how do you want to be paid? They said not dollars, euros or sterling.

People are not idiots. If we are going into an environment of a weak dollar, I will suspect that we will find out that it will not take long for people to say, I don't want to put my money into a dollar linked stable coin. Right. All these other central banks are going to come out with the US comes out with one. All these other central banks will come out with one.

Right. And you'll just end up maybe you end up with net more money that can be sucked into efficiently into some of these coins. But also, you know, you'll be killing the local banking systems of all these countries if everyone just takes their deposits out. Right. So I think this idea that we're going to start invent all this new demand for debt.

in a financial system which is incredibly effective at re-hypothecating assets. So they take an asset and then they lend it somewhere else and then they lend it somewhere else and lend it somewhere else to build these

great pyramids of and fund all these great pyramids of debt. The idea that we're going to find trillions and trillions of dollars buried under some mattress and that somehow that's going to solve and let us out from actually dealing with our problem, which is Johnny said rightly points out, it's just running too much bloody debt and borrowing too much money, I think is a joke. And just getting back to your point for the commercial banking system,

There is no need for them to take duration risk because the deposits, it's like in Liars Poker, they're 363 bankers. In that case, borrowing at three, lending at six, and they'd be on the golf course at three. And that's effectively the same kind of trade they're doing now. They're borrowing for nothing. They're paying nothing on the deposits, and they can put it into the money markets or into bills, whatever they want, and they're going to earn more than 4%.

So why go from earning a very safe, secure, guaranteed by the US government 4.2%, why go from moving out in duration to 10 years to earn an extra 20 basis points, 25 basis points? It doesn't make sense. So the point that both of you are making, the yield curve is not steep enough for banks, insurance companies all around the world to take duration risk. No. We've done some work on this, Jack, and we think you need...

something like, let's say between deposits, a three month deposit in 10 year treasuries to stabilize demand in the treasury market. And that we haven't tested this, but historically, right? Historically, because remember, we're borrowing a lot more money since 2022, right? You need something like a three month, 10 year curve of about 130 basis points, something like that. 130 plus. We're at 16, right?

So we've got to see at least 100 basis points on 10-year yields, which I suspect would not be what they'd want, or 100 basis points of rate cuts by the Fed. And the yield curve has been steepening. Which do you think is more likely, Julian? The 10-year going up or the Fed cutting and the three-month rate going up? I mean, certainly until we see a correction in the equity market, it's probably that long-end yields will go. It's definitely that long-end yields will go up.

right? But that's not the way that you really want to do this, Jack. No one wants to buy, but as long-end yields are rising, bonds are obviously getting sold. So that's like catching the falling dagger, right? That's not the way that bond dealers generally like to jump into a market, right? Where are both of you on how much the Fed is going to cut? One of you, I think it's Johnny, actually, you've got a chart of just

how much the rate markets have moved. And the rate markets priced in a lot of cuts on the Liberation Day chaos of April 2nd, but now they're pricing in a lot fewer cuts. So we can put that chart up. So if you were to short the rate market, there's much less juice in it than there was on April 3rd, let's say. So how are you finding opportunities in the rates markets, let's say, so for Fed funds, the two-year area on the long or short side or option side, which Johnny, I know you'd like to be involved with.

Yeah, for the SOFR futures, happy to take the risk outright. This year hasn't been as easy as last year. At the start of last year, as you may well remember, the market was pricing in seven cuts by the end of the year. I first got involved in that in shorting SOFR futures, where the market was pricing about five cuts, and it went offside at the start of the year, but I was pretty confident about the trade.

And of course, that proved to be a great trade. This year, it's been much more challenging. At one point, we were pricing in four more cuts. Now we're back down to pricing just two cuts in line with what the Fed, the median estimate from the FOMC, from the dot plot in at the June meeting and sorry, at the March meeting and at the previous meeting in December. The Fed has really been quite consistent that it expects to cut twice this year.

So now the market is now pricing two cuts and I just don't think there's a great opportunity there to get involved. I think you just got to wait till the market does something crazy, just move on. What do you think about, we've got quite a big, I've been looking at this and I know this is going to get a bit wonky for some people, but I've been looking at the spread between December of this year

and December of next year. We're still pricing in quite a lot of cuts. Well, yeah, it's got even more recently. We've shifted. We've shifted. We've done the old classes. Okay, they're not cutting now, but they're going to definitely cut

next year. It's the reason why this year into next year. Yeah. And so I'm looking at that and going, I'll tell you what I don't. Right. I'll tell you what I find strange or unusual. Let's say unusual. You can look at deck 25, deck 26, sofa spread and the same for the arrivals. And basically just looking at those spreads, it shows the Fed is it shows the Fed it's pricing an ever deeper cutting cycle for next year by the Fed.

The ECB should be hiking next year. And I also think that the amount of cuts priced into this year by the ECB is too much. The market's pricing between two and three more cuts.

And of course, you've got a lot of hawks on the governing council, the ECB governing council that are pushing back on that. Isabel Schnabel, she thinks we're currently at about the right rate, but we've had some pretty horrible data over the last couple of weeks. And now I think it's almost a dead certainty they're going to cut in June and they're probably going to hint at another one.

It could be one and done for them because the market is pricing a profile where the ECB cuts another two or three times this year and then starts hiking next year. And if it's that obvious that the economy, once the German fiscal stimulus kicks in and perhaps the European defence spending kicks in, if it's that obvious that growth is going to pick up and inflation is going to pick up later on in the year, why do you want to cut now and then start reversing those cuts? Yeah, I mean...

And I look at the labour market in Europe, right? It's the only labour market. You were talking about the UK data coming in better, and I agree with you, it has. But I look at the momentum in the labour market and it's really starting to wane. A bit like the US, right? Hiring is definitely grinding to a halt, right? And unsurprisingly, given the tax changes.

But Europe, and so you could, I model a lot of labor metrics using moving averages because they tend to follow, they are momentum indicators. Employment's either rising or falling. It doesn't go sideways for an extended period of time. Europe is the only one that hasn't crossed its sort of momentum to the upside. Europe actually strangely looks quite good. And that's another reason why I think it's possible that the euro continues to do well.

quite well for the rest of this year. Given that ongoing hedging that we need to do from all these asset managers who are net long Europe, the fact that the US is

turning their back on Europe has to spend that money, whether they want to or not. It's not the most effective way of spending 5% of GDP. It would be better if you spend it on AI rather than guns and helicopters, but needs must. But I think that that's going to be quite interesting for the euro if they do start to switch to be a more hawkish message, because I agree with you, John, it's not priced. I was going to say record low unemployment in the eurozone. It's at a record low. It's never been this low.

And this fiscal stimulus, the German fiscal stimulus is absolutely gigantic. It's something like about 12% of GDP they're just going to go and spend over the next decade.

decade or so that will lift growth and that will lift labor demand and if you look at even before this has started actually the data in germany has been surprising to the upside we just they just revised q1 gdp growth from 0.2 percent to 0.4 is twice what they thought it was and this is

The GDP is expressed in quarter on quarter, so it's north of 1.6% annually. That's German GDP growth in Q1, much stronger than expected. The industrial production has really picked up to be a function of a lot of front running of industrial orders to avoid the tariffs. That's partly it, but I also think it's the industrial sector has turned the corner in Europe.

after a horrible two-year recession. They're coming out of it now. And now they've got a... With the lowest unemployment ever. Exactly. This is the problem that I don't think people quite realise. AI better bloody deliver. Otherwise, you know, wage inflation globally... I don't know what you're saying. We have it in Japan. The risk is you get it in Europe. And ultimately, the risk is you could get it in the US. Right.

And that is what drives core inflation is basically wages. Jonny, did you say that your eyeball, the European rates curve is pricing in hikes from 2025 to 2026? Yeah. Wow. I didn't know that. Oh, yeah. Something like only about 20 basis points. If you look at the curve, I think the lowest point on the curve is early next year. And then it flattens out and starts getting higher.

So that 25 to 26, you got about 20 basis points of hike. That's okay. So yeah, that's just where it stops being inverted. Okay. Okay. That makes sense. Thanks, Johnny. And then Julian, how are you thinking? I now want to move on to trades, but I'll just start proposing one. Like I understand you guys are both bearish.

on a delta factor on interest rates globally. But just how are you thinking about like a call option of a super large amount of cuts that would pay off a lot if interest rates in the Fed cut to 1% or the 10-year went to 2%? Both of you are not strangers to those kinds of trades. Are they attracting you at all at this point or no? And then if you have no real thoughts on that, then let's just move on to other sorts of trades elsewhere. Johnny first. I would actually...

I prefer to look at the opposite. Let's look at what is the prospect that the Fed doesn't cut at all this year. That would be something that's, to me, potentially has a reasonable chance. It really does depend. I think the next, like I said before, the next two or three months are very critical. I don't know. First of all, we don't know what the tariff rate will be if Trump goes crazy and we do have these really high tariffs on China in the Eurozone. Then I think it's all bets are off.

By the same token, we don't know the impact of all this uncertainty, what it's going to do to companies in the meantime, to their capex and hiring plans, how much of an impact that's going to have if companies just put the brakes on everything due to this uncertainty. But we should see that unfold over the next couple of months. Cautiously optimistic that the economy has enough momentum to get through this period, in which case there is a chance the Fed doesn't cut at all this year.

It's a possibility. There's only one way that they cut aggressively, and that's if we go into a recession. And to go into a recession, you need 30% equity correction. So basically, by placing your bet in the bond market, you're buying a put on stocks. I think it's that kind of simple. Right here, right now, don't get me wrong, I think we could have another sell-off, maybe not from the current levels, maybe from higher, in stocks.

You know, September, October, if we do pivot back once the budget is passed to this more hawkish sort of trade stance again, even if I see U.S. equity underperformance in foreign currency terms, which as I said, I think is key for Americans to start thinking about going forward. I don't know whether I and right here, right now, I certainly do not have recessionary indicators. In fact, to Johnny's point, quite the opposite.

Really quite the opposite. Yeah, I have no increase in unemployment. My model is so basically flat at 4.2, 4.3 for the next three months, four months. The soft data, we've seen some of the soft data which got, which shot up after the election, swan dived after Liberation Day and then has subsequently shown signs of recovery. So if you look at the Philly Fed six month order, expectations of orders in six month time,

It had the second, it shot up straight after the election, second largest drop in history on Liberation Day. And now just had the twofold biggest increase ever, month on month, ever, rebound. So if anything, and we haven't even seen it in any of the hard data yet, if anything, the soft data now is getting better, not worse, which is why I'm bearish on Liberation.

bonds here, right? To me, I think the tariffs are going to be inflationary. We're spending too much money. I think that inflation is bad for bonds. Spending too much money is bad for bonds. And now if you get a cyclical rebound and we never get the slowdown, then to me, the bond market's in even more trouble. Johnny, go ahead. I've got a couple of

high frequency data charts in the chart deck that I sent you. And we obviously, we get the weekly jobless claims and they've been low and stable 220 something thousand a week.

The Doge job cuts just don't show up. They are in the hundreds. They will though, I think, mate, right? Yeah, in October. Yeah, Q3 will see more of an impact. But for now, they're not really showing up. And I put a chart of Indeed online job ads, which is an online agency.

And that provides its weekly data, its daily data, but they update it once a week. And it's a pretty good forward indicator of the JALT's job openings data. And you can see on that, obviously, there was a massive rush to hire everyone back after they were fired during the pandemic. And then the demand for labor has been tailing off since then. But it's not collapsing. It's stable. There is still job demand out there.

And the other point I want to make there, there's another chart after that looking at retail sales, retail sales really captures spending on goods, spending on stuff. The only glimpse of services spending we get in the retail sales data is outside of the control group, which everyone focuses on is spending at food services and drinking places, bars and restaurants.

And in the last two months, that was just almost off the chart. I don't know what. I saw that. I was gobsmacked by that. I hadn't seen that. Unbelievable. It's just incredible. March and April spending at food services and drinking places. In fact, February, March and April combined growing at an annualized rate of something like eight and a half percent. So I have a question for you. I have a question for you.

I'm worried. I've talked about this thing called hyper-financialization. So this is an incredibly strong relationship, Johnny, between stock prices, basically, and the real economy. You can see it in hiring. And I'm wondering whether it's affecting the consumer. So let me give you a couple of stats. So we know, because I think it was Moody's that came out recently, top 10%.

48% of total consumption, which is mind blowing, right? Figure how much they're paying for a meal versus that bottom 10% of pay, 'cause they're not eating five times as many meals, right?

So the next thing is when you look at stats for how many people in the US have a portfolio of over half a million dollars. It's now 30, over 30% of the population. Wow. Right? Whoa, whoa, whoa, whoa, whoa. 30% of the US. According to the consumer confidence data.

Jack, right? Of those respondents, maybe that's wrong. We're not talking Michigan, I will say, which everyone thinks is biased, right? Okay. But it's over 30%. Now, if that's the case- Over 1 million? Over 30% of the population, over $500,000. Half a million. Okay. Okay. Yeah. Half a million dollars. So let's just play this game, John. Liberation Day comes in, right? Stocks go down, everyone goes,

No, we're not going out for dinner. No, we're not doing this. Spending goes down. Turn it back on again. Spending comes all the way back. Plus revenge because I didn't go out last month. So I'll go out.

No, I think you're absolutely right. I think you're absolutely right. And I think the other important point is the wealthiest cohorts, they don't really care that much about tariffs. They've brought forward their purchases of Porsches and BMWs and whatever else they need to get before the tariffs hit. They've done that.

And as far as the tariffs go on on on imported goods, they really won't notice the difference. They're certainly not going to slow down the spending in dining out and travel and other leisure pursuits. And when you look at inflation in those categories, it is still pretty high.

And getting back to a point that you made earlier, and I fully agree with this, companies don't, they don't just say, oh, our costs have gone up by X, we need to put the prices up. It's much more straightforward than that. They will sell stuff for the highest price they can possibly get away with.

with, they will milk the consumer for whatever they can. And if demand is there, if demand is still there, they will continue pushing the envelope until competitive pressures in they start losing market share or whatever they will try to make as much as they can. And that's their job, profit maximization. So they will continue to do that. And so if this is true that the upper 10% of responsible for 50% will consumption, um,

And the actual tariff impact on the price level is between 1% and 2%, the overall price level. I just don't think you're going to see much of a slowdown. You are just going to see... And so no rate cuts then? No rate cuts. And let's face it, we've been through this before, where you have loose fiscal policy and a price shock. And the Fed made the mistake previously of saying, well, this is just transitory.

and look what happened so i don't think they're going to make the same mistake twice yeah but they might be replaced the trouble is is 26 where this comes through mate my concern is 26 this is when they should be stepping up to the plate at that point and hiking

and then we'll be talking about powers replacement and we'll end up with someone like wallah who seems to have turned your turncoat all of a sudden yeah yeah and then that's when i worry about i go back to worrying about the long end of the bond market you just you're not protecting me as an investor so i do jack i keep going back to this i think we're in this push me pull me kind of environment right here right now that as long as

We're Trump 1.0, which a lot of people want to believe you sell bonds. If we switch back to tough

from trade, I'm going to reset things, you sell stocks. I think in both of those environments, you sell dollars because I think you're just creating more and more uncertainty. And I think the world is max long dollars. And I think the cycle is beginning. It isn't a smooth process to Johnny's point. It would be great from a macro guy to just be able to go, right, all in, black, here we go, straight up, right? But it hasn't been an easy trading environment. It's been a tough trading environment.

Because these markets have been very volatile. And remember, hedge funds operate on tiny, tiny stock losses. Right. But structurally, that's how I view this world until we resolve one way or another, whether we are Trump 1.0 or 2.0.

And so people in the comments may be saying, oh, Trump 1.0, literally in 2018, the Trump tariffs were not accompanied by a large amount of inflation. I think, Johnny, your response to that, you're saying that now companies have more pricing. Number one, the tariffs are going to be higher, even if it is a mild version of time. And number two is that the consumer is stronger. So the companies can pass on prices more. Much stronger. I think what happened in that period in the Trump

1.0 was the economy was just getting back to its feet after the financial crisis, after years of struggling along, just getting back on its feet. Inflation was picking up. The Fed started hiking.

at the time and of course the tariffs came in and the economy at the stock market puked and the economy slowed down and the Fed went into reverse the Fed went into panic and so I don't I don't I'm not sure it was completely clear-cut what impact that the tariffs had in in in a sense it's not a good comparison to to the way things are currently where we have such strong economic momentum

The other thing I'd say, Johnny, as well, just as an additive to that, is I think that psychologically firms' behavior has changed. I think in 2018, we were still pre-COVID. We still worked in a world where I think firms tried to be, to maintain, were scared of raising prices and losing market share. I think COVID has taught them. We can see it in like Procter & Gamble.

Now, Procter & Gamble, every single Pepsi or Coca-Cola, every single quarter, they make their numbers by raising prices. I don't know how much a bloody can of Coke is going to cost in the end, but that's basically what they're going to do. We just walk this bugger up every single quarter.

And we as consumers expect it. We expect it. We are, our inflation expectations are that much higher. You go to renew your car insurance. You are expecting a price hike, aren't you? And you know, you just accept it. Okay. 10% this year. And meanwhile, central banks just keep going, no, it's not real. People dismiss the University of Michigan stuff. Oh, it's all biased. Look, I will ask you, you know, I will say, I say this to all my clients that

that just because a survey gives the breakdown between Democrats, Republicans and independents doesn't necessarily mean in itself it's biased. And when you look at the University of Michigan, I haven't looked at the latest month, but I remember, ask yourself, who's the most delusional? So Republicans, when asked about inflation, have, yes, increased their inflation expectation. But I think it was three months ago, they were expecting inflation year over year to fall 0.1%.

They now expect it to rise to point four. Right. So who's delusional in this survey? Is it just biased because it's they ask Democrats and I think Democrats are around six percent. Right. I think all of these inflation expectations are becoming unanchored.

which is yet another reason not to own the long end of these bond markets. That is really critical. I believe there are Fed studies that said one of the most important components that drives inflation is inflation expectations, because we're all expecting prices to go up again year after year. So we have to push for higher wages. Yeah. Even...

And maybe we can't because maybe what will happen, Johnny, is AI will just make us all unemployed. We'll try and increase. But basically, then we better come up with some alternative because we're just going to be impoverished. But to your point, even if you don't go, I was looking at this today, the New York Fed's own one year inflation expectation, right? Even if you don't agree with Michigan, which is running at 7%, right? The New York Fed's own survey now is at 3.6%.

And five years and three years is at 3.2. Those are miles above target.

You mentioned insurance costs, like there's social inflation that like juries in courts and judges in courts are like going to assign greater damages. So insurance companies are raising prices. So this is- Repair costs are higher. So your car insurance is up, right? All of this stuff, right? So Julian, people may be asking, okay, so Julian, we get it. You don't like the dollar. You don't like the US equities. Where do you put- I don't like US bonds right here. Are we talking Chinese stocks, European stocks? So I want to own-

non-US assets. It's very simple. On any rally I want to, I think the US assets have peaked in, call it whatever terms you want to, not just in dollar terms, they may go up. But if I'm looking at myself in a sort of global wealth perspective, I think US assets will underperform. If I'm a European investor, will underperform. If I'm a US investor, you'd be better off voting more European assets. So I am buying

equities in the rest of the world. I really want to get to that point that the Fed starts to really ease to go fully committed to outright longs, Jack, and buy emerging markets and industrial commodities and that sort of stuff. So I'm not touching those at the moment. I have a lot in gold.

I've got a lot of relative trades on, so I'm like long Europe, short the US. I'm long the Euro. I want to be long the Norwegian Krona. I think it's very undervalued. Ultimately, I'd love to buy dollar to be long Brazilian real and South African Rand, but you need that Fed stuff to be to kicking in. So I'm sitting on some cash, but I'm sitting on cash not in dollars.

Not in dollars. Any cash I have is not in dollars. And Julian, when we did an interview a little over a month ago, it was just about the peak in gold. So even though the gold is actually down 1% and you were cautious, you said long, medium term, I'm bullish on gold, but it's gone quite far. So is now the tactical setup better for gold? Now, I don't really think so, Jack. I'm still worried. Look, I still think there is a risk.

that we have, I do not believe that we've had yet the true capital rotation event where you go out of US assets and you start to buy global assets. You get a true bull market in precious metals, which means silver goes up, right? Because historically to get those events, we've really only had three. So the 1930s, the 1970s and the dot-com bubble, right?

Typically, you need a real bear market in US stocks, and we haven't got that yet. Right. So I think what we're seeing is this sort of bull market in lots of assets. Bitcoin, gold, US stocks have come back. European stocks are doing well still. Right. We're still in this sort of bull market phase to get true like gold goes to 12,000.

almost certainly means a 50% correction in stocks because to get gold to 12,000, you need to take the buy on dip US retail client and you need to bash their head against the wall until their brain bleeds and they learn don't buy US stocks on the dip, right? Mm-hmm.

So in that bearish environment, Julian, how are you assessing the risk off trades? Obviously, puts on the US market or... Yeah, if you're happy to buy puts, I'm not in them at the moment, Jack. I think we could be running out of oomph right here, right now. We've had a nice rally in stocks, but we'll see. Technically, we're getting some signs of exhaustion, but there's no follow through yet. So I'm not doing that yet. And you run, as I said, you run some cash.

but I don't hold it in dollars. And the HYG put option that you did for clients? Yeah, I mean, we made a little bit of money, we closed it out. You know, now we'll live to fight another day. Let's see. I think it could be close to another sell, Jack, but I don't have that sell signal yet. Johnny, what about you? Either on gold or on risk-off puts on S&P or credit?

A couple of things about gold and precious metals. The rally really is driven by the Chinese central bank. They've been hoovering up gold for the last year or so, and the retail punter hasn't really been that much involved. You can see it in the ownership of the ETFs. There's not that much retail participation. And if you look at the absolutely gigantic volumes of gold being bought by China,

And they're not worried about market to market. They're really not. They bought it, it's going into a vault and you'll probably never see it again. So from that perspective, I think the rally is fairly, you know, could have legs. But I was looking at something the other day that I thought was interesting and I don't know the fundamentals well enough, but platinum and gold were the same price about 10 years ago.

platinum used to be more expensive prior to that and now platinum's a third of the price of gold i'm sure there's a good reason for it but platinum had a good rally day last week and i perhaps there's something in platinum that's that's worth looking at i'm sure people with more knowledge of commodities can tell me what's going on there so i i like gold i do i think

As Julian says, it's had a good run and it is vulnerable to a pullback. But I really don't think it's going back down to $2,000 an ounce. Oh, God, no, mate. I think everyone's waiting for $2,800, which is why we'll probably never see it again. But I would store my boots if the thing got to $2,800. Yeah.

I think your choice is either wait and hope for the best to jump in at a better level or give yourself an understanding that there's probably going to be a pullback and you've got enough margin in the account that you can hold it. But I still like gold. On the rates markets, I... No, sorry. Like risk puts like on HYG or high yield...

options and S&P. Okay. Well, first of all, the composition of the credit markets has changed quite a lot in several aspects. Companies are much less leveraged than they used to be. The credit quality in general is much better. And you've got different companies in the high yield basket. I'm not a credit analyst. But you've traded credit in the past. You have. Yeah, yeah, yeah. You're not a total noob. Yeah. Well,

I don't know enough to really make really intelligent comments here, but I would say that I think when I look at it in general, if I look at corporate leverage now, it's really at, in terms of interest costs as a percentage of corporate profits, they are as low as they've been in decades. The corporate sector has really deleveraged over the last few years. There's basically been a wealth transfer from governments to the private sector.

whether it's the household sector or the corporate sector. So the government's got the debt now and the households and the corporates don't have the debt. That's what's happened over the last 15 years. So credit, trading credit is different to how it was post the GFC or pre the GFC. It's a different animal now. That's how I think of it. So I'm really not doing anything in credit at the moment. And as far as puts on the equity market,

implied volatility is at a fair price, I would say now. It's not high and it's not super low. For me, when it gets down

At the moment, one month implied volatility on the S&P is about 16 or perhaps a bit higher, 18 maybe. When it's down at 12, 11, whatever, you can afford to spend 10, 20 basis points or a week on some short-dated puts. Just keep doing that. And eventually, one of them will pay off very nicely. I don't think you can do that trick now. If you want to buy downside puts on the S&P, you've got to time it quite well. Yeah.

And as Julian says, the dip pile is always there. So the way things are at the moment, if you get a good result, you don't want to think, oh, okay, I've got to really pile into this. I've got to press this trade because you will get your ass handed to you. It's going to turn around and fly back up. The rallies have been more vicious, actually, than the downturns.

Julian, as I said at the beginning, this conversation, we're going to air quite shortly for your MacroCapture clients. A few days later, I think three or four days later, we're going to release this to all of Monetary Matters network. If people who are listening to this now on Monetary Matters, they want to subscribe, they can still get 10% discounted access. So check the link in the description. But Julian, just tell us a little bit about MacroCapture, what people get and how you distinguish it from other services.

So what you get, I hate to say this, I think we've got collectively, Johnny, now over 200 years of experience in the firm. So we're all about your age and my age, mate. You're getting people who've really managed money like Johnny did. And as opposed to me, I'm more of the strategist. You go get guys who've really managed money. You're getting a team of people with a skill set across the whole range of assets and finance from FX to fixed income to equities and commodities.

And what we try and do is to try and to a certain extent educate people on macro, because as Johnny and I will attest, it isn't the easiest

of things to get right. There are times when it seems to be very easy. I think there are times when you've really got to start thinking about itself. It's more of a mindset. It's like a, it's a bias to how you think about your risk tolerances and how your portfolio is set up, right? So there are just some basic rules that you need to do. So there's an element of education.

We do try and help steer people through what we think is going to be a very tumultuous period. I think Johnny and I would both agree that these are some of the best, even though they're not easy, these are some of the best macro environments that we can envisage. And we don't think

as you can tell from this conversation, that things are about to go quiet and tiptoe gently into the night. I think we both think that things are building momentum and ahead of steam. And then finally, we try and help people make money by recommending trades. And if you don't want to trade it, essentially give you a bias on your asset allocation.

Thank you, Julian. Johnny, thank you so much for joining us. We've got a conversation scheduled, I think, the very last day of July, right after a Fed meeting, I think. So that should be fun. People should also check out your work at Super Macro. We'll include a link there. Thank you, everyone, for listening. Remember to check out Julian's discounted access to MacroCapture and also subscribe to the Monetary Matters YouTube channel and leave a rating and review for Monetary Matters on Apple Podcasts and Spotify.

Thank you both. Thank you everyone for listening. Until next time. Thank you, Jack, for having both of us on the show. Good to see you again, Julian and Jack. Pleasure, mate. Pleasure, mate. Thanks for listening. Remember to check out Julian's research product, MacroCapture, by clicking the link in the description. Discounted access is available to Monetary Matters listeners by using code MM10 for annual membership and MM10Q for quarterly membership. Until next time. Thank you. Just close this f***ing door.