Why Fiscal Policy Is What Really Matters For Investors | Kevin Muir
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What's up, everybody? My name is Demetri Kofinas, and you're listening to Hidden Forces, a podcast that inspires investors, entrepreneurs, and everyday citizens to challenge consensus narratives and learn how to think critically about the systems of power shaping our world. My guest in this episode of Hidden Forces is Kevin Muir, an independent trader who is best known for his public writings of the Macro Tourist and from his podcast, The Market Huddle.

Kevin and I spend the first hour of this conversation discussing the importance of fiscal policy and why government spending has been one of the biggest sources of outperformance for investors in the last five years. We discuss why this has been the case, why the effects of fiscal policy continue to be overlooked and discounted relative to monetary policy, and what this means going forward if we take the Trump administration at its word about wanting to reduce the deficit and scale back on fiscal spending.

In the second hour, Kevin and I dig even deeper into the fiscal spending implications for U.S. equity and bond markets, concerns about rotation risk into global equities, the investment opportunities in Europe and Asia, downside risks to the U.S. dollar, the China gold put, and much more.

If you want access to that part of the conversation and you're not already subscribed to Hidden Forces, you can join our premium feed and listen to the second hour of today's episode by going to hiddenforces.io slash subscribe. All of our content tiers give you access to our premium feed, which you can listen to on your mobile device using your favorite podcast app, just like you're listening to this episode right now.

If you want to join in on the conversation and become a member of the Hidden Forces Genius Community, which includes Q&A calls with guests, access to special research and analysis, in-person events and dinners, you can also do that on our subscriber page. And if you still have questions, feel free to send an email to info at hiddenforces.io and I or someone from our team will get right back to you.

Lastly, because this conversation deals with investing, nothing we say on this podcast can or should be viewed as financial advice. All opinions expressed by me and my guests are solely our own opinions and should not be relied upon as the basis for financial decisions. And with that, please enjoy this thoughtful and extraordinarily valuable conversation with my guest, Kevin Muir. Kevin Muir, welcome to Hidden Forces.

Great to be with you today, Dimitri. So what's the weather up there in Toronto like today? It actually snowed this morning. Really? I thought we were done with it. We had gotten some nice weather. It actually gone up to 17 degrees, which I guess in your Fahrenheit, what is that? Maybe 60, 65. And it was looking like that winter was over. And then this morning I woke up to some snow.

You know, this wasn't where I was intending to take the conversation. We're not going to take it there right now. And I don't mean asking you about the weather in Toronto, but it got me thinking about global warming, climate change, and how you don't really hear about this much anymore. And how you, in general, you just don't hear about things that we become obsessed about things as a society. And then we just kind of move on. And this has become the norm in the last 10 years, especially, I don't remember if it was like that before that. Maybe it probably always was.

But I think that that is relevant to where our discussion is going to go because one of the things I emailed you about yesterday, you and I had a call yesterday to sort of have a prep conversation ahead of this recording or two days ago. And we're talking about the recent rotation into European defense stocks and the foreign exchange move between the dollar and the Euro and the larger rotation out of US equities. This is a theme that we've discussed not only with Russell Napier on the podcast, but also more recently with Mark Holowesco and with the guys out of Canix, Charles and Jeff.

And I noticed that this is like a narrative now that I'm seeing everywhere. Now, maybe it's just because I sort of in niche financial media and I see it, but I'm surprised at how quickly this narrative is picked up and I'm seeing it, this concern about concentration risk and US equities and the rotation into Europe. And while this was something that certainly I was hearing in tight circles for several years, for years now, I mean, we covered it also with Mike Green back in 2019, we first covered this, the

the rise of passive and the systematic flows and the effect that was having in terms of not just concentration risk, but also in driving valuations upwards. It seems like now we're beginning to see it in the media and that always makes me a little nervous when I start hearing things that are getting mainstream. But anyway, we're going to talk about that, Kevin. Before we do, just introduce yourself to our audience. You have a very successful sub stack, it's Macro Tourist. You also have a very successful podcast and you're a successful trader in your own right. So what is your whole story?

Well, I grew up on the institutional equity desk at RBC Dominion Securities. I was lucky enough to be there in the 90s during the dot-com bubble. I was in a prop group and we traded our own book and I was lucky to make a little bit of money. And then in 2000, or actually late 1999, my wife and I had a daughter and she was born with a heart defect. And it was one of those kind of moments where you question what's important in life. And I realized that

The bank that I joined was no longer as much fun. And luckily my daughter's problem was corrected at birth and everything was fine, but it was really a kind of seminal moment for me. And I decided that I wasn't having fun anymore at the bank and I was going to go off and do my own thing. So yeah,

I went home. This was 2000. I kind of timed it really lucky in terms of left, right as the market was rolling over. I like to joke and say that I was like Michael Jordan, you know, nailing that one shot and walking off the desk after that. Hopefully I don't have the same situation where I come back to the Wizards and play and

blow the rest of my career. But I ended up going and deciding that I was going to trade for myself for a little bit. And I thought to myself that, well, listen, if I trade for myself and it doesn't work, I can always go work for a hedge fund or something like that. So I just started trading and another guy from RBC joined me and I kept saying to myself, sometime I'll have to get a real job. And

One year turned into two, which turned into five, which turned into 25 years later, and I'm still doing it. First of all, I'm very happy. I did not know about your daughter. I'm very happy to hear that things worked out for you. It's amazing how life works too, right? Yeah. This event that turned out to be a scare was so important in getting you to shift your career, which also turned out to be a net positive for you in many ways. Well, I'm not sure about that. I was wondering...

Probably would have made more money if I stayed at the bank, but it ended up being that I had a much better life in terms of my work-life balance leaving the bank. What are the most important considerations for someone looking to make a move like that in your opinion? Well, so I kind of touched upon it there. I didn't maximize revenue. I didn't do this decision to maximize revenue. If I had wanted to maximize revenue, I would have stayed at the bank. I probably would have been...

some, you know, prop trader there that most people would never heard of. And I would have just quietly been doing well for myself, but I ultimately decided that that's not what I wanted. And I had to find a, find my own way. And one of the things I just want people to be aware of when they do it is that

It's difficult going off on your own. It's tough in terms of not having a steady paycheck, of not having the security that you had there. So you trade one for the other. So I don't have a boss, which is terrific, but I also don't have a big pension at the bank. I don't have the security of when things go bad that I have somewhere to fall back on. So it's just this decision about what's important in life and ultimately...

I hope I made the right decision and I got to spend a lot of time with my kids in terms of when they were younger. Like I see a lot of my friends that stayed at the bank and stayed on the sales side and

They always said, oh, you know what? I'll have time later. I'll retire and I'll spend time with my family then. The thing is they're retiring now, you know, like I'm 54 years old and I see some of my buddies retiring, but the kids are already out of the house. They've gone on with their lives. You don't get that time back. So I kind of look at it as I say to everyone, I didn't work as hard as everyone else did for that period from 35 to 55. So I'm actually ready to put my head down and do some stuff now.

Also, that's scary to me, retiring at 55. That seems, honestly, unless you're a gazillionaire, that seems not only boring, but also am I crazy to think that that's reckless?

I don't... Listen, a lot of my pals made so much money. Because that's a lot of years that you need to rely on- Yeah, they made so much money, it doesn't matter. I suppose it's different too because you guys are in finance, so you guys literally, your job is managing money. So I'm thinking about this from a different perspective. I'm thinking about it where my core competency is not managing money. So to me, it's scary having to rely on some pre-portioned pool of capital to have to manage that for the next potentially 30 or more years.

I think it's more scary about what they do with themselves. And you find lots of people go and they retire and they're actually less happy than they were. And they kind of struggle with trying to figure out what to do. There's only so much golf you can play. And a lot of them are...

like, I think you can see the studies, they're not as happy as they were when they were working. So I think making the transition to doing something that's a little bit of both or finding a passion, that's even something, nothing to do with what you were doing in terms of work, whether it's, you know, you go out and you decide you're going to trek across the Alps or you're going to become a birder and, you know, there's a million different things, but you need to find something to occupy your time. Yeah, I totally agree with that. And, uh,

I think also besides the fact that you are no longer engaged in something exciting that preoccupies your time and maybe is fulfilling, because I don't play golf. I know some people do, but I don't know if I can sustain you. You also importantly lose the networks.

You lose the networks of people who are interesting with whom you have interesting conversations. And now you're basically just hanging out with people that are just kind of at the end of their lives, just kind of like dialing it in, going golfing. And that's just, you know, a lot of those folks, those are boring conversations to have with a lot of people and their skills deteriorate. You lose a lot of the knowledge. So you don't really have as much of an understanding of what's going on in the world. So look- So Demetri, can I actually just interrupt there? Because that's actually the impetus of writing my letter.

So when I went off on my own, I'm just like me, another guy. And we had a computer programmer and a woman that was helping us with the tickets and stuff. So it was just the four of us. It was kind of lonely. Like I didn't get a chance. There was no community to chat with on the trading desk. There was nothing for me to kind of

bounce ideas off and stuff like that. So I started writing this letter and it was free for a while. And it was just kind of my journal that I put out there. And then ultimately I realized that it was a great source of networking in terms of sharing ideas with people. Now, all of a sudden people were reading me. I could phone them up and talk to them. They became my friends. Same with the podcast. I consider myself the luckiest guy in the world. And I don't know if you feel this way as well, but to be able to do this podcast and to talk to people that are so smart and

and pick their brain and learn and, you know, make them my friends in terms of, you know, sharing ideas. And I kind of laugh and say, I would do the podcast if nobody was listening. That's how much I enjoy it. And that's how important I think it is.

That's how I used to feel. I used to feel that I would do the podcast if no one listens. I don't know if that's true anymore, but I definitely love what I do too. And I enjoy it very much. And when you were talking about the pros and cons of being, in your case, being at a large bank versus being self-employed, or in my case, I think it's the choice is perhaps way more obvious because it isn't as lucrative to be in a large media company, unless I guess you're like a

you're Andrew Ross Sorkin or something. Right. But I wouldn't trade it for the world. I love it much more. And I think it's also in some ways a more stable way to go because now you have direct relationship with your audience. And if you've got a good model and you build for the long term and your goal is not clicks,

Your goal is to build a reputation as a trusted source and to develop a relationship with your audience. Over time, what you have is a very stable source of revenue. And that also is freeing and it makes the content better because you're not constantly worried about, I just need to hit the numbers this month. I got to get the numbers up. So tell me a little bit now, when and how did you first begin to speak publicly to an audience that you were cultivating?

So I started writing this journal and then some buddies would ask me, what do you think about the market? And I would say, oh, here, you know what? I'll send you what I wrote to myself. And, you know, a lot of traders will talk about the importance of journaling and the importance of writing down what you think. It makes you really zero in on your thoughts. Yeah. Right. So I started writing this and then people started asking for it. And I said, oh, you know what? I'll just throw it up on the internet. It'll be easy that way.

And the next thing you know, I would go downtown Toronto and I would talk to some guy and they'd be like, oh, I'm reading your stuff. And I was like, kind of shocked. When was this? When did you start doing this? Like...

I don't know, 2013, 15, somewhere around there. You had an independent... What did you want? WordPress blog at the time? Yeah, it was just a WordPress blog that I threw up there. And so I started doing it. And then I realized, as I said, this light bulb clicked that it was going to be something that would help me create people that I can talk to, that I can share ideas with. And then all of a sudden, the real important part is...

You mentioned that you lose your contacts. And that is what that was, what was happening to me, you know, in 2000, when I left the bank, I knew everybody by 2010, a lot of the traders had gone on different, different stuff. People had forgotten, you know, that I used to

be a big trader at RBC. And now also I'm just some guy in his pajamas, like in this office trading. Right. And so the letter enabled me to have a little bit more of a, of a presence. So, and then what happened was I started to get picked up by zero hedge and it was kind of really the point where things changed a lot because I

Zero Hedge would republish my content, only the bearish stuff, by the way. And that was all of a sudden I went from being, you know, having a thousand people reading me to big numbers when the Zero Hedge picked it up. It was so much to the point where people used to think I would like I work for Zero Hedge and I'd be like, I don't know the guy. He's never phoned me. He just republishes my stuff.

But it was that period that we went through and gradually it just kept getting more and more important. As I went along, I eventually hit this point where my wife was like, you're spending so much time writing this. And God bless her soul. She actually said, you're going to have to get paid for it. And I went to behind the paywall. And not only was that good for me in terms of just helping out with paying some bills, but it was also really important in terms of

being able to focus on people that were more engaged in my community. I was actually kind of surprised. There were some people that were taking a lot of my time and I thought, oh, those people are for sure going to be, you know, there to support me when I went pay. And yet they disappeared. And then other people, like, I remember a good buddy of mine that I was lucky enough to meet on the podcast, Jim Leitner. He was like one of the first guys. He's like, oh, I'm so happy you're doing this. This is terrific. Good for you. I want to be your first customer.

And so it was a really actually liberating thing. And what it enabled me to do is focus on the people that were actually willing to invest in me and help me out. So that was terrific. Now, in terms of the podcast, I just want to kind of tell a quick little story about that.

I was on Macro Voices early on. And Macro Voices is this podcast by Eric Townsend. And the reason I was on it was because Patrick Srezna, who's my partner on Market Huddle now, was actually Eric Townsend's partner also at the time. And he says, why don't you come on? And at this point, I had done, you know, maybe a little bit of radio, but not much podcast, not much talking. And Dimitri, it went so bad. Yeah.

I was terrible. They had the ability to edit and they messed me up. And it was just, you know, some podcast hosts are make you feel comfortable. Others don't work on it as much. And it was a disaster. And I came home and to my wife, I said, well, I guess I'm going to be a writer. I thought to myself, there's no way I'm going to ever do podcasts. And after kind of picking myself off the floor from that, I said to myself, well, I'm not going to go out of my way to do podcasts. But if anyone asks, I'll continue to say yes.

And lucky enough for me, some people kept asking. Next thing I knew, you know, I was getting a little bit more airplay. And then Patrick came to me and said, do you want to do our own podcast? And at this time, there was lots of great macro podcasts out there. And I said, well, listen, we're going to compete against the Americans. We're going to have real trouble because the Americans have, you know, there's big podcasts with big audiences. Let's do something a little different.

Let's have some more fun. Let's make it a little more casual. What do you think about drinking beers while we do it? And at the time, I didn't know Patrick that well, but in hindsight, it was the perfect kind of segue in terms of our relationship. And we made the market huddle. And as I said, it was really important in terms of the great people that I've had on and the people I count as my friends now.

I want to ask you a question about ... Actually, I want to get to our discussion about markets, but maybe there's one more question about zero hedge. I just want to validate a few things here, or maybe one thing in particular, which is the importance of courage. You had this negative experience in your first time on a podcast in terms of how you felt that you came across.

Yeah. So much so that you were like, "Well, there goes my career in podcasting. It's over, honey." But you had the courage to say yes again. And that's just something that's very important. I know this podcast isn't about that, but I think courage... I was having this conversation a few days ago with my wife.

And I just think that courage is perhaps the most underrated quality for success. We talk about perseverance, we talk about intelligence, we talk about a go-getting attitude, we talk about adaptability, which is very important. But it takes a lot of courage to become successful at anything.

And learning to say yes is such an important skill that you have to learn when you're young and so much so that if you get really good at it, there comes a point when you get older when you have to learn to not say yes so often. Then you know you're successful when you're at a point where you have to learn how to say no. Right. And that's an important lesson people learn. So there's one last question about Zero Hedge and then we'll move on. I remember when Zero Hedge was such an important outlet. If you wanted to get published,

It was kind of like, I don't know if this is quite, it wasn't the Joe Rogan of the finance sort of

It might have been the Joe Rogan or the finance blogosphere, like independent, non-consensus financial media. If you want it to go viral, if Xero had posted your stuff between 2007 and, I don't know, 2011, 2012, 2013, I feel like the quality has gone downhill since the early days when it was really excellent. But it was a powerful, a very powerful source. So when did you begin your paid model on your sub stack? 2019, or maybe it was...

Yeah, I think it was late 2019 or maybe early 2020 before the COVID. Got it. Okay. In fact, I think it's exactly around the time that I did as well. So, all right. If people want to learn more about your Substack, where do they go? Can they email you? How do they do that? Sure. They can go to themacrotourist.com or just send me an email, kevin at themacrotourist.com, and I'll be happy to send you off some samples. All right. So what do you write about at The Macro Tourist? I

I write about anything and everything. And that's the one thing that over the years, I've been lucky enough to make my living trading for myself. And people have always asked me, well, what do you specialize in? You know, you were an index trader, an equity derivative index trader at the bank. You must do a lot of that. And I say, well, yeah, you know, I do trade a lot of equity index, but I really trade anything. And over the years, I, one of the kind of my

strengths I feel is the ability to go and to learn about different opportunities that are out there. And so an example might be that in, I can't remember when the oil went first down in like 2015, we had a bear market in oil and,

And during that bear market, we had this situation where the futures curve got really steep, meaning that if you wanted to go out and buy futures contracts and the forward futures contracts, they were trading up huge premiums. So if you were going to go and get long oil, you had to be more right than what was priced into the market.

Then the problem with the stocks was that there was such a decline in the stocks that they were actually trading as call options because what had happened was companies' total enterprise value had gone below the cost of the bonds. So what the bonds were trading at, like, you know, energy bonds were trading 50, 60 cents on the dollar and the stocks were trading like call options on this. So I thought to myself, well, you know, I can go and try to be right on the futures or

Or I can go buy these overpriced equities. But the trouble is that the moment that the stock market gets better and oil goes back up, they're going to issue a ton of stock to fix their debt. Or I can actually go buy the debt.

And I can buy this debt. And if I'm wrong, I'm going to be the next layer of equity. Like they're going to refinance these into the next layer of equity and I'll go through it. And if I'm right, these things that, you know, that are trading 50 cents on the dollar are going to be par again. And I'm going to make a lot more that way. So that year I traded tons of energy, you know, corporates and

And it was just that was the sort of thing I would do. Then another year I'll go and say, like, I think that the end is really overvalued or undervalued. I'll go trade that or that I'll go pick something like gold and start trading gold options. The reality is that the nice part about trading for myself is that I don't have anyone telling me, no, you can't trade that.

One of the other reasons I left the bank was that I would sit in there and I was trading on a prop book. And they, in the old days when, before the bank had kind of seeped into the dealer, because the dealer was originally this partnership that had existed for many hundreds, you know, many tens of decades and maybe even a hundred years. And up until that point, then the bank bought out. And then what happened was when I came up with a good idea, I'd go put it on the sheets and then I'd get inevitably someone telling me, oh no, you can't do that. You can't trade that.

And that would drive me nuts. Like I'd be like, oh, I can't trade that. Like it's a good idea, but I can't trade it. And that is really one of the other main reasons that I left the bank was I just love trading so much. I love coming up with different ideas and nothing kind of excites me more than figuring out something that the market is missing and finding an opportunity set and exploiting it.

Yeah, that's wonderful. And that's what it takes also to be successful, right? You got to love what you do because you go through difficult spells, dry spells. And if you hate it, then you don't need to be insane to keep doing it. So one of the things that I feel like... Actually, I would say probably the theme that you've been writing about recently that seems to be the theme that you're most obsessed about is fiscal, the role of fiscal.

and people's under appreciation for fiscal. We've spent the last 20 years becoming, or longer really, I remember when we used to have the Greenspan briefcase indicator, we were obsessed with the Oracle back in the '90s with Greenspan, the Maestro and monetary policy. It was also an era of technocracy. In some sense, I feel like we're coming out of this era of technocracy. And that era was so characterized by the omniscient Federal Reserve, its chairman,

What is it, in your view, that people are missing about fiscal, the role of government spending, in other words? And how has that informed your trading and your investment style in recent years? I completely agree. And I wrote a piece recently saying that the fiscal is the best source of alpha out there. And I continue to believe that. I have a good friend that's a big hedge fund manager, and he always laughs. And he says, phone up at Wall Street Bank, ask to speak to their monetary policy analysts.

And you'll get a wide variety of different guys. You'll get the Fed guy. You can get the plumbing guy. You can get all these monetary analysis kind of analysts asked to speak to the fiscal analysts. And it's like crickets. There's nobody doing it or very few people doing it, or at least compared to monetary, it is woefully underappreciated money.

And the reason that it's woefully underappreciated is because from 1982, when Volcker, you know, cracked the back of inflation all the way to the COVID crisis. If we think about how we tried to affect the economy, it was solely through the use of monetary policy. There was nothing else. We never thought about fiscal because we didn't use fiscal.

What happened was Volkler broke the back of inflation. He lowered rates. The economy gets going, speeds up. He raises rates. Then what happens is the economy eventually rolls over. He lowers rates again. And we go through this period for decades when monetary policy is the only game in town. Now, the trouble about using monetary policy as your sole mechanism for affecting the economy is that

As the private sector puts more and more debt on their balance sheet, it takes lower and lower rates to stimulate the economy. So if you look at the first time Volcker cut rates, I can't remember what it was. Let's say he cut to eight. The next time when they had to raise rates, he only raised to 12.

12, the economy rolls over because there's a slightly more dead in the system. Then all of a sudden he has to lower it again. This time eight doesn't do it. He's got to lower it all the way to six. Then the next time there is this 10 and it's a series of lower losses.

highs and lower lows until eventually we hit the great financial crisis. We hit this point where it goes to zero. There's so much debt in the system on the private sector side. We go to zero. The Fed tries to cut rates. Doesn't work. Everyone says, well, no, it's a balance sheet recession. So then they try all these extraordinary monetary measures.

all the kind of operation twists, the QE and things like that. At first, everyone's convinced that there's going to be inflation and not listen. I was as well. And, but then we find it doesn't work. It absolutely doesn't work. And this was really ultimately what led me to understanding fiscal was that I stumbled upon MMT. And every time I mentioned MMT, it

All the hard money guys are going to spit on the ground and think, oh, it's useless and stuff like that. And just hear me out on it. Although I want to just say, as you continue, there's a good reason that people feel that way. It's because a lot of ideologues...

have entered the MMT debate and became flag bearers for modern monetary theory by focusing on the prescriptive side of the equation. What to do about it coming up with ridiculous theories. And it's understandable that people have associated MMT with those folks because it's the most vocal part of the group that proposes such theories. Yeah. And Dimitri, you nailed it. You mentioned the prescriptive part of MMT.

And I just throw away the prescriptive part. Who cares? They all, that's their opinion. Doesn't matter. Let's talk about the descriptive part. And one of the things that I kind of stumbled upon when I originally kind of was introduced to MMT, I was like, oh, everyone's talking about this. I better learn about it. So I phoned up my buddy, George Perks at Bespoke Investment, and he was kind of more knowledgeable about it. And he sent me on this like little,

tour about it. He says, go listen to this professor and go listen to this professor and stuff like that. And Dimitri, when I heard it, I was like, that is the stupidest thing in the world. Like it was literally everything in my bones, like every bone in my body was like, that's wrong. And I'm like, I went about trying to prove how it was wrong. When you say that's wrong, the things where you're

were learning there about what the prescriptive stuff or like sectoral balances the balance the accounting okay the accounting the accounting identities yeah and i was just like that just doesn't make sense and they and they kind of the way that they think about how the economy actually works how the government can spend money into existence and all these things that we just as traditional economists have been so focused on

kind of old school way of doing it. And ultimately the real problem is, Dimitri, we have gone and macroeconomics is based upon the gold standard. So we took the gold standard system and then we went off the gold standard and kept all the gold standard rules.

The gold standard frameworks, which is why I think also Austrian theorists, while they have a really great grasp of the business cycle, have failed miserably in understanding the modern monetary system. Right. And so I went about trying to prove this wrong. I couldn't prove it wrong. And not only that, the more I learned about it, the descriptive part, explaining how the economy works. Like for example, MMTers were the ones that said the European Union wouldn't work.

They're like, just doesn't work. You can't have a monetary union without a fiscal union. You can't do this. There was a million things that they had actually gotten really right, but

And I was just like, oh, for the first time, you know, I'm an economics major from university and I always had thrown away everything I knew about economics because it didn't work in trading. And then all of a sudden there was like this light bulb went off in terms of understanding how the actual economy works, how the real those balances and those the flow of funds and the plumbing and all of that stuff worked. It made sense.

And so going back to your question about fiscal and why it became so important, if you rewind back to the late 2010s, we were in a period of just disinflation across the world. And the one thing is I kept arguing that the bond market was a disaster waiting to happen.

And when I did this, I got really smart people telling me that it was impossible. Like impossible, not just not probable, impossible. And they told me- What was impossible? To have inflation. So they told me that there was the three Ds. Debt, the total amount of debt would make inflation impossible. The demographics, the fact that we were getting older was going to make inflation impossible. And disinflation from technology.

These three things were going to make inflation coming back impossible. And I always said, if the government has enough political will, they can spend the money into existence. That came from my understanding of MMT. And so now when you're asking me about fiscal and why it's so important, in March of 2020, when everyone was very worried about the stock market and was concerned about the economy rolling over,

I wasn't as scared as they were because I saw the fiscal fire hose that was about to be unleashed. And it enabled me to go out and say, no, you got to buy stocks. You got to buy commodities. You got to buy everything because the reality is that the government can fill the hole.

The economic hole. Now, I happen to think that they did way more than filling the hole and they did way too much. But part of the reason they did way too much was because nobody thought it would work.

And everyone now takes it for granted that we've had this inflation and it was so obvious. But rewind back to 2020 and 2021 even, nobody thought there was going to be inflation. So then that was a source of alpha for the fiscal. Next thing, let's think about when they started raising rates. They started raising rates in early 2022, late 2021. They started signaling it.

At the same time, everyone was like, there's no way once they start raising rates, the economy doesn't roll over. They were so bearish on the economy. Goldman Sachs said, there's no way we're going to get above 2%. And the reason that they said we're not going to get above 2% is because they had looked at these series of lower highs in the Fed funds rate throughout the past 40, 50 years. And they had assumed that we were still in the same environment.

And I kept saying, "Listen, if we were just trying to use monetary policy to fix this, I completely agree we wouldn't get above 2%, but fiscal has changed the ballgame." What a great call. Yeah. I got that call so wrong. I look at them raising rates so quickly and I got so nervous about that, the effect it would have on the business cycle. That was an even better call in my opinion.

than getting the COVID stimulus right. Because the COVID stimulus, you could argue, okay, yes, you might be operating with the monetary framework in your head and saying, we tried to stimulate in 2008, didn't work. Same thing is going to happen again. You transfer it over to fiscal. But you could have also been looking at it and saying, okay, there's a huge fiscal impulse coming that's going to do. But in the case of negating those interest rate hikes, because you were looking at the power of fiscal, that was a phenomenal-

call. Oh, well, thank you, Dimitri. Actually, I wrote in the Bloomberg op-ed and I wrote, I think at the time, the bond market had never had two down years in a row. And in 2021, it had its first down year. And then at the beginning of 2022, I wrote this piece that said, basically, well, there's a good chance we're going to have another down year in the bond market because we're going to be surprised at how strong the economy is. Well, you should have seen the emails I got.

People were like telling me, you know, you're fighting the bond market. You don't know anything. You'll be surprised. You know, lots of people have gone up against the bond market and they're always proven wrong. And the reality is the reason they were so confident to say those things is because we've had 40, 50 years of interest rates only going down.

And they failed to appreciate that the world had changed with the advent of all this fiscal in 2020.

And so that was a source of alpha again, was understanding fiscal. Even 2023 and 2024, it was a little more subtle, but the reality was that at this point, people had accepted that fiscal had juiced the economy, but they were looking at all the stimulus checks running out and they're saying, oh, we've run out of money. Now, all of a sudden, the economy is going to roll over because the stimmy checks are spent. Well,

What they failed to realize on this case was that the IRA and the CHIPS Act, it was sitting in the system and it took a long time to get through. My buddy Vincent Deloitte from Stonex highlighted this report.

from the states, the actual United States, the individual states that shows the spending over the period. And one of the things you need to realize is that the federal government went and did all this stimulus in 2022 in terms of the CHIPS Act, the IRA, and they went out and sent the money to the states. But at that point, it still hadn't been spent. It hadn't been felt in their actual economy. So if you look at 2024,

We had a situation where the actual state spending was still increasing. So at that point, I kept saying, no, we're going to be surprised at how strong the economy is. We're going to continually surprise because there's all this money still sitting in the system waiting to be spent. And now finally, 2025,

We get to this point and everyone is still focused on monetary policy. They're all of a sudden gone from being super bearish on the economy and the stock market to super bullish. And I'm sitting here looking at the state spending. The state spending is already scheduled to go from a 15% increase to a zero in terms of nominal. In terms of real, it's actually a decline.

And then we have Trump telling me that he's going to go and balance the budget. And I look at it all of a sudden and I say to myself, the reasons the economy has done so well over the past four years and has been so resilient is now all of a sudden turning from a positive to a negative. Yet everyone else is now bullish on the economy. And I'm like, you guys got it all backwards. You're again, missing how important fiscal is.

And one of the things that really just made me much more confident in my trade is that if you look at Steve Cohen, who is one of the greatest traders around, he very rarely makes any calls, but he went out and publicly said, no, the stock market is going to get into trouble. And he used the word austerity. He said that this cutting of the federal trade

deficit is in essence going to be austerity. And what I love about Steve is my guess is he's a right wing kind of guy, but he's not going to let his politics get in the way of where the market is going. And too many people let their politics influence their trading. And I always say like trade the market you have, not the market you want. Don't let your views about what should be done get in the way of what will be done.

And nobody epitomizes that more to me than Steve Cohen. So a couple of things to highlight there. One is I love the focus on detail and understanding the transmission mechanism, right? That takes work and understanding so that you could set yourself up to be in a position where you could look and say, ah, there's still money coming down the pipe or the pike, whatever it is. I can never tell if it's the pike or the pipe. It's supposed to be pike, I think, but I think- It's the pike, yeah. But you could also send money down a pipe. So first of all, let's kind of maybe try to identify-

and sketch out here the prevailing narrative that people had in their heads that a Trump administration would be bullish for assets. If you had to describe what you think the consensus narrative was around that, what was it? So it was two things. One was deregulation. And they're not wrong that that's bullish.

And one of the things that we need to understand, and if I'm going to criticize MMT, even the descriptive part about MMT, is that it's so busy focusing on

spending money into existence. Like there's two ways you can, money can be created. One can be the government can spend it into existence. The other can be that the private sector creates it through bank lending. And gets to hold onto it through low taxes. Right. But this period from 1982 to 2020, we focused on

solely on the private sector credit creation. And that's how we try to influence the economy. And that's why we focus so much on monetary policy. Then 2020 comes along and all of a sudden we get this situation where the government spends it into existence and people have forgotten or never understood in the first place that that actually can be stimulative as well.

So now I kind of think about what we're faced in 2025 or late 2024 when Trump comes along, he comes and says, listen, the banks have been handcuffed. I'm going to unleash the banks. I'm going to make business great again. It's going to create all sorts of jobs. And they're not incorrect in that if the banks started lending, that would be positive. That would be money being created on the private sector side.

So that was part of the narrative. And I was actually very sympathetic to that part of the narrative. I said, you should buy bank stocks. It was, it ended up being something that ran for a little bit. That was part of the narrative. The other part though, that I think that they were completely wrong on was this idea that if the government cuts spending, they can get rates down and that will be bullish for the economy. And their kind of model was,

was the Clinton environment of the late 1990s. And during that time, he had a treasury secretary called Bob Rubin, who used to be Goldman Sachs. I think he's Goldman Sachs. Yeah. And he actually made something called Rubinomics. And he encouraged the

this Democrat to actually try balancing the budget and pull back on spending. And what he argued was that if he pulled back on spending, they could get rates down and then the economy could grow more, right? That was Rubinomics.

And Scott Bestin looks at this and remembers this Ruminomics well, and he's convinced that this will be the way to prosperity in America. And listen, I'm not going to judge whether over the long run it's going to work, but we're faced with trading it over the short run.

And one of the reasons that Rubinomics works so well was because rates were actually really high. Like the rates, like twos were seven, tens were seven and a bit or something like that. But more importantly, the term premium for the 10 year bond and what people, maybe I'll just take a moment to explain what term premium is. Term premium is the extra amount that the market demands from the government to

in terms of higher yield to compensate for the risks of where they expect the interest rates to be over the life of a bond. So if the market thinks that over the life of the bond, that the Fed funds is going to be three,

And they all of a sudden are demanding four. They think that that extra 100 basis points of that's called term premium is to compensate for them for the risk that the government does something stupid and makes inflation or causes rates to be much higher. It's the amount they're compensated for locking up their capital, for taking on further duration risk. And it expresses itself geometrically as an upwardly sloping curve.

Right. Well, the yield curve is slightly different than term premium because the term premium takes into account the yield curve. Because don't forget, the yield curve is over a short period of time and they expect it. It's more like over the life of the bond. What do market participants expect Fed funds to be? And then if you take that amount, like if there was zero term premium, they would be indifferent. If they were confident that the over the life of the bond, that the Fed funds would average 4%.

And then they only, they would say, okay, we're really a hundred percent confident on that. So therefore we're indifferent to floating it over the short run or buying a 10 year bond because it's the same thing to them. Right. But if they're worried that there's going to be something wrong and there's going to be inflation, they will demand more. But wouldn't you also see that expressed in the bond market with a higher demand for yield on new issues?

So in terms of, oh, a higher demand for bonds. A higher demand for the yield on new bond issues. And it's a complicated game with lots of different players. But the point is that during Bob Rubin's time,

the term premium was two and a half percent at the 10 year level, meaning that there was a lot of uncertainty priced into the bond market. So when Rubin went and convinced Clinton to pull back on spending, to make the budget in order, it created an environment where it gave a lot more confidence and the term premium was able to come down from two and a half down to 100 basis points or something like that. So the savings were huge. The problem,

The problem is right now, we don't have a huge term premium. We don't have a situation where the 10-year term premium is 250 basis points. It's 30.

Meaning that the benefits from slowing the economy and getting the budget deficit in order are a lot less than the stock market and Wall Street thinks. And that's ultimately, you asked me the question, what did Wall Street get wrong or what are they potentially getting wrong? They are accruing way too much benefit to rates coming back down.

And back to my point, I actually think that fiscal is more important than monetary. They're still stuck in this idea that we need to get rates down because that's going to be how the economy grows. And I'm like, no, the reality is that part of the reason that the U.S. is the most expensive stock market in the world is because you have been running the largest fiscal deficit around.

And whenever I ask people what they think the US deficit is, and then so maybe they'll guess, and they'll guess that it's 5%. In reality, it's closer to 7%. And then I ask them, what do you think Canada is? What do you think the EU is? Most of them will say, well, if we're 6% or 7%, then they must be like 9%. The reality is that Canada is 2%. EU is 2.5%. Japan's 2.5%.

So part of the reason that the U.S. economy has just been running like gangbusters versus the rest of the world is that the fiscal stance of America in the post-COVID environment has been so aggressive compared to everybody else. If you go look at the total amount of fiscal that the U.S. did from the COVID period till today, it's 44%.

Well, in Canada, it's 16. In Europe, it's 22. So you've created a ton of money, a ton of economic prosperity that way. And you might argue that it's not sustainable over the long run. I'm not going to deny that. I'm not even going to argue it. But what I don't think you can argue is that that hasn't caused the stock market to go up. And one of the things that I just want to stress that so many people are

just fail to realize, and you touched upon this when you talked about the sectoral balances, the government's deficit is the private sector's credit. You might not like it. You might think it's terrible. You might think it's wasted money. Doesn't matter. When the government creates a deficit, it's the private sector's credit.

Yeah, no, completely. And if you're going to change that dynamic, you have to go through an adjustment process. Correct. And I think that's what we're talking about here. So let me ask you something. I don't know if you touched on this, but besides those who, let's say, interpreted and maybe still interpret Trump's actions as being something that will be bullish for Trump,

the market and for their portfolio. There are those who see what he's doing and recognize it as bearish, but their response to that is, so he's not going to continue. Once he starts to see the negative effects that it has on his political standing, he's going to reverse policy. And your response to that is what? Okay. So there's two parts to this. The first part is in regards to the deregulation and the private sector credit creation,

One of the important parts of private sector credit creation is the confidence to go out and borrow money. You go out and buy a house, go out and do CapEx. And these on again, off again tariffs, these picking fights with allies, with all of this uncertainty has decreased dramatically.

the private sector's propensity to borrow and create money. So I think he's almost shot himself in the foot in terms of trying to get the private sector going. Do you think it's also having a negative impact on foreigners' confidence in US capital markets? And is that a more difficult thing to reverse? So 100%. I think that Trump has unleashed things

that are irreversible, or at least irreversible for many, many years, maybe decades. And one of the things that I don't think Americans appreciate enough is how upset the rest of the world is with the policies, and not just the policies, the attitude and the way that he's conducting himself in the rest of the world.

So I'll just take Canada. We have enjoyed a tremendous relationship with America for many, many decades. They're our best friends. It is the longest unsupervised or unmanned border in the world. We are very much tied at the hip in terms of our economies, our

We've always, you know, we have a free trade deal that actually Trump himself negotiated in terms of back when he was president, way back when the USMCA. And all of a sudden we wake up and we wake up to him ripping up the deal he himself signed and created.

We wake up to this, but even more worrisome than him ripping up the trade deal, because I think we wouldn't like it, but we could live with that, is this talk about annexing us. And we're just like, where the heck did this come from? This is just unbelievable. We have gone and...

Being your friends, like we went, let's just go through it. You know, Scott Galloway had this great story about during the Iran problems in the 70s or maybe it was the 80s. We actually hid you guys in terms of the Americans in Iran. Our diplomats went out of their way to hide you guys and sneak you out of the country.

When 9-11 happened, we let all the planes land in Newfoundland. And there's like, you know, all of a sudden, next thing we know, there was 300 planes landing in this tiny little place in Newfoundland. When you were attacked at 9-11, we went to war and our countrymen died with you guys, you know, in Afghanistan. We've been your friends. We wake up all of a sudden to this. We're nasty people.

comments from him. And not only that, we're going to annex you like that's batshit crazy. And so I don't think that Americans like to say, oh, you're just it's just Trump being Trump. Don't be so upset about it. It's just Trump being Trump. He doesn't really mean it. Well, he keeps saying it like, what can we do but to rearrange our economy?

And not only that, how do we go about ever doing another deal with you guys? Because the reality is that he ripped up the last deal that he did. It wasn't even the previous president. It was his deal.

So you can kind of say to yourself that maybe we're taking it too, you know, personally, and that this is just Trump and the art of the deal. But the reality is that this has forced us into a spot where we have no choice but to rearrange our economy.

And I think that the part that a lot of Americans underappreciate is that the rest of the world is looking at how he's treating us. He's looking at J.D. Vance, what he said about European soldiers or UK soldiers and French soldiers. And they're just going, holy smokes, we can't rely on you guys.

And this is not something that even if he said tomorrow, just kidding, let's cut a great deal. We can't afford to let ourselves be exposed to you guys again, because he's shown us that the deals, what he agrees to isn't worth anything and he'll change his mind from time to time. So when I'm thinking about the world and you know,

Put aside how you feel about politics because, again, trade the market you have, not the market you want. It doesn't matter what I feel as a Canadian or what a European feels. Let's talk about where markets are going and let's talk about the reality of this. But if you're sitting there and you're a European pension plan,

And you overweight U.S. equities because let's face it, U.S. equities have been the only place to be for the last 10, 20 years. And it's just have crushed everyone else. But you're sitting there and you're overweight these things. And now all of a sudden you have this president that is upending the global system.

What do you do? You're just like, I got to bring money back home. That's the key. Like you got to bring money back home and going back to our things about fiscal. So Canada is gone from, I mentioned I have, we have a 2% deficit now in terms of our fiscal, you know, to GDP deficit. Well, now all of a sudden we're sitting around going, Holy smokes. We can't rely on selling our oil to Americans. We're,

We can't rely on this. We need to expand our business in terms of making ourselves less reliant on America. We need to spend a lot of money and a lot of money now.

And now all of a sudden there has been a huge change in terms of attitudes about pipelines, in terms of mining, in terms of free trade with other countries. And we're going to go from being a 2% deficit to GDP to like 5%, 6%. Because the reality is we have no choice, right? We have to rearrange our economy to make ourselves less reliant on the American economy, right?

And you know stuff is crazy when you get guys like David Rosenberg, famed Merrill Lynch analyst that has been a huge hard money guy, talking about the amount of fiscal room that Canada has and how they should use it and they need to change it. I really think that people are underestimating the amount of spending that's going to happen in the rest of the world as this new order is created.

And so when I look at what drives stock markets, going back to my idea that the private sector or the government's deficit is the private sector's credit, I look at the US. The US is going from seven to three, right? They're going to go and they're going to try to get it down because they're doing doge. They're going to raise tariffs. They're going to try to get their deficit down. So they're going from seven to three. Canada is going from two to six to seven, maybe 10. Who knows? Europe is going from two to

to five to 10, whatever it takes in terms of them spending for the Ukraine. The reality is that it's very clear to me that the direction of change in the fiscal trajectories of the world has gone from one that has been benefiting the U.S.,

to one that's going to be benefiting the rest of the world. And so to me, if there was one thing I would tell people to take away from this, it's like over the longer term, fiscal spending in the rest of the world is going up, fiscal spending in the US is going down, trade accordingly. So Kevin, I'm going to move us to the second hour where we're going to get into more of the specifics of this forecast and the effects of your interpretation or expectation about the effects of fiscal policy.

as well as the impact of tariffs and the threatened use of tariffs on US equity markets, on the US bond market, and on other asset classes that are particularly vulnerable and where some of the opportunities are, especially in more attractively priced companies in Europe and Asia. I also want to talk about the dollar, which had been doing very well up until the beginning of this year. And since then, and especially in the last month, has sold off substantially against the basket of global currencies. And I want to try and understand the drivers of this move.

How much of it is being driven by concerns about a new Plaza Accord? How much of it reflects a deteriorating confidence, for example, in US capital markets? And how much of it reflects larger concerns about dollar recycling and a secular reversal of trends in globalization, international security, and the free flow of capital that have been in place since the end of the Cold War?

The translation for investors being, does this mark the beginning of a new multi-year downward trend in the dollar, or is it just noise driven by a temporary blip in defense spending by the Europeans or transitory concerns about Trump's tariff policies and some of the general communication coming out of the White House? And then what are the implications in either case for various asset classes, including gold, which we're also going to discuss in the second hour?

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