0:04

macro trading floor. With me,

0:06

Alfonso of the macro founder of former head of

0:08

investments of large European European Bank. Donnelly

0:10

I am Brent spectrum president of been

0:13

a portfolio I've been a portfolio

0:15

manager, day trader and market maker

0:17

at the biggest commercial and

0:19

investment banks in the United States.

0:22

States I'm also the author of of Alpha Trader

0:24

and of Currency Trading. If you

0:26

wanna know what's going on in markets on where

0:28

they're going, and you found the right podcast. found the right

0:30

podcast Bune-Jorno everyone, here, welcome

0:33

back to the back to the Hey Brent Buddy,

0:35

how are you? Hey Alf, I'm good.

0:37

Exciting times in the I'm good. right to

0:39

the finish line of right

0:41

to the finish line of we are,

0:43

but not with not with a calm

0:45

I think Santa Powell, for God it was

0:47

supposed to be Santa Claus and

0:49

delivered quite, I would say, say,

0:52

quite a hawkish press press conference overall. there

0:54

I think there were a

0:56

couple of sentences that that were... pretty

0:58

impressive if you ask

1:00

me, but for sure

1:03

for sure markets reacted in stride,

1:05

mean stock stock markets, it's quite

1:07

some Let me start

1:09

by asking you before I tell

1:11

my opinion. my Do you think

1:13

that Powell was hawkish, and how hawkish

1:15

was how a scale of 1 to

1:17

10? a scale do to 10? because going

1:20

in, going I had written a thing a

1:22

thing for those about to hawk, which

1:24

is a horrible reference to an ACDC

1:26

song, to an ACDC song, but... a

1:28

hawkish outcome. a lot I got a

1:30

lot of pushback saying hey hey, everyone expects

1:32

them to be hawkish. It's going

1:34

to be a hawkish cut, everyone knows

1:36

that. that And then obviously you saw

1:39

the market reaction. And I think

1:41

the divergence was that. was were

1:43

kind of leaning towards something hawkish,

1:45

but people didn't really have much of

1:47

a position for it, and a position

1:49

think the two dots, going from four

1:51

cuts to two, to two again, people so

1:53

people were saying, two cuts are

1:55

already priced in. in so like who cares

1:57

if the the goes to two cuts? cuts

1:59

but in And work like that like soon

2:01

as they go to soon the market

2:03

goes to one. market goes to one. So always

2:05

going to be one step ahead of

2:07

the be whatever direction they're going whatever direction

2:09

they're going. And all the details, it was interesting

2:12

because a lot of times a get

2:14

the times you statement dots in the they show

2:16

one thing, but then he kind of

2:18

pushes back at the press conference

2:20

and you get a whipsaw in the

2:22

market. and you But this was just the

2:24

on top of hawkish. just like I

2:26

mean, I thought it was So yeah, I

2:29

hawkish. think the fact that inflation is

2:31

sticky on a lot of measures

2:33

is resonating with the you know labor markets you can

2:35

you can can slice and dice a

2:37

lot of different ways right now been the

2:39

case been the case for the last

2:41

six months, like not as strong

2:43

as as strong but obviously that was

2:46

overheated. And then the question is

2:48

like, are we is like are we 2019,

2:50

or is something worse coming in

2:52

the labor market? And just one

2:54

more thing about 2018, 2018. Very similar Eve

2:56

2018 was the massive sell-off the massive sell had

2:59

to come in and say liquidity was to come

3:01

in and a really was plentiful, which

3:03

was a really strange comment. been up a

3:05

lot and they been up a lot

3:07

and they were down 10 % or

3:09

we're kind of getting we're kind of getting

3:11

like a little bit of a we talked

3:14

about call. And we talked that bit

3:16

last week that the Fed just doesn't

3:18

have your back anymore. So part

3:20

of the reason that risky assets were

3:22

exploding was was... You had soft landing Fed

3:24

cuts, a davish Fed, dovish a soft a soft

3:26

landing is like the dream scenario for

3:28

risky assets. And now you don't

3:30

really have that. Not that the Fed's

3:32

gonna hike, but hike, but a lot

3:35

of weird stuff going on in going

3:37

none of it's really great for risky

3:39

assets. really great for risky I have to

3:41

echo your opinion. I think

3:43

this was the most this was I

3:45

can remember power I can long while

3:47

a think since I think since 2022. And

3:49

are are... reasons why I would

3:51

say he was really really main

3:53

message I think Brent was brand was

3:55

if you were assigning high value to

3:57

your fed boots basically the fed providing

4:00

comfort that protection equity investors, because the

4:02

idea was was to ease at

4:04

the first sign of weakness, right? right

4:06

Now, Paul has told people that

4:08

if they want puts they they can

4:10

go and buy them themselves. okay so

4:12

he's not going to be there

4:14

to provide provide all these puts and And

4:16

it came in the form of

4:18

assigning the same to to inflation they assigned

4:20

to labour they assign to labor market

4:22

deterioration. a That's quite the change

4:24

of pace. mean, they always told

4:26

us for nine that the job on was

4:28

done. was done and therefore, they were were worried

4:30

about the labor market. I mean, that's

4:33

great for a stock market investor, because as

4:35

you said, it looks like a soft it

4:37

looks like a going to protect your downside. the

4:39

That's perfect. to protect your downside. want some

4:41

puts, go buy them. saying know, I'm not

4:43

gonna give them to you anymore. buy big

4:45

change. not And the other thing that impressed

4:47

me was, It's a big change and the other the

4:49

dot plot, they have so in

4:52

thing they have they say neutral

4:54

thing and they say mutually is whatever. whatever.

4:56

And then in the press

4:58

conference, conference, Powell you know, now

5:00

we are now we are remarkably closer, much

5:02

more. to close to neutral

5:04

than before. you're still at 425. still at

5:06

like not so That's three, so close to three,

5:08

is it? yeah, And then later he says, it

5:10

was a but actually it was a closer at

5:12

weather to cut at this meeting. What? four

5:14

I mean, half. at four and a half.

5:16

You're telling me in the dot plot,

5:18

the the neutral is three. You a a close cold

5:20

weather to cut at all. And then you

5:22

tell me you're remarkably close to neutral.

5:24

mean, it seems like your neutral is not

5:26

three. It's actually more like three and

5:29

a half or actually four. So it felt

5:31

to me like, half or actually four. So

5:33

it felt to me which I think matters a

5:35

little bit more than what other people

5:37

think in the bit more actually higher than

5:39

3%. I think neutral rates in the

5:41

is to Powell are higher, percent. That's my

5:43

impression. rates in it's very interesting, to

5:45

because in the context of a lot

5:47

of other countries heading much, much

5:50

closer to neutral. And like you said, you

5:52

said, mean, I people I don't think

5:54

would think that neutral is is above

5:56

4% in the US. So a lot So

5:58

a lot of his comments. were

6:00

very hawkish, and

6:02

also raise the question

6:06

or the issue that nobody knows

6:08

where neutral is. It's going up

6:10

from X to Y, and we

6:12

didn't really know what X was,

6:14

and we don't know what Y

6:16

is. So yeah, I think it was

6:18

a very interesting meeting. And now the

6:21

onus is on, I mean, if inflation

6:23

just goes to 2%, we're going to

6:25

get the biggest bond market rally of

6:27

all time. But it doesn't look like

6:29

it really wants to, right? mean, inflation

6:31

has been pretty sticky now for six,

6:33

seven months. And the easy like

6:35

Powell mentioned this a few times, the

6:37

easy comps are falling out. So

6:39

the base effect stuff is means that,

6:41

you know, inflation is really more

6:43

like around 3, three and a half

6:45

percent on a lot of measures. So

6:48

look, I think the

6:51

bond market reaction is really

6:53

interesting here because base rates

6:55

at 425 are arguably not

6:57

low. it's, let's say, many

6:59

people wouldn't tell you that

7:01

base rates at 425 %

7:03

in the US are accommodative.

7:05

They would tell you they

7:08

are a bit high, but

7:10

not accommodative, yet the bond

7:12

market is basically reacting as

7:14

if they are. which is

7:16

a big, big news. So we

7:18

were before recording, we were discussing

7:20

this steepening behavior. that the

7:22

yield curve normally has late in

7:24

the cycle. know, when the Fed is

7:26

approaching a bunch of cuts because

7:29

the market is weakening, then yes, the

7:31

curve steepens because the front and

7:33

yields go down so much. so they

7:35

outpace basically the long -end And that

7:37

steepening, a bull steepening that case

7:39

is effectively the market telling us

7:41

that fed cuts will be stimulative

7:43

for growth and inflation down the

7:45

road. So the cuts are absorbed

7:47

at the front -end and then

7:50

the curve is steeper at the

7:52

long end reflecting that these cuts

7:54

will work to stimulate the economy.

7:56

Okay, that's understandable. But now the

7:58

market yesterday took off. a lot of

8:00

cuts, so so we were pricing, we

8:02

are still pricing, for the entire

8:04

2025. 2025, 35 bits of bits of

8:06

cuts, that's it. we And so

8:09

we are basically pricing, we're gonna

8:11

stay around to stay around four, and nevertheless,

8:13

curve today is really aggressively. really So

8:15

to interpret this, there are a couple of

8:17

ways to think about it. to think about

8:20

first first is... the market thinks that even

8:22

these few cuts that the Fed is

8:24

doing now, now brand, they are already stimulating

8:26

inflation and they will be stimulating growth

8:28

and inflation down the road. down the road. a

8:30

completely different approach where the market doesn't

8:32

need the Fed to cut to doesn't

8:34

to be Fed to cut 2% to be stimulative.

8:37

The market thinks that the Fed a half is

8:39

already more than enough to more than

8:41

and inflation down the road, which

8:43

is quite interesting. the road, which is it

8:45

can be seen as a combination

8:47

of inflation and fiscal risks risks

8:49

up in the long the long because

8:51

most of the the is really happening

8:53

in really happening 10 20 -year, 30 -year

8:55

bonds. 20 or 30 So it could also

8:57

be that be market is saying

8:59

to the Fed, saying to the you cut,

9:01

knowing there is uncertainty about tariffs

9:03

coming and knowing the economy is

9:05

already economy is already really adding

9:07

inflation really adding to the

9:10

curve to the curve top of

9:12

top of the fiscal patterns we we really

9:14

feel like we should be rewarded

9:16

for inflation risk risk at the at

9:18

of the curve. But in any

9:20

case, those are not things we're

9:22

very used to to. For the bombarding really

9:24

strange. If there's definitely a lot

9:26

of weird stuff going on. stuff on

9:28

top of what you're saying, you're saying,

9:31

normally when the curve curve like

9:33

I I usually look at three three

9:35

10 year or whatever, but whatever

9:37

you look at, look at, usually it it

9:39

disinverts. it's entering it's it's when we're entering

9:41

recession it's late. late cycle and are going

9:43

down down so generally what you see

9:46

like as the disinversion and that

9:48

steepening happens happens usually seeing yields

9:50

going down down and this this is one

9:52

of the very few times when

9:54

it yields are actually going up

9:56

up so I was just looking at

9:58

the disinversion happened in in three 30 years, what

10:00

I was looking at for whatever reason, but that

10:02

happened a week ago. And

10:04

so then I looked at the seven day

10:06

change in the 10 year yield after

10:08

the disinversion. And normally

10:11

it's negative because you're heading into

10:13

recession and rate cuts are

10:15

coming exactly what you described. And

10:17

we're up 34 basis points

10:19

since then. And the only other

10:21

time that happened was the

10:23

repo crisis in 2019, which was

10:25

like, basically under

10:27

the hood, a lot of bad

10:29

stuff was happening in the treasury

10:31

market. And so it makes me

10:33

actually wonder if, again, kind of

10:35

combining what you said, that maybe

10:37

there is this kind of double

10:39

fear. There's a fear that inflation

10:41

is still strong and they're cutting

10:43

into it. But then there's also

10:45

this fiscal concern, which is like,

10:48

you know, they're talking about cutting

10:50

spending, but nobody actually believes that

10:52

that's possible or it's going to

10:54

happen. But then today, Trump

10:56

actually said we want to get he

10:58

wants to just get rid of the

11:01

debt limit and And the debt limit

11:03

is like this stupid circus that goes

11:05

on every now and then and they

11:07

always raise it But the one thing

11:09

you could argue from a psychological point

11:11

of view is that at least it

11:13

requires some kind of conversation to there

11:15

it's like a limiter in theory even

11:18

though it's not a limiter because they

11:20

just keep raising it it's still like

11:23

you know, like if you had no

11:25

credit card limit, that's different from having

11:27

a $10 ,000 limit And then you raise

11:29

it to 20, then you raise it

11:31

to 30. You're just going keep hitting

11:33

the limit. At least it slows you

11:35

down a little bit. So I wonder

11:37

if there's some aspect of, people are

11:39

just worried that another crazy round of

11:41

MMT style deficits may be around the

11:43

corner and maybe not, but if they

11:46

are, then we gotta price it in

11:48

a little bit. Yeah, I mean, on

11:50

this dead limit. I

11:52

agree it's full circus so the

11:54

US doesn't need the limit

11:56

on its debt. I mean if

11:58

there is an end entity that

12:00

going to put a limit on is

12:02

that it's actually market participants one

12:04

day. If they ever grow tired of

12:06

this game, although as we've explained

12:08

multiple times, the game works because the

12:10

entire system is based on the

12:12

dollar. That's why it works. So everybody

12:14

wants more dollar collateral. Everybody needs

12:16

more dollar collateral. And that's why it's

12:19

possible for the U .S. to have

12:21

twin deficits and all these beautiful

12:23

things. But if one day there is

12:25

discipline to be injected there, it's

12:27

not going to be that limit legislation

12:29

that does. that. it's going be

12:31

the market. So welcome taking

12:33

the circus of my calendar when

12:35

I have to mark that limit.

12:37

Oh, okay. Let's see if the

12:39

Treasury General Account, how much dollars

12:42

do they have? Are they going

12:44

to find a deal before or

12:46

after? Are we going to have

12:48

a technical default? I mean, it's

12:50

more of an annoying circus than

12:52

anything else. But one thing, an

12:54

observation for our listeners is this

12:56

fiscal thing is actually not only

12:58

showing up in nominal yields at

13:00

the long end, where a simple

13:03

observation is Fed funds are 425,

13:05

30 yields are 475. So

13:07

the fact that you have base rates

13:09

so high and then 30 year yields

13:12

are even higher basically that these base

13:14

rates are not enough to slow the

13:16

economy or inflation down in the long

13:18

run, it's quite something. And then there

13:20

is another way to observe it, which

13:22

is if you are an investor and

13:24

you want to have duration interest

13:26

rate risk in your portfolio, then you

13:28

can do it in two ways.

13:31

You can buy 30 bonds or you

13:33

can receive third year swaps. These

13:35

are your two ways to basically receive

13:37

interest rates or expect interest rates

13:39

to go down with a bet. And

13:41

so when you look at the

13:43

differential between these two yields. the

13:45

30 year swap rate and the Treasury yields.

13:48

30 year Treasury yields today are trading

13:50

over 90 basis points over

13:53

year swaps. So,

13:55

this is a premium brand

13:57

that investors are requiring. to actually

14:00

buy the treasuries to actually

14:02

buy the bones than do the

14:04

same trading swaps. So this is a

14:06

thing called swap spreads or if you're

14:08

not in the US asset swap spread

14:10

but it's the same thing. And And

14:13

I mean, if you look at it,

14:16

it has been going up steadily over

14:18

time. So the premium that investors are

14:20

requiring to buy bonds rather than have

14:22

swaps as a duration exposure is going

14:24

up and up and up, which yes,

14:26

has to do with some regulatory constraint

14:28

and balance sheet capacity, but also could

14:31

be an indication that people are worried

14:33

about the amount of collateral the US

14:35

is going to issue, especially because Bessent

14:37

looks like he wants to term out

14:39

that it's something that he would like

14:41

to do. But term out that means

14:44

issuing. more long bonds, is very, very,

14:46

very duration heavy intensive product

14:48

to absorb, and the more you

14:50

issue, the more the private

14:52

sector needs to absorb it somewhere,

14:54

I mean banks, pension funds,

14:56

insurances, etc., And they seem to

14:58

be requiring a premium to

15:00

do so, which also Brent could

15:02

echo your feeling that these

15:04

fiscal risks are getting now

15:06

quite intense and we also have

15:08

an anecdotal evidence from your

15:10

side that apparently not only professionals

15:12

but also retail people at the

15:14

shop are worried. Yeah, today

15:16

I was down at the deli and

15:18

some random guy was telling the owner of

15:20

the deli how worried he was about

15:23

the U .S. debt and interest rate interest

15:25

payments on the debt. And normally I would

15:27

see that as a reverse indicator. You

15:30

know, normally like your friend says

15:32

is it too late to buy gold

15:34

and that's the highs in gold or

15:36

whatever. But in this case, because we

15:38

haven't really had like that moment in

15:40

the markets, I'm actually wondering if it's

15:42

maybe the start of something. And then

15:45

you also see normally when the

15:47

system starts to feel a little bit

15:49

of pressure like this so you see weird

15:51

stuff going on in the bond market

15:53

like check, see EM starting to blow up

15:55

and you see the dollars start to

15:57

rip and And so we're starting.

15:59

see Brazil up. we're seeing the seeing

16:02

the dollar we're We're actually getting

16:04

almost back to the highs highs in dollar

16:06

yen. So I don't know if you have

16:08

any thoughts on Brazil, but Brazil, but the

16:10

thing is is ends up ends up happening

16:12

is it creates a lot of a

16:14

lot of negative consequences say for say

16:16

for, for example, in Brazil, of the because

16:18

of the pressure from the U then

16:20

dollar Brazil starts dollar up, starts going

16:22

up, people start worrying about Brazilian deficits, and

16:25

then they have to start hiking rates

16:27

in order to offset the currency weakness,

16:29

which is bad for the economy, and

16:31

then you go into this negative cycle.

16:34

cycle. So what are you thinking about

16:36

Brazil now that it's it's of

16:38

blowing up? blowing it's pretty much

16:40

blowing up, I would say. I

16:42

would So So one comment about Brazil,

16:45

These people are great at barbecue and

16:47

is great, is but it has

16:49

nothing to nothing to do with markets. Then the

16:51

I have on Brazil I have on Brazil

16:53

is... So the market is on

16:55

a narrative narrative where Lula is is

16:57

expected to want to juice up the

16:59

economy ahead of elections. The

17:02

elections are in October 26, so that's a a

17:04

long way to go. It's almost

17:06

two years But people are assuming

17:08

that Lula will be quite easy

17:10

on fiscal spending basically to juice

17:12

up the up the economy before elections

17:14

already next year. next year. Now in Brazil

17:16

you already have core inflation I

17:18

think a bit north of I

17:21

percent of 5% People are, are like like, dude, no,

17:23

you cannot cannot do this are you

17:25

kidding me you cannot do more

17:27

fiscal spending on an economy running

17:29

at five percent core inflation running at

17:31

5% core inflation. And so this the fact that

17:33

Lula is Lula has appointed his

17:35

friend to be the new Brazilian central

17:38

bank president, you know, you

17:40

know, makes investors quite worried

17:42

about about the prospect of

17:44

Brazil losing independence on monetary

17:46

and fiscal, monetary and fiscal. They're adding

17:48

risk premium. The extent of this

17:50

risk premium has become quite impressive. impressive.

17:52

So there is a is a product, is very is

17:54

very cool when it comes to access

17:57

to financial markets and sophistication of the hedge

17:59

funds out there. There is even a product

18:01

to trade to trade. The expected Brazilian central

18:03

bank bank rates a year or

18:05

two years from now. now. So like the

18:07

SOFA or the Sonya or the Uribere they also

18:09

have something like that in

18:12

Brazil. something like has in Brazil. So points

18:14

at the last meeting. a The

18:16

base rate for reference is over

18:18

at the meeting. The base And now, in a

18:20

year from is over 12%. expecting rates to

18:22

be above now, we're expecting rates to be above 15%,

18:24

and rate at which we closed

18:27

yesterday. So what the are

18:29

doing is the typical typical bond vigilantes the

18:31

bonds, sell the currency, sell sell any is

18:33

that is denominated in Brazil This is the

18:35

This is the bond trade brand. So

18:37

when somebody says says the vigilantes are at

18:39

are in the US in the US and bonds

18:41

are selling off, but the dollar is

18:43

going up. I'm sorry to break

18:46

it to you you There are no

18:48

bond vigilantes. These are only people selling

18:50

bonds. That's not enough. bonds, have the

18:52

whole risk to have the going on,

18:54

right? trade Well, the weird thing

18:56

about the weird too, is that

18:58

too. the US dollars are safe

19:00

haven, and because it responds

19:02

to yields, to crazy shit happens. happens,

19:04

even when the US got downgraded, the

19:06

the dollar actually went up

19:08

people bought treasuries, which is like, what,

19:10

you know, 2011. a lot of weird stuff lot

19:12

of weird stuff happens. yeah, if you

19:14

see think, yeah, if you see

19:16

the vigilantes here, goes through the bond

19:18

it just goes through the bond

19:20

market. and then the dollar reacts, and then

19:23

you get all these consequences. And

19:25

And there tends to be a lot

19:27

of sort of feedback loops too, because

19:29

then in Brazil, Brazil, you know, when Salique

19:31

is 15% then people start putting their money,

19:33

taking their money out of risky assets

19:35

out of the stock market, putting it

19:37

into market, fixed income, because you get

19:39

the inflation protection in Brazil and all

19:41

that. So in start to see all kinds

19:44

of stuff. And I feel like of

19:46

stuff seeing it even in gold

19:48

and silver it even is and silver too,

19:50

kind of like shows of we're at

19:52

the front we're of a little

19:54

bit of a liquidity issue not going

19:56

not going to say some kind

19:58

of crisis or anything but it does

20:00

feel like bit a little bit now to

20:03

of sketchy right now to me.

20:05

plentiful and liquidity saying whatever he's saying, people are is

20:07

saying I'll he's saying, people are

20:09

just like, I'll just buy to carry.

20:11

I want to carry. doesn't know, like

20:13

it doesn't always like not always

20:15

like Y in these in these situations. And

20:17

I think what the the move

20:19

in Brazil is showing and the

20:22

move in dollar yen overnight, which

20:24

is pretty gargantuan. think we're up

20:26

500 points in 12 hours or

20:28

something or something like like that. maybe

20:30

not quite that 400 I guess. But

20:32

again, it's kind of kind of showing

20:34

that actually And Powell actually emphasized

20:36

this in the press conference,

20:38

that the US is like this

20:41

island of stability and and the balance sheets,

20:43

sheets, consumer and corporate balance

20:45

sheets are great and awesome

20:47

in the in the US. And then

20:49

you start looking around and

20:51

you're like, you're like, holy Zealand New

20:53

printed a negative quarter GDP and

20:55

they they revised the quarter

20:57

before that down like like one and

20:59

a half percent you got Canada governments

21:01

falling apart, cataclysmic tariffs might come.

21:03

you You start looking around

21:05

the world and it's like like

21:07

the US is is this safe bastion of

21:09

of strength and everything else

21:11

looks really, really sketchy. sketchy yeah

21:13

which actually brings me to

21:15

one thing we should discuss. should

21:18

discuss I mean, okay Brazil is

21:20

an idiosyncratic case. mean, they're

21:22

really pushing this fiscal monetary

21:24

problem. a And it's a very

21:26

idiosyncratic event driven situation. China, we

21:28

might we might also discuss idiosyncratic

21:30

it is, right? mean, mean, it's really city it's

21:32

a very specific case, very but

21:34

instead, case, if we focus on focus on

21:36

like Europe, New Zealand, Australia, even

21:38

down the the road, when you look at you

21:41

look at these countries you have

21:43

to wonder year, year the will the

21:45

central bank behave in these places brand?

21:47

now they're facing a hard situation.

21:49

situation. facing a situation a like in

21:51

places like for example like for Australia

21:53

UK or Canada. Canada, you have

21:55

core inflation, which is still

21:57

a little bit above the central

21:59

bank targets. general, then you have a depreciating

22:02

currency versus the dollar because the Fed is

22:04

out-hocking anyone else. And so if you are

22:06

the central bank of New Zealand, okay? Great

22:08

example. So what are you going to do

22:11

next year? Are you going to try and

22:13

mimic the Fed to protect your currency? and

22:15

therefore not to avoid it weakening more and

22:17

ends importing more inflation? Or are you going

22:19

to say look at my GDP, it's looking

22:22

horrible, I should actually detach from the Federal

22:24

Reserve, I should cut rates which will weaken

22:26

my currency aggressively, which will make industry differentials

22:28

very very wide? So this is quite the

22:31

question for next year. Your answer? Yeah, and

22:33

there's a point, it's some kind of nonlinear,

22:35

but like saying Canada... The pass-through from the

22:37

exchange rate is pretty significant and it's pretty

22:40

fast because of the tight relationship between the

22:42

US and Canada. So if Dollar Canada goes

22:44

to 150, then you got a problem on

22:46

the inflation side and you wanted to cut

22:49

because of XYZ, but now you can't. And

22:51

so, yeah, then the curves all around the

22:53

world start shifting up because there's not really

22:55

a limit to how much the central banks

22:58

can diverge from the Fed, but like you

23:00

said... It's basically a strategic decision of are

23:02

we going to risk inflationary currency weakness and

23:04

just like do our own thing or are

23:07

we going to actually kind of take it

23:09

easy now because we're worried that that the

23:11

currency is our currency is too weak. So

23:13

Japan's another example there where around 160 the

23:16

Ministry of Finance intervened last time and but

23:18

the problem is that if US yields are

23:20

going up fast and Japan you know B

23:22

OJ last night was pretty dovish then at

23:25

some point the release valve just becomes the

23:27

currency and then if the release valves of

23:29

currency then the problem is then rates become

23:31

a problem and you can't you can't be

23:34

so dovish because your currency is so weak

23:36

that you have an inflation problem in Japan

23:38

which is like something they would have dreamed

23:40

of 10 years ago,

23:43

but now it's potentially

23:45

could turn into a

23:47

nightmare. Yeah. So my

23:49

answer to my same

23:52

question is, I think

23:54

that mostly central banks

23:56

will try to take

23:58

care of their own

24:01

economies. I mean, I

24:03

think if you really

24:05

force them to choose,

24:07

they will have to

24:10

take care of the

24:12

domestic weakness in their

24:14

own economies. And so

24:16

they will have to

24:19

detach from the Fed.

24:21

And if they do detach from the

24:23

Fed, then the FX market, we're going

24:26

to see some fireworks. And

24:28

because if they are forced to

24:30

detach from the Fed, there are

24:32

two things going on here. The

24:34

first is their domestic fundamentals suck,

24:36

otherwise they wouldn't be forced anyway

24:38

to detach in a dovish way,

24:40

which is already bad for their

24:42

currency. Second, the dollar is probably

24:44

stronger because the Fed remains hawkish

24:46

at that point. So I think

24:48

some of these currencies are quite exposed.

24:51

And I mean, you know better than I

24:54

do in FX, What's the sentiment around

24:56

this? For sure, nobody wants to be short

24:58

the dollar here, but how bad is

25:00

the sentiment around certain currencies? Like, I don't

25:02

know, the Euro or the New Zealand

25:04

dollar or the Aussie dollar or Canadian dollar.

25:06

And is that really like, can you

25:08

see it in option prices? I mean, how

25:10

bad is the sentiment around this? currency?

25:12

there Is there to go? Well, the thing

25:14

is we actually passed the extreme because

25:16

the most dollars most dollar period was kind

25:19

of like mid to end of November.

25:21

And then euro dropped and then the euro been

25:23

flatlining for about a month, so. So People

25:25

now who had like a lot

25:27

of options, positions and stuff, a lot

25:29

of them have burnt off. And

25:31

then dolly people didn't want to touch

25:34

it because they thought BoJ might

25:36

hike. And then EM, it's like, it's

25:38

expensive to be long dollars in,

25:40

in EM. So the positioning actually hasn't

25:42

been that extreme. And then in

25:44

Australia, people have been waiting for the

25:46

China Stimmy. every time that happened,

25:48

they react and buy Aussie. So. I

25:50

don't think the positioning is actually that

25:52

extreme and the interesting thing in China

25:54

is like, it's if you look at

25:57

a chart of yields in China, it's

25:59

unbelievable. like They're absolutely collapsing. It's

26:01

a crazy situation. currencies the currency's

26:03

essentially give or take give or

26:05

take or two. or two. seen much

26:07

haven't seen much reaction in

26:09

the currency, it but it does

26:11

create pressure because it's just

26:13

a lot more. to own

26:15

dollars own dollars against all these

26:18

currencies, because you're just

26:20

getting a massive head start. start. Switzerland's

26:22

another one one where. if you look

26:24

at where dollar swiss is now you have

26:26

you have about a three four hundred

26:28

or like a % cushion cushion from the

26:30

the yield advantage, you know voles and

26:33

are only are only 7 %

26:35

or something. So so to

26:37

the volatility of which isn't

26:39

which isn't that high, you're

26:41

just getting an enormous pickup long dollars,

26:43

and I think it's that crap. it's

26:45

that crowded honestly yeah that's an

26:48

interesting uh observation I

26:50

also don't have the feeling that

26:52

these currencies are so negatively assessed

26:54

by on on the downside in I think in

26:56

think in effects going to be

26:58

quite a lot of fun next

27:00

year so if you're an so if you're

27:02

an it might be fun for

27:04

you it might be fun for you let me me

27:06

ask you one behavioral question I

27:08

think we'll take take different sides here,

27:10

but it's interesting. So so do you

27:13

try and see whether has has

27:15

joined the crowd or I should

27:17

say like the late money is

27:19

in a trade and therefore you

27:21

should maybe maybe or take the other

27:23

side of it. side of of the

27:26

things of me has worked the

27:28

best me has worked the best is leverage

27:30

my Twitter followership, come

27:32

out with a poll and when

27:34

I think there is something

27:36

that can be really can overcrowded. overcrowded,

27:39

ask. Twitter in a poll and I

27:41

receive about thousand replies the sample

27:43

is quite wide wide and

27:45

them. them where do you Where do

27:48

you think Z asset asset will

27:50

be in three months? we'll

27:52

them a defined asset, asset horizon,

27:54

time and then go and

27:56

calculate calculate standard deviation negative answer.

27:58

negative answer two. kind of

28:00

meat and and one positive

28:02

answer. Just give

28:05

them the distribution

28:07

of rational outcomes the distribution

28:09

of rational outcomes basically. And so when

28:12

Twitter are one standard deviation one

28:14

either of the two division tail, see

28:16

of the two to more

28:18

than 35 votes cluster to more than

28:20

35% in the it means it's

28:22

crowded. It's crowded. It's my rate

28:24

on my book. I I asked

28:26

this, I think, on 10

28:28

year treasuries when no no first no, 2022

28:30

First, in 2022, could like

28:32

I like the Fed could hike

28:35

above like one and a half

28:37

percent or something, the was the

28:39

one side deviation 50 % said way

28:41

way. like impossible so then well of well,

28:43

of course, they ended up hiking

28:45

above that. above second time I

28:47

asked was the other way. I

28:49

asked was the other way can 10 they

28:51

were at be when they were at

28:53

4 75% will they be in three

28:56

months? months? Huge tail on on So my mother,

28:58

So my mother, my dog, your

29:00

mother, everybody said the treasure should

29:02

be should Needless to say, they were

29:04

much lower after three months in

29:06

December at the end of the

29:08

year. in December at the end of the

29:11

year. And that. generally take that

29:13

overconfidence about a tail one way to

29:15

measure how crowded it is. it is.

29:17

But what do we say about

29:19

the deli guy? mean, guy? I

29:21

is the deli guy? the deli Is

29:23

taxi driver? taxi How we assess

29:25

that? Yeah, there's two ways. that?

29:27

the first thing is, I see

29:29

what you see, which is you

29:31

see, the mega extremes, it's a

29:33

signal. The one thing

29:35

I feel like you have to

29:38

be careful with is with is

29:40

bias bias sometimes you can find

29:42

things. that. that look like a signal

29:44

when they're actually not. But I

29:46

feel like when I'm I'm just agnostic

29:48

and a signal comes to me me and

29:50

and it's extreme like what you're

29:52

describing. I think those think those those mega

29:55

deviation signals are amazing. are The

29:57

other one is the shoe shine thing. I

29:59

think like if You're non, non financial market

30:01

people are asking you about something. That's

30:03

a huge indicator because like it takes

30:05

a lot for, you know, gold has

30:07

to be up 30 % before your

30:09

brother -in -law is going to text you

30:11

to say, is it too late to

30:13

buy gold or whatever. Um, and actually

30:16

I tend to post those things on

30:18

Twitter and the hit rates really high.

30:20

Um, so I feel like when, when

30:22

the zeitgeist, like, I'm I always listening

30:24

on the subway and all that, just

30:26

for like what people are talking about.

30:28

like, you know, six, it was like,

30:30

oh, it's impossible to find an apartment

30:32

in New York and whatever. Um, So

30:35

I feel like that stuff has value,

30:37

but if you already have a view. you're

30:39

going to get confirmation of it

30:41

if you look hard enough. So best

30:44

thing is like something that you

30:46

don't even care about, like quantum computing

30:48

or whatever. And you hear people

30:50

talking about it on the subway and

30:52

you're like, okay, yeah, now I

30:54

can sell Q U B T or

30:56

whatever POS is out there. Yeah,

30:58

I think it's uh, most important thing

31:00

is indeed not try to concoct

31:02

something to validate your priors. Right. And

31:04

um, is something else that I

31:06

want your opinion on because it interests

31:08

me for. uh, my hedge fund strategies

31:10

next year. So we're discussing with

31:12

the guys here at the fund.

31:15

We were saying, okay, of course,

31:17

the best possible trade for macro

31:19

investor is when you have a

31:21

narrative, macro narrative that you believe

31:23

in, and then the market is

31:25

completely off versus your narrative, right?

31:27

So they're offering a symmetric payouts

31:29

versus a narrative that you have.

31:31

So that's great. Everything ticks, you

31:33

put it up, you size it

31:35

right and you own it. You

31:37

can be still wrong, but it

31:39

ticks the boxes. Okay.

31:41

what if, Brent? Brent, you were

31:43

really 50 -50 on something, you don't

31:45

have a macro narrative, you really

31:48

don't know, you're indifferent, as you said,

31:50

okay, Completely indifferent. but the market

31:52

has pushed the pricing of something

31:54

to a level which is

31:56

objectively offering a symmetry. then

32:00

walked. Yeah, that's such a tricky one such a tricky

32:02

one because there's two things. One is things

32:04

down a lot, I down a lot. I got

32:06

to buy it, which is not what

32:08

you're describing. But I think that's what

32:11

people tend to look at is tend to

32:13

at at is like, look at Oh, it's at

32:15

30 or low. I need to buy

32:17

it. at 30 or low, I then buy there a

32:19

reason it's is 30 a low? But I year

32:21

low? am more in the camp more in the

32:23

camp of playing a lot, like just like

32:25

just taking a lot of positive expected

32:28

value value is the way. So the only

32:30

question is, like, can you get enough

32:32

of them? So, like, if you have

32:34

a short time horizon, you can get

32:36

millions of them. can And then of yeah,

32:38

so going into so some number where

32:40

I just. I just from talking to everyone,

32:42

I know I short dollars and I

32:45

don't really have a view on the

32:47

number, don't but I'll go in long dollars

32:49

just because I think there's gonna be

32:51

just % move versus a 0 .2 % the

32:53

other way. versus a 0.2% the other do like

32:55

those, but I think. I think Ultimately,

32:57

like the election is a good example of a

32:59

bad one bad one mean, even though I had

33:01

a view and I lost money on the

33:04

election. lost money on the election, where, you know, know, if

33:06

you're a macro person, you don't get

33:08

enough even if it's positive So if what you want with

33:10

like what you want with positive that

33:12

something that you can run a thousand

33:14

times, right? You don't want to. a coin toss

33:16

that pays two to one and you

33:18

bet your life savings on it and

33:21

you only get one flip. What you

33:23

want is to find like zillions of

33:25

them. That's why like events and them. That's

33:27

banks and economic data and all that

33:29

is that if you have like a data

33:31

which would be a lot, if but

33:34

if you have a a 60-40 edge, on that

33:36

be a lot, but if you you get edge on 200

33:38

reps a year get then your edge

33:40

will year and then your edge will will be

33:42

excess of the the variance. Whereas if

33:44

you take three a year,

33:46

you know, is gonna kill

33:48

you. to kill we came to

33:50

a similar conclusion, conclusion, which is,

33:52

should probably, when we

33:54

don't have we we should

33:57

probably size those purely asymmetric payoff

33:59

without an art. behind way less because this less us

34:01

this will allow us to take more

34:03

of them during the year the the

34:05

sample therefore if the payoff is really

34:07

a symmetric a at least you can take

34:09

more of them can the smaller sizing with

34:11

the making sure that you know you

34:14

can at least that you can at least provoke your

34:16

luck. I think this was more or

34:18

less or less there. Increasing the surface

34:20

area or whatever. the kind of

34:22

a similar question to the one of a

34:24

lot of times I'll put out a view

34:26

based on like, you know, one of a and

34:28

some correlation or whatever, a bunch of factors on like,

34:31

someone will say to me, okay, yeah, but

34:33

what's the catalyst? And a

34:35

lot of times I'll just say,

34:37

I have no idea, dude. a just,

34:39

this is the setup. And someone will

34:41

catalyst me, I make the money. what's the

34:43

catalyst? 8 was a was a sitting at my place

34:45

and and writing a piece for

34:47

clients. I I was observing a bunch

34:49

of stuff stuff like the in stock stock

34:52

markets was like depressed. I mean like you could

34:54

buy puts relative to cost to cost

34:56

cheap. cheap. So you So you see all

34:58

this stuff and credit spreads are

35:00

like spreads are like 30 and stuff like

35:02

that. stuff like that okay so objectively if

35:04

you can have this set

35:06

up a hundred times you don't

35:09

and you don't know the cut as you just close your eye

35:11

and you eye and you buy protection during

35:13

exactly this setup probably positive have the end of

35:15

the thing Okay, but you need

35:17

to be able to repeat it a

35:19

hundred times of course, so it a Well,

35:21

I said, of this looks decent. Let's buy some

35:23

out -of -the -money puts here. Just spend some little

35:26

premium on this thing. puts here just

35:28

spend some little premium on this thing okay 25

35:30

emails should stocks go down? but

35:32

what's the catalyst? go down

35:34

like the article I wrote and the

35:37

can be anything it can be

35:39

it being anything it can be Trump

35:41

super hawkish ended up being the

35:43

thing. But I I gave like or

35:45

six different things things the questions,

35:47

Brian, because I know that people

35:49

always people always the the type A macro trade which

35:51

is what I trade, which is what

35:54

I described before this conversation, which

35:56

is have a have a macro narrative, you

35:58

you have an asymmetric pricing. and

36:00

you end up being proven right on

36:02

your narrative and great on the setup

36:04

of your trade. That's what everybody wants,

36:06

but it doesn't always work like that.

36:08

Sometimes you just find this thing and

36:10

then people are like, what the catalyst

36:12

will be? I don't have any clue

36:14

what the catalyst will be. I don't

36:17

have any clue what the catalyst will

36:19

be. I ended up being right because

36:21

Powell woke up and wanted to have

36:23

blood on the streets yesterday, apparently. Right

36:25

and if you look back at some

36:27

of the great crashes like the flash

36:29

crash then crash of 87 The cable

36:31

flash crash in the sterling in the

36:33

pound and they do these reports on

36:35

them like the Treasury and academics do

36:37

the reports They don't even know what

36:40

the catalyst is after the fact, you

36:42

know, like a lot of times things

36:44

just move because There's an exogenous thing

36:46

that's some BS thing and there's an

36:48

endogenous setup within the market and everything

36:50

unloads. So yeah I'm not a huge

36:52

like obviously like you said it's great

36:54

if you can forecast a catalyst but

36:56

I would definitely say to people you

36:58

don't need a catalyst in advance for

37:00

the trade because a lot of times

37:03

even ex ante people don't even know

37:05

what the catalyst was for the move.

37:07

Okay guys we spent almost 10 minutes

37:09

talking about trading psychology because it was

37:11

way too much. time we didn't do

37:13

that but I would also like to

37:15

take a second to thank you guys

37:17

for listening to us the entire year

37:19

I'm guessing this will be the last

37:21

episode because next week it's Christmas in

37:23

Italy brand so I'm going to pass

37:26

my recording day in Canada there you

37:28

go so guys this has been great

37:30

and as always just renewing the invite

37:32

If you want to talk to us,

37:34

open a Bloomberg and send us a

37:36

Bloomberg, send us an email. I mean,

37:38

very happy to engage with you. And

37:40

thanks for all the feedback on the

37:42

podcast. I guess the YouTube version has

37:44

been something that people pushed for, so

37:46

we made it happen. Brent does the

37:49

chart, so he does most of it.

37:51

the work anyway. Thank you. I do

37:53

love making do love

37:55

making charts. that. Thank you everybody

37:57

that. Thank you

37:59

everybody for listening. Thanks

38:01

for the feedback. Alf.

38:03

Thanks, been This has

38:05

been a fun

38:07

experience so far and

38:09

looking forward to to

38:12

2025. Happy New Year, Merry Year. Merry

38:14

Christmas. soon. Happy Hanukkah too. It starts I think

38:16

the same day as I think, the

38:18

same day as Christmas this

38:20

year. next year. Ciao. All you next

38:22

year. All right. Ciao. The everybody.

38:24

Ciao. content provided on the

38:26

floor podcast is for for general information

38:28

purposes only. No No information

38:30

or other content provided in

38:32

this podcast should be considered

38:34

as investment advice. Seek Seek independent

38:36

professional consultation in the form

38:38

of legal, financial, and fiscal

38:40

advice before making any investment

38:42

any investment decision. own due diligence.

38:44

own due diligence.