Interview: Talking Macro With Guy Adami on Risk Reversal Podcast.
I am honored to be invited back by @g onto his Risk Reversal Podcast. We packed a lot into 30 minutes: USD, Oil, Gold, Markets, Macro/Geopolitics and, of course, Tariffs!
I am honored to be invited back by Guy Adami onto his Risk Reversal Podcast. We packed a lot into 30 minutes: USD, Oil, Gold, Markets, Macro/Geopolitics and, of course, Tariffs!
As always, I try to provide a bit of added value in my Show Notes below as a “Read-Along” Thread as you listen.
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Show Notes
1:00 USD Discussion
First, I think that the “End of the USD / End of the UST” Narrative, while certainly contributing to the recent USD Weakness, is completely blown out of proportion.
Some Big Picture context is required first, and when you look at the 50+ year chart of the USD, you begin to realize how ludicrous these recent USD Hyperventilations sound:
I mentioned my West Point Paper entitled “USD Primacy In An Era of Economic Warfare” from 2023 that delved deeply into the roots of USD Hegemony, which primarily stem from National Power:
There is a common conflation of FX Strength vs. FX Adoption:
From our paper:
When the Pax Brittania Liberal World Order (LWO) ended, the USD took over as Global Reserve Currency (GRC) because the US was an upstart that offered tremendous advantages over Great Britain in all domains of National Power.
While the current LWO is shifting, it is not subject to collapse precisely because there is no equivalent upstart that can claim dominance over the US in anywhere close to all domains of National Power.
The USD became the GRC because the US dominated all pillars of National Power. There is no current upstart that can claim that, and no, China does not come close.
Check out Michael Every’s “Balance of Power” Triangles from his Geopolitical treatise, "The World in 2030", which we talked about in KAOS THEORY 9:
USD Hegemony mirrors US National Power Hegemony, and there is no close contender, certainly not CNY nor EUR.
One of the key prerequisites for a GRC is the depth and liquidity of its underlying Sovereign Bond Market.
The depth and liquidity of the UST Bond Market is of paramount importance, and there simply is no other Sovereign Bond Market under the sun that can come close to matching it. From the West Point Paper:
In the world of Fiat, THERE IS NO ALTERNATIVE TO THE UST AS RESERVE ASSET, and I believe that the recent flight to Gold is NOT a sign that Fiat is ending.
I argue that the Fiat “Pandora’s Box,” once opened, can never be contained without extreme Austerity (that no government on earth will be willing to stomach).
The Gold Bug’s dream is a return to a Hard Money standard, but be careful what you wish for if you have gotten accustomed to Fiat-enabled GDP Growth. From my piece above:
World GDP Growth exploded due to Credit-Driven growth enabled by FIAT, and a return to a Hard Money Standard will cause severe AUSTERITY.
8:00 Sovereign Creditworthiness Discussion
When it comes to Sovereign Creditworthiness, Debt/GDP is just one of many metrics that need to be considered, because it is only a Stock/Flow metric. Stock/Stock metrics must also be considered — what about the Asset Side of the National Balance Sheet if you’re going to focus on the Liability Side of the National Balance Sheet?
As I stated in my "Asteroid Field" piece, I think the idea of a US Sovereign Wealth Fund (SWF) that can mobilize and monetize the Asset Side of the National Balance Sheet is extremely intriguing:
Here is that podcast that talked about the SWF idea:
When you factor in Total National Assets vs. Total National Liabilities, I think the US absolutely dominates China’s farcical National Balance Sheet.
Here is a deep dive I wrote in 2023 about China’s use of Off-Balance Sheet Debt and why the PBOC’s “pristine” Balance Sheet is really a House of Cards:
If this Tariff War forces China to transition to a more Consumer-Driven Economy, it would likely need to consider a Debt Jubilee (given its moribund Real Estate Sector and the wealth destruction that it has wrought on its populace) and/or Fiscal Stimulus, both of which can become mechanisms by which Off-Balance Sheet Debt transfers ON-BALANCE SHEET.
12:00 Oil Discussion
Guy was kind enough to remind me of my Bearish Oil call back in September, 2023:
Some context first.
Early 2021 was last time I was truly Bullish Oil:
I have been selling rallies in Oil (primarily via XOP) since April, 2022 when I wrote this piece:
I voiced my concerns early on that Saudi Arabia’s Unilateral Cuts would put them in a bind and that the Fed would likely win the battle against OPEC+, primarily because both the tools of the Fed and OPEC+ were Demand Destructive:
My warnings became more strident about true Geopolitical Risk in Oil being to the DOWNSIDE given Saudi’s Unilateral Cuts with NO EXIT STRATEGY:
I have had a consistent view that a Q1’25 Negative Surprise for Oil would be heightened with a Trump election.
This was from April of last year:
What would make me turn Bullish Oil?
What would change my mind and make me think we can enter a sustainable Oil Bull Market would be if the following occurred:
Saudi’s and OPEC+ are maxed out on Spare Capacity
Permian Basin peaks (this will likely happen in the next 1-3 years)
We emerge out of a Recession/Slowdown with the Fed at our backs instead of in our faces
Until that happens, I’m likely to continue to fade faux Geopolitical Risk rallies.
20:30 Gold Discussion
Guy asked me again about Gold, and I reiterated my difficulty of owning Chameleon Trades, taken from my last chat with Guy in this episode of "On The Tape," from April, 2024:
I think a lot about Exit Strategies, and I’ve always had a hard time figuring out what my Exit Condition is for a trade that morphs from thesis to thesis.
Here is one possible Exit Condition for Gold:
22:00 Tips on how to survive the Trump Asteroid Field:
On point 3, in particular, I have a good Mental Model about the dangerous of making Linear Extrapolations off of volatile and/or cyclical signals:
I think it’s particularly important to look through the day-to-day noise and really consider the underlying Economic Statecraft goals. ICYMI, here is a great discussion about Economic Statecraft trumping Economic Policy:
25:00 China Discussion
For the last several decades, China has urbanized its population through a Top-Down, Investment-Led, GDP-Targeted Economic Model primarily through Real Estate Development.
Today, many Ghost Cities later, with ~100 mm unoccupied housing units and another ~100 mm in various states of incompletion, that jig is now up.
The CCP “Eye of Sauron” has now turned its attention to INDUSTRIAL CAPACITY, resulting in a RUNAWAY ASSEMBLY LINE that churns out goods regardless of Supply/Demand dynamics or profits (or lack thereof):
What we have now is NOT Globalization based on Comparative Advantage:
The EU is at risk of making a huge Geopolitical mistake in aligning with China over the US because of its current Trump Animus. It would be akin to letting the proverbial Fox into the Hen House:
28:00 Method to the Madness?
I do think there is a Method to the Madness behind the Trump 2.0 Policy Playbook, and I wrote about it a month ago:
I think it’s very important to remember the lessons from Trump 1.0:
Say what you will about Trump’s methods, but he has definitively shifted the Overton Window on the idea of minimum acceptable Tariffs:
If the price of getting what you want is to be criticized as “caving,” so be it:
It seems increasingly evident that there might be two general Tariff categories:
Long-Term Incentive Modifiers (Sectoral Tariffs)
Short-Term Negotiation Tools (Punitive Reciprocal Tariffs)
If I were advising the Trump 2.0 Admin, I would set “Long Term Incentive Modifier” Tariffs at rates designed to truly change behavior over the Long-Term, while simultaneously offering to take the “Short-Term Negotiation Tool” Tariffs down to zero or near-zero in exchange for mirror treatment:
31:00 Market Outlook
I am expecting more Market Volatility, as I think that negotiations with China may drag out, although I expect deals with other countries to be announced soon. The key is to stay nimble and liquid enough to take advantage of inevitable market dislocations.
I have always been an Alpha Hunter over my investing career, and I have never carried Passive Beta in my portfolio, so I don’t care that much about the broader markets.
That said, I am always interested when Beta declines swamp “Alpha” names. What I am vigilant for in this environment is finding beaten down Event-Driven names that have gotten slammed due to Beta effects, where the probability of the upside catalyst has all been priced out.
Here is a piece I have written about Alpha vs. Beta:
Although Guy and I didn’t talk about it, here is one such example of an Idiosyncratic Event-Driven name that got excessively discounted amidst the Tariff Selloff.
From last week’s Interview with Paul Sankey:
Thank for your reading and listening!
A lot packed into a short conversation. Good to hear the consolidation of many topics.
Thank you Michael. Your perspective is very much appreciated.