Episode 46: Bonds and Macro Outlook with George Goncalves

Ben Lakoff, CFA
May 17, 2021
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George Goncalves on Macro Outlook.

Fed Action, USD – including Shadow Banking & EuroDollar, Gold, and obviously Bonds. We talk about the current state of these markets and where they could go in the future.

George has a wealth of information and shares with us his keen insight on these topics.

Recording Date: January 2021.

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Show Notes

0:00:00   Welcome and context

0:01:30   What is your background?

0:04:15   What is going on with Central Banks?

0:11:05   How the Fed can start unwinding the dept?

0:18:50   What is the endgame with the current debt levels?

0:23:41   What is your mid-term outlook for the US dollar?

0:28:50   The Euro – Dollar Banking

0:35:00   What is your long-term outlook for the US dollar?

0:37:45   What are your thoughts on gold?

0:42:35   What are your thoughts on bitcoin?

0:45:25   What are your thoughts on the bond market?

0:53:10   The bubbles on the current markets

0:57:30   How do you filter content on Twitter?

1:02:30   Where can people find out more about you?

Show Links

George on Twitter

George’s Website

Episode Transcript

Ben: [00:00:00] Welcome to the alt asset allocation podcast, exploring alternative investment opportunities available to the everyday investor. Here’s your host Ben Lakoff.

Hello and welcome to the Alta asset allocation podcast. Today’s interview is with George Goncalves. The world is weird right now, and George is an expert on macro outlook.

So we start this episode with a recap of the fed action. As a result of the coronavirus, then we quickly cover all things macro. So us dollars, including shadow banking and the Euro dollar. Gold. And then obviously bonds. We talk about the current state of these markets and where they could go in the future.

So I get a lot of listeners on this podcast, but I really only have like 30 reviews. If you’re listening to this and you’re getting some value, please, please, please take a second, stop and drop a review. If you’re getting any sort of value, I really appreciate it. And it really helps if you’re watching this on YouTube.

Hello, please hit subscribe. That also helps. And I really, really appreciate it. There you go. Enjoy this conversation with George can call this George, welcome to the show. Excited to have you on today.

George: [00:01:18] I’m glad to be here. Thanks for having me, Ben.

Ben: [00:01:21] Absolutely. Hey, I’ve really enjoyed reading a lot of your tweets and a lot of the, a lot of the content that you have on your blog.

But to kick this thing off, let’s start off with a little bit of your background, who you are.

George: [00:01:33] Sure. So I’m I guess when you would consider a, a global macro type strategies, that’s really, you know, looks like, you know it’s, it’s becoming more of an art form than necessarily sort of a skill set per se, but it, especially in the world that we live in it’s everything’s digital, and we could kind of put algorithms on everything, but I’m a classically trained fundamental economics you know, global macro looking at cross market relationships with all through the lens of bond strategy.

Ultimately bringing it back to like the basics of, of, of, of, of global macro, which is simple FX and, and fixed income securities. You know, I’ve been doing this for over 20 years primarily on wall street through various investment banks where I’ve held positions. As a senior strategist, as well as leads of the fixed income groups on the strategy side and you know, in the last year or so you know, really have been venturing off on my own.

The partly because of, you know, the world that we went through in 2020, and, and COVID kind of making us all kind of work from home and having to really rethink how platforms are developed and how content is delivered. And so I’ve been you know, really building out my outreach to, to to the audience out there in, in, in  as well as, you know, more broadly on the internet and doing these podcasts like this and, and videos.

So really with the goal and the intent of that there’s in my belief, it was a a good understanding of the bond market, but it’s sometimes loosely thrown around, out there and. And I feel like there’s a, you know, a lot of financial literacy that has to take place you know, for, for investors to understand that really key component in their portfolio, as well as you know, the, the day to day activity, which sometimes, you know, once you’re really in it and understand like why things are moving you know, the bond market can, can seem like a, you know, a foreign territory.

Ben: [00:03:33] Your Twitter is a treasure trove of information. So I’ll definitely link that in the bond And so there’s a lot going on. I wanted to start off today talking about central bank action. This is being recorded January, 2021. The numbers are, are, are just overwhelming for most folks, myself included.

And there’s just a lot going on. Let’s start the conversation. If you start with a recap of what central banks have done since the start of this Corona virus issue and let us know, you know, where are they now and where, what, what do they have left

George: [00:04:09] if we go back to the beginning of last year in 20, and basically this time last year, 2020.

And, and we think about how far we’ve come along. We’ve now moved and we’ve always been one could argue since 2008, 2009, there was a, the cross, the Rubicon back then where, you know, the central bank activism. Really picked up. As we know, we really got to the kind of the final stages of a finalized world that requires, you know, more and more liquidity and cheaper ways of funding and, and, you know, central banks for the, you know, except for the fed who really try to lift off rates and get off of zero really spent only a couple of years there above zero and, and what we found and what we’ve have been really going through for the last decade plus is just this realization that we, you know, we’re, we moved from the central bank action, taking place through the price of money, which would encourage or change the behavior of investors as well as banks to, to, to expand lending, which really grows the you know, the, kind of the, the, the, the actual dollars in the system through the private sector banking.

You know, they really got to a point where, you know, you know, the, the actual rate channel stopped operating like a used to, I mean, one would expect that as you get close to zero or in some cases in Europe and Japan, that negative, which is a whole other story, but yeah, the the reason Alliance and the, and the shift from REA policy to, to QE, which initially caught lot of people off guard who was shocked them.

And there were so many, you know, gold bugs and, you know, in many ways, I guess some of the, the reasons why cryptocurrency took off was really in response to this idea that the, you know, the old system has to tick, you know, has a three think and overhaul itself when there’s this much that in the system and, you know, things are not balancing out.

You know, the, this move towards QE really is it’s still a legacy of the, you know, the financial crisis. Right? So if you, if you think about that and when you think about. What a pandemic, the size of coronavirus would do to to assist them, especially one that is dependent on cash flows to be always operational and for money to be circulating globally, not just in the us, but moving around so that, you know, living in an adjusting time tech world, where payment systems are super critical to making sure that other companies get money in the door to help pay out some sort of dividend or a debt obligation or whatever the case may be.

When you start locking down, you know, countries and or regions and, and, and economic activity stalls, you really create this, this, this shortage of liquidity. And considering that, you know, most of this liquidity globally still operates on the, on the back of the dollar. It was one, one didn’t have to really imagine much to think that.

The fed would probably have to do the most of the heavy lifting. And so what the fed did was it was massive. I mean, they did over 3 trillion by, by the early summer period of 2020. And, you know, I think, you know, that that’s, that, that response in that quantum and that number seems, seems, it seems big and it is indeed very large, but it’s kind of has like taken on a life of its own where it’s now almost become like as if the, you know, the narrative out there is that now that we’ve seen this happen before that it’s, it’s always going to be like this.

Whenever there is some sort of major crisis we’re going to see just trillions upon trillions being printed or really more, you know, injected into the system. We can go into more details on how the Fitz balance sheet works. If you’re interested in. And how the internet interacts with the banks and what options that they have going forward.

But I mean, I think there’s this kind of like there was this, this shock and awe moment in the early part in response to making sure that the systems were liquid and operational and the fed really taking the lead there that then, you know, for the months and quarters, since the Fed’s balance sheet is continues to grow, don’t get me wrong.

It’s growing at 120 billion per month, but it pales in comparison to the, the speed of what we saw on an annualized basis in that end of Q1, early part of Q2 of 2020, but the narrative, which I see it all throughout FinTech and all throughout the financial media is that they’re printing like there’s no tomorrow.

And that there’s going to be this, you know, a massive liquidity it’s going to keep going forever. And that’s justify, you know, asset valuations for everything. That to me is where I start to diverge from the kind of consensus out there. That’s, that’s just that central banks are just never going to stop.

And I think that’s going to be the real question as we, you know, we sit here at the beginning of 21, you know, are they going to up the ante? Are they going to do even more than what they did last year? Or are they still in this kind of deceleration and eventually which we’re hearing from some fed speakers that they may have to taper and, and that’s that, you know, but these are all very important dynamics to, to, to understand because, and one thing I, I have a good friend, I’m sure, you know, Danielle DiMartino booth and, you know, for us, you know, we’re looking at the outlook for 21, you know, the, the, the, the, the common theme in the, in the overall kind of topic for the year is really starting points.

And we’re starting from a point where a lot of this information is baked in the cake, in my humble opinion.

Ben: [00:10:03] Yeah, that makes sense. The world is drunk on cheap debt, and we need a lot of liquidity to keep this thing going. And yes, we’ve done massive QE, but it just seems like, you know, this narrative that you talk about is that the fed is running out of  silver bullets.

That just kind of keep inflating the balance sheet. What’s your view? How do they, how did they start unwinding this in your opinion?

George: [00:10:26] So this is where I feel like it’s it we’ll look, we’ll see how the next few days, a few weeks things worked out on the first hundred days of the next administration and how the treasury really at that point, which w we would assume would, you know Janet Yellen confirmed as treasury secretary and No at that point, it’s almost like, I feel like we’re going to see like a Baton being passed to the fiscal side.

If you think about it all throughout last year after the cares act, there was a ton of money sitting at the fed, which was Treasury’s money, which was raised for a lot of different reasons. I’ve, I’ve covered it either. You know in reports that I’ve written or, you know sporadically throughout the Twitter world.

But you know, this, this, this money, this sits in an account called the treasury general account. And if for years it was really a sleepy account, all really focused on, I don’t really care you know, really up until the financial crisis, there was actually some balance of some dollars that were sitting us money, us government money, sitting at banks, as well as at the fed, because they’re kind of indifferent.

But then after like, you know, counterparty risks and concerns around that, as well as operational readiness and quite frankly, I always characterize it to TGA in a similar vein, like the strategic petroleum reserve, the SP know the SPR where you kind of have this national defense element to having extra liquidity, both, you know, oil or extra dollars just in case.

Right. And so that, that started to take on a bigger meaning over the course of it, post financial crisis especially during the more which now seems like, you know, yeah, it seemed like child’s play compared to the sort of acrimony that we have in Washington. But if you recall, throughout the Obama administration, there was many you know, debt, ceiling impasses in fights and even into the Trump administration as well around like, you know, just spending and try to reign things in and, and have the ability to have a slow down this debt, load those growing at a fast rate.

Now it’s really accelerated even further. So this, you know, this having operational readiness to be able to pay your bills on time and have extra cash has been an initiative that the treasury has put in place for the last 10 years or less seven or so years, and really post financial crisis that, that, you know, that account balloons to over 1.5 trillion, 1.6 or something during the height of the, the, the, that one quarter when the fed was expanding its balance sheet at the same time.

And so when this was happening at the same time, it’s almost like you couldn’t tell what was going on. They have a fence, you know, massively buying law treasuries, lot of them legacy older treasuries that were in the system. And the, on the other side of the ledger, which, you know, are on the other side where the government actually issues the debt, the treasury was issuing a lot of short-term treasuries, mostly T-bills as they’re called.

And that those dollars raised were then redeposited back up the fence. That’s where the treasure keeps us extra cash. Because the us government was not spending money fast enough, even during the height of the pandemic and even through, you know, the passage of the cares act, you know, money was just not leaving fast enough because it wasn’t fully appropriated or the spending wasn’t authorized.

And then we spent, you know, really from June until basically the end of the year, you know, fighting over how to do another fiscal stimulus deal, which a lot of that cash should now fund the stimulus bill that was recently passed and, and probably can give a down payment on the, any subsequent stimulus packages that we may get this year as well.

So I bring this up because this, you know, this is very wonky and maybe some of your audience might not fully care, but I think it’s an important point largely because that those dollars were taken out of the system in a way where the fed didn’t really. Didn’t create those reserves. The us government did, but borrowing from investors that quite frankly, were panicked and moved money into short-term treasuries for defensive reasons.

And most of them through the channels of money market funds. And so in money market funds, they only could buy, you know, they have a kind of jurisdictional constraint, like what, what, what can they buy? And a lot of them bought these short term treasuries. Then that money just basically went from the money market investors straight through the treasury onto the Fed’s balance sheet.

And it’s just sitting there kind of in there not doing anything. And now as the government starts to spend on money for stimulus you know, it, it could get re-introduced bright back into, into the economy, which would then potentially accelerate inflation as well as it did. It could be the echo effect of basically.

What we saw last year. So even if the fed does not expand its balance sheet at a faster rate, the reserves can be growing at a speed. That’s much quicker than $120 billion per month. And that’s where this song and dance gets very, very interesting. And this is where the fed may at some point, realize that look we’re that the balance sheets reserves are going to get too big.

So the reserves sit on the liability side, that they may have to slow down their QE. Otherwise you’re going to see so much extra reserves in the, in the system and, you know, either inflate this bubbles even more, because I think we’re definitely in, in final stages of certain bubbles and some asset classes.

And so this is the challenge that they have as they know that the economy is going to move hopefully back to you know, more, whatever normal is going to be, but we’re going to get some sort of stability with the vaccines and. Yeah, reopening of the economy over the next year or so. And then you have all this pent up liquidity that was already created and it’s going to get spent through the fiscal channels.

And therefore the fed has not have to do more actually, in fact, you might have to actually start to peel back and taper. And that’s something that, you know, sounds kind of like sec religious that I can say, something like that, whatever one’s like, no way the Fed’s never going to stop, they’re going to keep renting.

I think that, you know, they, they realized that, you know, they probably overdid it. They probably did too much easing. And now you have this cash injection, which may come through the government side. The fed might have to actually to slow it down. Now that’s a lot that I just downloaded. So I’m going to take a pause there and see if you want to break it apart.

Ben: [00:17:03] Yeah. Firstly, there’s so many connected pieces here and it’s the culmination of. Many many years of cheap debt and and Corona virus was kind of the, the linchpin that just, we kind of used, but I mean w w the average investor here just knows that the fed is printing. I get that eventually we’ll have to switch to fiscal policy, and, you know, maybe this, this is enabled by things like central bank, digital currencies, so they can push fiscal policy directly into your wallet and things like that.

But just thinking a little bit further, like, what is the end game here? Do we have to switch to something like MMT? I mean, with debt levels, this high yeah. We can taper. Yeah. We can be a little bit more aware of our spent cut back our spending, but like, ultimately, you know, the other two options, inflate or default seem to be the more likely scenarios.

How do you see this playing out with all these moving parts?

George: [00:18:01] Yeah. So, I mean, look, I think anyone that comes on your show, or quite frankly, anyone in the. In the financial content business will tell you that it’s, we all have our kind of short term, medium term and longterm projections. And in our conviction levels will kind of fade as the further you go out.

I think like, look, it does look untenable and we’re at a point where it’s, you know, it does feel like the kind of last mile and especially with the debt loads that are out there. Having said that though, I mean, there’s, there’s gotta be you know, at some point I think what we’ll probably find out in the next, you know, four to eight years and we’ll see how, how the, this administration conducts itself.

I mean, th what, what they really want it. I think I generally believe this, that. They want the private sector to take up and take over again, not idea that we can just somehow have the government provide all forms of assistance and that that’s going to lead to actual productivity and real growth, not just as nominal growth, that that might wash away some of this debt.

You know, th that, that to me is it’s definitely not the American way regardless of where you stand. And I think, you know, we, we basically, and I’ve been saying this since 2008. I mean, we basically have been fighting a financial war akin to like world war two and, and it’s, and it’s really because of how the system has been designed globally.

And so we, we, we, our way out of that, and hopefully we’ll never get to that, that extreme, but we worked our way out of world war II into the fifties and sixties. It’s going to require, you know, in, in many ways control first and then release. Later in the, and that’s why some are advocating it and I’m, I’m not completely against it myself, either that, you know, given where we are with low levels of yields and, and there is some long-term investments that could be done that could enhance the, the, the overall nation’s productivity around infrastructure and things like that, that will really, you know, boost overall growth in the next 10, 20 years, because what we cannot have, we cannot have like a stagnant type world and hope that it’s going to resolve itself.

And that inflation magically is going to appear. You need to really need to see. And this is where I think it’s going to be fascinating because of, you know, technology not really having much of a footprint you know, it’s hop rates in the cloud and, and things like that. And, and, and the barriers are not that expensive to get in and you can start to have the intellectual capacity On the one hand that like, that’s obviously deflationary by nature.

You know, AI is deflationary by nature, but at the same time, there’s, you know, there’s the pendulum is swung so hard in favor of those that are, you know, the, the whole, the capital that are, you know, the, you know, the, really the, you know, the culmination of this wealth inequality that we’re seeing, the pendulum is swinging the other way towards, away from capital holders and more towards actual human capital in, in, in, in wages.

Like that’s really the only saving grace, because at that point you can tax people more, not that I’m advocating taxes, but like you need to broaden out your tax base. You need to get people a chance to have part of that pie. It’s really been shifted over. It’s only to one side of, of, of the, of the, of society that has to kind of happen through some government measures and organically.

And look who knows when, when who’s going to be the right person to do that, but. We need to start at some point because perpetuating this is not going to work.

Ben: [00:21:50] Yeah, I completely agree. I think it’s pretty unlikely that taxes will go anywhere, but up in the kind of longer term in my opinion, but I think I think that sets the stage quite nicely for where we are and kind of lends itself into the next question, which would be midterm and longer term outlook for the U S dollar.

George: [00:22:14] Yeah. So look, I think, you know, these things don’t happen overnight. I don’t think they will, but it’s a process, right? We’ve seen reserve currencies come and go over the last 500 years. And and I think also, you know, there’s a, there’s a school of thought that thinks that this is great. Benefit and there is tremendous benefit by being the reserve currency, but at the same time, there is a lot of burden that’s really placed on, on, on the us.

And, and, you know, in many ways, sometimes the fed has had to overstimulate because it wants to make sure that these leaky pipes that exist further out into the outside of the U S somehow get their fill of liquidity to when in fact, if there was a more globalized real-time payments system that didn’t require everything to be conducted through the dollar channel, it actually might allow the fed to have actually better monetary policy flexibility.

So I it’s it’s, it could be both, you know, there’s benefits and, you know, there’s pros and cons to all this. I mean I think that the, the dollar will remain a key piece of whatever world that we’re heading into. And it’s, it’s not going to be dethroned that quickly, but we’ve been going through that process really since 2008.

And so it’s, it’s, it’s trying to manage it. And the issue is we ended up getting more and more into debt, which then compounds the problem down the road. But, and not just me, I’m saying like these you know, emerging market companies in corporates and in countries that, you know, borrow in dollars, which they can’t even, they can’t print the dollar.

So they have to like source it. I mean, the it’s the shadow banking system, it’s the Euro dollar banking system. It’s, it’s the money that’s created out of thin air outside of the Fed’s domain that really, you know, sometimes creates these these bottlenecks and concerns that really brings the financial markets to its knees.

So I, I think there’s there’s if done in a way where it it’s in proper kind of coordination, a a more. Basket style payment system. And it, and it could, this is where I think, you know, the, the great work is being done by a number of, of the FinTech companies, even, you know, how crypto we’ll we’ll we’ll, we’ll be part of that.

And we might run on the same rails, I don’t know, or maybe not, but, but this, this this area of finance, that’s really, you know, the, the area of innovation, that’s, it’s thinking through some of these issues and trying to, you know, come up with ways where, you know, it’s not about bashing the dollar or we want to get rid of the dollar.

It’s more about, you know, there’s gotta be better ways of it, more efficient ways of, you know, money circulating globally and not have to only be in one type of currency. And I think that that’s definitely, you know, in the near future that’s coming and, and, and it does have consequences, right? Because for the last really 20 or 30 years our debts in the U S have been largely financed up until like three or four years ago by foreign investors.

And so they, they did that because of various payment shocks back when finance was even less mature than it is now where they, you know, the Asian financial crisis there’s a number of key events over the last 20, 30 years that really shifted, you know, the dollar as the preferred medium of exchange.

And if we get to a more efficient way of conducting payment systems, then you won’t need to see these big hoards of dollars sitting outside the U S. And so those daughters come home to roost. They come back home to the U S back into the domain of the fed back into the us banking system. And in a way you kind of regained some of your, again, flexibility and autonomy that you don’t need to just.

Have to ease because of the rest of the world is suffering from some sort of reason. And the fed has to stay ultra accommodated to that. Meanwhile, it’s like inflating housing prices or something. Right, right. So, you know, this is where I think there’s, you know, there’s pros and cons to a better balanced designs painted system that moves away from the dollar in a, in a, in a way that’s constructive.

Ben: [00:26:33] Yeah. There’s a lot of innovations, especially in the crypto space that are, could lend itself to helping Quicken this transition. But I think before we can move on from this, I think it’s important to, if you could explain Euro dollar and shadow banking a little bit on how, how the U S dollar is created outside of the U S and what this looks like.

George: [00:26:56] Yeah. So there’s I mean, and this is, this goes back to just, even in the U S I mean, when there’s. Lending that’s done. And then it gets redeposited at another bank. You know, those dollars were created out of thin air. And then there’s a portion of that’s reserved and well now not because of some of the changes that defended post coronavirus but you know, just standard banking.

One-on-one when you it’s the private sector that grows the actual the Fiat in the system. And so when that’s happening in outside the purview to the direct purview of the fed and it’s happening in, you know, in Asia and in Europe, it primarily started in Europe. It’s wider, you know, in London, specifically why it’s called the Euro dollar system, but it’s when you actually are seeing you know, dollars created by, you know, jurisdictions outside the feds control and these banks.

Are expanding the dollars globally now. Because you know, this is based on the lending and debt financed architecture, you know, there are times where either some of those loans don’t are not money good and, or you know, those cash flow shortfalls. And then that creates these weird bottlenecks that we get from time to time that people say, Oh, there’s a massive shortage of dollars globally overseas.

It’s because it’s, it’s, it wasn’t, it wasn’t created through the FET channel or not even created because the fed doesn’t create the, the dollars. They actually just create the reserves that allow for the expansion. But it’s, it’s this it’s this network of banks, corporates that sit in overseas markets and that’s like the, like the most basic, and then there’s a whole level around training that’s done on top of that.

And. You know, short-term interest rate trading, you know, foreign currency exchange trading you know, Rebo plays a role in all the repo markets and the collateral systems are, are really super critical to the functioning of that Euro dollar. You know, there’s been a lot of, a lot of folks have covered that in, in greater detail that I’m going through right now, but it’s it’s, it’s, it’s part and parcel to this dollar based global world.

I mean, it, it it’s, it’s what, it’s a part of the transmission mechanism that allows the dollars to kind of circulate outside of a us banking system.

Ben: [00:29:20] And then crazy thing for me is the size of this market. I mean, we don’t even know how big it is, right. Or how integral it is part of the global financial system, as we know it in type right.

George: [00:29:36] Yeah, that’s true. I mean, I mean, there’s a lot of great work done by, you know, the bank of international settlements dis in Switzerland. And, you know, they’ll, they’ll, they’ll come out with reports like every, you know, every quarter, once a year, at least that we’ll try to estimate the size of this you know, overseas dollar market and non us.

And you know, a lot of it is just kind of trying to follow the money cause it has to circulate through and get a sense of the scope and how big it is, but it’s, it’s really taken on a life of its own. And, and to think that you can stop that just because, you know, the dollar is like falling out of favor.

It doesn’t make any sense because all that really happens is that the dollar by the dollar getting cheaper, it actually helps a lot of these emerging markets, because then it’s easier to service their debt if their currency is, you know, is doing better. So I think, you know, this, this notion that. We, you know, we have this behemoth out there.

We don’t know the full extent of it doesn’t mean it’s a bad system per se. It’s just what ended up being designed and created, you know, post world war II into, you know, moving away from the gold standard. It’s now just gotten so massive and it has a lot of leaks and it’s, it’s, it’s something where you can’t assert just like pull the plug on it.

You can’t reset it overnight. You need to, you need to be really thoughtful and work with both again, the financial industry, you know, take the texts of context side of things and, and, and, and really have a global cooperation. And at some point where if they want to get off a dollar only standard, you need to work out a lot of these these issues and have a huge long run.

You cannot do it overnight. It’s it’s a five, 10, maybe 20 year plan. It’s it’s. And it’s something that has to be done in stages. And in many ways, how a lot of the regulation has done and coordinated globally on, on the federal side, I think this is probably even more important than that. And it has to be done in a way where it’s not meant to punish or reward anyone else, although there will be on the margin, winners and losers to this.

Cause, you know, if you’re changing a system, that’s benefited some in ways where we can’t fully quantify. If we get better architecture, more checks and balances, which things like blockchain help create and a more stable payment system that is accountable and verifiable that that’s going to probably enhance efficiencies, but also take away some that were probably benefiting from the legacy system.

Ben: [00:32:12] That’s a lot about the dollar. There’s a lot going on there and a lot of connected pieces globally. And like you said, things certainly don’t happen overnight, but actually, what was your, what was your kind of mid term and longer term outlook for outlook for the U S dollar there

George: [00:32:29] as a value in terms of valuation?

Yeah. Okay. Yeah. So, so this is where I’m a little bit, I think have a consensus and not being all improve, prove wrong this year, but it’s a view that I’m taking and it’s, and it’s tied to the earlier points that we made that I made about perhaps central banks did too much already. And that now this year it’s more about you know, slowly scaling back and perhaps even tapering on the fence part that me, you know, and then we’re shifting the Baton and passing the Baton to the fiscal side that the dollar does not necessarily have to continue to weaken that other countries are in just as bad shape or worse.

And, and everyone’s really coming out of this global pandemic in different, at different levels, but not, you know, not one area is really gonna outshine the other. And so, especially in a developed market side, there might be more quicker to, to the punch KRAS. There M countries that might be able to accelerate 30 economies faster in the recovery, but by and large developed markets are all in the same boat.

So this idea that the dollar has to fall out of bed and really, and have the crash, I think it’s just the wrong trade and everyone’s PR and a lot of folks are in that trade. I mean, there’s been a lot of shorts put in place. So medium term, meaning like the next six months to a year, I feel like we probably did a lot of damage on the dollar.

It’s it’s to a bounce. I don’t think it has to necessarily go back all the way to the highs that we saw last March, but anywhere in between makes a lot of sense. And and I think that’s going to then. It’s going to be the combination of the dollar, getting a little bit stronger. And the, and this move up in rates that we’re seeing, which I think still has legs, which we can discuss later.

That’s going to start to tighten financial conditions, and this is where it’s going to be very delicate between what the fed interprets the fiscal policy. Is it bigger than the tightening that we’re going to see coming from these two other channels? And that’s, what’s really going to calibrate a monetary policy more so than them rushing to market with some new initiative, unless, you know, rates spike to like two or 3%, which I don’t think so.

They’re not going to do anything major. And then I think this really takes them out of the equation. So, and that’s, that’s a big deal for a lot of investors who are thinking that they’re just going to keep printing forever and then the dollar should appreciate in that sort of backdrop.

Ben: [00:34:54] Yeah, that makes sense.

I completely agree. It’s like the dollar’s bad, but Nearly every country, if not every country is also bad, if not worse. perhaps it’s trust and fit overall. That’s kind of declining which leads me perhaps into the next question on just your overall thoughts on something like gold.

George: [00:35:13] So gold is plays a special, special role still, you know, and it’s it’s been with us for thousands of years and I don’t think it’s going anywhere anytime soon. The, the challenge I think with, with gold and this environment is it’s all about speed of change. And I just went through the early part of this interview, podcasts.

It should say, you know, it’s kind of discussing that I could be wrong. This is just my own personal view that perhaps we’ve done a lot from the policy side and. And, and too, in this idea that we’re going to see the more debasement and devaluing the dollar or any currency, quite frankly. You know, if, if, if we don’t see the speed pick up, so if I’m wrong and the fed did 3 trillion last year, they’re on track for a little bit over a trillion or so this year, if they go back up to three or 4 trillion, then they’re beating last year’s comps, right?

So they’re going faster than the speed at which there were expanding their balance sheet in 2020. I mean, it’s going to take something like that to really, really motivate and push up all these other alternative forms of storage, of value and safety. It’s going to really require the, the speed of the change of all this to accelerate even more than what we saw last year, last year was impressive.

And, and just you know, Yeah, shocking at the same time to see how fast they can expand the, the monetary base and, and all these  and everything. We’re just growing in leaps and bounds. But typically when that happens, the following year is like the hangover effect where you actually see a give back because you just can’t keep running at that speed forever.

So if we don’t get an acceleration from where we are now I mean, I think for, to, to expect gold, to to, to, to rise to the numbers that some have out there I’m not there having said all that, like, you know, like three or $5,000 in the next year or so having said that, I mean, I do think that what we’ve leased, what everyone’s learned, at least in some manner over the last year is that you have to have savings.

And you have to think about where you put that savings and you know how you’re gonna protect your overall wealth. And it’s not just in equities, it’s in other forms of. Alternative assets, which I know you do a great job in highlighting. So it does play a role. So you cannot have, you got to have zero allegation.

We need to have an allocation towards these other forms like gold, like cryptocurrency, because you just don’t know when there might be another impulse higher. So, you know, that’s a long winded answer of saying that. I mean, would I be buying necessarily or adding here? I mean, as a long-term investor.

Sure. But we have to realize that it’s probably going to get bumpy over the course of 21 and that it’s not going to just be a straight line. We’re going to see waves of, of, of ups and downs in these alternative assets, because we just don’t know a, what their intrinsic values are over long periods of time.

And if, and unless began an acceleration of additional liquidity, it’s going to be hard to chase them higher. So I think it’s something that it’s, it’s, it’s an anchor in many people’s portfolios that should remain. And it’s something that you may want to, you know, if that’s something that you do to dollar cost average, and to add to it over over the years, but relatively neutral to slightly concerned that we might see a pullback and it’s, and it’s linked to my view on the dollar, because if the dollar does go up 5% or so and if real rates were to keep going higher here in, in the course of the next three to six months, that’s gonna introduce further weakness into the, into these precious metals.

Ben: [00:39:15] Yeah, that makes a lot of sense. And we’re, we’re obviously big fans of alternative assets here, but it’s all relative. Right. They can be great, great stores of value for thousands of years, but if everything’s screaming higher and real rates are rising, then yeah. It’s tough to outperform that, that backdrop.

Transitioning from gold. I always like to go right to the digital equivalent of gold perhaps, but coming from your background as a wall street insider, you know, I’d be curious your, your thoughts on something like Bitcoin and cryptocurrencies in general. Yeah.

George: [00:39:46] So, I mean, I’ve been I’ve been studying it over the last year or so really trying to understand and, and drawing parallel the, the old system of payments, which we went over briefly and tried to understand how this, you know, these, these currencies, as well as the technology around it, it could, you know, really.

Benefit and eventually replace some of the architecture that we have out there. So I, I I’m, you know, I’m a, I’m very open to this, this, this new frontier. That’s been opened up on the, on the crypto side. And I do think more and more investors in traditional finance and in institutional side, we’re hearing more and more interest picking up as, as each day goes by.

So I’m, I’m, I’m, I’m, I’m a fan in the sense that I, I like innovation. And I think it’s, it’s fascinating to to do this, you know, this kind of contrast between the old system and the new system, it will kind of trades would work how people trade distinct to begin with. To me, it feels like still like a, a commodity in many regards you know, and with the way the momentum really, and just the idea of scarcity or this idea of like what’s out there.

And the availability. But at the same time I’m just wondering how early are we in this process and who’s going to be the ultimate winner or, or will there be like just, you know, multiple winners, I mean, but not all coins will or not all forms of cryptocurrencies will, will remain. Not all stable coins will be successful.

So I think it’s definitely early days. It’s something that I’m spending more time trying to, again, analyze through the, the traditional finance lens and then juxtaposing it to what may be coming down the road, because I think there’s going to be tremendous benefits around again, this whole just-in-time cashflow exchanging settlement issues enhancing just the efficiencies of, of transactions, the avoidance of mistakes.

In all of these, which ended up being attacks or inflation on the, on the banking side, which hopefully can go away and, you know, things, the advent and all the things that we’re learning from crypto and how it’s being implemented should one day have a better system that that’s more purely more digital and and really start to kind of compete with this old world.

Ben: [00:42:11] Yeah, definitely. And it’s reached this point, this inflection point, I think, where it’s too big to ignore. It’s getting too big to perhaps not have a view on it. Not own any at this point. It’s certainly getting very exciting, but at risk of going down, yeah, go ahead.

George: [00:42:29] No, I’m sorry.

I’m cutting you off. It’s like everything else, like everything else we’ve learned that, you know, diversification is something that’s important, right? I mean, it’s part of it, like the whole idea that certification you have to understand. That not all of them are going to be winners. And, but this idea that they’re going to, you can’t dismiss it either.

It’s now a real thing.

Ben: [00:42:50] I’d be remiss if I didn’t ask you, I mean, a bit more, your Twitter handle and website is the bond strategists and, you know, save these things for the very last trait. But I think everything we’ve talked to kind of feeds into your decision-making with the bond market.  I see headlines like the end of the 40 year bond bull market or the 60 40 portfolio with the 40% being bonds is dead.

You know, you talked about gold serving as a a bellwether in the, in the asset allocation. Like what are your, what are your views on, on bonds in general? And then perhaps we’ll jump in a little bit more deep.

George: [00:43:29] So it’s, it’s no surprise that when bonds became super volatile last year and. And that then also infected the credit markets, which are also corporate bonds will say, if you start from the foundation, which has government bonds and, you know, read bone overall liquidity at the fed provides, and you work your way up the pyramid you know, the bond market is the building blocks of, of the current financial system.

So you, you, you cannot think that they’re going to go away. If anything, they’re just, just too big. Right? So it’s, and that’s why the fed is always super laser focused on making sure that it’s operating smoothly and things are going well. So the bond market, you know, is, is going to be around. So it’s going to play a role in people’s portfolios.

The question is how big of a role it’s going to play, whose portfolios are they’re going to be in. And and at some point, are we able to eventually get back to, you know, really rewarding investors and savers with more proper interest rates? That’s. In line with just the idea of everyone’s time is worth something everyone’s capital is worth something it’s not worth zero or negative.

We shouldn’t be penalizing capital holders either. So I think that, you know, the, you know, what investors are, you know, especially for those that don’t have to manage to benchmarks in the don’t need to, you know, they’re not mandated by regulation or by law to be invested in certain sectors. I mean, bonds at this point do not offer that much value, but they offer a little bit more value than they did in the summer of last year, especially when rates were, you know, close to 50 basis points on the tenure.

I think, you know, there’s going to be a limitation on how high rates can go as we are. As I described earlier, we’re in this long-term game plan of. Where we need to transition away from just capital, getting all the rewards of the system to more you know, wage earners that get the bond. Market’s going to be like the, the, the middle ground for that.

So, you know, I, I think, you know, having really barbelled approach to the bond market in any portfolio is that, you know, especially when you know this 60, 40 is a notion that’s put out there, you know, linked to age, age groups and things like that. And demographics does suggest they should shift more into bonds, but then when they’re earning next to nothing, it really we’re seeing this, this whole, you know, reach for yield.

And in many ways, bond, surrogates and substitutes, which sometimes are much worse than the bonds, because they can actually lose money not just not pay you interest. So I think, you know, people have to be prudent. They still need to have a decent portion of. Fixed income, especially considering all other asset classes are overvalued too.

So this is like a game of hot potato, like, which one’s more overvalued than, than the next. Yeah. If, if, if we’re lucky and rates do got up to like one 50 on the 10 year and you know, and we’re stabilizing and the economy is doing okay, I think there could very well be yeah. Environment where the economy the economy does.

Okay. But risk assets do not because they, again pulled forward too much of the future growth expectations. And so we’ll start to see a healing of the economy and in reopening, but yet assets won’t be reacted to that because they basically pulled it forward. And then some that the bond market might not be a bad place to hang out, to figure things out.

So I would not completely, you know shun, you know, fixed income at this, at this juncture. I would just be much more barbelled. Have a little bit of extra cash so that you can at times opportunistically you know, put into higher yielding fixed income type securities as rates start to continue to rise a little bit higher and then be, you know, be, be aware that this can all turn on its head if if there’s any sort of a new variable that we’re not thinking about.

So I’m, I’m genuinely, you know, that would consider I’ll be considered bearish bond market. I’ve been basically bearish since August, September of last year, when rates got to the lows and it was too pessimistic. Everyone was expecting the fed to keep rates at that level. They haven’t really stepped up the rhetoric yet.

They’re even some of them are talking about taper. I think that in order to do what would be one of the remaining tools from the fed is this yield curve control. I think that we would have to get rates higher and feel like as if they’re going to get away from us or run away from what the fed can potentially do.

Then that’s when I would step in and do yield curve control. So I think that they’re allowing the system to open up and breathe and pick up some yield. This is good for pensions. And for those that are in, you know, in retirement. So I think that that’s, that’s what we’re at right now is we get into the summer beyond that.

I really don’t know. You know, it all depends on, you know, the, how well the vaccine rollout really is. And, and if there’s no other mutations, if the economy is able to really properly open up and, and if, you know, we don’t just see a reaction to a financial market that cannot keep going up at the speed of those going up.

If that wealth effect slows things down in the second half, it’s already to early 22. So I think, you know, bonds are giving the fed and the bonds are giving you a little bit of a window here to, to, to be you know, to be cautious, but also to be. Opportunistic and really learn how to barbell, take some cash.

Reinvestment rates are going up and do that. I think that’s that’s, that’s where bonds are right now, long long-term it’s it’s it’s it’s one of the reasons why they cannot let rates go up too much.

Ben: [00:49:05] Yeah. That makes a lot of sense. Things certainly are changing in the way that bonds are viewed in a portfolio that’s for sure.

Earlier in the conversation you missed should that we might perhaps be in the final stages of bubbles in certain asset classes. What were you referring to?

George: [00:49:22] I mean, primarily the equity space, although it’s not my area. And when we again, when we’re looking at things through a global macro lens and you go back and look at where valuations are, and then you try to think about what that means also for my specialty in my area, which is the bond market.

You know, if there is a sort of equity correction in, in, in the near future, it’s going to really limit this, you know, this view that rates can actually go up because at some point people would just flip it and then start buying bonds and, and drill rates lower. So, I mean, I watch it closely and everything that I’m looking at, it’s, it’s hard not to walk away unless you subscribe to this idea that, Hey, it’s only justifiable because rates are low, but then I’m like, okay, but what if rates are higher?

It’s not just the file. What is it like? So this idea that, you know, we have super stretched valuations on every single metric that you can look at over, you know, over the long, long haul. And it’s, it’s, it’s really I would say the high flyers, which we all know who they are. And, and, you know, these are valuations that we’ll look back and say, what were we thinking.

But in the heat of the moment as we are today and where we’ve been for the last six months did, there’s just been just a lot of chasing up performance and quite frankly, you know, this buildup of dollars also in the banking system with you know, just, you know, fiscal transfers, you know, moratoriums and just you know, people just having more dollars at their disposal.

Some, a lot of it had to have gone into the equity markets. I mean, there’s no other way to think about it. And so as we move away, get back to some sort of normalcy and people started to go back to their normal livelihoods, maybe the day trade glass, I don’t know, maybe they will actually, you know, see you know, actually start using their money to pay back bills or whatever the case may be instead of just you know, going into equities.

And if you have to start monetizing those equities to make payments. For either leverage or margin debt. So I feel like that’s really the pinnacle of it. It could very well end up being like as a rotation within, you know, which, which hasn’t really happened for the last 10 years between growth and value me value has had a nice run in the last two and a half months.

Post-election but, you know, there’s probably more gains in that, you know, in store in that area, but people have to realize that it’s, you know, value stocks are still stocks. And so if we were to see some sort of, you know, risk reduction or a just kind of a correction or even a bear market, again, that value probably comes down with it too.

It just probably doesn’t come down as much. So I think that’s where you know, I see the, the, you know, the greatest bubbles and then some of the, you know, some of the, I’m not, again, not an expert on the crypto space, but there is this, you know, this fervor that pre that happens every so often. And I think we just went through one.

Maybe we’re still in it and there’s, there’s more upside still. I don’t know. But I think even within the crypto space, you know, it lends itself to chasing performance. And so that’s where bubbles start to pick up. And I think that’s, you know, outside of commodities and value, there’s pretty much, you know, in the bond market in many regards are some of the credit sectors are in kind of bubble ish territories because they’re stretched versus intrinsic value.

They’re not really at a fair value. And, and that happens. It’s not unusual, but there’s usually some mean reversion that takes place. And when that, when it happens at a point like this, where everyone thinks we’ll never see a correction ever again, if the fed has our back, if that does not happen that way, then it’s going to be a rude awakening.

Ben: [00:53:04] Oh yeah. It begs the this time it’s different argument, but we’ll save that one. George  you’re hyper prevalent on fin twit. We’ve talked about it a bit. I’m curious a little twist here. I mean, how do you use Twitter effectively to kind of filter through the massive amount of noise that’s out there and deliver as much value as I’m sure it does?

George: [00:53:28] Yeah. So I think in general, there’s you know, information overload has been something that we’ve been dealing with for the last 10, 20 years, and it’s only just grown in speed. Ever since the one thing I found in that, and I I’ve, and this is just my approach. I think everyone has their own techniques and style, but one thing I found very useful and then is, and this is just the way I’m kind of trained thinking.

It’s just my nature as well. Is it really compartmentalize you know, the various tribes within Twitter. The various, you know, there’s a lot of great content, but there’s not a lot of, a lot of it is also noise and, and really try to then others there’s people that actually built algorithms for that. And I have not gotten to that stage, but I do it just for my own just vantage point of looking in and seeing who I think is saying something unique and creative or has a specialty and, and, and just, you know, periodically really checked in and see how their thought processes evolving, how it’s triggering other conversations, what, what information is being brought to the surface because of those conversations.

And so in many ways, I, I view it in the, I, I, I ran teams of analysts on, on wall street that I, that I’ve trained. I don’t know, maybe a hundred interns over the last 20 years. I don’t know, don’t quote me, but, but I’ve, I’ve spent a lot of time working with. Very smart people and trying to maximize and, and, and, and learn from them as well.

And to just, just to really get a better product and, and, and employed some of those techniques and some of those that, that style of compartmentalizing really narrowing in, you know, seeing who’s an expert in what and then tracking it, you know, taking my own notes and then know synthesizing it into my, my overall macro thinking.

And in many ways it’s actually helped me not have to have a team of like 20, 30 hours, because if you know how to pick and choose who’s smart and actually doing great work. It’s almost like you’ve outsourced an analyst group and I see it’s so true.

It’s true. It’s a, it’s a network effect, right? Ultimately it comes down to the network effect, but you have to be a good orchestrator and, and you have to, not that, I’m the only one that knows how to do this, but I think if you’ve done either research in some capacity in your life, or you’ve learned that the skills and the tools that are needed to do that, and then you see something like a treasure trove, like Twitter or any of these, you know financial mediums you can just basically supplant and incorporate and really get an even better insight into what you were either looking into, or we’re not, you know, you’re overlooking it’s, it’s really amazing.

So I’m I’m actually, this is, you know, this is my, really my first year, year and a half on Twitter before I was just more of a casual observer, but it’s actually been very active. And and I, and I’ve also learned a lot too, so it’s been a great experience and it’s really helped me you know, just improve my process.

Ben: [00:56:37] Yeah. Do you have any tools or softwares that you use to help you do this a little bit more effectively?

George: [00:56:42] I’m old school, so I’m still just scanning through and reading and, and then, and then the only tools that I really would use it or consider them tools, or like, you know, just you know, like, you know, just saving articles.

But like, you know, indexing articles by names blank, like I’m basically, I’m creating, I’m creating like a card catalog system within my own computer through like, you know, Evernote and things like that, where just, you know, keeping track of ideas and then being able to search them and then have an index so that you don’t lose your train of thought or what you were working on.

You know, saving certain bookmarks, whatever, but yeah, it’s, it’s really old-school block and tackle actually. Hands-on going through all those tweets. I haven’t yet gotten to the point where I’ve industrialized it yet. I’m looking into it. But yeah, it’s, it’s, it’s the way I, I think anyway,

Ben: [00:57:32] yeah, I think that’s the unfortunate reality.

I mean, they have the smartest people in the world trying to get you to spend more time searching and scrolling and these things. These tools would eliminate that, they don’t exist for a reason. But George, I really appreciate you coming on today. We’re we’re bumping up against the time to leave my listeners.

Where would you like to send them? Where can they find out about you, your writings?  Where do you want to send them?

George: [00:57:55] Yeah, no, I think for now, just you know, the bond it’s, you know, it’s still in its early stages and it’s really a place where if you can get ahold of me, you can Email me asked to get added to my, my distribution list, whatever is your fancy.

And of course I’m pretty active on Twitter. So the ATS bond strategist handle is me. And so you know, just, you know, look me up there and feel free to, to, to follow and, and go you know, if, feel free to ask questions. Cause I mean, I’m, I’m, I don’t answer all of them. It’s impossible, but I do, I do find that it’s important to have an open dialogue on this topics around fat macro and bonds, because I don’t think enough of it’s covered properly and, and hopefully I’m helping out the, the greater university

Ben: [00:58:43] I’ll link up all of those things in the show notes.

It’s been a real pleasure, George. Thanks for coming on today.

George: [00:58:48] Well, thanks for having me been. It was, it was a pleasure as well.

Ben: [00:58:51] Absolutely. There you go. First off. Thank you very much for listening all the way through. I hope you got a lot of value out of that conversation. As always. You can find show notes, links, and [email protected]

Please share this with anyone you think might be interested and derive any value from this conversation. And as always, you can reach out to me for any feedback or questions. Please give the video a like, or even better subscribe on YouTube or your podcast player of choice. This really helps others find the podcast or the video as well.

Thanks a lot. Hope everybody has a fantastic day and stay safe out there and invest wisely. Cheers.

Ben Lakoff is an entrepreneur and finance professional. He has developed strong global finance experience through 10 years of international assignments in the US, Brazil, Afghanistan, Southeast Asia, Czech Republic and through the award of his Chartered Financial Analyst (CFA) certification.