You're listening to Strictly Business Podcast with Lindsay Williams.
Sahil Matani, Director of the Investment Institute at 91 in London,
spoke to me in the middle of last year about the ingredients for a dollar bear
market.
So where are we now?
And Sahil, it's a very easy question, but with so many moving parts, I don't know
where to start.
But perhaps a suggestion might be the new nominee for Fed Chair.
And that's Mr.
Walsh.
What do you make of him?
Thanks, Lindsay.
Good to be speaking with you.
In January, President Trump nominates Kevin Walsh to be the new Fed chair,
and you get the dollar rising, you get a bull steepening of the yield curve, you
get the NASDAQ lower,
and you get the precious metals trade lower.
And you get a sense that the US trade is back.
And I think that is not the right reaction because of the starting point.
The sell America trade.
that came up after Liberation Day last year.
It was not about dumping US assets wholesale.
It was about hedging existing US exposure, diversifying into other assets,
and directing new marginal flows away from the US.
So it's not about abandoning the US markets entirely.
And allocators are just trying to diversify because their starting point is
so overweighted to the US.
If you look at the MSCI world, US is still 70%, 71% of that.
US dollar is at a 15 plus.
Yeah, hi.
So you were already having to think about risk management.
And as an allocator, you now need to think about central bank independence, US fiscal
trajectory,
transformation of the US relationship with its allies.
So I think a single Fed chair, no matter how credible, no matter how hawkish, well,
could be very hawkish.
But in this particular case, I think there is a nuance to the Walsh reputation.
You know, I think it's just one variable in a multivariable trade.
It's very interesting because Liberation Day and what it represented was a sort of
a blunt instrument.
But the sell America trade is not a blunt instrument at all.
From what you say, it's got lots of bits and pieces.
And in fact, instead of being vanilla, is rather sophisticated.
We'll explore that as well with our next part of the discussion, which is about
Walsh as well.
He's apparently quite dovish, and the market seems to be pricing in...
two or three interest rate cuts this year in the United States or America.
If that's the case, why is the dollar relatively stable?
And why are bond yields ticking higher?
Yes, he has a reputation as a hawk, but I think the market has read him correctly in
the sense that he could be
more dovish than markets expect throughout 2026.
And you have to remember his reputation as a hawk comes from speeches he gave during
and after the GFC.
when he warned about upside risk to inflation from commodity price run-ups.
And throughout the 2010s, he's calling for an early end to the Fed balance sheet
expansion.
But he is not against crisis error
QE. And he is a person who is able to make that distinction between balance sheet
expansion
at the zero lower bound, when rates are at zero and you want to stimulate the economy
more,
versus balance sheet expansion at...
these crisis era turning points.
So I think he's a more subtle and nuanced figure than has been portrayed.
And I think the market's actually reading that correctly.
I think if you look at the op-ed he wrote for the Wall Street Journal last year,
he's also stating that the economy doesn't need interest rates that are higher than
they are now.
They actually need lower interest rates because the economy is currently going
through a period of strong growth.
productivity growth.
That means you get growth without inflation.
That's very similar to the gains you saw in the 90s.
And that's because there's a productivity miracle underpinned by AI that's going to
be a significant disinflationary force
pushing rates down sharply.
You're going to hate this question.
You already do.
I can sense it because it's politically linked.
Is he a Trump puppet?
And we know that Trump wants interest rate cuts, and he wants them big, and he wants
them fast.
Will Walsh pander to him?
I think he is not a Trump puppet.
I also think that the balance of power shifts the moment you are appointed to the
Fed.
Before you are appointed,
you do have to say a number of things to please the person that is appointing you.
After you are appointed, you have a different level of security.
in your job because it will require a process to take you out of that.
So I think that's there.
His personality is not a pushover.
He says what he thinks.
He has independent wealth,
which makes him less likely to perhaps be a pushover.
So I think the market is reading him correctly.
You've mentioned the economy already, but we need to delve into it a bit deeper.
And when I say the economy, I mean the US economy, so important, of course.
And we've had some good GDP numbers.
well above 4% the last print.
We've had inflation relatively benign, but we've got employment looking a little bit
shaky.
Difficult job for the new Fed chair.
What will he focus on, do you think, particularly with reference to
AI productivity and all the implications that that implies?
I think it's going to be a good year where inflation is going to surprise to the
downside and growth is going to surprise to the upside.
You've already got some...
foretaste of that with the early now cast numbers for Q1, which are in the 5%
real GDP growth level.
So I think it's a pretty benign year for markets.
I think, you know, all throughout last year, there was a scenario in which labor
markets would weaken because we were in a low hire,
low fire environment.
And I think that is still where we are.
And you're seeing unemployment rates rise at the margin, say for young workers or
certain type of minorities.
You know, I think given where the economy is,
it is just as likely to see that those numbers coming down towards the end of the
year as they are to keep
rising.
So this is a pretty good environment, I think, if you are in charge of managing
the U.S.
economy.
What about sell America?
It's more sophisticated than just selling every American asset that you've got or
rather drawing down your American assets.
Can the dollar weaken and the bond yields rise at the same time, Sahil?
Yes, you can have the yield curve bull steepening move that accompanies dollar
weakness,
as you've just had in the last month.
I think if you go back to our dollar cycles piece, you know,
we all know as allocators what to do in the event that we're going to get a weaker
dollar.
You buy non-dollar assets, you buy emerging markets.
I think the challenge is figuring out whether you are at a turning point in the
dollar.
And in the dollar cycles piece, I noted that past turning points, early 2000s,
1971,
1985, were accompanied by four changes.
You had something in geopolitics, so trade and defense agreements.
You had rate differentials falling, principally at the short end.
You had a reallocation to non-US assets by investment committees.
And you have some sort of FX intervention event at the sovereign level.
So if you look at those four criteria You know, we've definitely had a shift in
geopolitics,
you know tariffs have quadrupled quintupled
Rate differentials between the US and Europe and US and yen which are the most
important ones for global markets at the moment
They have been falling all year
as you've seen European growth stabilize and Japanese growth stabilize and U.S.
inflation come down.
Investment committees have not gone all in.
I would say they still want exposure to the AI theme in the U.S.
They still want exposure to high return on invested capital U.S.
assets.
We'll see if the software sell-off changes any of that.
But they're kind of half in, I would say.
And then what we haven't seen is a sovereign FX intervention moment of the
kind that we saw in the past.
the Plaza Accord or G7 coordinated euro buying or Nixon gold shock.
And I think that is what the market is waiting for.
It is interesting after a quiet year last year where, you know,
Trump and Besson didn't really raise the dollar as they did in 2024, that in
January this year,
we started to get wind of some sort of intervention with the won or comments on
the yen.
So I think suddenly it's on the agenda back at Treasury again.
And that's what we're waiting for.
Final question.
Since we spoke in July of last year, has your view changed?
You put forward the idea that perhaps we're on the cusp of a long term dollar
bear market.
Have you changed your opinion, Sahil?
No, I think the odds of a dollar down market are going up not down and you're
starting
to see that prospect of FX intervention coming.
And I would argue when you see that,
that is the moment you know that we are in a multi-year dollar bear market cycle.
Sahil, thank you very much for your time.
Sahil Matani is Director of the Investment Institute at 91 in London.
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