WEBVTT 1 00:00:00.380 --> 00:00:04.523 You're listening to Strictly Business Podcast with Lindsay Williams. 2 00:00:05.884 --> 00:00:09.506 Sahil Matani, Director of the Investment Institute at 91 in London, 3 00:00:09.606 --> 00:00:13.869 spoke to me in the middle of last year about the ingredients for a dollar bear 4 00:00:13.869 --> 00:00:15.869 market. 5 00:00:15.869 --> 00:00:17.869 So where are we now? 6 00:00:17.869 --> 00:00:21.054 And Sahil, it's a very easy question, but with so many moving parts, I don't know 7 00:00:21.054 --> 00:00:23.054 where to start. 8 00:00:23.054 --> 00:00:25.297 But perhaps a suggestion might be the new nominee for Fed Chair. 9 00:00:25.697 --> 00:00:26.397 And that's Mr. 10 00:00:26.438 --> 00:00:27.138 Walsh. 11 00:00:27.138 --> 00:00:27.538 What do you make of him? 12 00:00:28.119 --> 00:00:28.819 Thanks, Lindsay. 13 00:00:28.819 --> 00:00:29.660 Good to be speaking with you. 14 00:00:30.216 --> 00:00:35.397 In January, President Trump nominates Kevin Walsh to be the new Fed chair, 15 00:00:36.098 --> 00:00:42.419 and you get the dollar rising, you get a bull steepening of the yield curve, you 16 00:00:42.419 --> 00:00:44.419 get the NASDAQ lower, 17 00:00:44.419 --> 00:00:44.660 and you get the precious metals trade lower. 18 00:00:45.480 --> 00:00:50.802 And you get a sense that the US trade is back. 19 00:00:51.922 --> 00:00:57.944 And I think that is not the right reaction because of the starting point. 20 00:00:58.264 --> 00:00:59.544 The sell America trade. 21 00:00:59.824 --> 00:01:02.166 that came up after Liberation Day last year. 22 00:01:02.887 --> 00:01:05.329 It was not about dumping US assets wholesale. 23 00:01:05.909 --> 00:01:10.272 It was about hedging existing US exposure, diversifying into other assets, 24 00:01:10.753 --> 00:01:13.355 and directing new marginal flows away from the US. 25 00:01:13.855 --> 00:01:16.337 So it's not about abandoning the US markets entirely. 26 00:01:17.318 --> 00:01:22.963 And allocators are just trying to diversify because their starting point is 27 00:01:22.963 --> 00:01:24.963 so overweighted to the US. 28 00:01:24.963 --> 00:01:27.466 If you look at the MSCI world, US is still 70%, 71% of that. 29 00:01:27.867 --> 00:01:29.288 US dollar is at a 15 plus. 30 00:01:29.684 --> 00:01:30.384 Yeah, hi. 31 00:01:30.865 --> 00:01:33.526 So you were already having to think about risk management. 32 00:01:34.206 --> 00:01:39.688 And as an allocator, you now need to think about central bank independence, US fiscal 33 00:01:39.688 --> 00:01:41.688 trajectory, 34 00:01:41.688 --> 00:01:43.390 transformation of the US relationship with its allies. 35 00:01:43.750 --> 00:01:50.013 So I think a single Fed chair, no matter how credible, no matter how hawkish, well, 36 00:01:50.513 --> 00:01:51.534 could be very hawkish. 37 00:01:51.654 --> 00:01:56.155 But in this particular case, I think there is a nuance to the Walsh reputation. 38 00:01:57.796 --> 00:02:03.219 You know, I think it's just one variable in a multivariable trade. 39 00:02:03.719 --> 00:02:09.382 It's very interesting because Liberation Day and what it represented was a sort of 40 00:02:09.382 --> 00:02:11.382 a blunt instrument. 41 00:02:11.382 --> 00:02:12.224 But the sell America trade is not a blunt instrument at all. 42 00:02:12.244 --> 00:02:14.705 From what you say, it's got lots of bits and pieces. 43 00:02:14.725 --> 00:02:18.467 And in fact, instead of being vanilla, is rather sophisticated. 44 00:02:18.887 --> 00:02:23.530 We'll explore that as well with our next part of the discussion, which is about 45 00:02:23.530 --> 00:02:25.530 Walsh as well. 46 00:02:25.530 --> 00:02:27.372 He's apparently quite dovish, and the market seems to be pricing in... 47 00:02:27.692 --> 00:02:32.073 two or three interest rate cuts this year in the United States or America. 48 00:02:32.173 --> 00:02:35.694 If that's the case, why is the dollar relatively stable? 49 00:02:35.954 --> 00:02:38.155 And why are bond yields ticking higher? 50 00:02:38.915 --> 00:02:44.917 Yes, he has a reputation as a hawk, but I think the market has read him correctly in 51 00:02:44.917 --> 00:02:46.917 the sense that he could be 52 00:02:46.917 --> 00:02:48.578 more dovish than markets expect throughout 2026. 53 00:02:49.298 --> 00:02:55.040 And you have to remember his reputation as a hawk comes from speeches he gave during 54 00:02:55.040 --> 00:02:57.040 and after the GFC. 55 00:02:57.040 --> 00:02:59.447 when he warned about upside risk to inflation from commodity price run-ups. 56 00:03:00.568 --> 00:03:04.992 And throughout the 2010s, he's calling for an early end to the Fed balance sheet 57 00:03:04.992 --> 00:03:06.992 expansion. 58 00:03:06.992 --> 00:03:08.835 But he is not against crisis error 59 00:03:09.296 --> 00:03:15.781 QE. And he is a person who is able to make that distinction between balance sheet 60 00:03:15.781 --> 00:03:17.781 expansion 61 00:03:17.781 --> 00:03:21.946 at the zero lower bound, when rates are at zero and you want to stimulate the economy 62 00:03:21.946 --> 00:03:22.007 more, 63 00:03:22.206 --> 00:03:24.068 versus balance sheet expansion at... 64 00:03:24.168 --> 00:03:25.829 these crisis era turning points. 65 00:03:26.429 --> 00:03:30.792 So I think he's a more subtle and nuanced figure than has been portrayed. 66 00:03:31.112 --> 00:03:33.133 And I think the market's actually reading that correctly. 67 00:03:33.893 --> 00:03:39.216 I think if you look at the op-ed he wrote for the Wall Street Journal last year, 68 00:03:40.577 --> 00:03:47.481 he's also stating that the economy doesn't need interest rates that are higher than 69 00:03:47.521 --> 00:03:48.221 they are now. 70 00:03:48.381 --> 00:03:53.304 They actually need lower interest rates because the economy is currently going 71 00:03:53.304 --> 00:03:55.304 through a period of strong growth. 72 00:03:55.304 --> 00:03:55.369 productivity growth. 73 00:03:55.730 --> 00:03:58.072 That means you get growth without inflation. 74 00:03:58.692 --> 00:04:01.855 That's very similar to the gains you saw in the 90s. 75 00:04:02.775 --> 00:04:09.681 And that's because there's a productivity miracle underpinned by AI that's going to 76 00:04:09.681 --> 00:04:11.681 be a significant disinflationary force 77 00:04:11.681 --> 00:04:13.681 pushing rates down sharply. 78 00:04:13.681 --> 00:04:15.681 You're going to hate this question. 79 00:04:15.681 --> 00:04:17.681 You already do. 80 00:04:17.681 --> 00:04:19.681 I can sense it because it's politically linked. 81 00:04:19.681 --> 00:04:21.681 Is he a Trump puppet? 82 00:04:21.681 --> 00:04:22.672 And we know that Trump wants interest rate cuts, and he wants them big, and he wants 83 00:04:22.672 --> 00:04:24.672 them fast. 84 00:04:24.672 --> 00:04:24.957 Will Walsh pander to him? 85 00:04:27.277 --> 00:04:29.958 I think he is not a Trump puppet. 86 00:04:31.538 --> 00:04:37.840 I also think that the balance of power shifts the moment you are appointed to the 87 00:04:37.840 --> 00:04:38.120 Fed. 88 00:04:38.240 --> 00:04:39.421 Before you are appointed, 89 00:04:39.761 --> 00:04:46.082 you do have to say a number of things to please the person that is appointing you. 90 00:04:46.322 --> 00:04:51.924 After you are appointed, you have a different level of security. 91 00:04:52.332 --> 00:04:57.529 in your job because it will require a process to take you out of that. 92 00:04:57.910 --> 00:04:59.335 So I think that's there. 93 00:05:00.174 --> 00:05:05.415 His personality is not a pushover. 94 00:05:06.016 --> 00:05:07.276 He says what he thinks. 95 00:05:08.516 --> 00:05:10.997 He has independent wealth, 96 00:05:11.097 --> 00:05:15.578 which makes him less likely to perhaps be a pushover. 97 00:05:15.718 --> 00:05:18.699 So I think the market is reading him correctly. 98 00:05:20.099 --> 00:05:23.240 You've mentioned the economy already, but we need to delve into it a bit deeper. 99 00:05:23.241 --> 00:05:27.241 And when I say the economy, I mean the US economy, so important, of course. 100 00:05:27.242 --> 00:05:28.962 And we've had some good GDP numbers. 101 00:05:29.302 --> 00:05:31.103 well above 4% the last print. 102 00:05:31.484 --> 00:05:37.248 We've had inflation relatively benign, but we've got employment looking a little bit 103 00:05:37.248 --> 00:05:37.347 shaky. 104 00:05:37.368 --> 00:05:39.829 Difficult job for the new Fed chair. 105 00:05:39.909 --> 00:05:43.032 What will he focus on, do you think, particularly with reference to 106 00:05:43.472 --> 00:05:47.875 AI productivity and all the implications that that implies? 107 00:05:48.395 --> 00:05:54.520 I think it's going to be a good year where inflation is going to surprise to the 108 00:05:54.520 --> 00:05:56.520 downside and growth is going to surprise to the upside. 109 00:05:56.520 --> 00:05:58.520 You've already got some... 110 00:05:58.520 --> 00:06:03.664 foretaste of that with the early now cast numbers for Q1, which are in the 5% 111 00:06:04.125 --> 00:06:05.725 real GDP growth level. 112 00:06:06.105 --> 00:06:09.727 So I think it's a pretty benign year for markets. 113 00:06:09.887 --> 00:06:15.789 I think, you know, all throughout last year, there was a scenario in which labor 114 00:06:15.789 --> 00:06:17.789 markets would weaken because we were in a low hire, 115 00:06:17.789 --> 00:06:19.789 low fire environment. 116 00:06:19.789 --> 00:06:20.951 And I think that is still where we are. 117 00:06:20.952 --> 00:06:27.034 And you're seeing unemployment rates rise at the margin, say for young workers or 118 00:06:27.034 --> 00:06:29.034 certain type of minorities. 119 00:06:29.034 --> 00:06:31.497 You know, I think given where the economy is, 120 00:06:31.957 --> 00:06:38.482 it is just as likely to see that those numbers coming down towards the end of the 121 00:06:38.482 --> 00:06:40.482 year as they are to keep 122 00:06:40.482 --> 00:06:42.482 rising. 123 00:06:42.482 --> 00:06:44.427 So this is a pretty good environment, I think, if you are in charge of managing 124 00:06:44.427 --> 00:06:46.427 the U.S. 125 00:06:46.427 --> 00:06:48.427 economy. 126 00:06:48.427 --> 00:06:50.427 What about sell America? 127 00:06:50.427 --> 00:06:53.554 It's more sophisticated than just selling every American asset that you've got or 128 00:06:53.554 --> 00:06:55.554 rather drawing down your American assets. 129 00:06:55.554 --> 00:06:58.613 Can the dollar weaken and the bond yields rise at the same time, Sahil? 130 00:06:59.233 --> 00:07:05.036 Yes, you can have the yield curve bull steepening move that accompanies dollar 131 00:07:05.036 --> 00:07:05.056 weakness, 132 00:07:05.176 --> 00:07:07.438 as you've just had in the last month. 133 00:07:07.758 --> 00:07:11.300 I think if you go back to our dollar cycles piece, you know, 134 00:07:11.440 --> 00:07:16.463 we all know as allocators what to do in the event that we're going to get a weaker 135 00:07:16.463 --> 00:07:16.583 dollar. 136 00:07:16.823 --> 00:07:19.445 You buy non-dollar assets, you buy emerging markets. 137 00:07:20.125 --> 00:07:23.967 I think the challenge is figuring out whether you are at a turning point in the 138 00:07:23.967 --> 00:07:24.307 dollar. 139 00:07:24.547 --> 00:07:30.848 And in the dollar cycles piece, I noted that past turning points, early 2000s, 140 00:07:30.848 --> 00:07:32.848 1971, 141 00:07:32.848 --> 00:07:35.970 1985, were accompanied by four changes. 142 00:07:36.470 --> 00:07:40.051 You had something in geopolitics, so trade and defense agreements. 143 00:07:40.451 --> 00:07:43.852 You had rate differentials falling, principally at the short end. 144 00:07:45.012 --> 00:07:51.374 You had a reallocation to non-US assets by investment committees. 145 00:07:52.514 --> 00:07:58.377 And you have some sort of FX intervention event at the sovereign level. 146 00:07:58.797 --> 00:08:04.080 So if you look at those four criteria You know, we've definitely had a shift in 147 00:08:04.080 --> 00:08:06.080 geopolitics, 148 00:08:06.080 --> 00:08:06.841 you know tariffs have quadrupled quintupled 149 00:08:07.702 --> 00:08:13.985 Rate differentials between the US and Europe and US and yen which are the most 150 00:08:13.985 --> 00:08:15.985 important ones for global markets at the moment 151 00:08:15.985 --> 00:08:16.006 They have been falling all year 152 00:08:17.014 --> 00:08:22.356 as you've seen European growth stabilize and Japanese growth stabilize and U.S. 153 00:08:22.416 --> 00:08:23.316 inflation come down. 154 00:08:23.776 --> 00:08:27.117 Investment committees have not gone all in. 155 00:08:27.197 --> 00:08:30.778 I would say they still want exposure to the AI theme in the U.S. 156 00:08:30.818 --> 00:08:33.999 They still want exposure to high return on invested capital U.S. 157 00:08:34.079 --> 00:08:34.779 assets. 158 00:08:34.779 --> 00:08:36.840 We'll see if the software sell-off changes any of that. 159 00:08:37.300 --> 00:08:39.380 But they're kind of half in, I would say. 160 00:08:39.720 --> 00:08:45.762 And then what we haven't seen is a sovereign FX intervention moment of the 161 00:08:45.762 --> 00:08:47.762 kind that we saw in the past. 162 00:08:47.762 --> 00:08:49.745 the Plaza Accord or G7 coordinated euro buying or Nixon gold shock. 163 00:08:50.506 --> 00:08:53.028 And I think that is what the market is waiting for. 164 00:08:53.548 --> 00:08:57.832 It is interesting after a quiet year last year where, you know, 165 00:08:59.233 --> 00:09:05.719 Trump and Besson didn't really raise the dollar as they did in 2024, that in 166 00:09:05.719 --> 00:09:07.719 January this year, 167 00:09:07.719 --> 00:09:11.923 we started to get wind of some sort of intervention with the won or comments on 168 00:09:11.923 --> 00:09:12.063 the yen. 169 00:09:12.964 --> 00:09:15.985 So I think suddenly it's on the agenda back at Treasury again. 170 00:09:16.826 --> 00:09:17.806 And that's what we're waiting for. 171 00:09:18.167 --> 00:09:18.867 Final question. 172 00:09:19.427 --> 00:09:23.069 Since we spoke in July of last year, has your view changed? 173 00:09:23.750 --> 00:09:29.173 You put forward the idea that perhaps we're on the cusp of a long term dollar 174 00:09:29.173 --> 00:09:31.173 bear market. 175 00:09:31.173 --> 00:09:33.173 Have you changed your opinion, Sahil? 176 00:09:33.173 --> 00:09:37.818 No, I think the odds of a dollar down market are going up not down and you're 177 00:09:37.818 --> 00:09:38.017 starting 178 00:09:38.017 --> 00:09:40.661 to see that prospect of FX intervention coming. 179 00:09:40.681 --> 00:09:43.164 And I would argue when you see that, 180 00:09:43.544 --> 00:09:47.950 that is the moment you know that we are in a multi-year dollar bear market cycle. 181 00:09:48.591 --> 00:09:50.133 Sahil, thank you very much for your time. 182 00:09:50.173 --> 00:09:54.378 Sahil Matani is Director of the Investment Institute at 91 in London. 183 00:09:55.755 --> 00:10:02.697 The views and opinions expressed in these podcasts are those of Lindsay Williams and 184 00:10:02.697 --> 00:10:04.697 various contributors and do not reflect the policy, 185 00:10:04.697 --> 00:10:06.438 position or opinion of any other agency, organisation, 186 00:10:06.778 --> 00:10:11.399 employer or company associated with StrictlyBusinessPodcast.com. 187 00:10:11.879 --> 00:10:18.841 Assumptions made on the analyses are not reflective of the position of any other 188 00:10:18.841 --> 00:10:20.841 entity other than the speaker or the author 189 00:10:20.841 --> 00:10:25.023 and since we are critically thinking human beings these views are always subject to 190 00:10:25.023 --> 00:10:27.023 change, revision, 191 00:10:27.023 --> 00:10:27.172 and rethinking at any time. 192 00:10:27.473 --> 00:10:29.884 Please do not hold us to them in perpetuity.