The Global Solvency Crisis | The Big Conversation | Refinitiv

Back in January, when Coved-19 was still considered
to be an isolated incident within China, Raoul Pal of Global Macro Investor was warning that
its impact was about to go global and that the underlying fragility of the economic framework
would amplify the effects. He outlined a three stage process that he
expected would unfold, and in this week’s Big Conversation, I asked Raoul to recap his
thesis and outline where we are in that cycle. Well, good to see you again,. Always good to see you. Great to see you. Now I just wanted to really drive straight
into the very heart of the matter, because back in January, you talked very vociferously
about what was ahead of us. And what was ahead of us was not going to
be a quick event with a V, but something a lot more a lot more lengthy. I’d love to just before we kind of go into
what’s coming up in the future, I’d love you just to go back in to kind of explaining what
you thought was going to be the first two phases of this three phase event, the liquidation,
then the hope, and then we’ll get on. But maybe just give us a bit of background
on those first two parts of this puzzle. Sure. I mean, the first part, Roger, before the
Coronavirus stepping back into January, December, the world was already slowing down. So we’d already gone through a rate tightening
cycle in the US, which had slowed things down. Then we’d had trade wars, which had slowed
things down, world trade to go negative. Many of the ISMs and the PMIs around the world
had crossed 50 and would start to show a weakness in the global cylce. So that was going on. And then the news of the Coronavirus starts. But we get an oil shock as well, as the oil
price collapses with the oil war. So we’ve got kind of this perfect storm and
then Covid on top as a black swan. What it’s going to do, in my opinion, is it
creates both a faster start to the cycle, which I call the liquidation phase, very typical
example of that would have been the early days of 1929 where we had a liquidation event,
or we have it many of the bear markets since the initial phase where everybody goes ‘oh
my God something’s changed’. So that is the liquidation phase which we
got to into March as the understanding that the virus was spreading around the world and
that worse was to come. Then the hope phase is as the market starts
to look forward and say, OK, we understand this virus now, we kind of think the worst
is behind us, we’ve seen the European case count falling, we’ve seen Asia doing okay,
so let’s look forward and look towards the reopening and the hope. The hope. Can we go back to normal? And I think just before you go there, I mean,
what is also happening is what you said before is that this was a fragile world that we had,
and maybe something that we’ll probably revisit later on this conversation is that if you
looked at the U.S. equity market, everything looked fine and dandy, but beneath the surface,
in fact, may be in fact, the equity market was actually a reason or an explanation of
things below the surface, weren’t that well, which is why the Fed was doing what they’re
doing. Maybe can you explain, you know, how some
the signals that we saw, a lot of people thought the world will look pretty good coming into
this. But actually underlying it, you say that it
was actually quite fragile, and yet the equity market was doing well and which in some ways
what we’re seeing again today. So if we think about what asset prices move
around most according to the economy. So we call them macro instruments. What are the most macro insurance of all? Well, firstly it’s interest rates. They tend to just move up and down with inflation
expectations and GDP growth roughly, with some forward elements. So bonds had started pricing in rate cuts
back in August, knowing that things were bad back in July, August, they started pricing
cuts and we started to get cuts and then they continue to price in more cuts when the Fed
said, ‘oh, we’re just done with them’ with just a gentle tap on the brakes, and the bond
markets said no, there’s no gentle tap on the brakes, you’re doing a full cycle. So the bonds were there. The dollar had been going higher, which was
also showing that there was probably a slowdown in the offing. And the commodity markets were falling. Equities were the only thing at the highs. And that, I think is a function of two things
is, equities tend to me the most sentiment and emotionally driven of all instruments. So they tend to be less macro. And also they’re driven by certain flows. And the equity market has basically two structural
buyers. One is the corporations who are buying back
their own shares, and secondly were basically the passive index flows generally of the younger
generation, because the baby boom generation had been starting to divest of equity assets
overall. So those two buyers were skewing all of the
indices towards the top largest stocks because they were also the ones buying back their
own shares. And that kind of party all stopped in one
go when all the corporations suddenly realized that they shouldn’t be spending their money
buying their own shares. They probably need to keep some cash to pay
their debts or even pay their staff. And so going forward, I mean, in some ways,
the most important part to understand about this is that we’ve seen liquidation and a
liquidity issue. But you’re talking about a solvency crisis
on the horizon. Could you explain that? Because that really very much that’s sort
of the nub of what is going on here. Yes. So a liquidity crisis is what everybody understands
from 2008. The banking system suddenly doesn’t have enough
money to pass around to all the people who need the money. And there’s not enough flowing of money through
the system, and that becomes liquidity. And what happens in that situation is everybody
sells anything to raise cash. So when the Fed do multiple trillion in March,
and also the government with their fiscal stimulus give money in people’s pockets, that’s
basically a liquidity event. So they’re just going to put money back into
the money markets and make sure that things are operating okay. The bond market stopped working for a period
of time and that’s a huge signal for the world. You need the bond market to work. So they got the bond market basically working
by injecting liquidity. Solvency events is different. Liquidity is no access to capital. Solvency is no access to cash flows. So if you think you as a householder and you
have a mortgage. The only way of paying that mortgage is to
have an income. If you don’t have an income, or if your income
is less than your mortgage, you default on your mortgage. And the same is true of corporations. Even if somebody kept lending you more money,
it doesn’t help you because you can’t pay the cash, you’re up to here. That’s a solvency event. And when we’ve got record amounts of debt
both at corporate level, household levels and also in foreign dollar denominated debt. So foreigners have borrowed 12 trillion, there’s
a bunch of people who really need that cash flow to pay those debts. And in a slow economic growth environment
that goes on for a longer period of time, they’re not able to pay their debts easily. And that’s a solvency event and that it doesn’t
help the Federal Reserve putting money into the system because you as the homeowner who’s
taken a hit on their income or doesn’t have a job, still can’t pay. You not going to borrow more money. And then the pushback that I know you always
get. And it’s sort of, you know, and some people
say, is this a valid one? And it’s not just that there’s going to be
QE infinity, which is the monetary side, but there is a fiscal side coming as well. But as I understand it, you see that the hole
that’s opened up, has been many, many years in the making is just so vast, that it doesn’t
really matter how much these guys do, they just won’t be able to do it quickly enough
to offset this coming kind of balance sheet issue across corporate households and the
rest. So if you look what’s just happened, we know
we’ve got one of the worst quarters in history still to come, that a quarter between and
it’s not the actual calendar quarter, but the quarter between call it February, late,
Feb, when everyone started to figure out what was going on, till mid-March, that whole period. I don’t know what the loss of GDP is for the
U.S. economy, but it’s going to be an order of magnitude of 10 percent. Okay, so all of the fiscal stimulus that’s
happened is basically papering over that loss of income that happened over that period,
because that’s what the that’s what the government did, they said, ‘you lost income, you lost
income, you lost income, you lost income, you lost income. Here’s some cash’. Good. OK. That helped everybody. It was important. The problem is, is what happens if the economy’s
slow in the next three months? ‘You can have some income, you can have some
income, you can’. And then the next three months. OK. I don’t have enough money to give you income. It becomes, it becomes very difficult politically
to give away that much capital. And we’re already seeing that in the US. So, you know, most governments in Europe,
particularly they’ve gone through about 20 to 25 percent of GDP. They’ve they’ve added in deficits. And we’re going to have a fight in Europe
over this, too, now. We’ve got to go to the E.U. and say, well,
the ECB is buying our bonds to help us out and the EU is going to go. Yes but you’re very naughty because you’ve
beaten the 6 percent max, the 3 percent Maastricht criteria, the 6 percent Maastricht criteria. It’s an impossible situation for everybody. So my fear is governments can’t paper over
the cracks for longer than three to six months. So they’re going to have to change eventually
to a much different form of fiscal stimulus, which is basically rebuilding of the nation. And I don’t see that happening for a long
time because the order of magnitude, if I’m correct and we go to a solvency event, you
kind of have to rebuild the global economies like a Marshall Plan or a New Deal. And that’s tens of trillions of dollars. And so are you seeing, expecting the consumers
here are effectively going to change their behavior, because so far what’s happened even
through Great Financial Crash, even with the mortgage situation, with the dot com situation,
the consumer always bounced back. They they’re always able to just manage. You know yields were pushed lower, debts were
pushed out. People manage to just hold on. This time around, it looks like the consumer
is going to have to address this balance sheet scenario that has built up over the last 20
years. So break down the consumer in the Western
world. It’s pretty much the same everywhere. But the problems are more extreme in some
countries. So the issue is there’s the baby boomer population,
the postwar generation who are all at retirement age in many places in Europe, that they’re
well into retirement age. And the US is a slightly younger population,
but basically it’s retirement age, massive group of people, I don’t know what it is across
the entire Western world, I’m guessing about 150 million or so huge numbers. So those people have hit retirement and their
investment pools have been hit by this event. Now the stock market’s rally back up, so it’s
helped a bit. But credit spreads and bond yields going to
zero has meant that they’ve got a huge future hole in their entitlements, so they stop spending. You know, and I’ve always talked this story
about my father when he retired. You know, he retired when bund yields in Germany
were 4.65 percent. He retired in Spain. He bought bunds, he thought everything was
fine. Ten years later, bund yields are at zero. And he’s like, oh, my God, do I have enough
money to survive? Depending how long I live for. And so he his consumption patterns collapse
I don’t know 60, 70 percent. So I think that’s an issue from that generation. They’re going to get hurt by all of this. The other generations, the millennials, well,
they were born late 80s when they were young as teenagers, they saw the first crisis in
2001. Then they got to university and they graduated
in the middle of the next crisis. These guys have never really been given a
break and they’ve only just started putting money in their 401K in the US, and that’s
the system of investing for their pensions. And it’s the same across Europe. And now they’re going to lose faith in this
whole system and they realize that they have student loans up to here, they have car loans
up to there, and they’re trying to get on the housing ladder and they can’t. So I dont see a world where we return to consumption. This is this is quite scarring thing. It’s like a war that’s just gone on and we’re
not finished. And so this must be in some ways why you’re
taking the side of view with with things like M2, because we are seeing M2 money supply
exploding everywhere, and there is a very strong argument that if you see M2 explode,
GDP falls then the velocity of money collapses, which is deflationary. But on the other side of that sort of coin
is people say, well, you have this monetary inflation that’s faster than kind of real
output, you’re going to see inflation. But it sounds like even if that inflation
is coming, it’s so far down the track that we’ve got this massive bust for the next few
years before then. Just think of it in these terms, right. Commodity prices, if you lose, use the the
Reuters Commodity Index, which are the longest data series of all. When you look at that it’s broken an enormous
top pattern. The price of commodities is falling and it
looks like it’s going to continue to fall until this cycle is done. It’s taking out basically the entire China
secular, you know, the commodity super bull market. So it’s going to take that out. But we know we’re devaluing money as well,
because we can see that all the fiat money, whether it’s pounds, euros, dollars, yen,
Swiss franc, are all falling against gold. And we know that because they’re all printing
money. What we’ve actually got is a weird world that
we haven’t had since the 1930s, where all currencies are falling in value. But commodities are falling more than the
currencies. That’s how deflationary this is. I can’t express how deflationary it is when
you’ve got currencies falling and commodities are actually falling more. Does that make any sense? It’s a different way of looking at it. Yes. No, absolute. I think it makes perfect sense, which actually
then brings me on to, I guess the next part of this, which is we worry about or how do
we play it, because there’s this price discovery issue we now have, which is the corporate
bond market in the U.S. is distorted, there is an implicit distortion in some parts of
the equity market. There is a kind of insinuated yield curve
control going on in a lot of bond yields globaly. So how do you play this? What markets are the best ways to express? Well, there’s one there’s one market bigger
than everybody. It’s bigger than the Fed is bigger than the
BOJ, it’s bigger than the ECB. It’s bigger than everybody. And that’s the currency markets. The currency markets is dominated like no
other time in history by one currency, the US dollar. So it’s not a reserve currency. It’s the dollar standard. It’s like the gold standard of the past. The dollar is everything. The problem is here, is if the dollar is everything
and everybody’s borrowed a lot of dollars and we talked about the cash flow and suddenly
we don’t have as much cash flow, then we have a real problem because everybody needs those
dollars and there aren’t any dollars around. So I referred to it like as a game of musical
chairs, everybody trying to get the dollars. And when the music stops, the weakest creditor
has to walk away. So we’ve seen it with Brazil, we’ve seen it
with Argentina, we’ve seen it with a bunch of places, and that will spread because each
time a chair gets taken away, as more cash flows diminish, it becomes harder to get those
dollars and it will spread to those corporations in China, India, Brazil, South Korea, all
of those places, that borrow, the European banking system. So what it creates is almost a perfect storm
for the dollar to rise. And if you also think of the cash flows of
the world, cash flows, global trade, which is negative and cash flow is also selling
commodities. Most cash flows in the world, world trade
terms are basically selling oil, copper, steel, agricultural commodities. All of those are falling. So you’re getting less dollars every day. So it is today really incredible set up, that
the Fed can’t really do anything about. And in terms of that that dollar dynamic,
in some ways this is the key because it’s the apex predator of global financial markets. And if you see, and people talk about the
printing of the Fed, but if the Fed prints money and then the Bank of Japan and then
Europe, if everybody tries to devalue, then no one devalues. But you also look at it in terms of the overall
pool of cash and therefore the relative size of printing vs. effictive the overall transactions. And that is a very, very different story in
terms of how the size of the Fed’s balance sheet expansion really is in the real world. I stumbled across it by accident about a week
ago. I was going through the BIS, the Bank of International
Settlements web site, and I realised and I knew obviously, as we all did, that the dollar’s
like 70 percent of the global system. But then I was looking okay, so the rest is
split between the euro and the yen and the pound and Swiss franc and Aussie and… I thought, well, it’s obvious that a trillion
dollars of stimulus from the Fed, is worth a lot less in terms of currency debasement
than a trillion dollars from the ECB. Because of the size of the markets. So I realised a trillion from the ECB was
basically 3 trillion from the Fed. So it’s almost impossible for the Fed to catch
up with the BOJ and ECB. So it means that they always have the ability
to weaken their currencies more so. And that’s basically been the trend since
2012, 2011. They all managed to weaken their currencies
because the Federal Reserve, the dominance of the dollar has made it almost impossible
for them to do it. And whilst we are waiting for these currencies,
I mean, we’ve seen very low volatility in things like global FX positions, but there
are some emerging markets where this has been happening quite dramatically already. So what are those? What are the sort of places where if you can’t
wait for the euro and the yen to actually break, which might be, you know, six months
or more down the road, although the euro is nearly there. Where are the places that people can actually
go, ‘right. I can do this now’. I prefer the patience trade. I think the euro is the best set up of of
all because we’ve got some structural problems in Europe that are coming to the fore. Something called the European Union is not
acting like a union right now in times of extreme adverse trouble. When member states have gone and said, listen,
we should mutalise this debt, we need a helping hand and Germany and Holland have said no. So then it’s kind of a it’s a European amalgamation
of independent states who are out for themselves right now. That doesn’t help the situation, so that’s
going to have to get tested and we’ve always known these structural deficiencies, but it’s
likely to affect the euro. The Europeans are about to start their printing
to help all of these governments. So that’s going to affect the euro. So actually, I like that. But on the other hand, if you want to look
at other currencies that are moving fast. Well, we’ve seen Brazil for the reasons because
they their two biggest exports are agricultural commodities, no it’s just basically commodities
are the top five of their exports. Well, cash flows have fallen 60 percent in
all commodities and in some cases more. So suddenly, Brazil can’t pay its debts. It’s the musical chairs game. We’ve seen the same with Turkey. Turkey has a lot of dollar denominated debt. The other places where we’ve seen some weaknesses. India, for example, as well. Argentina, anywhere that’s got debts, need
dollars. The interesting one is all always going to
be China within this equation because China actually has the most dollar denominated debt
of all, but their currency is pegged. So there’s a chance that maybe that they move
alongside the other emerging market currencies. We don’t have to look for a dramatic devaluation
of the RMB, but could it move 10 percent from here soon? For sure. And then in terms of the bond markets, I’m
quite interested in that because we’re looking at potentially a market which certainly yields
seem to be capped on the upside, not just by the Fed, but by the dynamics of pension
funds, etc.. But do you think that the market or that the
yield curve will see the frontend move down first, or do you think we will actually get
another inversion where we could see the five year, maybe ten year go negative first, which
then forces the hand of the Fed to go, okay well, you know, we can go into negative rates
at the front end as well. Or do you expect the Fed to break first and
go go into negative territory on U.S. rates? I think the curve is going to steepen as it
moves towards negative rates. So I think it’s going to automatically adjust
itself. Forget the Fed not wanting to go to negative
– they don’t get the choice. The bond market has all the muscle here, and
the easing it happened in Europe in 2012. Two year Schatz in Germany went negative. But it took 18 months for the ECB to have
the courage to do it. So I think there’s a similar dynamic coming,
whether it’s 18 months or not. I think the bond market is all going to shift. We already saw Fed funds rate negative just
marginally the other day. And I think with any sniffing out of this
deflation thing or slow growth, we will see negative rates at two years. And in the end, we should see two years at
like negative 1 percent. We should see five years at negative a half. We should see 10 years at somewhere like zero. And then you’ve got a steeper curve. But it’s implying something different. The banks need the steep curve, but it’s probably
only get it in negative rates, which is not very helpful. And the catastrophic kind of scenario with
all this is that real yields could start to explode higher. Yeah, this is the really troubling thing. So step back ot of all of this. What’s been freaking the central banks out
of you since you and I were working together at Goldman in the late 90s? The thing that started to freak the central
banks out that they saw in Asia in 1998, was what happens when rates get to close to zero
and deflation sets in? That only happened in the 1930s. And so they fought that tooth and nail, inflate,
inflate, inflate. Stop that happening. But the problem is, is due to debt and demographics,
that that natural interest rate kept falling. So here we are in the biggest recession. Well, in the UK, it’s the biggest recession
in 300 years, according to the Bank of England. And we’ve got rates at zero. And commodity prices are falling and the business
cycles falling and expenditure’s falling. So deflation is coming. So looking at a lot of forward looking charts
that I use, I would suggest that negative 2 to negative 3 percent CPI is likely in the
US and probably somewhere around elsewhere in the world. Well, with bond yields at zero, it means real
yields are about 3 percent. So that’s tightening rates above where they
were in 2000 and 2001 in the middle of the biggest crisis in three hundred years. That is what the central banks have feared
all along. And as mainly in life, the thing you fear
the most is the thing you make happen out of your avoidance tactics. And here we are. So I don’t know how we avoid this, but that’s
why I think we’re going to negative rates. This is a world where we could see I presume
we could see massive monetary inflation and deflation in real economy at the same time,
is basically what you’re saying? And exactly what happened in the 1930s. So they were printing money. They were buying bonds. They were supporting the equity market, doing
a bunch of other issues. They had fiscal stimulus going on and yet
prices were falling. And eventually, and the problem was, lo and
behold, obviously, there was too much debt in the system. They had to renegotiate all of that sovereign
debt, which was the debt owed by France, the U.K., Germany and all of that post-World War
1. All of that got written off in the end. There was a massive fiscal stimulus, but the
key thing was through that whole period of that deflation is the US was pegged to gold. And it was too strong. It kept accumulating all the world’s gold. So with the currency too strong, what you
got was massive deflation. And here we are with the same set up. The dollar standard is basically the world’s
reserve currency. It can’t move away from it, it’s too strong. It’s attracting all the world’s capital flows
and that’s making it worse for the US and the world. So however much monetary and fiscal stimulus
to throw at this, you’ve got that big issue to solve. So there’s a dollar, debt, demographics and
deflation story. It’s now the 4 Ds. And there’s probably a couple of ways that
you can play this. Because there’s some of this and also because
some people are still gonna be skeptical that the super printing this QE infinity doesn’t
create inflation. But the path to if we could ever get there
is actually paved with the same trade, isn’t it? Because there’s a couple of trades which deflation
during monetary inflation will still work out in the medium, short, medium and maybe
in the long term. What are those? Look, I mean, this this is a trade that’s
so superior. I mean, I like the dollar. I think that’s an extremely superior trade. But if you just want one simple thing, one
true north that works in every scenario, because a lot people think I’m going to be wrong on
the dollar and the dollar collapses because of monetary printing. I get it. So that scares a lot of people away. But there’s one trade that everybody agrees
on, which is interesting, which is, okay, Roger, you think it’s a massive inflation,
you tell me you need to buy gold because it’s inflation. And I say it’s a massive deflation, the central
banks, the only way they can they can try and control it is to print more money. And it’s not going to work, but they’re going
to keep printing and it’s gonna devalue fiat money versus gold. So here we are, an inflationist and a deflationist
and we both think we should buy gold. Now, if you’re a little bit racy, we might
agree also, that you might wanna buy bitcoin. Because at the end of this we have what’s
known as the dollar standard. Which doesn’t work for the world any longer. Mark Carney when he was at the head of the
BOE, we’ve heard it from Benoit Coeuret from the ECB, we’ve heard it from the BOJ, we’ve
heard it from everybody, the BBOC we can’t operate under this system any longer, we need
to create a new system. And they are talking about moving to a digital
currency system as a start. The point being is if I’m right and the dollar
goes up, or you’re right and not that this is your view, but if if you were the inflationist,
well the chances again of Bitcoin, which is a super hard currency, I mean, yesterday it
quantitatively tightened. While the world was quantitatively easing
fiat currency, that’s an extraordinary difference. So that I think gives you an option on the
future of the financial system, too. So, you know, those are the those are the
obvious bets to me are; yes you can bet on bonds going to negative interest rates. You can bet on the dollar rising, or if you
want a kind of relatively straightforward bet for the next three years of where do I
put money and i’m relatively safe, gold. If I wanna make a ton of money, if I’m really
right, bitcoin. And just around this out, kind of just in
terms of timeframe, there’s a few there’s a few past examples in terms of where we think
this could go and it’s probably the next few months are going to be absolutely critical. Would that be fair? Yes. We need to know what is going back to work
look like. Right there’s a bunch of assumptions that
were in the market in the hope phase. But I’m looking at the forward looking data
in China and around the world and it looks like Asian economies aren’t going to fully
reopen, that the trend rate of growth is still negative. You get a first about bounce back in the first
month because it was great, I can do this. But the reality is everyone’s a bit scarred,
and that I better keep my income, maybe we shut down again. We’ve seen that in in Japan and Singapore
and other places. So maybe I just keep hold of it. Employers are slower to take back staff that
they let go of. And before you know, it we are in reduced
growth world. So that transition from June, July, August,
I think will give us everything. But I know one thing I’m armed with one secret
weapon, is the bond market will tell us first. Because it’s always right on stuff like this. So just keep an eye on, let’s say, five year
rates or two year rates and watch them go towards zero. The closer they go to zero to the higher,
the probability is that the trend rate of growth is not going to return back to normal
and we’ve got a longer recession ahead. If it starts flipping to negative rates, which
is not very far away, well, then it means that growth rates, that deflation is probably
the base case for the bond market. Excellent. Raoul thank you very much. And that’s a great way to finish it. Very clear and very sort of simple, a simple
kind of thing to have on the radar to kind of understand where we’re going. Thank you very much. Not at all. There’s also a whole host of things we can
take from that, but the three things that stuck out for me were, were firstly, it’s
the liquidity turning into a solvency crisis. So liquidity, the need to get cash now. Obviously, as people were fighting for cash,
that ‘dash for cash’ that we’ve talked about before. That was the liquidity crisis a bit like 2008
and governments now have worked out how to deal with that sort of crisis. So they’ve gone to the usual rule book of
quantitative easing, et cetera. But I think the real issue here is the solvency
crisis that’s coming. Now what’s that about? It’s balance sheets, balance sheet impairments,
the household level, the corporate level, and ultimately the government level. Households will be thinking that future revenues
– that’s wages or even employment, is impaired and therefore they’ll be retrenching today,
saving more, paying down debts and therefore $1 that’s coming to them from, let’s say,
the government fiscal stimulus will not become $1 going back into consumption. So consumption drops. The corporates will be anticipating that with
declining wages that their future revenues will also fall. They will be thinking about cutting jobs and
reducing wages, reinforcing that negative loop. And then governments which have already anticipated
this and have therefore done the fiscal and forced the central banks to do more of the
monetary through quantitative easing, they will ultimately have balance sheets impaired. We can see this burgeoning debt to GDP already,
and they will be looking to try and claw some of that back through taxes. Now, that probably means that things will
therefore be deflationary. And that was the second thing. The inflation argument is is not all pervasive,
but because you’ve got a massive monetary and ultimately fiscal stimulus, the expectation
is that this will be inflationary. But the hole, the pit that’s already been
dug is only being filled up at the moment. In fact, we’re not seeing a stimulus, we’re
seeing stabilization from this liquidity. A stimulus needs to take growth beyond where
it was before, and that needs a hell of a lot more. In fact, I think that’s got to have to be
or going to have to be a much bigger bailout in almost every region, something that we
talked about about a month ago. So that was the second thing. And then the third thing, again we’ve talked
about this, is that in a world where we are seeing assets being distorted, particularly
in the US, corporate bonds, equity markets with the Nasdaq near its all time high, once
more, those are financial assets, equities and not the economy and U.S. equities are
not global equities. U.S. equities are being pumped by the anticipation
of liquidity and in some ways that immediate liquidity going through some of the hedge
funds via those banks. But that’s not the real economy. That’s not really the way to play this, that’s
not that’s not the way to play the macro. The dollar is the way to play the macro. Raoul was talking about the euro, the euro
sitting on this very, very big support line. So that could certainly be something to watch
over the medium to long term. Volatility still remains quite low. The CVIX is quite low. And that means that maybe the euro will still
take some time to grind out to a lower level. But we can already see this happening in a
lot of emerging markets. A few weeks ago, we talked about the Brazilian
real, we talked about the South African rand, we talked about the Mexican peso. The one that’s really moved so far is Brazil. That’s still somewhat the one to watch, but
I think across that emerging market FX space, there is going to be a lot more weakness because
these aren’t central banks or these areas don’t have central banks, that can have as
dramatic a response as places like Europe, Japan and the US. They can cut rates, but that only has a limited
impact. Ultimately, these are countries which need
to effectively export their way out of a crisis. So emerging market currencies looks like the
place to play the global macro and ultimately the euro and eventually maybe the yen, also
near big levels, those might be the ones to go as ultimately the dollar tries to push
higher as this real dash for cash in the world’s economy and the world’s real economy takes
hold and drives that demand for dollars higher from here over the next weeks, months and
maybe even years, although that might generate a significant response from all global central

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