AdamsNotes

Welcome to ‘AdamsNotes’, concise summaries of Wealthion’s interviews with top macro experts.

These notes capture Adam’s key takeaways from his discussions with his guests. They’re not meant to be exhaustive transcripts; rather they’re the distilled insights that different each interview from all the others.

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Expert: Brent Johnson

Date Recorded: 8.4.22
PART1: The Dollar To Get Even Stronger? Latest Update On The Dollar Milkshake Theory

Understanding The Dollar Milkshake Theory “”DMT”):

  • The Milkshake: Over the past several decades, central banks & governments around the world have engaged in a tremendous amount of money printing/stimulus to paper over all the debts they’ve continuously taken on. This has led to a global ‘milkshake’ of liquidity.
  • The Straw: given that the US dollar has global reserve currency status (other countries need dollars to buy oil & service their dollar-denominated debts) and its capital markets are seen as the safest/most trusted, when trouble hits the global economy, capital flees into the US dollar/markets. In this way, the US holds the ‘straw’ that drinks the global ‘milkshake’ of liquidity. Brent says “It doesn’t matter who mixes the milkshake. What matters is who holds the straw to drink it. And that’s the US.”

DMT is the framework by which Brent sees a sovereign debt crisis playing out.

A global sovereign debt crisis is frightening because debt is critical to how most nations & their industries fund economic activity. As that debt becomes harder to obtain & more expensive to service, economies destabilize. That leads to serious economic hardship (e.g., recession, unemployment, loss of essential services) that, if it gets severe enough, can trigger social unrest/revolt (see: Sri Lanka)

There’s $300 Trillion of global debt right now (ignoring derivatives). Much of that debt is owned by foreign countries by STILL denominated in dollars. So when the dollar strengthens (as it’s been doing this year), it makes the cost of this debt burden higher. And unlike the US, these countries can’t print new dollars to address this. 

The big danger here is that the weaker countries may fail, and if they do, that creates repercussions that can take down larger countries, and cascade further from there. Currently, we’re seeing concerning degrees of buckling in countries like: Sri Lanka, El Salavador, Peru, Ecuador, Chile, Egypt, Argentina, Turkey. Even major players like Japan and Europe are seeing major stresses in their currencies.

Brent believes that, deserved or not, the US holds advantages the rest of the world doesn’t, and as a result, global capital will flow into US and enable it to be the ‘last domino standing’ as the global sovereign debt crisis unfolds.

He’s not a fan of the US/dollar. He agrees both have serious problems. BUT, he sees all other countries/fiat currencies as having worse problems.

He can relate to those who hold alternative assets like gold & crypto as a “superior form of money” to the dollar. BUT he thinks it naive to expect them to supplant the dollar, at least anytime soon (ie. decades). Like it or not, the world runs on the dollar. You likely won’t get far or do well if you set up your life/portfolio to fight that.

Dollars & dollar-denominated debt held outside of the US is called the ‘Eurodollar system’. The size of the Eurodollar system dwarfs the dollar supply within the US.

So it has a disproportionate influence on the strength of the US dollar vs other currencies. 

But there is no central body managing its supply, like a Federal Reserve. So if the supply of Eurodollars starts shrinking due to a contracting global economy, there’s no entity to stimulate it with freshly-printed new Eurodollars.

That means that, regardless of what the Federal Reserve does, the Eurodollar market action may have more power over what happens with the global strength of the dollar.

This explains why the purchasing power of the dollar is declining within the US due to the $trillions in domestic stimulus WHILE the dollar has risen to a 20-year high vs other currencies.

Hyperinflation = when there are no external buyers for your domestic currency (i.e., no one wants it). Weaker countries start printing more and more currency as they struggle, and once the world no longer wants to own their depreciating currency, it rapidly builds up within their borders and they fall into hyperinflation.

Capital fleeing those struggling countries/regions runs into the US for safety & liquidity.

Brent thinks it will be very difficult for the dollar to be replaced as the world reserve currency. Relative to every other currency, it has a much better track record of stability, liquidity, acceptance & trust. And the entire global economy & financial system are standardized to it. There is a truly massive switching cost to replacing it. So you have to have a REALLY compelling & attractive reason for the world to switch off the dollar. No other currency currently is close to offering one. Doesn’t mean it won’t happen (Brent actually thinks the dollar will one day lose it), but it will likely take decades at least, and probably a war that America loses.

Brent does not think the Fed will pivot anytime soon. Thinks it will pivot only under 2 scenarios: either when inflation is under control or if a “break” forces it to. Doesn’t see it feeling pressure to pivot while inflation is still hot, the S&P is above 4000 and rising, and unemployment remains low.

The Dollar Milkshake Theory in some ways is the Fed’s best friend right now, because it’s driving foreign capital into the US capital markets – supporting them & keeping them from crashing – while the Fed is tightening. It’s helping the Fed to get the Fed Funds Rate higher without “breaking” the markets or US corporations.

PT 2: [to come when video launches tomorrow]

Expert: Thomas Thornton

Date Recorded: 8.1.22
PART1: Hedge Fund Expert Warns: This Is A ‘Very Hard Market’ With “Few To Hide’

We’re dealing with the repercussions of too much worldwide stimulus. Inflation genie is out of the bottle & going to be a challenge to put back in it.

This is a difficult market. Few very places to hide. Bonds have been an absolute nightmare for investors. Energy is in the process of doing a rug-pull. Precious metals, bitcoin have disappointed. Cash only real safe haven.

This is a TACTICAL year: trajectory is lower, punctuated by short-lived rallies – right now, the herd is chasing the current rally & likely to get burned.

This is a great market for traders who have trained for volatility. But it’s awful for the average retail investor (who hasn’t). It’s an exceptionally hard market for those deploying the traditional playbook that worked well over the past decade. Success starts by realizing it’s a very different market than what you’re used to.

CPI likely peaked in June. But it’s going to remain elevated. And unemployment is still very low. Tom thinks the Fed will continue tightening for as long as these two conditions continue. Thinks it will tighten higher for longer than most pivot-predictors are anticipating. If you look at the CPI & unemployment rate charts from the 1980s when finally Volker broke inflation, they support the argument that the Fed has a long way to go before it pivots.

We’re on track for a recession and likely not a ‘soft’ one.

Consumers (especially on the low end) and companies will continue to suffer as long as inflation remains >5%. More demand destruction/margin compression lies ahead. Tom expects worse rev/profit guidance to come out as the year progresses, forcing asset prices down further still. This is a big reason why he thinks this bear market isn’t over yet.

There was a huge emerging productivity boom (led by the move to the mobile internet) that served to cushion how bad the Great Recession in 2008 was. We don’t have a similar ‘cushion’ this time around. Prob will result in a harsher recession than many are expecting. Don’t underestimate the scope of coming job losses; once they start, they snowball. Wouldn’t be surprised to see 6% unemployment.

Beware of the Fed pivot. It may happen, but it may not produce the results many are expecting. Easing may not goose the economic growth folks want in the time they want. And the bond market may well revolt, sending credit yields higher – Tom agrees with Bill Fleckenstein’s prediction of this.

The current rally actually decreases the likelihood of a Fed pivot. Fed needs to see something really scary to give it the aircover to return to easing. That’s not going to happen with the S&P above 4000.

Those worrying about a Fed policy error that “breaks something” need to realize that that error already happened. It was in easing & stimulating for far too long, creating history’s largest asset bubble and deforming our markets. We’re now dealing with the bullwhip effect of reacting to that principal “error”

Thinks market could pop higher if July CPI is indeed lower than June. Tom thinks this may be short-lived though, esp as Aug CPI could be higher again – and if that happens, he thinks those jumping in the current rally could get badly burned.

This year, Tom has made more money on the short side than the long side, though he has placed more trades on the long side. He attributes his 27% gain this year to his discipline with position sizing. Any position is never <2% or >5%. This helps prevent his bad bets from doing too much damage. His is not a get-rich-quick strategy; it’s a way to do well in the longer run by containing risk. This year, Tom has been in cash much more and much more often than normal – a sign of how poor his confidence is in today’s options on both the long & the short side.

PART 2: A Sideways Market For Several Years?

Best case scenario for the S&P: a retest the June lows. There’s a lot of support around 3500/3600. If mega cap names like Apple, Microsoft, Google, etc start underperforming, he thinks 3000 is realistic. 

There a lot of uncertainty coming up with the Nov elections. We could see a repeat of 2000, where political instability combined with sinking corp margins and pulled everything down. Also, there are a lot black swans risks out there right now that could negatively impact markets further.

Fed’s actions have a lag effect of 3-6 months before being seen in the economy. We may see the demand destruction impact hit in full force right as companies announce disappointing Q3 earnings. Could swiftly freak out the markets.

Tom advises to use market correction as an opportunity to upgrade the quality of your holdings. Add great companies at better values. FYI: Tom is shorting right now, so he expects lower prices ahead.

Tom likes Paramount as a stock. Thinks it’s quite undervalued and well-positioned in the media sector.

Sentiment is a really significant predictive indicator. Inflows are dwarfing outflows right now (i.e., majority is still bullish). We haven’t seen a capitulation in equities yet this year. We maybe have in bonds.

Tom likes to compile data from numerous sentiment sources. Two he likes in particular: Investors Intelligence (in a bear market formation right now) & Daily Sentiment Index (at a midpoint right now).

The DeMARK Exhaustion Signals applied to the CPI have been extremely accurate over the past century. Tom monitors this closely.

Market could go sideways for a long time from here – thinks it could trade in a choppy range between 3500-4300 on the S&P for several years.

Tom’s investing best practices:

  • Don’t be afraid to take losses for tax-loss harvesting. They will shelter past or future gains, and give you the chance to move poorly-performing capital into better prospects.
  • Don’t be afraid to sell too early. If it looks like you’re wrong, get out while the bleeding is light.
  • Once you have gains, lock in a portion of them. Better to lock in at least 50% of your earlier gains, than risk losing all of them.
  • Beware of sentiment as an important indicator. As emotions (yours or the public’s) start to run hot, step back and question if the passion is overtaking reason. Tom writes his emotions down in a notebook, in order to analyze them and reduce their power over him.
  • As mentioned earlier: respect position sizing! Don’t over-concentrate or spread yourself too thin.

Follow Tom: 

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Expert: Louis-Vincent Gave

Date Recorded: 7.26.22
PART1: Inflation Here To Stay As Globalization Dies?

We’re in an “ursa minor” (-20%) bear market right now. The danger is we’ll enter an “ursus magnus” one (-40%) as the major world economies slide further into recession.

  • Time for defense right now. That requires a different portfolio allocation than the standard 60/40
  • Recession risk by region:
    • Europe definitely in one. Things there look dire. Europe is in a full-blown energy crisis.
    • China looks to be in recession, too. Though China’s slowdown is mostly government-driven, which can be more easily reduced as things are opened back up.
    • US is a wild card. There’s likely still enough stimulus ‘pig going through the python’ to keep the economy propped up for a good while. Maybe it has a short & shallow recession, but it’s not going to fall off a cliff.

The energy-driven slowdown in Europe is likely to be inflationary. Will further disrupt global supply chains as less energy to produce goods (Eurozone economy now deeply integrated, so production shortages in one country will cascade across the others). Euro likely to continue to weaken vs USD (exacerbating inflation within the Eurozone)

Europe is fighting a 2-front war: climate change + Russia. That’s one front too many and both are exacerbating its energy crisis. Until policy shifts to sustainably addressing its energy woes, Louis doesn’t recommend deploying investment capital in Europe.

The Era of Globalization is now reversing. This is a massively important development. Geopolitical risk matters much more in this new era. For example: Industry is being weaponized now in a way it has rarely been before:

  • US weaponized semi-conductors vs China under the Trump admin
  • The West weaponized the financial industry against Russia after it invaded Ukraine
  • Now, Russia has weaponized energy fuels against the West

Ongoing supply chain shortages and inflationary price pressures are likely to continue in this environment

Globalization was profoundly disinflationary. Now that “it’s over”, secular inflation is likely to gain the upper hand. Those investors who don’t realize this and position as they have in the past are likely to be at risk.

China’s goal is not “global domination”; it’s “global independence”. Banning them from semiconductors has only fed its desire to be self-sufficient. 

  • Its biggest weakness today is its dependence on US dollars to get what it wants. It has a strong incentive to de-dollarize. 
  • With the boycott of Russia, the West has given China a tremendous gift. Russia is now motivated to sell resources cheaply to China in exchange for renminbi. This is also giving China more bargaining power to demand that other countries settle trade in its currency, too.
  • If they succeed in de-dollarizing, this will have HUGE implications for the opportunities available to investors in Asia (=will create a lot of new opportunities for big returns). Louis thinks China’s odds of winning are getting a lot better.
  • Louis thinks the big trend here will be the lowering of China bond yields (Chinese bond yields are now below US Treasury yields!). A similar playbook played out in Germany 35 years ago. Betting on rising bond prices in China and/or the Asian countries that benefit from trade with it should be a big tailwind to bet on.

PART 2: De-Dollarization Is Accelerating, Propelled By China & Russia

Louis’ thoughts on investing:

  • Step 1: Have to realize that the game has changed. Multi-decade era of globalization is now over, secular disinflation is now shifting to secular inflation. You need a different portfolio allocation for this (just like you need a different team on the football field when you’re on defense vs offense). The traditional 60/40 portfolio likely won’t perform as well as it did in the past
  • Focus on assets with intrinsic value. Bonds with negative real yields don’t have any. Take the 40% of your portfolio in negative yielding bonds & shift it into positive real-yielding EM debt or energy plays.
  • Look for growth in equities. Louis prefers buying undervalued equities and undervalued currencies. He doesn’t like the Euro, but he thinks companies in Japan, Korea, Canada look attractive.
  • As we navigate this bear market, which could very well get worse, Louis thinks it wise to hold cash and precious metals, too
  • Think of your portfolio as a sport team: every one has a specific & differentiated role to play. Cash/gold are to protect against loss – they’re not for speculative gain, as certain equities are. So construct the ‘team’ intelligently. And while in a bear market, beef up the ‘loss protection’ part of your team.

The paths out of a bear market:

  • Energy prices collapse
  • The central banks aggressively stimulate
  • USD tanks
  • Investors capitulate & don’t want to touch stocks

As we’re not seeing any of these yet, it’s unlikely this bear market is near over

Follow Louis at

  • Gavekal.com
  • haymaker.substack.com/

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