The Macro Trading Floor transcript – 25 October 2024

Alf (00:01.049)

Hi everyone, welcome back to The Macro Trading Floor. This is Alf. With me, my good friend, Brent Donnelly. How are you doing man?

Brent (00:07.062)

Alfonso Peccatiello, now I learned something about Italian yesterday, that the singular of spaghetti is spaghetto. Yeah, is that just common knowledge, I guess, for Italians? I think English speaking people who have adopted the Italian words wouldn’t necessarily know that. So is the singular of panini, panino?

Alf (00:27.737)

Yeah, a panino, that’s perfect.

Brent (00:29.656)

So if you go and buy a panini, you’re actually saying the wrong thing. You’re saying like, want a sandwiches.

Alf (00:33.177)

Yes, yes, that’s correct. yes. Pani no, Pani no. And you know, man, I mean, with this Italian thing and spaghetti, you really wake up feelings for me because there is one thing that as Italians, we cannot forgive on top of pineapple on pizza. Of course, that’s forbidden. But there is another big, big rule when it comes to spaghetti, specifically the type of pasta. And as an Italian, I would say you break spaghetti, you break my heart.

So basically the thing is you don’t break the freaking spaghetti with your hands or with your knife. I’m gonna kill you. You just eat spaghetti properly, you You rotate them around your fork and you put them in your mouth. You don’t break them. I’m gonna kill you if you do.

Brent (01:15.192)

Yeah, but if you grew up lower middle-class Canadian, you probably broke your spaghetti, but I won’t say. Anyways, okay. So I think people generally are getting a bit bored of the election, but also we need to talk a little bit about it.

So one thing I wanted to cover is we saw a big flurry of activity in our franchise buying dollars. You know, people are selling bonds. There’s a trade obviously around Trump. But one thing I just wanted to point out to the listeners is it’s very difficult to separate what’s Trump and what’s just the stuff that happened in the economy. Because after August payrolls, Trump’s odds collapsed and yields collapsed. And then when Trump’s odds started picking up, the economic data was really strong. So you see this very tight correlation or like a very tight link between yields, dollar yen, for example, and Trump’s odds.

But then if you go outside of that and you look at something like Bitcoin or even dollar Mex, dollar Mexico, the tightness isn’t there between the odds and the security. So I think there’s a chance that people are overestimating how much it’s actually priced in positioning wise. Yes, people have definitely been buying dollars and selling bonds, but I don’t think this is some massive position.

I think a lot of it’s done through options and some of it is just fooled by randomness because the economic data happened to go a certain way and it just happened to match the flow of Trump’s odds, which went down after the assassination attempt for about a month and then rallied at the same time as yields.

Alf (02:52.825)

Yeah, I have to back you up there, ran a bit of a research for clients this week showing what happens after elections. Like if you put in a scatterplot, the dollar and 10-year treasury yields moves the six months around the election period, you hardly find anything which is incredibly large. And so it tends to basically tell you that it matters, but it doesn’t really matter that much in the big scheme of things.

I mean, the economic cycle in the US matters more, what the Federal Reserve will be doing matters more, and what happens around the US and outside the US matters probably more than the elections themselves. But everybody wants to trade them, everybody wants to talk about them.

But there is one thing on options though, which I feel like I have to say. So it’s true that you spend little by implementing an idea through an option, especially if you buy the option and it’s out of the money. But that doesn’t mean your trade is small. That just means your premium is small, but it means in principle your trade can become very large as your Delta expands if you effectively end up being in the money.

So just a more leveraged way to play it, but if everybody accumulates out of the money options all in the same directions, then probably the dealers are going to feel it as well if it starts going there. So in general, I feel it’s a bit overdone, overhyped, and maybe we won’t even know the results for a month actually. That’s also something to consider, right?

Brent (04:18.648)

Well, that’s a tricky thing. So if you’re buying the election, you either have to buy like the day or two days after, which is assuming that the election is resolved in the normal way, or you have to buy way out because, for example, 2000 was decided on December 12th. So you really can’t like, if you think that there’s a chance that the election will be contested, you really can’t buy anything close to November 6th because the uncertainty around what that objection or challenge would look like is completely unknowable.

So what our clients are doing is either buying right after the election just to try to go as cheap as possible, or they’re buying after inauguration date like January and February kind of stuff, just to make absolutely sure that they get it. But then obviously if you do that, it’s a lot more expensive.

Alf (05:09.197)

Yeah, and we have this amazing trifecta of things, right? We have non-farm payrolls, elections, and then the Fed, like in the span of a week. That’s going to be fireworks, or it’s going to be nothing because too much vol is priced in and then we end up after a week having made no moves.

But in any case, I think we should talk about stuff and non-farm payrolls are what? Next Friday? And which means that we will be recording on a Thursday before that and we will sound very stupid again trying to talk about something that hasn’t happened. So why don’t we talk about it now? And specifically, I mean, I know that you have some opinions about the US labor market, which might annoy a few people. So why don’t you go on?

Brent (05:49.614)

I mean, my main opinion on the labor market is just that we’re returning back to 2017, 2018, 2019 levels. And if you look at any kind of chart of comparing what the labor market looked like then and what it looks like now, they’re very similar.

And then there’s two big pushbacks on the data. So the first one is more recent that there’s a lot of weird stuff going on in the household survey. I’m not going to go into it because I just think it’s a waste of time. I’ll put up a chart in the YouTube version showing the household survey versus the establishment survey. And the volatility of the household survey is so extreme. It’s just a garbage in garbage out type situation.

And people try to sort of unslice and dice it and go into the micro aspects of it. So if you, if your headline number on household is already garbage and then you start going into the details, those details are generally like statistically gonna be even more garbage. So I’m not a fan of that survey. I think it’s just a waste of time. And I mean, the simplest, the only thing you need to know is which one does the market react to? It reacts to the establishment survey because it’s less noisy and it’s more meaningful.

So and the second pushback that people have been saying for months, maybe for years, couple of years now is, it’s all just government, so it’s bullshit, it’s not even real hiring. But people have to understand that are saying that, government is basically education and healthcare. And during COVID, guess who quit their jobs or resigned or retired early was all people in education and health services. So again, I’ll put it up in the YouTube. If you chart the trend of education and health services through 2020, we’re not even back to trend. So all those people that quit are being replaced slowly but surely.

And yes, at some point, like people are less eager to go to college and all that stuff. Okay, eventually maybe there’s like a bearish case. But first of all, we just got to get back the jobs that we lost in 2020 because a lot of those people never came back. So you need a new cohort of workers to come in and that’s what’s happening.

So all that to say, I think the labor market’s fine. It’s not 2021 levels of overheated, obviously, but it’s much more similar to 2017, 2018, 2019, which is consistent with 3 % growth and whatever 3%, 4 % wage growth is not crazy.

Alf (08:27.011)

Yeah, mean the other things one can consider to look at the labor market are things as well that Mr. Powell is considering. So I always urge people to listen to Powell. I mean, Powell is the guy effectively deciding or carrying a large share of votes within the FOMC. So you should listen to what he says.

And he talks about the quits rate, for example. So in the private sector, it’s looking at how many people are voluntarily quitting their job, right, which is a sign of strength in the labor market. If you’re quitting your job voluntarily, it means you’re really looking to find a new one very soon. And you know the quit rate is back to like 2019 levels, but it’s not a recessionary level. It’s just back to a labor market, which is quite well balanced and, you know. It’s weakening for sure, but it is nothing dramatic yet.

If you look at the cyclical industries, this is not what Powell says, this is what Alf says. So, you know, give your balance of weight there. But if you look at the cyclical industries, I don’t know, constructions and financials and trade and transportation, their full-time hiring on a year-on-year basis is like a bit less than 1%. It’s not great, but it’s not recessionary either. It’s just a soft patch like 2019 or what it was in early 2007.

Does it mean we have to turn into COVID or 2008 as the next step? Well, I don’t know. It only means that right now the labor market is like, you know, has fully rebalanced for sure. And it’s, you know, big softish, but nothing dramatic.

And if you expand this thing, I would say, Brent, if you look at multiple things like retail sales and consumer spending, retail sales, you look at like a broad number of indicators in the US, I mean, you figure out the US broader growth is something like the 35th, 40th percentile over the last 20 years. So does it mean it’s great? No, it’s probably not great.

If you use GDP only, it looks great, but if you look at the broader set of indicators, it’s a bit less great. But the 40th percentile is not the 10th, it’s not the fifth, it’s not a disaster. It’s just a soft patch. That’s what it is. It’s way less, I would say, dramatic, but also way less inspiring, I would say, as people want to make it. In US growth, there is not a story really at the moment. That’s a bit boring, but it is what it is.

Brent (10:43.542)

Yeah. And actually one other thing on the labor market that I think is really interesting in the context of, as we’ve spoken on, on this podcast a few times, especially me, cause I don’t know, this is a pet peeve of mine – the confirmation bias thing where people that are expecting a weak labor market will always be able to find something weak because there’s so many labor market indicators.

But an interesting specific aspect of that right now is the hiring versus firing. So there has been a slowdown in hiring, which you can pick up in a lot of the data, but then there hasn’t really been an increase in firing. So again, to me, that means it’s a rebalancing labor market. It’s, you know, things have rebalanced somewhat and we’re getting closer to equilibrium and you know, the shortages are being absorbed or are disappearing and you’re getting back to essentially like an okay labor market in equilibrium.

Alf (11:36.911)

Yeah, that’s basically where we are. So unless you have more on the labor market, which I don’t, I would say then it’s best to move on to either some additional things on the elections, but before killing people by boredom, we also have more topics coming. Some of them are going to be fun. Do you have something to add on elections or do you want to move on to something else?

Brent (11:59.97)

Well, the only thing I’ll mention, because you mentioned the options thing of what’s priced in for the election. And I wasn’t going to talk about this, but the DJT options are trading at 280 vols. And just for comparison, like, NVIDIA is 50, Apple’s 28. So there’s a lot priced in for DJT, but I guess it’s either going to 100 or going to zero. So maybe it makes sense.

Alf (12:25.285)

280 vol, that’s pretty cheap. I think we should make a market there Brent what do you say?

Brent (12:29.999)

Yeah, I think that’s the highest implied vol I’ve ever seen for a stock. I’m sure it’s not the highest of all time, but it’s the highest I’ve seen.

Alf (12:35.535)

It’s pretty high. So, okay, let’s take a step geographically very close to the US and let’s talk about another country. You know, today we mix it around a little bit. So the other country is going to be Canada in this case because the Bank of Canada has embarked in a pretty hefty cutting cycle. The bond market is not shy at all, pricing the next steps as well. So they are seeing a central bank that has hiked pretty strongly, but it’s also now very very strong about cutting on the other way around.

So what should we make of Canada I would say right now, market pricing the Canadian dollar. I have some opinion on the Canadian dollar but what about market pricing Brent? What should we make of that? Do we think Canada is gonna go full back to like 2 % rates?

Brent (13:26.638)

So it’s very interesting because there’s always this view from people that don’t follow Canada that closely that the Fed and the Bank of Canada are the same thing and the Bank of Canada always waits for the Fed and the Bank of Canada can’t move ahead of the Fed. All those things are wrong. Like, lots of times the Bank of Canada goes first.

However, there is still a limit to how far ahead the Bank of Canada can get because really the US and Canada are very, very tied to one another. I mean, almost everyone in Canada lives within 50 miles of the border. Almost all the trade that Canada does is with the US. So if the US is doing okay, there’s really no scenario where Canada completely collapses. Those two economies are tightly linked enough that that’s not gonna happen.

And so therefore there’s a link between interest rates and there’s sort of like a stretched rubber band between Canada and the US and it can only go so far. And if you look at like twos, fives, tens, whatever, generally US rates don’t go more than 1 % above Canada. And that’s where we are now on most of the curve.

And it makes sense. Canada is a different economy. It’s a lot more indebted. That’s the main thing is that balance sheets in Canada just are not as good as the US. But also GDP growth is way slower, which is actually pretty bad considering that the population has exploded in Canada. So GDP per capita is very bad in Canada. So there is a lot more slack.

But at the same time, if the US is doing okay, Canada can have leads and lags and you know, but fair value of Canada growth is going to oscillate around US growth. So to me, the rates pricing, especially if you look at something like April 2025, looks very extreme to the point where I don’t think it can really extend that much.

And there’s another reason is that there’s kind of a natural limit on how fast the Bank of Canada can cut. Because as you get closer to neutral, if you consider the range of uncertainty around neutral, so they think it’s 2.25 to 3.25, you start projecting into April 2.9 % is what the market’s pricing. That’s like below the top of the neutral band.

It’s very hard for them to go like deep into neutral or accommodative when the US is doing well and when the Fed is not cutting as aggressively. So I think they’re gonna have to slow down a little bit. And the only way that that gets ratified is if something goes on in the US and then the Fed goes 50, 50, 50, then I mean, sure, Canada will be at 2.75. But right now, I think with the 1 % difference across the curve, I don’t see a scenario where Canada actually outcuts the pricing relative to the U.S.

Alf (16:26.819)

Outcuts the pricing, quite important thing. In bond markets, you don’t make money if the Bank of Canada cuts, but if the Bank of Canada cuts more than what’s priced in. Just easy reminder for people maybe not too familiar with the bond market.

So on Canada, I think there are a few things people should know. Two, I think, are structural. The first is that Canada is one of the countries, the developed countries, with the highest private sector leverage as a percentage of GDP. So an impressive statistics, Canadian households and corporates combined are now more leveraged than Japanese households and corporates right before the real estate bubble in Japan. Which is quite scary if you think about it. I mean, Japan had like, think 190 % private debt to GDP. It’s quite a lot. It’s private debt, so you can’t print money to pay that. You have to actually have earnings and wages to support that private debt and Canada has over 200.

So you you’re talking about a country as as Brent said it’s very very highly leveraged balance sheets aren’t great, and the other thing is that the mortgage markets of Canadians is an interesting one because it’s not 30-year fixed as guys in the US and mostly in Europe are used to as well, but it is it is with short-term resets, it’s floating mortgages, so basically the pass-through of the previous Bank of Canada hike is being felt by households in Canada quite rapidly.

And now I think, Brent, that the Bank of Canada is also rushing to this because at least my analysis shows that in 2025, in the first half actually of 2025, Canada faces quite some refinancing of mortgages. And so basically it could also be that they’re trying to cut rates a little bit faster and upfront to ease into a soft landing, to make sure that these people who are refinancing don’t have to face rates that are too high, basically, when they come at refinancing. It could be one of the reasons why they wanna put some cuts up front and be a little bit ahead of the curve rather than waiting. What do you think?

Brent (18:29.26)

Yeah, I think that makes sense because as we’ve seen in this cycle, there’s essentially been no relationship between liability payments and interest rates in the U.S., but there definitely is in Canada.

And just since we’re zooming out today, something that’s really important, I don’t know if anyone has seen the chart of Canadian population, but it’s absolutely bonkers. It’s becoming a political issue that’s part of the pressure on Trudeau. But they’re actually reducing the amount of quality immigration that’s gonna be allowed in future years because the pushback has become so significant, and the pressure on services and things like that. They’re kind of realizing like, okay, we gotta twist the tap a little bit. This is getting a little bit crazy.

And given that they can’t even grow GDP with population growing at like 3 % a year or whatever it was for a few years, when you slow down that immigration, that’s going to be another downward pressure, a creator of more slack in Canada. So I think I agree generally that the writing is kind of on the wall for Canada, but when that thing happens will be when the U.S. is actually turning lower.

And when, you know, when U.S. GDP is at 1.2 % for a couple of quarters, Canada is going to be in a deep recession. But for now, I don’t think that we’re close enough to that point to actually say that we’re going to go much, much lower in Canadian yields, which are pricing a lot.

Alf (20:00.773)

So now that we’re talking about yields, right, and I look on the screen at something that says 10-year treasury yields are 4.2%, I often have people telling me, hey, Alf, yields are XYZ percent, okay, so 4%, 3%, 5% — should I buy them? Should I sell bonds? What should I do? Which is always a fun question because it basically means what is a framework to judge whether yields are at an acceptable level or too low or too high.

And I’m then gonna ask you the same question about the dollar, but let me give people a couple of answers for how they can look at bond yields and make sense of them, okay? So there are two frameworks, I would say. The first one is you can think of bond yields like, especially long-term bond yields, like 10 or 30 years, as the sum of real growth, inflation expectations, and term premium.

So now one way to answer your question is, where do you think the real equilibrium growth over the long run in the US should be? Now you can look at GDP growth, for example, and you would say, the US growth at potential is like 1.75, 2%, around-ish, more or less. Okay, then we have information. Then you should say, what are long-term inflation expectations in the US? Meh, that’s normally around two as well, long run.

So okay, we’re at 3.75. And then there is term premium, and term premium will be something very debatable. For the last 10 years, it’s been negative because people were so happy to have duration on their balance sheet. Effectively, the Federal Reserve was always ready to ease policy and there was very little uncertainty around what was gonna happen. So term premium was quite deeply negative. Now it’s around zero, but that’s the third part of the equation.

So this is a way to look at bond yields on a very long-term basis. And you look at this and you say, well, 10-year treasury should be around 3.5%, 3.75 % on an equilibrium level. That’s one way. The problem is that when you buy yields and you buy bonds, you’re also facing the reality of carry. And that’s a very, very important thing to understand.

That’s when we can use the second approach, which is thinking of 10-year bond yields as the sum of all the federal funds rate for the next 10 years discounted to today. So, Fed funds today are at 4.75%, correct? Yeah, 4.75. So all of a sudden, when you try and buy 10-year yields at 4.2, you’re basically assuming that the Fed is going to cut rates going forward. So that effectively when you buy a 10-year rate below the level of Fed funds, you’re pricing cuts in, right?

So then you look at how much is priced for the next 10 years and think for yourself, like what do you think will be a level of prevailing federal fund rates over the next 10 years? And then you can get a sense of, you know, where do you think 10 year yields should be? And remember, we start from 4.75.

Now my answer to all this long question is that I think when you start at 4.75, it’s quite hard to have 10 year treasury yields below three and a half at the moment, but it all can rapidly change if the Fed goes dovish. So always use these two yardsticks, you know, real growth, inflation, expectation, term premium, and instead try to discount as well what the Fed Fund rate should be for the next 10 years. This should give you an idea where 10 year bonds should trade today. Did I make any sense? Hope so.

Brent (23:28.078)

No, that completely makes sense. But it’s interesting in the context of what I trade, which is more FX, because there are so many anchors, right, for fixed income. You have mature, things are going to mature. If you buy the thing and hold it for 10 years, it’s going to have a value. So there’s a terminal value. There’s fed funds that anchors 10 year yields and all these anchors and terminal value and real cash flows all make sense.

But for FX, none of that stuff applies. So you can have the Swiss franc be overvalued in 20, you know, 2000, whatever 2009 at 150 against Euro Swiss. And then it can go all the way to 0.93 and now it’s even more overvalued and it can still go to 0.61 and be be more overvalued. It’s like, it’s not like the big Mac index can be cashed in.

So in FX, I have a completely different approach, which is essentially to only really think about changes and not about levels. So I kind of just say, okay, the current price of whatever currency is the equilibrium of all the known information that’s in the world and all the flows that have been going through and what’s going to change in the future compared to the sort of starting point now.

So as we, I think we’ve discussed on here, I’m pretty sure, but for the dollar, I think the location of the dollar, where we are on the dollar smile, is probably the number one thing. That’s just like the easy, simple heuristic, which is if on the left of the dollar smile is a strong U S growth, on the right is U S recession. And if you picture the smile, that means like dollar going up in those two conditions. And then when the U S is kind of in the middle and the rest of the world’s doing okay. And that’s what you really need is synchronized global growth is the middle of the dollar smile and U S not booming and not in recession.

And so a lot of times what I’m thinking about is where are we on the smile and where are we going? But obviously there’s much more to it. Like interest rate differentials are pretty well reflected by the dollar smile as well. So if the world’s doing well, yields will be going up in those countries like Australia. And if the global growth is sucking wind, but the U.S. is not, then U.S. rates will be going up faster.

So interest rate differentials are another thing. But again, I’m not really going to say like, okay, eurozone, Germany rates are 1 % below US rates. So that means your dollar should be 1.0633. What I’ll say is if interest rates drop in Germany by 50 basis points over the next week and US rates don’t change, then euro should go down X.

So for me, it’s always about changes because the problem with FX is if you use valuations or any kind of framework, like fair value, that doesn’t recalibrate, you just end up getting stuck in specific themes that are just wrong for years and years. So like Swiss Franc is one. The Norwegian Krona is a crazy one. So almost always if you do a scorecard, Norway has the best fundamentals in the world. But then…

Alf (26:47.385)

Yes, yes.

Brent (26:49.014)

I don’t want to get into the weeds too much, but there’s a specific reason why Norway generally doesn’t benefit from domestic economic strength. It essentially actually benefits more from just risk appetite being strong because a lot of equity hedging goes through Norway. So anyways, I won’t get into that too much.

But if you have some kind of valuation machine that tells you what Norway should be worth based on terms of trade and interest rate differentials, you’re just going to lose money year after year because those things are not the actual drivers of the currency.

So, and I think that’s actually a good thing just to always keep in mind is what are the actual drivers of the thing that I’m trading? Whatever the thing is. Because a lot of times people will think it’s one thing, but it’s actually just some totally other, other different thing.

Like even a simple example, like dollar Canada, a lot of times you can do all the work on Canadian economics and Bank of Canada and all that. But if you’re wrong on the dollar, it just won’t matter what your Canadian view is because the beta or like the primary driver of dollar Canada and the volatility is going to come from the dollar side.

So that’s like a really important thing to understand in FX is just like, what are the sort of principle drivers of the currency pair that you’re trading so that you’re not you know, falling in love with Norway, but actually by being long Norway, you’re just long, like Swedish equities is essentially or whatever. So, so that’s, that’s how I think about it. And I just think fair value and valuation and stuff is just pointless in FX.

Alf (28:27.427)

Yeah, I like the answer. Now, if people have followed you, along this train of thought, you said something about know what is your real underlying driver between your trades, right? I mean, like your dollar Canada, it’s mostly about the dollar. Okay.

And so this is something that always comes to mind to me because often when you run a book, so I know that you trade more single shots at different trades on a shorter time horizon, but if you’re running more of a book, like five or seven trades, you will find yourself having these five or seven trades that, know, sometimes it’s good to ask yourself, what is the real driver of this thing?

I remember there was once a friend and he said, Alf, I’m running five trades. I said, yeah, I mean, tell me, I wanna know so we can check some notes. And he went something like, so I’m long the yen and then I’m long rates and then I bought some downside in equities. I’m like, sorry, man, it’s the same thing. Like you just said three things that are mostly the same thing, right?

All of them benefit from a bad sentiment in equities. Your puts in equities will make money. Your yen will make money. Your bonds will probably make money because we were in a disinflationary world when we were talking about this. So basically you’re short equities. That’s all you’re doing here, pretty much one way or another. And so this is something that is always on the back of my mind. People sometimes don’t really ask themselves the tough question, what is driving each of my trades?

Brent (29:55.564)

Yeah, I think that’s a really important, I know you gave a simpler example. like most people would understand that’s pretty obvious why those things would all be correlated. But sometimes somebody will do something like Aussie Canada and they won’t realize that since Aussie is just so much more volatile than the Canadian dollar, if you do Aussie CAD, you’re just doing Aussie but a little bit slightly more boring version of Aussie. So like really understanding the components of the trade can be super important.

One thing I think that is interesting from that point of view, and I find interesting anyways, is gold and silver, because I feel like with those metals, I’m the least comfortable with what I’m actually doing when I trade or when I have a view on those. Like, what’s the principal driver of gold? Like, is it deficits? Okay, well deficits only change every year, whatever. Like, I mean, they come out every month, but it’s not like you can look at the deficits tick for tick on the screen.

So I do find gold and silver, I avoid simply because I don’t feel like I understand what the underlying drivers are. And if news comes out, I don’t even know if gold’s gonna go up or down most of the time. So I don’t know, any thoughts on gold or silver?

Alf (31:14.937)

It’s beautiful guys. You’re listening to a podcast from two macro experts or supposedly so, who are telling you they have no clue about what’s driving gold. So on the short term, I find this pretty complicated because I used to have a framework around it, some sort of a zero coupon risk-prone asset. And that’s what gold used to be to me at least, before the pandemic.

And then since the US has imposed sanctions on the Russian FX reserves, frankly, all correlations have broken loose, at least on my monitors on what drives gold, frankly. It seems to be doing its own thing for like a couple of years by now. And there’s only one thing that I like, but it’s more of a long-term model.

So gold is, I think most people see it as a alternative coexistent form of money, with the big difference, it doesn’t pay you any coupons and most money normally do pay coupons, positive interest rates for most of normal times. And so when you look at that, there is a simple way to value gold, which will be simply looking at how much the gold market capitalization is, how much gold is worth as an asset class. And it’s about 16 or 17 trillion dollars today.

It’s quite big actually. It’s a third of the Chinese real estate market and a little bit less than half of the US stock market, but it doesn’t produce any cash flows. That’s quite impressive if you think about it. Yeah, so it’s about $17 trillion, I think. And then you take that and you compare it with, yeah, but how much money is out there? Like how much fiat money? What is the alternative? mean, the alternative is the fiat money we can spend, right?

So as long as you’re able to really calculate the denominator well – and, caveat, it’s not M2, it’s not, because M2 also includes stuff that can be spent in the real economy – but if you can really detach that you will see it’s very cool, like gold always tends to be around 20 % in terms of valuation of the stock of money that is out there. Seems like for every new dollar we create, spendable dollar, about 20 cents go in gold. Okay so people reallocate central banks and people and investors, they buy some gold with it, about 20 % of it.

And so when you look at it today, that number is higher than 20%, much higher. So sometimes it tends to coincide with gold fevers or with periods where gold is structurally overpriced, like people are attaching a premium to it Brent, which could be central banks just stocking like there’s no tomorrow, maybe.

Brent (33:58.264)

Well, that’s one thing that we touched on last week, is, and if you look at it, if you have some kind of model and then you say, okay, there’s a huge premium, maybe that premium is just simply deficits plus sanctions plus the put in the bond market.

So like gold is a better hedge against deficits because if bond markets come unglued, the government’s going to intervene. But if gold goes to 3,800, no one in the government’s really going to give a rat’s ass. So maybe it’s that simple, and that’s why gold is probably a better hedge for deficits than bonds are because ultimately bonds is not a free market. Gold is more of a free market. Although I know some people argue that. Since 2002, people have been arguing that.

Alf (34:42.743)

You have your tinfoil hat, you put it up.

Brent (34:44.558)

Meanwhile, gold’s gone up 10x and people still think that the government is shorting it, but whatever.

Alf (34:51.097)

Well, people still think that QE is inflationary, so what should I say? Guys, I think that for this week, we’ve probably exhausted the topics unless you wanna be bored with stuff that doesn’t make fun in macro. So why don’t we just close the podcast for the week? Ciao guys, see you next Friday. Ciao, Brent.

Brent (35:09.144)

Sure, that’s perfect. All right, thanks, Alf. Thanks, everybody. Ciao.