MacroVoices #391 Brent Johnson: The Dollar Is Not Done
Aug 31, 2023
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MacroVoices welcomes Brent Johnson, Founder of Santiago Capital, to discuss the US Dollar bull market and potential challenges to its hegemony. They delve into the dilemma of the yen and the bond market, with insights on crude oil futures and market vulnerability. Don't miss their analysis of the EIA report and the importance of left tail hedges. Visit macrovoices.com for more details.
The U.S. Dollar bull market is not over and new highs for the dollar index are still expected.
Hedging broader market risk is a prudent strategy, especially for sectors like uranium mining, and utilizing spreads can effectively manage risk.
The strength of the US dollar has implications for the global economy, and gold serves as a hedge against the dollar and should be included in investment portfolios.
Deep dives
The Potential Topping Process in Equities
The market may be in a topping process, with potential for retesting highs or even breaking slightly higher. However, there are vulnerabilities and warning signs that suggest a correction may be on the horizon.
Cheap Left Tail Hedges and Option Strategies
Options-based left tail hedges have been relatively cheap compared to historical norms. Volatility premiums are at multi-year lows, and the volatility skew indicates the presence of left tail skew. The low interest rate environment has contributed to the affordability of insurance options.
Hedging Broader Market Risk vs. Specific Sector Risk
Hedging broader market risk is a prudent strategy, particularly if you have significant exposure to a specific sector like uranium mining. Putting hedges on broad market indices provides liquidity and takes advantage of historically discounted premia. Additionally, expressing downside hedges through spreads can be an effective way to manage risk.
The importance of the yen's value and the dilemma faced by the Bank of Japan
The yen's value is crucial to the global financial landscape, and the Bank of Japan finds itself in a difficult position. The bank needs to choose whether to save the bond market or the currency market. However, saving one could harm the other due to the negative yielding JGBs issued by Japan. The banks, insurance companies, pension funds, and endowments are heavily invested in these bonds. If interest rates rise, the value of these bonds falls, which could lead to a banking system crisis. On the other hand, allowing the yen to keep losing value can also cause issues. Ultimately, it is likely that Japan will choose to prioritize saving its bond market over the currency market, leading to a further decline in the yen.
The impact of the US dollar's strength and the importance of gold as a hedge
The strength of the US dollar has significant implications for the global economy, especially when it rises against foreign currencies. The rise of the dollar puts pressure on prices, causing them to fall. This trend has consistently coincided with crises around the world. It is crucial to understand that the strength of one fiat currency against another does matter, as commodity prices and invoices are often based on the US dollar. One asset that historically serves as a hedge against the dollar is gold. While gold may initially be vulnerable to short-term corrections and could be influenced by geopolitical risks, it generally trades inversely to real rates. Gold has held up well amidst rising rates, suggesting a positive outlook. It is recommended to include gold as a strategic allocation in investment portfolios.
MacroVoices Erik Townsend and Patrick Ceresna welcome Santiago Capital founder Brent Johnson to the show. They discuss the reasons Brent thinks the U.S. Dollar bull market isn’t over yet, and why Brent thinks new highs for the dollar index are still to come. https://bit.ly/3EjuaYB
