Brent Johnson – DLJ, then Credit Suisse, then wealth management
Started Santiago Capital – manage money for individuals
His website: SantiagoCapital.com
Coined the term Dollar Milkshake Theory
-framework for global sovereign debt currency crisis
-name comes a scene in There Will Be Blood
-US dollar and capital markets have advantages rest of world (ROW) doesn’t have
-US will drain ROW’s milkshake of dollars and capital
Dollar will become too strong for global system to function appropriately – lead to a crash, restructuring / new system (eg, new Plaza Accord)
Jim Grant: “return free risk” (when rates were zero)
US Treasuries outlook
-if rates drop, dollar will fall, Treasuries rise
-if rates continue higher, dollar will continue to strengthen
-if govt bonds are rejected globally, US Treasuries will be demanded more than other countries’ bonds
Milkshake Theory is a relative thesis – US assets / Treasuries / currency will outperform
Thinks there will be more QE eventually
In perfect scenario – whole world will return to QE, sovereign bonds globally will be rejected, all excess liquidity flows back to US, into stocks / real estate / USD assets, get a big melt-up
USD in this scenario will still rise – but underperform USD assets (eg, stocks)
Oil runs the world
-Oil mostly priced and traded in USD
-If oil rises 20% and USD rises 20% versus your currency, that’s 40% increase in energy costs!
-If crisis where every country for themselves, US more energy self sufficient than others
-Maybe Russia is stronger position
-Because of US energy self sufficiency, we’re exporting fewer USD to ROW to buy their oil, less supply of ex-US dollars
ROW still trades with each other but primarily denominated in USD
Huge amounts of USD credit between them – France-Singapore, Europe-Turkey, etc
Whole system is game of musical chairs
Chairs = base money (currency, bank reserves)
Credit = people walking around in the game
If more credit, new people enter the game, but same # of chairs
As US tightens monetary policy, not creating new money, taking chairs out of game, system becomes even more levered
Eurodollar market can’t add more chairs, only more people
Music could stop at any moment
Triffin’s Dilemma
A country currency that functions as global reserve currency – eventually situation where domestic needs conflict with int’l needs
Vicious loop
Other countries need to print more of their own money to buy USD / buy energy, and this causes further currency weakening vs USD
A few commodity producing country currencies have held up well – eg, Russian ruble, Brazilian real
Fed won’t stop while US equity is still rallying, unemployment low
Keep going until prices come down, wages come down, some jobs are lost
“Wouldn’t surprise me if it slows down” – dollar would then drop 10, 15%
Over next 2-3 years, dollar will continue to rise
Expects Powell continue to raise more than most expect
Europe already buying periphery bonds; UK with pension fund crisis
Japan doing YCC
Ex-US currencies down dramatically
Nothing ROW can do to make USD go lower that wouldn’t hurt themselves more
China’s gold-backed yuan – silly idea tbh
BRICS launching basket of currencies – not reality
If these things were done, would be even less USD in circulation – would worsen the short-term credit problem, Eurodollar market would lose a ton of assets
If the world moves to new system – process would be violent, may involve military conflict
US has weaponized dollar – doing it on purpose – Putin is doing same thing by requiring Russian energy buyers to pay in ruble
More free market price discovery in US Treasury market today than any other treasury market
Japan outlook
-can’t let rates rise – YCC will flood system with yen, and yen will lose value
-in 2013 and 2015, when yen weakened, led to Chinese yuan weakening
-because yuan and yen are competitive currencies, both exporting nations, yuan must devalue to maintain competition for exports
-think yen will go a lot lower – now around 147 – thinks yen will go to 200 or higher (!)
-will put enormous pressure on Chinese yuan – pull inflationary pressures into their economy to keep export markets strong
-yen could still rally 5-10% in bursts
-yen is big signal