You're listening to Strictly Business Podcast with Lindsay Williams.
Now over the length of my career I've noticed that when a major currency gets
into a groove, a trend,
it can keep going for a long time.
And when that currency is the world's reserve currency, i.e.
the US dollar, then maybe it's time to sit up and take notice.
I received a piece from the desk of Sahil Matani, Director of the Investment
Institute at 91 in London and it is entitled
The Unstoppable Dollar Meets the Immovable.
Mr.
Trump immediately got my attention.
And I think this is an important read for all investors and beyond.
Sahil is with me now.
Sahil, this is a very easy question for you.
The dollar's had a fairly torrid time under Trump thus far.
Will it continue?
Will it develop into a major trend, do you think?
Thanks, Lindsay.
Good to be here with you today.
I mean, look, the dollar is like any other asset class.
When flows go in, the price goes up and you catch a bid.
And historically, these dollar cycles have been very,
very long because they've been driven by four types of flows.
There's structural flows from geopolitics and geoeconomics.
There are rate differentials where demographics, investment and productivity
trends can remain out of sync or in sync for years.
There's the asset management industry.
Investment flows can be procyclical if they do well.
And then there is...
periodic effects adjustments of the kind you got during the Plaza Accord or during
the Nixon shock in 71.
So the dollar cycles are very long because each of these forces have nurture.
And at the moment, all of these four forces are being challenged by the
policies of President Trump.
And so I think we've got the best chance in years of a dollar down cycle.
It's interesting because you say that full dollar cycles typically last 18 years.
We're 14 years into the...
full dollar market of, I think, 2011 up to 2025.
At what point do you say to yourself, okay, the cycle has finished and we're
into a new one?
I mean, we're about, what, six, seven months into a bear,
a sort of nascent bear market.
That's how I see it.
Yeah.
So actually, just to clarify, full dollar cycles we define as an up cycle and a down
cycle.
the period from 2011 to 2025 that you've just mentioned has just been pure upcycle.
So this has been a particularly long upcycle.
When we look at the data since 1970, because prior to 1970,
countries were on fixed pegs tied to the gold standard, and they've been floating
really since 71,
at least the dollar has, you see three big cycles.
And the peaks are 71, 85 and 2002.
So pretty distinct movements in the pattern.
The length is the product of the inertia I mentioned.
The average adjustment of previous dollar bear markets is about 35%.
Dollar trade weighted in real terms is only down 4% since the Trump election.
Obviously, it's down 10% from the peak earlier this year.
So if we are in a multi-year dollar bear market, which I think we have a pretty
good chance of being in,
then you've probably got another 20% to 25% to go over a multi-year period.
So that's a pretty big adjustment.
If you're an asset allocator, you know what to do when you think you're in a
dollar bear market.
You have to marginally allocate the non-US assets.
You've got to increase your EM weighting.
I mean, the challenge is not really knowing what to do if you're in a dollar
bear market.
The challenge is to know if you're in a dollar bear market in the first place.
This is a huge call, Tahil, and the four reinforcing forces that you talk about,
are they your forces or are they conventional wisdom?
I think it's like the blind man and the elephant.
Everyone knows that these forces have an impact on markets,
but I think the key is putting it together in a unified framework.
So a lot of macro investing teams will focus disproportionately on policy
dynamics and rate differentials
because they have a...
process that foreground central bank decision making.
But of course, there are these major structural forces.
So if you look at the post dot com boom, where the dollar went on a down cycle,
yes,
there's a rate differential story.
The Fed cuts rates by 200 bps more than the Europeans in a short period because
they're worried about the equity drawdown becoming
a recession, you know, serious recession risk.
But you've also got a major geopolitical shift.
With the US letting China into the WTO in 1999, the assessment starts in November
2001.
You've got major shift in cross-border investment trends.
The Nasdaq is down by 50% in April 2001.
So asset managers feel the pain and they want to allocate towards things that are
not going to have that kind of drawdown in the
future.
They increased their risk premium on tech assets, which had done really, really
well.
And on the FX side, historically, dollar down cycles, you've got an FX adjustment.
2002, you didn't have that, but you had the rise of the euro.
which is a pretty distinct new thing.
Euro rise is 25% versus the dollar from mid-2001 to end-2002.
And so you've got these big historic forces in a very short time period that
lead people to think, OK,
I need to allocate less to the dollar and more to non-dollar forces.
It's very interesting, the four forces that you talk about.
And if we can, we can be methodical and just look through them.
You may be repeating yourself, but that doesn't matter.
trade and geopolitical shifts, first of all, obviously, tariffs front and center
of that Trump tariffs, that is.
Yeah.
So flash forward to 2025, you know, what are the four forces today?
Yeah.
I mean, as you say, geopolitics is a massive Trump shock on tariffs.
So that feels quite significant.
That's going to be marginally that's going to impart a stagflationary impulse to the
US.
I'm not calling for stagflation, but I am calling for.
higher inflation and lower growth at the margins.
So that makes the US assets marginally less effective.
It increases investments in the rest of the world and in the US to boost up supply
chains.
So let's see where that evens each other out.
Rate differentials.
I think this is probably the big story here.
In 2017 and 2021, everyone got excited about a weak dollar.
But what happened wars, Europe and China were not ready.
to show higher growth differentials.
And I think we are in place for a European growth shift.
Europe has gone from being a deindustrializing region that can't get
its act together on a bunch of things.
And since the Draghi report, since the German stimulus plan, I think there is a
growth story in Europe that is convincing.
I think there's a question mark about China.
If that comes to the party, then suddenly You know, you might have two regions in
the world growing,
you know, with narrowing growth differentials, or in some cases, even
growing faster than the US.
Cross-border investment flows, I think our industry is already adjusting.
You know, European stocks are doing better than US stocks this year, certainly in
Euro terms.
And then the wildcard is FX adjustment.
Parencies don't sync with each other.
Naturally, they require periods of extremes.
before authorities take action.
We clearly are in a period of extreme.
The Trump economic team has talked about various extraordinary action to rein in
the currency.
So we had talk of capital controls recently.
We've had lots of feverish talk about a Mar-a-Lago accord.
I don't know where they end up, but I do know that they are laser-focused on this
question.
And at the very least, if you're an allocator, you should be thinking that
dollar upside is...
is capped, whereas dollar downside is relatively less capped.
Yeah, I can remember in, I think it was around about 1986, 1987,
the then chair of the US Federal Reserve, was it Fulker?
Was it the one before Fulker?
But anyway, you'd wake up and the currency markets would work, the futures markets
would wake up in Chicago and everyone would think,
is the US going to intervene in the currency?
markets.
It's a little bit more sophisticated these days, isn't it?
But terribly important.
Yeah, I think 85 is very interesting.
We woke up one morning and saw that they had made an agreement.
But of course, James Baker had been preparing the way for months and months to
do this kind of
hardcore international economic diplomacy to deliver plaza.
What's interesting, I think, and probably less discussed around plaza is that
It was preceded by some serious tariff action.
You know, there were voluntary export restraints put in place in 81.
This is when the U.S.
went to Japan and said, hey, can you stop exporting as much as you have been and
maybe start building some factories in the South?
There was the Trade and Tariff Act of 1984, which evened out the power between
the executive and the legislature on tariffs.
And there's a major shift in cross-border investment flows in this period.
So, EV stocks and in Europe outperform US stocks by 100% from September 85 to
87 after Plaza happens.
There's a commodities boom in 86.
There's a lot of things going on that's not just the Plaza Accord.
Plaza is, in a way,
part of a broader economic strategy to rebalance the global economy and to
rebalance the
dollar.
The interest rate differential story is so important.
You will know, of course, that the chair of the U.S. Federal Reserve, Jerome
Powell, has been called low IQ,
dumb and stupid.
by President Trump because he hasn't been cutting rates.
Meanwhile, the ECB, the European Central Bank, has been cutting gleefully and
therefore that differential has widened.
Yes, the cyclical macro, how do we think about Fed policy?
I think the market started to get a bit more comfortable with the fact that we're
about to see a few more rate cuts even
under Jay Powell in the coming year.
I think the US economy is uh you know, is slowing.
The question is, is the labor market slowing fast enough to enable cuts?
You know, ultimately, Trump, you have to watch what he does, and not always what he
says.
And I think historically, he's been relatively responsible on Fed nominations.
Obviously, he nominated Powell in the first place.
And I think Powell's been a great Fed there.
So I think the Fed's in a tough spot.
you know, they are going to be guided by the US economy.
You say the following in your fast view at the beginning of your piece.
In summary, you say the difficulty with the dollar down cycle is not what
investors need to do,
usually increasing exposure to non-US assets,
but rather about recognising a prolonged down cycle is underway.
Can we underestimate how important a US dollar...
trend change is, Sahil?
Thank you for underlining that point.
No, I think it's really important because I think it's in a way like the fish
swimming in the water and not realising that
it's a different kind of water.
We have been in a period since 2008, 2010 of an unquestioned American overweight.
And it's so hard to remember that in the early 2000s and in past periods,
that the default presumption was...
precisely the opposite.
It was about going global because going global got you higher growth and higher
returns.
And if we are about to endure another shift in financial markets back to, you
know,
what we had in the early 2000s, for example, and what we had in, you know, the
mid 80s onwards,
then that is a major shift.
And typically, in the first year of a dollar bear market
You do see some outsized action in non-dollar assets, and in particular in
emerging markets.
So if this is the first year of a multi-year dollar bear market, as I think
there's a pretty good chance it could be,
then you have to close your eyes and buy some emerging markets and buy some
non-dollar assets.
Good point to end on, but I've got one point to end on myself.
We're dealing with Trump here, and he's an erratic fellow.
Could he turn around completely and stop?
the dollar bear market through whatever pronunciation he makes or a policy that he
imposes?
Anything is possible with President Trump.
I think if you look at what he believes in, and you know,
he's been talking about tariffs since well into the early
80s, it's very unlikely that a man of his age is going to change his position on
tariffs.
It's very unlikely that
We're suddenly going to see a shift away from defense in Europe as a result of
things like JD Vance's
Munich speech.
It's very unlikely that we're going to see lower industrial policy impulses in the
US.
So I think what I'm saying is I don't need to predict Trump's behavior.
I just need to see what he's already done and some of the multi-year changes that
are already in place.
And I think as allocators, you can get confidence in some of those things have
legs.
So interesting you brought up the age factor.
Sahil, thank you very much for your time.
Sahil Matani is Director, Investment Institute at 91 in London.
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