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You're listening to Strictly Business
Podcast with Lindsay Williams.

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Now over the length of my career I've
noticed that when a major currency gets

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into a groove, a trend,

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it can keep going for a long time.

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And when that currency is the world's
reserve currency, i.e.

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the US dollar, then maybe it's time to sit
up and take notice.

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I received a piece from the desk of Sahil
Matani, Director of the Investment

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Institute at 91 in London and it is
entitled

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The Unstoppable Dollar Meets the
Immovable.

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Mr.

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Trump immediately got my attention.

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And I think this is an important read for
all investors and beyond.

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Sahil is with me now.

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Sahil, this is a very easy question for
you.

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The dollar's had a fairly torrid time
under Trump thus far.

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Will it continue?

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Will it develop into a major trend, do you
think?

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Thanks, Lindsay.

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Good to be here with you today.

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I mean, look, the dollar is like any other
asset class.

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When flows go in, the price goes up and
you catch a bid.

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And historically, these dollar cycles have
been very,

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very long because they've been driven by
four types of flows.

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There's structural flows from geopolitics
and geoeconomics.

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There are rate differentials where
demographics, investment and productivity

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trends can remain out of sync or in sync
for years.

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There's the asset management industry.

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Investment flows can be procyclical if
they do well.

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And then there is...

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periodic effects adjustments of the kind
you got during the Plaza Accord or during

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the Nixon shock in 71.

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So the dollar cycles are very long because
each of these forces have nurture.

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And at the moment, all of these four
forces are being challenged by the

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policies of President Trump.

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And so I think we've got the best chance
in years of a dollar down cycle.

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It's interesting because you say that full
dollar cycles typically last 18 years.

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We're 14 years into the...

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full dollar market of, I think, 2011 up to
2025.

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At what point do you say to yourself,
okay, the cycle has finished and we're

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into a new one?

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I mean, we're about, what, six, seven
months into a bear,

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a sort of nascent bear market.

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That's how I see it.

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Yeah.

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So actually, just to clarify, full dollar
cycles we define as an up cycle and a down

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cycle.

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the period from 2011 to 2025 that you've
just mentioned has just been pure upcycle.

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So this has been a particularly long
upcycle.

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When we look at the data since 1970,
because prior to 1970,

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countries were on fixed pegs tied to the
gold standard, and they've been floating

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really since 71,

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at least the dollar has, you see three big
cycles.

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And the peaks are 71, 85 and 2002.

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So pretty distinct movements in the
pattern.

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The length is the product of the inertia I
mentioned.

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The average adjustment of previous dollar
bear markets is about 35%.

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Dollar trade weighted in real terms is
only down 4% since the Trump election.

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Obviously, it's down 10% from the peak
earlier this year.

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So if we are in a multi-year dollar bear
market, which I think we have a pretty

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good chance of being in,

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then you've probably got another 20% to
25% to go over a multi-year period.

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So that's a pretty big adjustment.

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If you're an asset allocator, you know
what to do when you think you're in a

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dollar bear market.

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You have to marginally allocate the non-US
assets.

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You've got to increase your EM weighting.

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I mean, the challenge is not really
knowing what to do if you're in a dollar

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bear market.

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The challenge is to know if you're in a
dollar bear market in the first place.

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This is a huge call, Tahil, and the four
reinforcing forces that you talk about,

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are they your forces or are they
conventional wisdom?

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I think it's like the blind man and the
elephant.

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Everyone knows that these forces have an
impact on markets,

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but I think the key is putting it together
in a unified framework.

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So a lot of macro investing teams will
focus disproportionately on policy

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dynamics and rate differentials

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because they have a...

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process that foreground central bank
decision making.

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But of course, there are these major
structural forces.

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So if you look at the post dot com boom,
where the dollar went on a down cycle,

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yes,

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there's a rate differential story.

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The Fed cuts rates by 200 bps more than
the Europeans in a short period because

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they're worried about the equity drawdown
becoming

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a recession, you know, serious recession
risk.

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But you've also got a major geopolitical
shift.

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With the US letting China into the WTO in
1999, the assessment starts in November

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2001.

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You've got major shift in cross-border
investment trends.

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The Nasdaq is down by 50% in April 2001.

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So asset managers feel the pain and they
want to allocate towards things that are

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not going to have that kind of drawdown in
the

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future.

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They increased their risk premium on tech
assets, which had done really, really

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well.

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And on the FX side, historically, dollar
down cycles, you've got an FX adjustment.

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2002, you didn't have that, but you had
the rise of the euro.

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which is a pretty distinct new thing.

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Euro rise is 25% versus the dollar from
mid-2001 to end-2002.

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And so you've got these big historic
forces in a very short time period that

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lead people to think, OK,

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I need to allocate less to the dollar and
more to non-dollar forces.

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It's very interesting, the four forces
that you talk about.

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And if we can, we can be methodical and
just look through them.

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You may be repeating yourself, but that
doesn't matter.

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trade and geopolitical shifts, first of
all, obviously, tariffs front and center

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of that Trump tariffs, that is.

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Yeah.

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So flash forward to 2025, you know, what
are the four forces today?

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Yeah.

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I mean, as you say, geopolitics is a
massive Trump shock on tariffs.

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So that feels quite significant.

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That's going to be marginally that's going
to impart a stagflationary impulse to the

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US.

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I'm not calling for stagflation, but I am
calling for.

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higher inflation and lower growth at the
margins.

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So that makes the US assets marginally
less effective.

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It increases investments in the rest of
the world and in the US to boost up supply

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chains.

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So let's see where that evens each other
out.

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Rate differentials.

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I think this is probably the big story
here.

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In 2017 and 2021, everyone got excited
about a weak dollar.

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But what happened wars, Europe and China
were not ready.

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to show higher growth differentials.

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And I think we are in place for a European
growth shift.

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Europe has gone from being a
deindustrializing region that can't get

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its act together on a bunch of things.

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And since the Draghi report, since the
German stimulus plan, I think there is a

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growth story in Europe that is convincing.

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I think there's a question mark about
China.

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If that comes to the party, then suddenly
You know, you might have two regions in

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the world growing,

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you know, with narrowing growth
differentials, or in some cases, even

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growing faster than the US.

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Cross-border investment flows, I think our
industry is already adjusting.

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You know, European stocks are doing better
than US stocks this year, certainly in

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Euro terms.

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And then the wildcard is FX adjustment.

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Parencies don't sync with each other.

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Naturally, they require periods of
extremes.

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before authorities take action.

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We clearly are in a period of extreme.

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The Trump economic team has talked about
various extraordinary action to rein in

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the currency.

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So we had talk of capital controls
recently.

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We've had lots of feverish talk about a
Mar-a-Lago accord.

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I don't know where they end up, but I do
know that they are laser-focused on this

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question.

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And at the very least, if you're an
allocator, you should be thinking that

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dollar upside is...

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is capped, whereas dollar downside is
relatively less capped.

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Yeah, I can remember in, I think it was
around about 1986, 1987,

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the then chair of the US Federal Reserve,
was it Fulker?

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Was it the one before Fulker?

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But anyway, you'd wake up and the currency
markets would work, the futures markets

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would wake up in Chicago and everyone
would think,

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is the US going to intervene in the
currency?

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markets.

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It's a little bit more sophisticated these
days, isn't it?

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But terribly important.

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Yeah, I think 85 is very interesting.

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We woke up one morning and saw that they
had made an agreement.

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But of course, James Baker had been
preparing the way for months and months to

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do this kind of

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hardcore international economic diplomacy
to deliver plaza.

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What's interesting, I think, and probably
less discussed around plaza is that

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It was preceded by some serious tariff
action.

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You know, there were voluntary export
restraints put in place in 81.

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This is when the U.S.

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went to Japan and said, hey, can you stop
exporting as much as you have been and

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maybe start building some factories in the
South?

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There was the Trade and Tariff Act of
1984, which evened out the power between

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the executive and the legislature on
tariffs.

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And there's a major shift in cross-border
investment flows in this period.

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So, EV stocks and in Europe outperform US
stocks by 100% from September 85 to

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87 after Plaza happens.

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There's a commodities boom in 86.

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There's a lot of things going on that's
not just the Plaza Accord.

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Plaza is, in a way,

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part of a broader economic strategy to
rebalance the global economy and to

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rebalance the

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dollar.

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The interest rate differential story is so
important.

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You will know, of course, that the chair
of the U.S. Federal Reserve, Jerome

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Powell, has been called low IQ,

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dumb and stupid.

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by President Trump because he hasn't been
cutting rates.

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Meanwhile, the ECB, the European Central
Bank, has been cutting gleefully and

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therefore that differential has widened.

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Yes, the cyclical macro, how do we think
about Fed policy?

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I think the market started to get a bit
more comfortable with the fact that we're

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about to see a few more rate cuts even

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under Jay Powell in the coming year.

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I think the US economy is uh you know, is
slowing.

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The question is, is the labor market
slowing fast enough to enable cuts?

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You know, ultimately, Trump, you have to
watch what he does, and not always what he

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says.

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And I think historically, he's been
relatively responsible on Fed nominations.

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Obviously, he nominated Powell in the
first place.

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And I think Powell's been a great Fed
there.

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So I think the Fed's in a tough spot.

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you know, they are going to be guided by
the US economy.

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You say the following in your fast view at
the beginning of your piece.

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In summary, you say the difficulty with
the dollar down cycle is not what

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investors need to do,

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usually increasing exposure to non-US
assets,

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but rather about recognising a prolonged
down cycle is underway.

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Can we underestimate how important a US
dollar...

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trend change is, Sahil?

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Thank you for underlining that point.

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No, I think it's really important because
I think it's in a way like the fish

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swimming in the water and not realising
that

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it's a different kind of water.

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We have been in a period since 2008, 2010
of an unquestioned American overweight.

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And it's so hard to remember that in the
early 2000s and in past periods,

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that the default presumption was...

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precisely the opposite.

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It was about going global because going
global got you higher growth and higher

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returns.

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And if we are about to endure another
shift in financial markets back to, you

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know,

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what we had in the early 2000s, for
example, and what we had in, you know, the

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mid 80s onwards,

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then that is a major shift.

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And typically, in the first year of a
dollar bear market

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You do see some outsized action in
non-dollar assets, and in particular in

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emerging markets.

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So if this is the first year of a
multi-year dollar bear market, as I think

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there's a pretty good chance it could be,

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then you have to close your eyes and buy
some emerging markets and buy some

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non-dollar assets.

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Good point to end on, but I've got one
point to end on myself.

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We're dealing with Trump here, and he's an
erratic fellow.

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Could he turn around completely and stop?

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the dollar bear market through whatever
pronunciation he makes or a policy that he

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imposes?

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Anything is possible with President Trump.

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I think if you look at what he believes
in, and you know,

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he's been talking about tariffs since well
into the early

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80s, it's very unlikely that a man of his
age is going to change his position on

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tariffs.

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It's very unlikely that

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We're suddenly going to see a shift away
from defense in Europe as a result of

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things like JD Vance's

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Munich speech.

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It's very unlikely that we're going to see
lower industrial policy impulses in the

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US.

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So I think what I'm saying is I don't need
to predict Trump's behavior.

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I just need to see what he's already done
and some of the multi-year changes that

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are already in place.

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And I think as allocators, you can get
confidence in some of those things have

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legs.

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So interesting you brought up the age
factor.

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Sahil, thank you very much for your time.

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Sahil Matani is Director, Investment
Institute at 91 in London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors and do not reflect
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employer or company associated with
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Assumptions made on the analyses are not
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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change,

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