Interesting thesis - question from my perspective what to do now from a personal perspective to protect wealth.

Hi Julian/Raoul (or any one else who knows better than me), asking as a nooby person who has limited experience in FX. Raoul's thesis is that dollar will become stronger as world trade plunges and offshore dollar debt still needs to be served. But if dollar does get stronger, wouldn't it weaken again because dollar strength is an opportunity for foreign banks to make money in their currency as they have (unlimited?) swap line with FED? for an extreme example, if I am a bank in Europe, and I see 1 dollar equates say 100 euros in FX market, and say through swap via ECB I can get 1 dollar for every 2 euros, doesn't that look like an immense opportunity to make 50x in euros?

Fascinating! Lots of problems with the present financial plumbing! The way I see the big picture is that there are to many financial claims on the real economy, leverage is to high after all the QE. In such environment the interest rate must be kept near zero, and volatility suppressed for the system to work. It then becomes increasingly difficult to provide acceptable collateral at many levels of the financial system. A black swan that reduces the growth of the real economy causes a fall in confidence, lack of collateral, increase in volatility, and the velocity of money drops and liquidity freezes up. To solve it the Fed needs to do more QE which increases the leverage in the economy even more. When we come out of this Covid-19 downturn, it will no longer be possible to sustain a financial system as we have been used to, it will be taken over by government/fed and tightly regulated to serve the real economy, but lots of pain and change of hands of wealth before that. Or we go one more round, Mnuchin saves Wall Street and not Main Street; who knows.

Interesting narrative on the financial plumbing which of course leads to..... does this change the ownership or timing of ownership of RVT recon for TLT and UUP. I am increasingly feeling that this 2020 financial chaos is going to lead to worse outcomes than the 2008 crisis and feel biased toward precious metal stocks as they may be one of the few industries that will generate big profits in 2020.

Summary: had crisis, got stimulus merge of fed+treasury...more, including yield curve control coming... A playbook to profit from some of these potential foresights would be useful! Thanks for the thoughts

Love it Julian...! Totally agree with the conclusion. Just don't see any other way out of this. The breaking of supply chains and de-globalization trend will only and fuel to the fire via cost push inflation. Can't help but think this will lead to high volatility across asset classes for several years...

Julian, as always thought provoking, but I am going to play devil’s advocate for a minute. The Fed, OCC and FDIC along with FASB are already rolling back regulations and accounting standards to the benefit of the banks. Would you mind being more specific with respect to the regulations from the GFC that you are referencing here and pardon my skepticism, but Jamie Dimon told us that JPM had the liquidity to preempt or at a minimum ameliorate the repo crisis back in September but he pretty much stated that JPM would not lend its liquidity as it wanted regulatory relief. The cynic in me cannot help but question the fact that the Fed is owned by the banks (a conflict in and of itself as their regulator) it seemed like Powell and the Fed wanted to cut rates/ do QE (as the Fed went from being a hostage of the stock market to the guardian of the stock market of their own volition) while Not wanting to be seen as giving in to Trump as it became apparent that earnings were not going to grow into the multiples of 2019 and the repo crisis became a convenient excuse for the Fed and the banks who wanted regulatory relief to both get what they wanted. It was working until the Coronavirus came along and as always the black swan exposed the fact that the risk markets (equity and credit) were priced for perfection and now the Fed is going to do even more to keep the “Everything Bubble” from causing too much damage. But when will the Fed get some humility and figure out that the cure causes a worse disease that may ultimately lead the US down a path of socialism? Apologies for the rant but I am concerned about where we end up from the Fed’s unmitigated disaster of the “Liquidity is the Answer to All of Our Problems” playbook started by Greenspan on 10/19/87?

Thank you Julian. Do you think that we are likely to see some central bank gold liquidation in places where the fed has not extended swap lines? Seems like an easy fix to alleviate short term dollar squeeze in EM countries. Just pondering on all of the longer term knock-on effects of global dollar shortage.

Great report Julian. In your last flash update, you recommended looking at high quality MBS REITS such as ARR and EARN which got a nice bump last week, however in this report it seems you are concerned MBS will struggle. Given the bounce in these higher quality REITS, would you recommend dipping a toe into these high quality options?

Hi Julian, great insights in your report as usual. I got an interesting letter this week from the Department of Insurance of Ca. Basically they are ordering the Insurance Data on Business Interruption Coverage to Assist Ca Small Businesses on the COVID-19 losses. The fact is all major carriers have excluded communicable diseases so most think the Insurance companies are off the hook and won't suffer major losses. I'm thinking when the states start to review this data and find out that almost all the major insurance carriers are going to deny these BI claims they are going to have some serious issues with this. This is also going to add to the public outcry on the denial of these claims. I would think we could see the states pass legislation to make insurance companies pay a portion of these claims. If this happens across the country I would also think it would make insurance companies forced sellers of some of their investment holdings. Do you have any thoughts on this? Below is a paragraph from the letter. “The coronavirus crisis is devastating small businesses across our state, throwing people out of work and quickly unraveling our economy,” Commissioner Lara said. “Although many small businesses maintain commercial multi-peril insurance policies with business interruption coverage, they will have large uninsured losses. We are currently working with the insurance industry and business groups to find creative solutions during this unprecedented crisis to make sure our businesses survive, and we need this data to define the size of the problem.”

I am sure that none of us want to clog up the board with our thanks. But this kind of clear thinking/writing is more appreciated than many of us can express. I am a seasoned investor and certainly do not feel helpless - but this is insight that only a true Professional can provide and it makes a big difference. As Julian said before, there is nothing wrong with cash, right now. Or, as Will Rogers once said during the 1930's "I am not as concerned about the return ON my money as I am the return OF my money".

For those of you RV PRO members who trade on dollar bull thesis, what's your take on the following counter-argument? https://twitter.com/LynAldenContact/status/1244640648071974912 I think it's interesting side to look at, basically saying while there's huge dollar debt, foreign entities also hold huge dollar assets as well. So the dollar shortage problem can be mitigated by selling dollar assets. If dollar bull thesis still true, then what's the incentive for foreign entities NOT to sell dollar assets?

Really excellent analysis Julian. Lots to think about but you have covered the lot and provided excellent tech background. My immediate takeaway is the fed needs to maneuver a deleveraging (perhaps over a longer period) to bring things back together with YCC.

slightly off topic, but the question that keeps rattling around in my head is- How does an economy start back up after a projected unemployment rate of 34%? Is there anything in history that might show us what it looks like?

Julian, I am wondering if you could step back a little with regards to these FX swaps/forward and detailed a little bit what is happening maybe in a next deep dive or focus. I found this paper interesting, however a little difficult to understand in my opinion for someone with no background in these markets. "On the demand side, institutional investors[...] have obligations in domestic currency, but they hold a globally diversified portfolio, with a substantial portion denominated in the US dollar. To finance the purchase of dollar assets, they swap domestic currency into dollars, thereby gaining access to dollar funding on a currency-hedged basis. Their portfolios have grown substantially since the GFC, giving rise to greater hedging needs. " if the demand for dollar funding is an hedge why do they require sill more dollars? Isn't it fixed/traded at inception? Are they borrowing short term to finance a "globally diversified portfolio" (it doesnt make much sense to me) https://www.bis.org/publ/bisbull01.pdf