Latest / Strictly Business / The Asset Class: Sahil Mahtani

Transcript

The Asset Class: Sahil Mahtani · Strictly Business

• 0:00
  You're listening to Strictly Business Podcast with Lindsay Williams.
• 0:05
  Sahil Matani, Director of the Investment Institute at 91 in London,
• 0:09
  spoke to me in the middle of last year about the ingredients for a dollar bear
• 0:13
  market.
• 0:15
  So where are we now?
• 0:17
  And Sahil, it's a very easy question, but with so many moving parts, I don't know
• 0:21
  where to start.
• 0:23
  But perhaps a suggestion might be the new nominee for Fed Chair.
• 0:25
  And that's Mr.
• 0:26
  Walsh.
• 0:27
  What do you make of him?
• 0:28
  Thanks, Lindsay.
• 0:28
  Good to be speaking with you.
• 0:30
  In January, President Trump nominates Kevin Walsh to be the new Fed chair,
• 0:36
  and you get the dollar rising, you get a bull steepening of the yield curve, you
• 0:42
  get the NASDAQ lower,
• 0:44
  and you get the precious metals trade lower.
• 0:45
  And you get a sense that the US trade is back.
• 0:51
  And I think that is not the right reaction because of the starting point.
• 0:58
  The sell America trade.
• 0:59
  that came up after Liberation Day last year.
• 1:02
  It was not about dumping US assets wholesale.
• 1:05
  It was about hedging existing US exposure, diversifying into other assets,
• 1:10
  and directing new marginal flows away from the US.
• 1:13
  So it's not about abandoning the US markets entirely.
• 1:17
  And allocators are just trying to diversify because their starting point is
• 1:22
  so overweighted to the US.
• 1:24
  If you look at the MSCI world, US is still 70%, 71% of that.
• 1:27
  US dollar is at a 15 plus.
• 1:29
  Yeah, hi.
• 1:30
  So you were already having to think about risk management.
• 1:34
  And as an allocator, you now need to think about central bank independence, US fiscal
• 1:39
  trajectory,
• 1:41
  transformation of the US relationship with its allies.
• 1:43
  So I think a single Fed chair, no matter how credible, no matter how hawkish, well,
• 1:50
  could be very hawkish.
• 1:51
  But in this particular case, I think there is a nuance to the Walsh reputation.
• 1:57
  You know, I think it's just one variable in a multivariable trade.
• 2:03
  It's very interesting because Liberation Day and what it represented was a sort of
• 2:09
  a blunt instrument.
• 2:11
  But the sell America trade is not a blunt instrument at all.
• 2:12
  From what you say, it's got lots of bits and pieces.
• 2:14
  And in fact, instead of being vanilla, is rather sophisticated.
• 2:18
  We'll explore that as well with our next part of the discussion, which is about
• 2:23
  Walsh as well.
• 2:25
  He's apparently quite dovish, and the market seems to be pricing in...
• 2:27
  two or three interest rate cuts this year in the United States or America.
• 2:32
  If that's the case, why is the dollar relatively stable?
• 2:35
  And why are bond yields ticking higher?
• 2:38
  Yes, he has a reputation as a hawk, but I think the market has read him correctly in
• 2:44
  the sense that he could be
• 2:46
  more dovish than markets expect throughout 2026.
• 2:49
  And you have to remember his reputation as a hawk comes from speeches he gave during
• 2:55
  and after the GFC.
• 2:57
  when he warned about upside risk to inflation from commodity price run-ups.
• 3:00
  And throughout the 2010s, he's calling for an early end to the Fed balance sheet
• 3:04
  expansion.
• 3:06
  But he is not against crisis error
• 3:09
  QE. And he is a person who is able to make that distinction between balance sheet
• 3:15
  expansion
• 3:17
  at the zero lower bound, when rates are at zero and you want to stimulate the economy
• 3:21
  more,
• 3:22
  versus balance sheet expansion at...
• 3:24
  these crisis era turning points.
• 3:26
  So I think he's a more subtle and nuanced figure than has been portrayed.
• 3:31
  And I think the market's actually reading that correctly.
• 3:33
  I think if you look at the op-ed he wrote for the Wall Street Journal last year,
• 3:40
  he's also stating that the economy doesn't need interest rates that are higher than
• 3:47
  they are now.
• 3:48
  They actually need lower interest rates because the economy is currently going
• 3:53
  through a period of strong growth.
• 3:55
  productivity growth.
• 3:55
  That means you get growth without inflation.
• 3:58
  That's very similar to the gains you saw in the 90s.
• 4:02
  And that's because there's a productivity miracle underpinned by AI that's going to
• 4:09
  be a significant disinflationary force
• 4:11
  pushing rates down sharply.
• 4:13
  You're going to hate this question.
• 4:15
  You already do.
• 4:17
  I can sense it because it's politically linked.
• 4:19
  Is he a Trump puppet?
• 4:21
  And we know that Trump wants interest rate cuts, and he wants them big, and he wants
• 4:22
  them fast.
• 4:24
  Will Walsh pander to him?
• 4:27
  I think he is not a Trump puppet.
• 4:31
  I also think that the balance of power shifts the moment you are appointed to the
• 4:37
  Fed.
• 4:38
  Before you are appointed,
• 4:39
  you do have to say a number of things to please the person that is appointing you.
• 4:46
  After you are appointed, you have a different level of security.
• 4:52
  in your job because it will require a process to take you out of that.
• 4:57
  So I think that's there.
• 5:00
  His personality is not a pushover.
• 5:06
  He says what he thinks.
• 5:08
  He has independent wealth,
• 5:11
  which makes him less likely to perhaps be a pushover.
• 5:15
  So I think the market is reading him correctly.
• 5:20
  You've mentioned the economy already, but we need to delve into it a bit deeper.
• 5:23
  And when I say the economy, I mean the US economy, so important, of course.
• 5:27
  And we've had some good GDP numbers.
• 5:29
  well above 4% the last print.
• 5:31
  We've had inflation relatively benign, but we've got employment looking a little bit
• 5:37
  shaky.
• 5:37
  Difficult job for the new Fed chair.
• 5:39
  What will he focus on, do you think, particularly with reference to
• 5:43
  AI productivity and all the implications that that implies?
• 5:48
  I think it's going to be a good year where inflation is going to surprise to the
• 5:54
  downside and growth is going to surprise to the upside.
• 5:56
  You've already got some...
• 5:58
  foretaste of that with the early now cast numbers for Q1, which are in the 5%
• 6:04
  real GDP growth level.
• 6:06
  So I think it's a pretty benign year for markets.
• 6:09
  I think, you know, all throughout last year, there was a scenario in which labor
• 6:15
  markets would weaken because we were in a low hire,
• 6:17
  low fire environment.
• 6:19
  And I think that is still where we are.
• 6:20
  And you're seeing unemployment rates rise at the margin, say for young workers or
• 6:27
  certain type of minorities.
• 6:29
  You know, I think given where the economy is,
• 6:31
  it is just as likely to see that those numbers coming down towards the end of the
• 6:38
  year as they are to keep
• 6:40
  rising.
• 6:42
  So this is a pretty good environment, I think, if you are in charge of managing
• 6:44
  the U.S.
• 6:46
  economy.
• 6:48
  What about sell America?
• 6:50
  It's more sophisticated than just selling every American asset that you've got or
• 6:53
  rather drawing down your American assets.
• 6:55
  Can the dollar weaken and the bond yields rise at the same time, Sahil?
• 6:59
  Yes, you can have the yield curve bull steepening move that accompanies dollar
• 7:05
  weakness,
• 7:05
  as you've just had in the last month.
• 7:07
  I think if you go back to our dollar cycles piece, you know,
• 7:11
  we all know as allocators what to do in the event that we're going to get a weaker
• 7:16
  dollar.
• 7:16
  You buy non-dollar assets, you buy emerging markets.
• 7:20
  I think the challenge is figuring out whether you are at a turning point in the
• 7:23
  dollar.
• 7:24
  And in the dollar cycles piece, I noted that past turning points, early 2000s,
• 7:30
  1971,
• 7:32
  1985, were accompanied by four changes.
• 7:36
  You had something in geopolitics, so trade and defense agreements.
• 7:40
  You had rate differentials falling, principally at the short end.
• 7:45
  You had a reallocation to non-US assets by investment committees.
• 7:52
  And you have some sort of FX intervention event at the sovereign level.
• 7:58
  So if you look at those four criteria You know, we've definitely had a shift in
• 8:04
  geopolitics,
• 8:06
  you know tariffs have quadrupled quintupled
• 8:07
  Rate differentials between the US and Europe and US and yen which are the most
• 8:13
  important ones for global markets at the moment
• 8:15
  They have been falling all year
• 8:17
  as you've seen European growth stabilize and Japanese growth stabilize and U.S.
• 8:22
  inflation come down.
• 8:23
  Investment committees have not gone all in.
• 8:27
  I would say they still want exposure to the AI theme in the U.S.
• 8:30
  They still want exposure to high return on invested capital U.S.
• 8:34
  assets.
• 8:34
  We'll see if the software sell-off changes any of that.
• 8:37
  But they're kind of half in, I would say.
• 8:39
  And then what we haven't seen is a sovereign FX intervention moment of the
• 8:45
  kind that we saw in the past.
• 8:47
  the Plaza Accord or G7 coordinated euro buying or Nixon gold shock.
• 8:50
  And I think that is what the market is waiting for.
• 8:53
  It is interesting after a quiet year last year where, you know,
• 8:59
  Trump and Besson didn't really raise the dollar as they did in 2024, that in
• 9:05
  January this year,
• 9:07
  we started to get wind of some sort of intervention with the won or comments on
• 9:11
  the yen.
• 9:12
  So I think suddenly it's on the agenda back at Treasury again.
• 9:16
  And that's what we're waiting for.
• 9:18
  Final question.
• 9:19
  Since we spoke in July of last year, has your view changed?
• 9:23
  You put forward the idea that perhaps we're on the cusp of a long term dollar
• 9:29
  bear market.
• 9:31
  Have you changed your opinion, Sahil?
• 9:33
  No, I think the odds of a dollar down market are going up not down and you're
• 9:37
  starting
• 9:38
  to see that prospect of FX intervention coming.
• 9:40
  And I would argue when you see that,
• 9:43
  that is the moment you know that we are in a multi-year dollar bear market cycle.
• 9:48
  Sahil, thank you very much for your time.
• 9:50
  Sahil Matani is Director of the Investment Institute at 91 in London.
• 9:55
  The views and opinions expressed in these podcasts are those of Lindsay Williams and
• 10:02
  various contributors and do not reflect the policy,
• 10:04
  position or opinion of any other agency, organisation,
• 10:06
  employer or company associated with StrictlyBusinessPodcast.com.
• 10:11
  Assumptions made on the analyses are not reflective of the position of any other
• 10:18
  entity other than the speaker or the author
• 10:20
  and since we are critically thinking human beings these views are always subject to
• 10:25
  change, revision,
• 10:27
  and rethinking at any time.
• 10:27
  Please do not hold us to them in perpetuity.