Matt King, Founder, Satori Insights

[00:00:01] Hello, this is Dean Curnutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry. For Matt King, evaluating market risk is often about pinpointing vulnerabilities within the financial system.

[00:00:26] Over the many years he's been advising institutional investors, he's gone where the action is. In the dot-com era, it was corporate balance sheets. In the pre-GFC period, it was asset-backed commercial paper. And in the last decade, it's been sovereigns and QE. Now the founder of Satori Insights, Matt shared his current assessment of risk on this episode of the Alpha Exchange. His materially bearish take is a function of what he views as U.S. trade policy,

[00:00:53] underpinned by both a misunderstanding of balance of payments math and a failure to appreciate the risks of chaotic implementation. On the latter, Matt worries that the U.S. is earning itself a risk premium in the back end of its bond market, a troubling development especially set against the ever-growing pile of debt outstanding. Matt shows the spike in U.S. real rates at a time when the VIX was also surging and the dollar falling,

[00:01:20] as similar to the U.K.'s Liz Trust moment in 2022, an event that forced the Bank of England to act quickly. Matt argues that while democracy ought to be mean reverting, where bad policy leads to bad outcomes and declining popularity, ultimately motivating a change of course, today's setup in the U.S. is one in which bad policies impact growth and further poison our politics, reinforcing bad policy.

[00:01:46] Stepping back, he sees value in gold, noting that both gold and FX vol are still too low. I hope you enjoy this episode of the Alpha Exchange, my conversation with Matt King. Matt, it's a pleasure to have you back on the Alpha Exchange at a truly unique time in markets. Thank you very much. Your timing is indeed excellent. I knew just the person to reach out to. And before we get the conversation underway, there'll be so much for us to dive into.

[00:02:16] But before we do, why don't you just tell us a little bit about your career history leading into the founding and the motivation for founding Satori? So I spent 25 years doing a mixture of macro and credit strategy at JPMorgan and at Citi. And I suppose over that time, I almost developed a reputation for focusing on whatever was going to blow up next. And it's not really that I tried to do that.

[00:02:44] It's just that I found rather than taking what the economist said was going to happen to the economy and then trying to apply it to the market, it just didn't work for me. And I always needed to try to understand what single factor was driving markets and get my head around that and then apply it back to whatever it was I was focused on, whether that was rates or credit or FX or whatever. And the funny thing is that through time, those things that were about to blow up seem to get bigger and bigger.

[00:03:11] So it was originally back in 2000, it was dot com and corporate balance sheets. And then gradually became CDOs of ABS and things like that in the financial crisis. And I did lots of work on repo around Neiman Brothers. And then over the last decade or so, of course, it's been sovereigns and it's been QE and central banks. And that factor more than anything else has been driving markets. And now here we are worrying about the reserve currency and the U.S. sovereign. And I hope that it doesn't lead to an even larger catastrophe than previously.

[00:03:41] But obviously, more and more people are becoming concerned about that. There's always a VIX, right? And sometimes assets can take on VIX-like qualities for periods of time. And then that can just fade away. I'm remembering the Eurozone crisis in 2011, 2012. And if you looked at the correlation between the price action and BTPs, Italian sovereigns versus the VIX, got to be about 60 something percent correlated.

[00:04:09] And then Draghi steps in and effectively overwhelms the system and quiets things down. And so you have these periods where assets can kind of take on a risk-off characteristic. And that seems to be some kind of consistency with which your process works. It's almost the storm-chasing process. And we find ourselves in this really unique and, I would say, unsettling backdrop for asset prices

[00:04:36] where the ultimate sovereign itself, the U.S. sovereign, is starting to, I would say, take a little bit of a dent in terms of its brand, in terms of its credibility. Trump wins. It's a historic win. November 5th of 2024. You have this reaction, kind of the same reaction you had in 2016. The S&P rallies, bonds sell off, the dollar rallies, the VIX goes down. And a lot of that has reversed in a big way.

[00:05:07] And so why don't you maybe start us, perhaps at the beginning of the year, we start to talk about tariffs and the U.S.'s kind of need to, or at least Trump's desire to, in his words, even things out. So you've done some writing and explored this through some of your charts where basically the predicate is not properly framed.

[00:05:35] That the goal of evening things out isn't even a proper goal. I'd love for you to just kind of set the table and walk through the why of that. So just before I do that, I love the way that you introduced that, because as you say, markets go through these periods where all the markets are operating independently on their own fundamentals, or at least on their own technicals.

[00:06:00] But then what we've had a series of times, certainly in my career, is these periods where the price action in one corner of financial markets comes to dominate everything else. And as I say, CDOs of ABS or Lehman and Broker Dealers or Italy. And it feels to me a little bit reminiscent of that period in 07-08, even now where there's this debate.

[00:06:26] And I listen to people in credit or in equities, and they're focused on tariffs, and they're focused on the economic impact of tariffs and think that's what's driving their market. And then I look at instead at the dollar. I look instead at risk premium on treasuries. I look instead at the enormous rally in gold. Uh-uh. These markets are focused on the risk of financial crisis and something altogether bigger. And so, yes. And it feels to me like one of these periods where that story has yet to sort of seep out

[00:06:55] or people have yet to see the relevance. It's where we're explaining to people what the relevance of Greece and Italy is or what the relevance of the weakness of the dollar is and why you can't just apply the normal cyclical framework that you've had in the past. So I do think that's a brilliant way of introducing it. So as usual with Trump, I think we can sympathize with what it is he's trying to fix.

[00:07:20] And we can sympathize with the issues in the US and the global economy, the steady downgrading of traditional, well-paying, satisfying manufacturing jobs and the desire to get them back. But at the same time, increasingly, it feels as though the supposed cure that is going to right that is actually risks making everything much worse than was the problem in the first place.

[00:07:50] And for me, this jumps out when I look at the data. And on the face of it, yes, you can see that the share of manufacturing employment in the US has been declining steadily. And no wonder people are upset, especially in the Midwest and traditional states. But then you listen to Trump and it's as though the US is the only place where this has happened. And you pull up the numbers and you say, well, hang on. No, the same thing's been happening in Germany.

[00:08:17] And the same thing, even in the last couple of years, has even been happening in China. And the same thing has been happening for decades in Japan. And it's not that this is unique. Actually, what we see is this has been a 75-year process in the US that the decline of manufacturing employment share has been going on. It's been 200 years in the US that services employment has been rising. And for me, the underlying villain here is not the nice, convenient foreign scapegoat that

[00:08:46] Trump makes it out to be. It's technology. And even if we can bring back manufacturing to the US, it's not going to be the big employer in the same way as it was in the past, because people are going to be using robots. And indeed, I'd go further than that. For me, the whole secret of stock market success and to some extent economic success in the US is this whole concept of designed in California and then manufactured in a sweatshop in Asia somewhere.

[00:09:15] And if you bring that back, even if it were good for Main Street, and I'm not convinced it's fully good for Main Street, it would be terribly, terribly negative for financial markets. And that's some of what we're beginning to see here. But actually, Trump's vision is broader than that and bigger than that and potentially more damaging that. But maybe that's one place to start. There are just all these inconsistencies in that vision that investors and economists

[00:09:41] are wrestling with, even if they might have sympathy with what it is he's trying to fix. And so the history of this, which goes back, this balance of payments discrepancy or imbalance has been around for a long time. We've run current account deficits for a long period of time. I'm remembering back to my study of the 87 stock market crash. And there was some mention, of course, there was a lot of things, probably portfolio insurance

[00:10:10] was the overriding sort of trade structure that overwhelmed the system. But a balance of payments deficit was mentioned as some part of the proximate cause where people started to get worried about inflation and things like that. So this goes back to the Japan dominance era of the late 80s. It's been around a long time. Is it the start stop?

[00:10:36] Is it just the magnitude of the proposals that really have gotten the markets unhinged? How do you disentangle what has really been kind of a top five equity vol event? If we just look at over a short period of time, the amount of realized volatility in the S&P, there's very, very few precedents to this.

[00:11:03] You've got to include GFC, COVID, the 87 crash. Maybe it's the Eurozone sovereign crisis. This has been a doozy in terms of the speed with which markets have sold off. What's the attribution from your perspective? At the risk of tempting fate, I'm inclined to say you ain't seen nothing yet.

[00:11:27] For me, the relatively orderly, if still striking spike in vol, pick up in risk that we have had, sell off in credit spreads that we have had to date, is frankly still really small compared with, yes, the magnitude of the proposals that are on the table.

[00:11:54] And you can see it, for example, if you compare these uncertainty indices, the number of references to uncertainty in the news with the sell off in credit spreads or with the pick up in vol was starting to get there. But still, the magnitude of the fundamental shock is really big. And that's where, for me, there is this disconnect between risk markets like credit and equities focused just on the tariffs and then FX and rates and gold focused on the potential for financial crisis.

[00:12:23] And I think it's a couple of different things. It's not just the magnitude of what is potentially being attempted. It's also the manner in which it's being attempted and how damaging that is. So just to take the tariffs themselves, for example, there is scope for using tariffs if, for example,

[00:12:47] for military or other reasons, you want to safeguard your mineral resources against a new rising potentially enemy power. Well, there's a case for doing that. But you do it in a targeted fashion and you make exceptions for your allies and you concentrate it on your potential enemies. And that's not what we're getting at all. And perhaps more than anything, what you do is you come up with a certain and fixed framework in which business can operate clearly.

[00:13:16] And that's not what we're getting at all, of course. We're getting something much more broader-ranging, targeting allies as well as enemies. We heard it in that Rose Garden speech. And it's utterly, utterly uncertain. And they're on again on one week and they're off the next week. And this just creates an utterly impossible environment as far as business is concerned. And so it's partly the magnitude and it's partly how it's even being done and the confusion that this creates.

[00:13:42] Beyond that, though, I think what's still particularly scary for financial markets and the rates and FX in particular is the threat which appeared in Stephen Mirren's paper. It's the way in which the different proposals, for all that they might be inconsistent and trying to achieve the impossible,

[00:14:07] they do nevertheless potentially form part of a consistent whole where the tariffs are needed to pay for the tax cuts. And where the potential threat to the dollar and user fees on treasuries and things like that that we haven't even had yet may likewise need to be invoked, because otherwise the other measures are simply too large and too expensive.

[00:14:36] There's this integrated approach here, which the market has still not fully got its head around. And credit and equities in particular, I think, are still looking at the scale of the tariffs and saying, well, this is too big. This is too disruptive. Of course, well, Trump will back down. This was just a negotiating ploy. And to my mind, that doesn't work with the scale of the tax cuts and the scale of what is being attempted.

[00:15:00] And that's why some markets are looking at the Stephen Mirren paper or looking at some of the proposals that people like Michael Pettis have almost made for things like capital controls on the dollar. And when you look at those and you come back to the volatility numbers you cited at the beginning, you can see that, well, maybe equity vol, yes, is starting to get there.

[00:15:24] But things like foreign exchange volatility are still significantly lower than you would anticipate. And this is where the sell-off in the dollar to date has been, frankly, small and orderly compared with what we may yet see. And the potential for that to disrupt other markets, again, is we're just scratching the surface of what we may yet get to. We had a period, I think, culminating on April 9th where the VIX got to just about 60.

[00:15:55] And what I had been saying, and this is just my own experience in markets, is that you get to a point in the very financialized, very interconnected world in which investors operate, counterparty agreements, cross-border capital flows and so forth, trades, leverage. The history of a VIX in the 50s is that it goes to 80 if left unarrested.

[00:16:22] In other words, the idea that markets can kind of repair themselves, the old adage, the cure for lower prices is lower prices, that doesn't happen when the VIX is in 50. The last two times it got to 50, GFC and COVID, it got to 80.

[00:16:40] And, you know, perhaps Besson finally got, you know, to Trump and said, listen, this is not going to repair itself, especially in light of the wicked sell-off in the bond market, the sell-off in the dollar amidst the, you know, almost 60 VIX. And so you had this massive climb down, the 90-day reprieve. And so Besson has also made the comment, and this is where I wanted you to kind of weigh in. He said, you know, we've probably reached the peak in the VIX.

[00:17:08] And my sense is that's probably correct, but that doesn't necessarily mean we've reached the low in the S&P. That, you know, if we've taken the potential real tail risk out, that doesn't mean that the uncertainty that's being imposed on the market and how that cripples decision-making, corporate profits, economic activity, that may not be priced in yet.

[00:17:33] And I just would be curious to have you reflect, it sounds to me as if you've got a pretty bearish forward-looking outlook, even amidst an asset price decline that's significant. Basically, yes. So, and again, I'd probably put it even more strongly than you just did.

[00:17:53] So if I do this in chart terms, again, the way I think of it is what follows vol, it's more vol, and you need a flushing out of positions, I guess, before or policymakers coming to the rescue, before you can have a proper decline and a drop in correlations and a return to underlying fundamentals. And to my mind, that hasn't happened yet.

[00:18:20] The way I would describe things is, as you said, it's a reprieve. The tariffs are postponed, but it's still highly likely we end up with some significant form of them. We are still highly likely to end up with 1930s levels of tariffs. Even now, arguably, we've got 1930s levels of tariffs, but with three times as much trade as we had back in the 1930s.

[00:18:48] So the economic impact would be larger, even without the uncertainty. And now we have all of the uncertainty on top of that. But more than all of that, for me, again, all of that focus is largely on the economic impact of the tariffs themselves. And for me, the broader things that rates and FX markets are just beginning to think of here are the policy announcements that we haven't yet had.

[00:19:17] The user fees on treasuries, the capital controls on the dollar, which might be the loss of independence for the Fed, which we're beginning to flirt with in all of these attacks on Powell. And what rates investors or fixed income investors are recognizing is that so many of these announcements strike at the heart of the processes of the buildup of credit,

[00:19:46] the buildup of debt and the integration of the global economy, which are the foundation of everything that's made America economically great and has made American markets the most profitable in the world, has made American companies the most profitable in the world. And even the threat to impose user fees on treasuries or to have capital controls on the dollar that are beginning to appear in some policy circles,

[00:20:12] those demand a much higher risk premium on treasuries in particular than we have priced to date. And those will be much harder to fix in the way that, say, prior crises have been dealt with by Fed intervention. Things like the slide in the dollar, it's kind of what everyone in Trump's policy circle actually wants. And it is very difficult to see that the Fed would intervene at all in order to stop it.

[00:20:41] It wouldn't be in the least bit surprising if we had another 10 or 20 percent move. And yet there is the potential for that to happen in a more disruptive way and to wake risk assets like credit and equities out of their stupor and make them think about the potential for financial crisis and not just economic crisis. That, for me, is still what's missing here. Yeah, I think I haven't dug in to the user fees concept,

[00:21:08] nor do I have a strong appreciation for how deeply that's being considered. But to even contemplate some form of adjustment to the flexibility that the owners of this asset have, whether it's the liquidity profile, the maturity profile, it seems to me that no free lunch comes to mind.

[00:21:35] And when you're potentially interfering with really one of our best assets, which is our capacity to export debt to the rest of the world, it seems to me that you might try to plug a hole in something but create a longer dated, or maybe not even longer dated, perhaps a shorter dated problem of confidence in the very asset that is one of our most valuable resources.

[00:22:05] Yes, the U.S.'s major asset is, or major export is financial assets to the rest of the world. The strength of the dollar should be seen not as the rest of the world manipulating their currencies to be competitive in manufacturing, but instead as a sign of the attractiveness of the U.S. until very recently as a destination for global capital. And if you bring that down, for example, by creating recession,

[00:22:35] well, it tends to have negative consequences. And one way of bringing it down, exactly as you say, is to threaten to interfere with the risk-free status of U.S. assets or people's ability to buy and sell at will. But there is a strong likelihood that if you do so, their reaction is nonlinear. You nudge it once or twice and not a great deal happens. And then suddenly you get a rush for the exits.

[00:23:03] And that's what we're just beginning to get at the moment. It started, as you said, at the beginning with this, oh, one Trump trade after another turning bad. And increasingly, it's turning into this re-evaluation of the attractiveness of U.S. assets across the board. And every investor everywhere is realizing, oh, crumbs, after these decades of U.S. outperformance, I've got too much.

[00:23:27] And the risk is that selling there begets more selling and more volatility rather than simply leading to a nice straightforward readjustment. And that's especially the case if we do things like interfering with the independence of the Fed. One of the things I always said is you can learn a lot about an asset just simply by observing its behavior on the worst days for the S&P. That's going to give me a sense of its kind of character.

[00:23:55] And as we were touching on with the example of Italian sovereigns before, sometimes a risk-off characteristic intensifies and then can kind of go away. Gold is in that category. It's correlations to the S&P come and go. Treasuries is a bit of a different story.

[00:24:16] The history of it as a reliable destination for capital that runs away from the risky asset class, at least in the post-GFC era, was very, very strong. And so if I look at my subset of 10% drawdowns in the S&P, of which there are not that many. This last one is, I believe it is an 18.9% was the max drawdown. Treasuries did not do well.

[00:24:46] It's not like they sold off a lot, but they certainly didn't rally. And if I think about 2022 as a comp, right, that's a big sell-off in both stocks and bonds at the same time. But that's a Fed tightening cycle. This is not a Fed tightening cycle. And so I think the behavior, especially of the long end, and I know you've talked about the basis trade, is concerning. And I think we can learn from it.

[00:25:15] And investors are observing what happened. I'd love for you to talk about how you have thought through the behavior of, call it duration, 10s and 30s in the U.S. amidst a pretty strong stock market sell-off in the last, let's call it, two months.

[00:25:35] So being a fixed income person, I tend to get all geeky and I like to break it down into the real yield and the inflation break-evens or to the rate expectations and then the risk premium. But roughly, despite, as you say, sometimes confusing dynamics in terms of bond yields moving up during periods of QE and inflation expectations moving up during periods of QE and nominal yields sometimes being confusing,

[00:26:02] I would argue that in periods of QE and inflation expectations moving up during periods of QE and inflation expectations moving up during periods of QE.

[00:26:30] What we started to see, and then usually those have coincided with a stronger dollar, but that relationship is slightly weaker. What is remarkable about the recent episode is it feels less like that traditional flight to quality in, if not nominal treasuries, then definitely in real treasuries. It's the exact opposite.

[00:26:53] It's the Liz Trust phenomenon where people, the emerging market phenomenon, where people dump your currency, dump your long bonds, and where you get a steepening of the real yield curve, and they pick up in the associated risk premium, the term premium, the extra yield that investors demand for taking duration risk in a given currency.

[00:27:14] And after at least a decade where term premium has been almost oddly low, we might blame it on QE, but there has been no or even a negative premium for holding long bonds. Suddenly, we're getting the exact opposite. Suddenly, we're getting that premium coming back.

[00:27:36] It's still much lower than arguably it should be, given the amount of interest payments that the U.S. Treasury now needs to make, equivalent to about 20% of its revenues, given this threat of things like user fees on treasuries, and given even just the level of nominal rates that we've got here.

[00:27:55] But more than anything, it's that dynamic where normally in a flight to quality, long bonds or long real yields should outperform and risk premium should come down. And now we're just starting to get the opposite, where people instead are panicking out of the supposed risk-free asset and out of the dollar and looking desperately for alternatives like Swiss francs or like gold.

[00:28:22] And it's that that gives you the clue that there is something much more sinister going on here. Those are small places for Swiss and gold, and therefore maybe exaggerate the underlying dynamics. But when you break down the yield curve moves and you see some of this price action, that is deeply concerning. And frankly, it limits the ability of the Fed to intervene in order to do very much about it.

[00:28:49] Even if they were to intervene to try to suppress the rise in yields, there's the risk that that just adds to what is rapidly turning it to, frankly, a run on the dollar. The term premium, as it were, is a kind of amorphous concept. If you ask two experts to explain it, sometimes you get slightly different explanations. I mean, for me, when I think about a premium that clears the market, I generally tend to default to supply and demand.

[00:29:18] So if I think about the vol risk premium and equity derivatives that really was quite substantial in 2021, to me, that's a function of the loss of capital that was very specific to equity derivative strategies in 2020. There were some basically bankruptcies for people that were short vol in that COVID meltdown. And it took a while for the capital base to restore itself.

[00:29:45] And so less capital, you're going to need more premium to effectively bring people to the table to get the market to clear. And so I think a little bit about the back end, perhaps, as having lost some of its customer base. There's another explanation, which might be just confidence in the U.S.'s fiscal dynamics, in the U.S.'s governance.

[00:30:11] You pointed to that chart of interest expense, which is just a terrifying chart in plain sight. How do you explain or how do you think about this emerging risk premium in the back end? And do you think there's a stopping point to it where at some point it's, you know, folks say, OK, that's enough. It's high enough for me to jump in. There is for now, there is the potential for all of this to run significantly further.

[00:30:40] There are processes that would reverse it, but they mostly require Trump to back down. And that's not what we're getting at the moment. So, yes, you're entirely right, even though everyone agrees what term premium is, they disagree strongly about how you measure it. And yes, you're right again that faced with that, as good a definition as any is to say, well, in practice, yes, we know it's this extra premium for taking duration risk.

[00:31:09] But surely that just depends on supply and demand for long bonds. Nevertheless, what is really striking in some of my charts is the way in which the inflation risk premium and the real term premium even now remain much lower than they were in previous periods when we had this level of interest rates.

[00:31:35] That in turn reflects that that in turn is all the more striking given, as you say, some of this fiscal dynamics and the complete difficulty in taking actions to reduce longer term expected deficits.

[00:31:52] That is also at the heart of the move in asset swap spreads or government swap spreads, the underperformance of treasuries relative to interest rate swaps, which fits entirely if they're a deteriorating credit. And this is where, as you say, traditionally we would get to this point where investors say, oh, this has run too far. This is cheap where you get the mean reversion.

[00:32:21] But I think what fixed income investors know is that that all hinges on credibility. And if you impair your credibility sufficiently, there comes a point where you start making proper promises that are designed to sort everything out. But you don't have any credibility and where investors just run for the exits all the more strongly. Now, we're not quite there yet, in particular with respect to treasuries.

[00:32:50] But for all that it seems that some of this price action and things like the dollar has been quite large or the pickup in some of the backup in long dated yields has been quite large.

[00:33:02] When I look at separate measures of ownership of U.S. treasuries by, for example, foreign exchange reserve managers or so far, the move has been really small compared with the potential for a larger move. Compared with the potential that we might anticipate, given the magnitude of the threats that are being made at the moment.

[00:33:31] And this is where similarly, again, I increasingly worry that it's the credibility of the U.S. government as a credit that is now being impaired. Even for example, so we had some of this immediately following the election victory, for example, in November.

[00:33:51] Yields did spike higher and term premium did spike higher as we had $150 billion worth or so of drop in foreign official U.S. treasury holdings. Well, now, as you start to threaten those foreign official treasury holders with unusual taxes or at a minimum with tariffs, actually, it's kind of remarkable that their holdings at the New York Fed have bounced back again.

[00:34:19] It seems highly likely to me that they do drop significantly and much more than we've seen to date. And I just think that very little of this is in the price. And there's the risk that this sort of dynamic, once it starts, it feeds on itself and is difficult to calm down. Again, we come back to this question of the Trump put and has he really backed down with tariffs or is it just a temporary stay of execution?

[00:34:49] And for him to back down on all of his policy, the hope would be that he will simply come to terms with the Wall Street view of things and say, oh, there's a limit to what we can do. I can't do all of these tariffs. Oh, I'm terribly, terribly sorry. But I think it's more and that bad policy creates this hit to growth and hit to the stock market. But that that leads to a change of course. I fear that we're more likely to get the opposite.

[00:35:14] And you see it in the attacks on Powell, the beginning of scapegoating him for always being too late, rather than what's happening is you start with this poisonous politics where you're not looking for honesty from your supporters and good advice. You're just looking for loyalty. In that environment, everything needs to be somebody else's fault.

[00:35:36] And even as your bad policy leads to bad outcomes, rather than recognize that and back down, actually, you're so invested in that emotionally and politically that you double down on the poisonous politics. And that's where, as I say, the risk is that the market is the only grown up in the room and the market continues to respond badly. And you end up getting much larger moves than we've had today. Yeah, the market is the vigilante.

[00:36:05] You know, the back end is a vigilante. The VIX is a vigilante. And there's got to be no doubt that there was conversation that got to Trump, you know, around April 9th, that afternoon that said, listen, this is about to break here. And, you know, for me, as someone who just lives and breathes market risk events, to see the S&P rise by 10% in an afternoon, I found it very disconcerting, candidly.

[00:36:34] It's just not a functioning market. And, you know, markets just can't do their jobs when realized vol is north of, you know, north of 50. I listened to a podcast recently. It was the Odd Lots podcast. And they had an expert in U.S. debt from a contractual standpoint.

[00:36:57] And I think it was probably motivated by some of what you're saying, the Stephen Mirren work on user fees, you know, implicit or closet ways of defaulting. And one of the kind of ideas that was brought up, and I don't know if Mirren had this idea, but basically, if the U.S. just suddenly said, listen, your 10-year piece of paper is now a 30-year piece of paper.

[00:37:22] And it was sort of contemplated whether or not that would trip the ISDA credit default swap convention as to, you know, what constitutes a default for U.S. sovereigns. There's not a lot of U.S. sovereign default written out there, but there's a market for it. And it was said that, yeah, that would constitute a default if you suddenly lengthen the maturity by 20 years. You know, that's a default.

[00:37:51] And what I found that they really didn't take up properly, and I think this is where you and I are very aligned, which is whether or not that trips the default on the small amount of U.S. sovereign credit default swaps written out there really isn't the issue. It's that you would even contemplate this sort of remedy to your problem is going to create a lot more issues.

[00:38:19] And then, you know, as you say, it probably adds to the default risk premium or the risk premium, I think is a better way of saying it, that, you know, is increasingly evident in the back end. Matt, what are the kind of premier questions, the topics that your clients are coming to you with and asking for help in understanding in terms of market dynamics? So some of it is just around the relevance of all of this.

[00:38:48] And people got excited about the basis trade in treasuries and whether that was significant or not. And I think they were probably too excited about leveraged unwinds and the significance of leverage unwinds. And especially equity investors, I think, are still too focused on the economy and the economic impact of tariffs.

[00:39:06] Mostly, though, what people tend to ask is at what point is gold too expensive or what period in history has the greatest lessons for us today? And I think the general conclusion there is one of the reasons that people find this difficult is because they tend to think in terms of traditional economic cycles.

[00:39:32] And instead, increasingly, we need to think in terms of what some people call debt super cycles or the interaction between politics and economics. And most of the time you've been able to ignore the politics and suddenly it becomes relevant. And for me, the best work I've seen here is the work by Ray Dalio in his mostly in his Changing World Order book. And sometimes it can come across as a little extreme. He has a slightly quirky style.

[00:40:00] And at the moment, he's going around talking about the potential for things worse than recession. But mostly I end up agreeing with him. And when you read his full book and recognize or look at this, a 40 minute video that does it nicely as well. And you recognize that he really tries quite hard not to take sides and just to look at history over several thousand years of financial cycles and say,

[00:40:30] what are the warning signs for a loss of confidence in an entire financial regime in a reserve currency? And he argues, and I think brings this out very neatly, that even though you can't necessarily perfectly quantify it, there are certain elements that go together. And when you have large amounts of debt, you're supposed to be worried.

[00:40:54] When you have large amounts of economic inequality, different segments of society pull in different directions, you're supposed to be worried. When you have political polarization, and again, society ends up fighting and trying to find ways around the laws rather than establishing rule of law, you're supposed to be worried. And when you have the decline of the old great power and the rise of the new great power, those are your four warning signals.

[00:41:18] And when you have all of them together, then historically speaking, the mess that we have at the moment actually fits a pattern. And as he puts it, just historically speaking, you get some of the actions that are just being threatened at the moment. And it's not just the tariffs. It's suspending debt service to enemy countries. It's having direct capital controls on the convertibility of what until previously you had thought was, say, a reserve currency.

[00:41:46] It's imposing special taxes on some segments of the population or some types of bondholders. And these are all the things that we then see today when we read the Stephen Mirren paper and when we see Michael Pettis talking about capital controls on the dollar. And for fixed income investors who know that they have limited upside and lots and lots of downside, these are things that make you run for the exit.

[00:42:13] And it's that sort of simultaneous run on treasuries and the dollar and reestablishment of risk premium, which I think we are supposed to look at this and worry. And it's not just about, say, hedge funds and leveraged unwind. It's about real money investors everywhere.

[00:42:33] And I think maybe also for people inside the U.S., I see a difference between the U.S. investors and the Swiss investors or the Asian investors, where inside the U.S., it's hard to appreciate the magnitude of this. And while on the one hand, that kind of makes sense, if you're in the U.S., your base currency is dollars and you're measuring that's where your liabilities are.

[00:42:51] But still, the potential for much bigger moves than we've had to date and for the dollar weakness, especially to run and run, I think this is still being downplayed. And as you say, there's this resilience even in the equity market, that willingness to bounce back and assume that, oh, but it was just a negotiating ploy.

[00:43:18] What Dalio tells you is, no, you can't put that all in the box and you don't get your credibility back fully, even if you do unwind this. And these risks are quite likely to play out more fully. Gold has been a real topic of focus for me. And I've always just thought about it as an asset that it's our way of expressing just a feeling of discomfort that all is not well.

[00:43:47] I took a tremendous amount away from gold's behavior during the debt ceiling crisis, the original one in 2011. Hard to disentangle exactly why gold moved up so much so fast. The Eurozone sovereign crisis was happening. The U.S. was slowing fast. Rates were coming down fast. But both gold and, you noted it, gold vol really spiked during that period.

[00:44:13] And this is a time when gold is up more than gold vol. So gold vol is rising. But I would put forth that you'll really know that there's panic when not just the asset itself, which is obviously up tremendously, but the vol really, really catches and gets into the mid-30s. You're more like low to mid-20s now as well. It's very easy to be negative.

[00:44:41] You know, there's just so much to be frightened by in terms of the price action. I do agree with you that the uncertainty coming from the strategy itself leaves, you know, should leave us with a lot to be worried about as investors. And as corporates, I can imagine it's very difficult to make decisions.

[00:45:06] However, you know, the U.S. equity market has just proven so resilient to incredible shocks right now. Of course, the COVID shock got a heavy dosage of monetary and fiscal stimulus. But somehow the U.S. made it through 2022 with an incredible rate hiking cycle, came out the other side really strong.

[00:45:32] How do we kind of put our caps on and sort of absorb the negative but also recognize that the entry price can really help, right? We're basically having a chance to buy stocks at a significant discount to the beginning of the year. How do we kind of look to the other side of this thing and try to find a way to buy in the face of adversity, which has often proven to be a profitable strategy?

[00:46:02] I wouldn't be doing it for U.S. equities just now. The lens, and that's based on a couple of different things, whereas I might still be tempted to do it for gold. So just briefly, again, if I pull up a chart or two, when I look at gold, I see all this extreme price action and I do see some ETF inflows.

[00:46:28] But as you say, prior spikes saw lots more call buying. And this time around, we've not had that. And while there have been ETF inflows, actually, a lot of the growth in ETF outstandings has just been because the price is high rather than because of the extraordinary volumes. And there is the potential for much larger purchases than we've had to date from central banks in particular, especially if the tariffs come in in full.

[00:46:56] And so for gold, even though the price seems extremely expensive on the face of things, my instinct is it can actually run further still and is difficult to have a price framework. Now, in a sense, more alarmingly, but in the opposite direction, I would then turn to the equity market and draw the opposite conclusion. And this is maybe my own unique lens.

[00:47:25] But for me, over the last decade or so, moves in equities and credit spreads reached expensive levels and then carried on getting more expensive. And for a long time, the factor that I found that explained them better than anything else, even often the short term moves, was central bank liquidity and reserves changes at global central banks.

[00:47:54] And for a long time, that was going into the U.S. equity market. And then more recently, it's been going into non-U.S. equity markets. But now, I think a couple of things are happening. So the first of these is that the central banks are no longer doing QE or even de facto QE in the same way as they were previously. They're doing QT.

[00:48:20] And even with the Fed slowing down the pace of QT, that support for markets is no longer there. And then in addition, thinking in these terms really makes me see the last six months or so as quite, or maybe a year or so, as quite distinct.

[00:48:43] So whereas in all the previous periods where markets were bouncing back or where they sold off in 2022 when we were getting proper QT and then they came back when we had liquidity added by central banks in 2023, it's only really over the last year or so that for me, there's been this underlying exuberance from end investors buying into the MAG-7 and U.S. equities in particular. And unsupported by central banks.

[00:49:10] The volume that went in on that, I reckon, is at least a trillion dollars or so. And while, yes, those flows have remained resilient, and even now we're getting outflows from bond funds, almost more than we're getting outflows from equity funds. To my mind, there is still a vulnerability there, and that comes from a mixture of the underlying fundamentals.

[00:49:35] Still this supposition that, oh, the U.S. should be best placed in any trade war, and the U.S. is only 15% of global trade. But actually, the secret to U.S. companies' record profit margins has been the globalization and the buildup of long value chains, which are now directly threatened by all of these tariffs.

[00:49:54] But also, again, for me, I think there's the risk that people misinterpret that whole decade or more of momentum chasing that we had by investors, where value investing underperformed and momentum chasing outperformed. For me, that was predicated on all of that central bank liquidity.

[00:50:20] That is now we're not likely to get it until we have a much bigger crisis in markets. And that just creates a much larger degree of vulnerability that I think we will see play out as we do start to get more outflows or as the tariffs and the uncertainty begin to bite.

[00:50:39] And that's where even as the valuations in equities have improved and U.S. equities in particular have improved relative to where they were, for me, there was a reason for that expensive previously. Well, there were two reasons. There was a fundamental reason and a technical reason, the profit margins and then the central bank liquidity herding people in. And that's exactly what we haven't got at the moment. We haven't got either of those.

[00:51:04] And so even as the valuations cheapen up, we've got a vulnerability on the earnings front. That means I don't want to touch the equity market at all. And I think there's still a bit too much tendency to rotate within equities rather than de-risking. And I still think that people are running too much long equity risk generically. So the sort of diversification across equities challenging.

[00:51:33] The duration side uncertain. We've talked about, sadly, the U.S. kind of earning its way into a risk premium, an uncertainty risk premium with respect to its large and global footprint in the bond market. Gold you've talked about. It's obviously been a great place to be.

[00:51:54] Are there other sources of either diversification or defensive places that folks ought to be thinking about allocating capital to right now? You can find little pockets like Mexico equities, for example. If we get some rotation away from Asia towards Mexico or Latin America, it comes out a little bit better.

[00:52:19] You can almost certainly make an argument for duration risk or bond risk outside the U.S.

[00:52:31] In Europe, for example, or even Japan relative to the U.S. So I think there's an argument for taking relative duration risk. You go short treasuries and then you go long bonds or gilts relative to the U.S.

[00:52:58] There is likewise an argument for things like the Swiss franc, which is already appreciated a long way, but is the only currency that historically has over centuries continued to focus solely on inflation targeting and not had significant bouts of depreciation.

[00:53:15] But mostly you're in this really difficult environment where there were processes of leveraging and processes of globalization and the buildup of global trade, which created a win-win situation, which created benefits all the way around, which drove asset prices up.

[00:53:37] And which are now, thanks to Trump's focus on zero-sum gains, at risk of turning not just into a zero-sum gain, but a lose-lose gain where asset valuations everywhere go down, where we all try and sell. On aggregate, nobody can sell, and all you get is that the price goes down.

[00:53:55] And while there are ways to make that stop, the deeper we go in, the harder it is to achieve that, and you risk undermining the faith and the confidence, the credibility of the world's largest borrowers, which underpins all of these valuations left, right, and center. And it's really difficult to hide from that. You know, each one of these episodes of market dysfunction or crisis is different.

[00:54:22] I keep going back to 2020, and that was obviously a doozy, and it took a kitchen sink of a fiscal response from the U.S., but it got to do that amidst the lowest rates in a century, right? We got to sort of take on that debt. We printed a lot of debt at extremely high prices, low rates for us, the U.S.,

[00:54:45] and it just strikes me that counter-cyclical measures that involve the U.S. issuing debt to plug up a growth shortfall are going to be especially different and potentially difficult this time around, given all of this conversation and then the starting point for rates, which is just considerably higher, and folks worry that, you know, there ought to be a risk premium associated with this. It's not a flight-to-safety asset. Maybe that'll return. I hope it does.

[00:55:15] But for now, that flight-to-safety element of U.S. Treasuries, which is a very valuable characteristic, has been certainly eroded. Matt, tell us where we can find the work that you're doing at Satori. Come to SatoriInsights.com, subscribe, and you get a free piece when you subscribe, and even the free emails give some sense of the full contents.

[00:55:40] If you want the full version, then there are various paid subscription options where the presentations and the webinars and the research pieces with all of their charts show up. Excellent. Really enjoyed the conversation. Thanks so much for being a guest. My pleasure. Thanks for having me.