MacroVoices #553 Brent Johnson: Disparate Housewives

Brent Johnson · Santiago Capital

Dollar can rise to much higher levels longer term despite a near-term pullback.

The Fed raised rates to establish credibility, and markets are demanding higher rates. The world still needs dollars to operate: it sells to the US in dollars, borrows in dollars, and stores money in dollars to match liabilities. Alternatives look weak: Europe has a war on its border, very little growth and a political union without fiscal union; Japan has problems; China's market is closed and it is in a trade war with the US. Higher US rates and AI-driven growth expectations also support owning dollars. Near term, the dollar is overbought and the narrative is no longer a shock, so a pullback is possible. Brent does not expect a super spike in the short term. But if the dollar keeps rising, 'heaven help the world,' because it would start to break things. In the end-game sovereign debt scenario, the dollar is more likely to shoot higher than lower.

“But more of the longer term, I still think that we can go back to much higher levels on the dollar.”at 5:55

Brent Johnson · Santiago Capital

He would rather own US dollars than Canadian dollars, earning the yield and the currency gain.

Erik Townsend suggests a carry trade that is long US Treasuries and short Canadian Treasuries, which is liquid and easy to access. Brent says the trade is not a bad one and he would much rather own US dollars than Canadian dollars. A Canadian investor could buy dollars and then a T-bill. As the Canadian dollar weakens against the dollar, they make money on the currency and also earn an extra percent on yields in dollars. He sees this as one way the US draws capital from around the world, and it reflects his view that rates will rise more sharply outside the US, hitting other economies harder.

“I would much rather own US dollars than own Canadian dollars. Or if you're a Canadian, you just buy dollars and then you buy a UST bill.”at 32:11

Patrick Ceresna · Big Picture Trading

Buying a 70-cent Canadian dollar put expiring 11/06/2026 to bet on CAD weakness against the dollar.

Patrick expresses Brent's dollar-over-Canadian-dollar view through options on Canadian dollar futures. The Canadian dollar is around 70.37 US cents and has moved about 260 pips, roughly 3.5%, peak to trough in 27 days, yet implied volatility is below 5%, so the premium is modest. He buys the 70-cent put with about 29 days left, costing about 22 pips. A return to 69 cents would give about 78 pips of profit net of the premium, roughly 3.5 times the risk. He notes the trade needs timely downside follow-through, and that a near-term dollar pullback could cause a Canadian dollar rebound.

“So here's the structure. With the Canadian dollar trading around 70.37 US cents, I'm looking at buying the 70¢ put option expiring on 11/06/2026 with about twenty nine days remaining.”at 49:52

Patrick Ceresna · Big Picture Trading

The dollar is the path of least resistance, supported by a euro breakdown, with no near-term reversal catalyst.

Patrick says the dollar broke out of an eighteen-month range after an earlier attempt failed, and this breakout is backed by a decisive breakdown in the euro. The euro has cleared most major support and could fall to 1.10 or 1.08, since Europe is the net energy importer most exposed to the supply disruption. Funding stresses are visible in currency trends, positioning favours the dollar, and the current macro regime is a rising dollar with no immediate catalyst to reverse it. He acknowledges the dollar could weaken over the long term.

“So at this moment, the dollar is strengthening, and it is the path of least resistance and continues to actually be one of the big macro drivers.”at 57:18

Brent Johnson · Santiago Capital

Gold could make a big move higher in weeks after a golden cross, though it may dip toward $3,700.

Gold has fallen from its summer run, with momentum and narrative gone, but it is now at a support area near $4,100. A golden cross, where the 50-day moving average crossed above the 100-day, just formed. If the dollar rises to 110, Brent thinks gold probably falls to about $3,700. If support at $4,100 breaks, gold could fall another 10%. He bought gold for a client the day before, sees the area as a place to start nibbling, and thinks gold will make a fairly big move higher in the next few weeks, probably going higher. If he is wrong and gold falls, he would buy the low. He also expects a short-term bounce in gold and the euro alongside a short-term dollar pullback.

“I actually think the gold's gonna make a fairly big move in the next few weeks. I think it probably goes higher, but if I'm wrong and it goes lower, I would probably be a buyer of that low”at 8:16

Brent Johnson · Santiago Capital

Treasury could revalue gold certificates to market for about $1 trillion, but he doubts it happens soon.

The US Treasury's gold is booked at $42 an ounce on Fed-held gold certificates. Marking them to market near $4,100 would let the Fed mark up the certificates and credit the Treasury's account with roughly $1 trillion, which can be done in an afternoon. It requires the Treasury to ask and the Fed to agree. If the two were at odds, the Fed could refuse to credit the account, and Brent thinks the Fed would lose such a fight. He calls it an accounting trick, similar to the 1930s gold confiscation and revaluation, that increases money supply and reduces the value of each dollar. He thinks the government keeps this as insurance, is not expecting it anytime soon, and sees it as far down the list of Treasury Secretary Bessent's ideas. A dollar bid shows they do not need to do it yet.

“They credit the treasury's account with that trillion dollars, and that can be done in an afternoon, but it requires the treasury to say to do it, but then it also requires the fed to say, okay.”at 17:53

Patrick Ceresna · Big Picture Trading

Rising real rates and dollar stress keep gold heavy near term; a break below $4,000 later could be a buy.

Patrick says the big-picture bull case for gold is there, but in the short to intermediate term the technicals are deteriorating. The macro regime does not support higher gold, since real rates are rising and dollar funding stresses are evident, both headwinds for gold. Price action is heavy with no follow-through across precious metals, and silver, platinum and palladium positioning sits in the very low percentiles on a one-year look back. A short-term breakdown below $4,000 is possible, which would be a long-term buying opportunity, but there is no reason to expect precious metals to turn bullish imminently.

“And the big issue here is that overall, the macro regime doesn't support higher gold. When you have real rates rising and dollar funding stresses being very clearly evident, this is a period where gold typically has headwinds.”at 1:00:42

Brent Johnson · Santiago Capital

The Fed is not independent, only autonomous, and will work more closely with Treasury.

US power rests on separation of powers and an independent central bank. But the Fed is not fully independent: it testifies to Congress twice a year and needs a charter from Congress. Its history with the Treasury has been mixed, with the 1951 Treasury-Fed Accord, and in 2022 Powell was raising rates while Yellen drained the TGA and reverse repo, adding liquidity. Over the past eighteen months, Treasury Secretary Bessent has moved into traditional Fed territory with buybacks and swap lines. He said 'we will work together' rather than staying in separate lanes. Brent thinks the Fed and Treasury are headed toward a closer working relationship, driven by a great power competition in which the sovereign needs full power. Whether it is a 'mutual marriage' or a 'shotgun wedding' is undetermined, but he sees dramatic consequences for domestic and world markets.

“We do not think the Fed is independent. We think they have autonomy, but we think that is different than independence.”at 10:02

Brent Johnson · Santiago Capital

The Fed has far more policy tools than markets assume; 'out of bullets' talk has been wrong for decades.

Brent has been hearing for 25 of his 26 years in the business that the Fed is out of bullets, and has been wrong each time. His view is that the Fed has far more tools than people appreciate. He ties this to its position as the banking arm and distribution arm of the dollar system to the rest of the world, which gives it leverage over the Treasury. He thinks it is a long way from the more extreme tools, like gold remonetization, that a crisis might require. Those tools do not mean people should expect them now. They do mean people should be ready for them in a crisis, and the Fed and Treasury have more ammunition than assumed.

“I've been doing this for twenty six years now, and for twenty five of the twenty six years, I've been hearing that the Fed is out of bullets. And my point to people is that they have a lot more bullets than you can possibly imagine.”at 22:55

Brent Johnson · Santiago Capital

Mounting volatility and geopolitical strain will force the US Treasury and Fed to coordinate to win the power competition.

Brent describes volatility across financial markets, social aspects of the world, geopolitical boundaries and energy markets, which he says underpin everything else. He says these challenges will lead the US Treasury and Fed to need to work together to win the great power competition. The argument is stated briefly and is more a prediction than a worked case.

“I think all of these challenges is what's going to lead to the United States Treasury and the United States Fed needing to come together in order to win this great power competition”at 42:18

Brent Johnson · Santiago Capital

US yields are rising because of policy uncertainty, weaker demand, AI growth hopes and passive selling, not inflation.

Many people say rates are backing up because inflation is about to run away, but Brent says the data don't show an inflation problem, which is what he finds puzzling. He gives several drivers. First, uncertainty over Trump's policies means investors are less eager to buy Treasuries. That is not a wholesale rejection, but it pushes rates higher. Second, the AI trade suggests growth could let the US kick the debt can down the road or even grow out of it, so bondholders want more compensation. Third, passive management works in reverse on bonds: as yields rise and bond prices fall, passive portfolios get sold by machines, which can cause fast dislocations, as passive flows do in equities. He is concerned about rates rising and especially their knock-on effects. Rates are also rising in Europe, South America and parts of Asia, and the US, as the big stack at the table, can absorb more pain than smaller players.

“I think there is some uncertainty with Trump's policies and what's going on in the world. I think people are perhaps not quite as excited to run out and buy a treasury as they used to be.”at 25:51

Patrick Ceresna · Big Picture Trading

Bond sell-off and rising yields raise valuation hurdle rates and could force an equity repricing.

Patrick says the bond market is in an incredibly strong sell-off, with continued pressure on yields, which has raised the hurdle rate for valuations and hurt many financial assets. The ten-year is at 5.35% and the thirty-year near 5.8%. Equities are holding up on the expectation that earnings growth can absorb higher borrowing costs, but the pressure in bonds could eventually force a repricing of equity prices. He describes two different regime expectations, with stocks and bonds telling different stories.

“We continue to see an incredibly strong bond sell off, continued pressure on yields, and this has certainly caused the hurdle rate for valuations to hurt so many of the financial assets out there.”at 52:15

Brent Johnson · Santiago Capital

The US is embarking on a Cold War with China, which will not end soon and is a better analog than the 1970s.

After World War II the US had large debt from financing the war and then began a Cold War with Russia. Brent sees the US embarking on a similar Cold War with China now. He does not want it, but he would prefer a cold war to a hot war, and does not see it ending anytime soon. He thinks the late 1940s into the 1950s is a better analog for today than the 1970s, which many people use because they expect a strongly inflationary period. The analogy comes from debt, great power rivalry and the post-war setting.

“And I kind of feel like that's what we're embarking on now. We're embarking on this great cold war with China.”at 33:14

Brent Johnson · Santiago Capital

US–China power competition will last decades and force countries to choose sides; no resolution in six to nine months.

Brent argues great power competition with China will force countries, regions or blocs to take sides, because few nations can stay on the sidelines. He is unsure whether the split ends as a China-only contest or a bloc contest, but expects it to run for years, if not decades, and not come to a head in the next six to nine months. He frames it as a pendulum shift: globalization ran for 30 to 40 years and the pendulum will now swing back toward blocs for a similar stretch. He also says China is an extremely formidable adversary, so a US win is not automatic.

“I think regardless of which one it is, I think this probably plays out for... a number of years, if not a number of decades. I don't see this all coming to a head in the next six to nine months”at 36:48

Erik Townsend · MacroVoices

AI is a white-collar tractor: long-run job-loss fears are ludicrous, though near-term displacement is real.

Erik compares AI to the tractor, arguing that fears AI will destroy the economy or jobs are as misplaced as fears tractors would destroy farming. He calls AI the biggest productivity tool ever and says it will make white-collar workers far more productive. He concedes the near-term harm: as with the field workers replaced by one tractor driver, people can be out of work for a while, which can bring political and local unrest. In the long run, displaced workers learn new jobs.

“I think in the long term, that is ludicrous. That's like saying that the invention of tractors is gonna destroy farming.”at 44:57

Brent Johnson · Santiago Capital

AI will be a long-run positive step change for humanity, with short-term unemployment and likely welfare expansion.

Brent rejects the apocalyptic view and says AI will be a step change for the better of humanity and could be fantastic for economic output. He expects short-term unemployment problems. He says the likely response is universal basic income or a further expansion of the welfare state, because the alternative is a large group of unemployed, upset people, and that he is predicting this rather than recommending it. He sees ten to thirty years of benefits but a bumpy road before that.

“I actually think it is going to be a step change function for the better of humanity. That's my base case... I think there will be short term problems with unemployment.”at 46:00

Brent Johnson · Santiago Capital

Europe is unattractive for capital: weak growth, a war on its border, and political union without fiscal union.

In arguing why global capital stays in dollars, Brent says there is little reason to go to Europe. It has very little economic growth, a war raging on its border, and a political union without a fiscal union, which he finds unattractive. Japan has a number of problems and China has a closed market, so neither is a good alternative. Together with the dollar's role in trade and funding, this means the world has nowhere better to park capital, which supports the dollar.

“Do you really wanna go to Europe that has a war raging on its border, very little economic growth, and a political union without a fiscal union. That doesn't seem too attractive to me.”at 2:26

Brent Johnson · Santiago Capital

Stablecoins let the Treasury bypass banks, eroding the Fed's leverage over it.

The Fed's leverage over the Treasury has come from being its bank and the distributor of the dollar system. Stablecoins are a new capability from the last five or ten years that could put some of that leverage back in the Treasury's hands. Stablecoins do not need a banking system to distribute bonds, raise cash or make payments. As that technology is built out, it removes some of the Fed's leverage. Brent says the Fed and Treasury still depend on each other today, but the ability to remonetize gold certificates or use stablecoins as a backup is a key factor in the future.

“Stablecoins do not need a banking system to distribute either the bonds or to raise cash or to make payments. And so as that technology gets built out, it starts to remove some of the leverage that the Fed has.”at 19:26

Brent Johnson · Santiago Capital

The US is more likely to follow Rome's path from republic to empire than to fall.

The US faces problems similar to late Republican Rome from roughly 120 to 60 BC: foreign wars draining the treasury, inequality between citizens, a cult of personality and political infighting. People compare the US to Rome and conclude it will fall. They miss that the Roman Republic was followed by an empire, after a strongman consolidated power and Rome kept running the Mediterranean. Combined with the world's debt, a cold war with China and a republic whose institutions have weakened, Brent thinks the empire path is more likely than a fall to second-class status. He says he does not take pleasure in this and hopes it can be avoided.

“And I think that is the more likely scenario for The United States now than one where The United States falls and becomes a second class citizen on the global stage.”at 35:12

Brent Johnson · Santiago Capital

Losing the AI race would make winning the broader power competition with China very difficult; the two are intertwined.

Brent says the rise of AI is a huge part of the Cold War and that the US will struggle to win the overall power competition without also winning the AI race, so the two are intertwined. He adds that chips and traditional energy are being weaponized as derivatives of this great power competition, which he sees as the common thread behind events such as the US Venezuela action and Marco Rubio's Iceland trip.

“I think it will be very difficult to win the overall power competition if you don't win the AI race as well, and so I think these two are very much intertwined.”at 37:23

Erik Townsend · MacroVoices

Free Chinese open-source AI models will soon be good enough for most corporate problems.

Erik cites Matt Berry's point that Chinese open-source models are only three to six months behind the frontier labs. He says that for most AI users, models like Opus are already strong enough, so the gap matters little. He argues Chinese models may not match US frontier models but will be good enough for most corporate problems, and they are free to run on your own hardware. Running them air-gapped would mean firms never send decision-making data through Anthropic or OpenAI clouds, which he sees as a possible major upset for US labs.

“Opus is plenty strong enough, and it says to me that it's not gonna be very long before open source free AI from China, maybe it's not as good as The US frontier models are, but it's still good enough that it can solve most corporate problems.”at 38:15

Brent Johnson · Santiago Capital

China's electricity output gives it a leg up in the AI race; the US needs new energy sources to keep pace.

Brent argues China's large electricity output gives it a fantastic advantage in AI, because it can run its AI industry on cheap power. He says China doesn't need to lead the frontier to matter, since being right behind it at much lower cost may be enough. He concludes the US has a chance only if it develops energy sources that keep it leading the AI race ahead of China, and that otherwise the outcome is an open game. He cites Carly Anderson's work on this as central to the contest.

“the fact that their [electricity] output in some ways gives them a fantastic leg up in this race, right? Especially if they can use that electricity, the ability to run their AI industry on that electricity”at 40:03

Erik Townsend · MacroVoices

China's nuclear buildout outpaces the US, and state funding leaves private US nuclear firms struggling.

Erik says China has more conventional nuclear plants planned and under construction than the entire US fleet. He adds that China has a strategy of advanced research into thorium-fuelled molten salt reactors, which almost no private-sector players have attempted. The few private firms trying are struggling against a state-funded Chinese competitor. On this evidence he says the assumption that the US wins a cold war with China is hard to support, since the facts look daunting.

“China's got more [conventional] nuclear power plants planned and under construction than [the] entire US fleet.”at 43:53

Patrick Ceresna · Big Picture Trading

Narrow leadership and weak breadth leave the index vulnerable, with systematic selling near 7,700 on the S&P.

Patrick says market breadth is terrible: earlier in the week only 20% of stocks were above their fifty-day moving averages, meaning about four in five are correcting. Most hyperscalers are stuck in a range, with only Nvidia and Microsoft still pressing higher. The equal-weight S&P 500 and the Russell are in downtrends even though the cap-weighted index holds near its highs. Systematic strategies that are structurally long could start selling near 7,700, about 2.5% below the highs, with estimates of up to $85 billion of forced selling. Only a rates relief rally would let the S&P break higher.

“We continue to see a horrible market breath where earlier in the week we were at 20% of stocks above their fifty day moving averages, which is basically four out of five stocks are clearly correcting”at 52:48

Patrick Ceresna · Big Picture Trading

Thin inventories and Hormuz risk mean oil must rise; a breakout above $100 would hit rates and stocks.

Patrick says crude is the primary story because it drives inflation expectations that are showing up in rates markets. The market relies on barrels moving through the Strait of Hormuz, and the inventory cushion is very thin, so any escalation there would push oil higher. Speculative shorts have hit a five-year extreme, so the market is not positioned for a rise, leaving pent-up energy for a short-term trend. A breakout above $100 would trigger responses in rates and could break the equity market's vulnerable state. A sharp front-month reversal is noted, but longer-dated contracts keep making new highs.

“the market has been reliant on the movement of the barrels that are coming through that lane and the inventory cushion is very thin. And so there is lots of room that if there is any escalation over there, that oil does need to go higher.”at 58:22

Patrick Ceresna · Big Picture Trading

Record gross short positioning could squeeze natural gas higher if early cold hits the US.

Patrick says commitment of traders data shows zero-percentile positioning on one-, three- and five-year look-backs, with gross short positioning at a record level, so traders are positioned for fundamental weakness to continue. Talk of early-season cold in the US has already lifted natural gas, including winter contracts out to January. If a colder winter forecast develops, the shorts could be squeezed into a substantial rally, as natural gas has been incredibly volatile when squeezed in the past.

“When we look directly at the commitment of trader reports, we continue to see the zero percentile of positioning going on a one year, three year, and a five year look back as we have now seen a build of gross short positioning that is at a record level.”at 1:01:55