"Bad Things" To Happen As US Dollar Strengthens | Brent Johnson

VanEck Gold Miners ETF

Across the shows: 1 speaker in other episodes, 2 bullish and 0 bearish calls, past 30 days

• MikeBullish

  Gold miners could double from recent highs before the bull market ends.

  Mike points to GDX's long monthly chart. It went from about 50 to more than double, then gave back nearly half of that move. He reads the current pattern as a large triangle on the monthly chart. A breakout in the coming year or two could lead to a powerful move, possibly a doubling. He admits there is no guarantee and says history is his basis. The gold miners did not make new lows even as gold and silver fell, which he takes as a possible positive divergence. His firm has precious metals and miners positions and agrees with the overweight.

  “Mining stocks, I believe could still just go back to the multi chart here. It could very well double from recent highs before this bull market is over.”at 1:41:41

US dollar

• Brent Johnson · Santiago Capital

  The dollar's relative strength is the most important variable in global finance, affecting almost everything.

  Brent argues the dollar's strength on a relative basis matters more than its purchasing power. Gold buyers are often told to buy because the dollar is dying, but that argument glosses over relative dollar strength. He calls relative dollar strength probably the single most important variable in global finance because it affects literally everything. Someone who cares only about purchasing power can buy gold and wait, but anyone who runs a business, operates globally, invests in capital markets or follows geopolitics has to watch the dollar, even if it is losing purchasing power, because it shapes all those markets. He says the dollar could die last and that is still extremely important for everything else.

  “And the strength of the dollar on a relative basis is probably the single most important variable in all of global finance because it affects literally everything.”at 13:06

• Brent Johnson · Santiago Capital

  Dollar breakout above its ~105 band would trigger bad outcomes; dollar near 102 and breakout more likely than a drop.

  Brent's framework says the dollar works within a band of roughly 90-105 (or 85-105) on a relative basis, where the global system can handle both dual carry trades that countries face. Above that band, bad things start to happen. He says the dollar is around 102 and getting close, and that given his scenarios a breakout to the upside is more likely than a breakdown. If the dollar rises fast from about 102 to 105, he expects elevated volatility. A move from 105 to 110 in a short period would be a liquidity event: assets get sold to meet margin calls and debt service, because asset prices fall while debts stay at par. He compares this to 2008, 2020 and early 2022, and notes that 2020 lasted about sixty days while 2008 lasted about nine months. His base case is that the dollar stays between 100 and 110 but probably tests the upside within the next year, with low conviction. He keeps hedges, cash and downside protection in case the breakout happens, and says a dollar decline would be fine for his holdings.

  “But if the dollar breaks out to the upside of that band, that's when bad things start to happen. And we're getting relatively close to where that is now.”at 16:12

• Brent Johnson · Santiago Capital

  The dollar's reserve role is moving toward re-dollarization, not de-dollarization, over a long-term trend.

  Johnson's framework rests on historical precedent (Rome from roughly 140 to 60 BC) where policies swing back and forth like a pendulum while the overall trend moves in one direction, which he calls the ratchet. He argues the world is decoupling and de-globalizing over 10 to 50 years regardless of year-to-year politics, and that the ratchet is moving toward re-dollarization. He says the US still has the dominant economy, the reserve currency and relative power, and that stablecoins help extend that position.

  “the ratchet is still moving in one direction and it's all moving towards re dollarization as opposed to de dollarization.”at 1:02:48

Gold & precious metals

• Brent Johnson · Santiago Capital

  Gold and silver would probably fall in a dollar liquidity event, as they have before, due to margin calls.

  In the liquidity event he expects if the dollar breaks out above its band, Brent thinks gold and silver would probably fall, because they always have in these episodes. He attributes this mainly to the margin-call dynamic, in which everything is sold to meet liquidity needs. This runs against the common gold argument that the dollar is dying. He argues that relative dollar strength matters more to gold in the near term than purchasing-power erosion.

  “think gold and silver would probably fall in that environment just because they always have.”at 22:21

• Brent Johnson · Santiago Capital

  Gold likely falls in dollar terms in a liquidity event, but may hold up better in euro terms.

  Johnson agrees gold would likely benefit in euro terms because of financial repression that Europe will need to service its debt. He thinks a liquidity event would probably push gold down in dollar terms. He is unsure whether gold falls in all currency terms, since a falling euro or other currency could mean gold falls less in euro terms.

  “certainly in euro terms... I think it probably falls in dollar terms. The question is, does it fall in all currency terms? I don't know.”at 59:04

• Mike

  Gold and silver have likely bottomed after a brutal selloff; a breakout above $4,400 would confirm it.

  Mike says gold and silver have been through a brutal stretch, with silver down about 60% and gold about 30%, but he thinks there is a good chance the bottom is in. His evidence is technical: gold has rallied to its 50-day moving average, and daily bars show a gap down, three sideways days, and a gap up, which he calls an island reversal. He says gold needs to get above about $4,400 on spot to confirm the bottom and leave the summer lows behind. He is also not convinced that precious metals fall just because the stock market does, pointing to 1987, when gold rose during the crash. Fear and negativity have been extreme, and he believes the fundamentals are still there. His fund holds metals positions.

  “It's been really, really brutal in gold and silver land, and I think there's a good chance we have seen the bottom.”at 1:38:06

US stock market outlook

• Brent Johnson · Santiago Capital

  US equities would fall in a dollar-breakout liquidity event, with real estate depending on how long it lasts.

  In the liquidity event that Brent expects if the dollar breaks out above its band, he expects everything to fall, including US stocks, because forced sellers meet margin calls and debt payments. He says treasuries should hold up, and short-term US fixed income is a place to hide. Whether real estate also falls sharply depends on how long the liquidity event lasts. In 2020 it lasted about sixty days; in 2008 it lasted about nine months. Brent says a 20% to 25% drawdown is possible and investors who cannot absorb one should prepare with hedges, cash and secondary liquidity so they do not become distressed sellers.

  “And I would expect US equities to go down. The question then becomes is does real estate start to fall precipitously as well?”at 22:31

• Mike

  US equities are very overvalued, with the S&P 500 about three times long-term averages.

  Mike's macro read is that US stock valuations are stretched. He says the S&P 500 is probably about three times long-term averages and that he has been making this point for years. He adds that the market is in a regime that almost has to persist, or the wider financial scheme starts to unravel. His fund is invested in equities and sets its risk levels from this macro view, which is why he is cutting exposure.

  “...And there's no doubt that we're very, very overvalued. If we talk about the macro, we talked about that for years. We're probably three times long term averages on the S and P 500, but we're also in a regime or a realm that almost has to stay that way or the whole scheme worldwide kinda starts to fall apart.”at 1:13:23

• Mike

  Near-term bounce likely after the selloff, though a crash is possible; his fund is cutting equity exposure.

  After a sharp one-day drop, Mike says he still expects some kind of bounce in the coming days, and he has not given up on the melt-up thesis. He is not ruling out a crash, and his fund has a plan for it. He is reducing exposure rather than adding, lowering equities to around 37.5% from about 42.5%. He points to support zones such as the Nasdaq's 200-day moving average and the S&P 200-day, and says the next few days will show whether they hold. He is also watching the Nasdaq and the S&P 500, which have broken through support, and the VIX, which has spiked into the high 20s.

  “Are we gonna crash, or are we gonna have some kind of bounce in the coming days? I still think, believe it or not, we're likely to have some kind of bounce in the coming days.”at 1:25:23

US–China AI & chip race

• Brent Johnson · Santiago Capital

  Losing the AI race would make it very hard for the US to keep global hegemony.

  Johnson's research service argues that the underlying driver of geopolitics and many capital-market moves over the last couple of years is great-power competition between the US and China. He says this competition is largely a technology and AI race, with technology one of the highest components. In his view it would be extremely difficult to lose the AI race and still keep global hegemony.

  “we think it would be extremely difficult to lose the AI race and yet remain global hegemony or win that overall power competition.”at 55:52

• Brent Johnson · Santiago Capital

  China is extremely formidable, not an automatic loser, because of its manufacturing and electricity generation.

  Johnson says he pushes back on the idea that China's rise is automatic and that it is not formidable. He says China is extremely formidable because of its manufacturing prowess and its ability to generate compute, which depends heavily on its electricity production. He adds that US challenges do not mean the US will automatically lose, and that the US has recently started putting efforts in place to counter this.

  “I think they're extremely formidable. Their manufacturing prowess is obvious... a big part of their ability to generate this compute is... their electricity production.”at 56:25

• Brent Johnson · Santiago Capital

  The US and China will weaponize compute if needed, with Europe, Africa and Southeast Asia likely losers.

  Johnson argues that the US-China competition is a technology and AI race, and that both countries will use control of compute as a weapon when needed. He says Europe, Africa and Southeast Asia are the likely losers. China's large electricity-generation advantage makes its compute capacity stronger, which in turn raises the chance that traditional energy prices rise and hurts importers.

  “there is no question that The United States and China will weaponize compute if needed. And I think the losers in that are probably Europe, Africa, Southeast Asia.”at 57:27

Europe's economy

• Brent Johnson · Santiago Capital

  Rising yields will cause crisis in Europe, especially France, before the US; Europe may have to cap yields.

  Brent points to a recent spike in European sovereign yields, especially in France, as evidence for his Slow Shave thesis. His earlier work argues that rising US yields cause problems overseas. Countries face two carry trades: one in dollar terms because the dollar is the global funding currency, and one in local currency because all money is loaned into existence. France is worse off because, as an EU member, it cannot print the euro and cannot control the currency it borrows in. The ECB and EU will not act for France specifically. Europe also faces weak growth, sovereign issues and new defense spending needs because of a war on its border. He expects financial repression, with yields capped and continued fiscal spending that erodes the euro's purchasing power. He thinks the US is the cleanest dirty shirt, not because it is clean but because problems elsewhere are bigger, and that these problems will show up overseas before they show up in the US. He calls the outlook a slow shave rather than a collapse, because central banks have kicked the can for years.

  “that rising yields are a problem for everybody, but that it will manifest in crisis overseas before it manifests in crisis here in The United States.”at 8:14

• Brent Johnson · Santiago Capital

  Dollar-priced energy and a strong dollar add to Europe's pain, straining its ability to stay relevant.

  Johnson argues that traditional energy is priced in dollars wherever it is sold, even when invoiced in yuan or euros. If energy prices rise while the dollar stays strong against the euro, that adds another source of pain for Europe. He ties this to Europe's debt-service burden, which he expects will likely force financial repression.

  “energy is priced in dollars... as that energy price goes higher and as the dollar remains strong versus the Euro or other currencies, that is another source of pain for Europe to remain relevant.”at 58:11

US elections & politics

• Brent Johnson · Santiago Capital

  Democratic midterm gains beyond his base case create uncertainty weighing on markets; he would buy a dip if Republicans held Congress.

  Brent expected Democrats to win the House but not the Senate, and he did not expect the Senate flip or the governor gains. He says this is a surprise, though not a shock, and that his base case was that markets would keep moving sideways with the same divided government. He thinks the current pullback reflects uncertainty about what Democrats will do, including investigations, rapid legislation to undo Trump's moves, and Trump's reaction. Adam adds that many governors were elected on anti-data-center platforms, so AI capex may be at risk. Brent says that if Republicans still held both chambers, he would probably be buying the dip. He also argues that midterm swings usually come with big promises that rarely materialize, and that the midterm outcome matters less over the long run than the market's reaction to uncertainty.

  “if we would have had this pullback today with both the house and the senate still republican, I would probably be buying the dip.”at 32:30

• Brent Johnson · Santiago Capital

  Democrats winning the midterms does not change his thesis; politics is a symptom of longer historical trends.

  Johnson argues that the Democrats' midterm win was driven by the economy rather than Trump's policies, and that economic conditions could flip control back. He says his framework is based on historical precedent in which the pendulum of politics swings while a long-term ratchet keeps moving in one direction. That trend is decoupling and de-globalization over 10 to 50 years, so the politicians are only a symptom of it.

  “whether the Republicans lose in 2028, whether the Democrats have some masterful campaign... to me it doesn't really matter in the overall scope of things. I think history is taking us in a certain direction.”at 40:12

US Treasuries & yields

• Brent Johnson · Santiago Capital

  Treasuries would likely hold up in a dollar liquidity event, possibly with yields falling sharply.

  In a dollar-breakout liquidity event, Brent expects forced selling across assets, but he thinks US Treasuries would probably hold up. He notes that a good argument exists that yields would fall dramatically in that environment, though he is not sure that will happen. He also says short-term US fixed income is where he would hide. This is part of his broader scenario in which a dollar breakout sets off a margin-driven selloff.

  “I would expect treasuries to probably hold up. Don't you know could make a very good argument that yields would fall dramatically in that environment.”at 22:06

US global standing & alliances

• Brent Johnson · Santiago Capital

  Democrats are unlikely to return Venezuelan energy control, since US control of its oil is a benefit.

  Johnson argues that a Democratic government is unlikely to hand Venezuela's oil back or tell US companies to leave. Behind the scenes he does not think they are that upset that the US now controls the biggest energy source in the Western Hemisphere. He concedes they may dislike how it was done and that it may have hurt the US visually in the short term.

  “I don't think that they are really that upset that The US now controls that biggest energy source in the Western Hemisphere.”at 42:10

US deficit & government debt

• Brent Johnson · Santiago Capital

  US government spending will not be cut regardless of which party controls Washington.

  Johnson recalls that after Trump's election, he and George Gammon laughed at the idea that Republicans would rein in spending and cut the budget. He says that did not happen then and does not happen now. He expects the same spending dynamics whichever party is in power.

  “I don't think that's going to happen. I didn't think it was going to happen then. I don't think it's going to happen now.”at 43:23

Middle East & Iran

• Brent Johnson · Santiago Capital

  The Iran situation is not over; more US action is likely while Trump remains president.

  Johnson argues that the Iran story is not over, and that the Democrats' midterm win will not end it. He expects US policy toward Iran to stay as it is while Trump is president, which he says is another two years. He says he would be surprised if there is no more action, though he is unsure how or when it will happen.

  “that the policies towards Iran are gonna stay what they have. I don't think it's over yet. I think there will be more action.”at 47:30

Oil & fuels

• Brent Johnson · Santiago Capital

  Traditional energy prices, including oil, natural gas and diesel, are likely to rise.

  Johnson argues that China's electricity generation advantage matters because traditional energy sources such as natural gas, oil and diesel are likely to go up in price. This is part of his view that the pressure from higher energy costs will fall hardest on importers such as Europe.

  “is the likelihood that traditional energy sources are going to go up in price. Whether it's natural gas, whether it's oil, whether it's diesel, all of these other things.”at 57:49

Stablecoins & crypto policy

• Brent Johnson · Santiago Capital

  The US has co-opted stablecoins, and their adoption will grow once regulatory clarity arrives and crisis hits.

  Johnson's research argues that the US government has co-opted stablecoins, a private-market innovation that works as a parallel system to traditional monetary rails, and that this is well underway. Adoption has been slower because markets hate uncertainty, and the pending Clarity Act is holding things up. He expects stablecoin use to grow tremendously, and to be used much more dramatically in a sovereign debt or currency crisis as part of the solution.

  “we think that they figured out a way to kind of co opt that system to their own benefit. And we think that that is well underway.”at 1:01:15

Wealth, inequality & billionaires

• Brent Johnson · Santiago Capital

  The K-shaped economy will keep growing, and inequality will likely worsen.

  Johnson says that if people ask how this will benefit them, he does not know that it will. He expects the K-shaped economy to keep growing and inequality to move in a negative direction. He says he dislikes this outcome but tries to assess the board dispassionately, and that is where he thinks it is headed.

  “I think this k shaped economy probably continues to grow. I expect, that inequality will probably continue to move in a negative direction.”at 1:03:32

Defense

• Brent Johnson · Santiago Capital

  Defense and national security spending will be the biggest wave of capital in the next five to ten years.

  Johnson says Santiago Capital sees a pro-security, defense or national security initiative as likely to be the biggest wave of capital, with the possible exception of AI, over the next five to ten years. He has been in the business 26 years and has never seen capital flow into a theme like this. The firm plays it through an asymmetric trade that allows a small portfolio allocation with large upside.

  “the PRO SEC... defense or national security initiative... we think that is probably going to be the biggest wave of capital... we think it'll probably the biggest wave of capital we've ever seen.”at 1:08:44

AI chips & semiconductors

• Mike

  Semiconductor chart has broken its trading range, possibly forming a head-and-shoulders top.

  Mike says semis rallied, traded in a large range, and have now broken below the bottom of that range. He asks whether this is a big head-and-shoulders top, admits no one knows, and calls the chart pretty terrible. He thinks filling the gap in the next couple of days would be a positive sign. The view rests on chart pattern analysis rather than fundamentals.

  “...That looks pretty bad. Right? Semis took off, had this big trading range, and now we've broken through the bottom. Is this a big head and shoulder top? No one knows. It looks pretty terrible.”at 1:26:19