So I think the Trump thing is complicated for the whole of this dollar trade. I think all we've seen now is just a correction as we go. I know a lot of people keep saying to me, “ the dollar has turned, the dollar has turned” maybe they're right but the balance of probabilities and how I look at things is the dollar still has got much further to go and therefore dip like this is probably a buying opportunity.
Erik: Now let's suppose that you and I are both proven right and the dollar does, have not just a little bit, but a lot further to go to the upside, let's suppose we get say north of one ten, at what point do you think this leads to enough problems that central bankers around the world are forced to contemplate - let's call it Plaza Accord 2.0 where there is some kind of coordinated intervention effort to arrest the dollar from appreciating any more. Does that come into play anytime soon?
Raoul: Well again it's difficult because we're trying to get our heads around what this kind of protectionist trade war is going to look like, what it means and what tensions it brings because at one point-- if I look at the parallel example of what happened in the 1930s where we had a similar situation where the U.S. dollar kept going up in relative terms because it was pinned to gold eventually everybody else had to do something about it and they eventually devalued the dollar because all the currencies go smashed, world trade got smashed etc.
So I think there’s further to go before people get together and try to negotiate something because in this mercantilist world we find that people actually want to have weaker currencies over time.
Erik: When we spoke in September, treasury yields – U.S. ten year treasury – was yielding one spot sixty, quite a big difference from where it is today. You predicted it at that time, you had actually covered your long bond positions brilliantly I might add back in August and you predicted a rise to at least 2% as being likely but at the time you thought that would be a buying opportunity by the dip.
Of course a lot has changed since then. Do you still see it that way, do you still think we're headed toward sub 1% yields at some point with the recession or it may be has the tide changed to the point where we really are seeing the beginning of a secular bear market in bonds as so many people have suggested?
Raoul: Yeah I don't believe that, I do think the U.S. economy is very much following how the Japanese economy went twenty years prior or ten years prior and I don't think these reflation remeasures are anything more than the market hoping that something's going to change.
When you got the demographic issues the United States has got, when you got the massive debt owe the United States has got, it's very, very difficult indeed to generate inflation and so I think the bond market is pricing in some of the reflation repolicies of the new administration, but the chances are that many of these things such as protectionism, such as a stronger dollar actually lead weaker growth and lower inflation.
So I don't think again the market can have what it wants and listen to the narrative that Trump is giving us. So I think-- could they get back up further? Quite possibly, could they get to 2.60, 3.00%? Possible, I don't think it goes above three, I don’t really think it goes a great deal higher than here or where it was at the recent peak.