By coinnews 
00:00 Doug Peta
to I and my colleagues at BCA, especially from talking to global investors because we have clients the world over, that there’s a real concern about investing in the United States. And there’s a revisiting of the safe haven status for US Treasuries. There is a revisiting of the US dollar also being a safe haven currency. And I can tell you I was in Toronto last week for two days and every single meeting I was asked about dedollarization. What do I think, what does BCA think about the notion that investors should diversify away from the US dollar?
00:48 Speaker A
What did you tell them, Doug?
00:50 Doug Peta
I told him it’s too soon to tell if this really has legs beyond the near term. But, you know, just this week, now as we debate the tax bill and it appears that there are going to be more tax cuts but less spending cuts than expected. Well, all else equal, that means the deficit grows. And if the deficit grows, then Treasury yields ought to rise. So the debate in Congress right now is really adding fuel to the fire of the sell-off in bonds.
01:24 Speaker A
And as you say, there is a lot of chatter around dedollarization and around assets coming out of the US or just, if not coming out, not coming in as much. There is less concrete evidence that it is happening and will continue to happen. So, how should we view that auction today? Is it a sign that or is it just a kind of one auction and we would have to look at a whole series of auctions?
02:04 Doug Peta
I lean more towards the latter, that it is one auction. We have to look at other ones, because the 20-year, right? When we talk about benchmark 10-year benchmark Treasury yields, we talk about the 10-year, we talk about the 30-year. The 20-year is sort of in this no man’s land. There isn’t a ton of institutional demand for 20-year paper. So I think this is one small data point, but it could easily be overwhelmed if we have a solid 10 or 30-year auction in the coming weeks. And if we do, this will be completely forgotten about.
03:02 Speaker A
Um, I want to ask about dedollarization for a moment, right? Or the view that we could see a weakening dollar and not be as much the reserve currency globally. And I know that when we look at dollar, um, there are advantages for some companies, for example, if there is a weaker dollar. Um, there are disadvantages. So how should investors who are not as well-versed perhaps in the world of currencies think about on where the balance of risks lie?
03:47 Doug Peta
Absolutely, there are puts and takes. So if you sell, if you’re a multinational based here and you sell goods in Europe or Asia, or anywhere else in the world, when you translate those revenues back into the dollar, if the dollar is weaker relative to the currencies where you sold the stuff, you make more money, right? It drops more to the bottom line. But like you said, there are a lot of puts and takes in there. If the dollar falls and you’ve, you know, a lot of inputs, a lot of costs in the rest of the world, then that hurts you. Look, the way I, I think of the dedollarization, I had a colleague who was in Europe two weeks ago. He said in every single meeting he was asked two questions. One, is there a possibility that the United States is going to impose a tax on inbound capital, so that you would be charged, say, 1% or half of a percent or a quarter of a percent for any investment in Treasuries? Then two, he was asked, what’s the possibility that the government is going to, the US Treasury is going to force a conversion of, say, a bond I own that now is a 10-year with a 4% coupon? What’s the possibility that the US says you’re going to have to convert this into a 20 or 30-year bond with a coupon less than that 4% 10-year coupon?
05:51 Speaker A
And those seem like insane questions in a normal world.
05:56 Doug Peta
They absolutely do. Utterly inconceivable before January 20th. But these were written about in White House advisor, Stephen Moore’s, paper was called like a user’s guide to fix the trade deficit when he was running a hedge fund. And people read that. Those were two provisions that were in that paper, absolutely inconceivable ideas. They would be technical default if you, or if you were to say, all right, we’re going to extend the maturity of this bond and we’re going to pay you less than we said at the beginning. That’s crazy talk. But just the fact that people are vocalizing these things, you know, professional institutional investors around the world are speaking this stuff. I’m of a mind that once it’s said, it can’t be unsaid. You can’t unring the bell. So if we really have opened Pandora’s box with this sort of talk, then what I think it means for everyone, be they equity investors, bond investors, retail investors, professionals, is that you should assign a greater amount of risk to investing in the United States than you did before we had this sort of talk.
07:29 Speaker A
And in terms of how you want to be positioned, and Doug, that means what? I want to get, I mean, I want to get more defensive.
07:40 Doug Peta
Absolutely, that you want to position more defensively. So you own T-bills instead of going further out the curve. You own, within equities, you own utilities instead of owning more go-go, more cyclically exposed spaces. You reduce your overall exposure to equities. And perhaps there’s an opening here to diversify away from the United States, be it equities or be it bonds.
08:21 Speaker A
Um, one other thing I want to ask you about is, if you’re, if you take the other side of this, you say everything’s going to be fine. We’re going to grow. We’ve got the tax cut coming. You know, that certainly is what the administration would argue. And if you look at the hard data right now, it’s held up pretty well. And I know that’s something you’re watching closely. The soft data has deteriorated. The hard data has not. And again, the bulls would say, Americans keep spending and they have kept spending. What would you say to that?
09:04 Doug Peta
There’s no doubt about it that the hard data have been solid. And it’s the survey data, what we call soft data, that have really crumbled, like they’re dire, whether it’s businesses or households. And you know, all else equal, you’d rather watch what people do than listen to what they say. However, the what, the hard data is really in the rearview mirror. The soft data is what households and businesses think they see through the windshield. Now, it’s not etched in stone that what they think they see coming up is what is actually going to be what’s there, right? When we travel those remaining miles. But I do think it’s a warning because it’s more forward-looking. And I would additionally say, consumers don’t have the buffers around them that they have had ever since the spring of 2020 when we got monumentally large fiscal transfers from Congress to Main Street, and when we got a return to zero interest rate policy and even new Federal Reserve programs to ease monetary conditions. Those are now wearing off. I like to say the long half-life of the pandemic stimulus is finally wearing off. So, when that when that buffer provided by the stimulus was around households, they were able to keep spending even though we had high inflation because they were sitting on a mountain of cash. But by our best analysis right now, that mountain of cash is gone. And additionally, you know, this is only at the margin, and not everybody has student loans, but now student loans that you didn’t have to pay for the last five years, now there’s a new pot of debt that households have to service. And mortgage rates are only going to increase every time there is a new transaction because anyone who owned a house who sells it now who’s going to need a mortgage in the next place is going from trading in roughly a 3% mortgage to something between 6 and a half and 7%. So there are new pressures on households that weren’t there and haven’t been there for the last five years.
11:43 Speaker A
Right. Really interesting stuff, Doug. Thanks so much for coming in and sharing it.
11:48 Doug Peta
Thank you.