Thread by @NathanDallon

I had a great time listening to @GeorgeGammon and @SantiagoAuFund most recent conversation regarding the Dollar, Dollar Milkshake, and inflation/deflation.



A few quick thoughts and comments on my part.

1/18

The Dollar Milkshake theory is right. The central idea is the dollar (world reserve currency) will remain strong relative to other currencies for a long time UNTIL it will spike and go REALLY high. This will draw money into US equities and Gold.

2/18

Recently (June 2020 to the present) the dollar has weakened. This has lead some (@HedgeyeTV being the principal voices on twitter lately) to make fun of Brent as being wrong or old or dumb or something.

3/18

That, of course, is mostly twitter manufactured drama which is fun and gets people talking.

Couple of quick thoughts. Brent's take is almost exactly what happened during the deflation bust of the early 1930s.

4/18

Irving Fisher, who admittedly missed the great depression, went back to the drawing board and tried to figure out HOW he missed it.

What did he learn? HIGH DEBT (as Brent says, demand for US dollars) LEADS to what Fisher called the dollar disease.

fraser.stlouisfed.org/files/docs/mel…

5/18

Simply put, the dollar disease occurs in highly indebted economies.

"Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness...

6/18

...with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast...

7/18

as it increases the value of each dollar owed."

@SantiagoAuFund has noticed the same dynamic AND THEN realized that the debt levels denominated in US dollars OUTSIDE the US could cause a weird effect that sucks up capital from international markets into the US.

8/18

We will see if that happens. I think it will. I think there are other reasons unrelated to finance that will drive more international capital into the US IN ADDITION to the dollar disease (see @PeterZeihan and his last 3 books).

9/18

Brent does a great job in this conversation explaining the general forces around the dollar and capital flows into the US are not happening RIGHT NOW. The day traders who are shorting the dollar can get away with it for a while...

10/18

...but there is little reason to believe the dollar is going to crash down to crazy low DXY levels (sub 70 or so). If the universe started on June 1 2020 and that were the only data you looked at AND you only plan trades in 10 day increments, then Brent isn't for you.

11/18

Onto inflation! I still think the inflation reflation calls by people are wrong.

Russel Napier, who is awesome BTW, makes a good case that both George and Brent take seriously, that the PPP loans and other programs (inside and outside the US)...

12/18

...have changed the fundamentals of the global financial system WHICH COULD allow for a pulse of inflation that breaks historic debt deflation trends.

I don't think so since, in the US anyway, these new programs were NOT credit creation of money.

13/18

The new programs, in the US case, were financed by Treasury auctions. Those PPP loans were REALLY grants with a possible claw back, not loans.

home.treasury.gov/policy-issues/…

14/18

The price hikes we have seen since June 2020 is temporary and a product of government debt and payments, NOT because of new money in M1, M2, bank credit creation, or the EuroDollar credit system.

cc @EmilKalinowski @JeffSnider_AIP Lacy Hunt and @scientificecon

15/18

Lacy Hunt laid out a DATA DRIVEN case for deflation in his recent quarterly report. Which I reviewed here:

https://twitter.com/NathanDallon/status/1382341707941969923?s=20

16/18

Finally, here is my write up on what we are seeing in the data:

n8dallon.medium.com/inflation-134b…

17/18

Just great work by @GeorgeGammon and @SantiagoAuFund in the interview. Thought provoking. Entertaining. I look forward to more from them!

18/Fin