An Epic Battle for the Rules Based Order

Wildfires burning down entire neighborhoods, presidential inaugurations rallying stock markets, helicopters running into airplanes, mass deportations spiking volatility, technological breakthroughs crashing semiconductor stocks, and escalating trade wars. And you know what? That's just January. What a start to the year!

I know I haven't been here for a while, uh, but I'm excited to be back and to talking to everybody today. We're going to talk about all the craziness that's going on in the world, the madness as it were, and we're going to talk about the rules-based order and why that is contributing to what is going on in these crazy markets and crazy, uh, political and social atmospheres that we find ourselves in.

Uh, what I thought I would do today is show some slides that we just kind of walk through, and then we go through and talk about the markets and do a catch-up because we haven't had a chance to do this in a while. But as I mentioned, a lot of what's going on in the world today has to do with the world, with the rules-based order. Now, what in the heck is the rules-based order? That is a term that you will occasionally hear when you're reading an article or a book about geopolitics or international relations, or sometimes even with global markets. But it's essentially the playbook for how the world was set up, up to be governed post-World War II.

And there are many positive aspects of this, and you know, we we had we were able to rebuild Europe, and we had free trade lanes, and you know, trade greatly expanded, and supply chains became integrated, and we had a more globalized and somewhat peaceful world than we did during World War II. However, this system also sets up a certain country to be the top dog, were as it were, and it favors, um, you know, their policies. And some people see the rules-based order as a bad thing, for lack of a better way of saying it. And over time, people who are not at the top of the pyramid like to climb to the top of the pyramid, and so that's kind of what we have going on over the last, I don't know, I would say several years now, but it's kind of coming to a head, and all of the stuff that is happening.

And part of the reason that Trump got elected—and Trump is obviously contributing to the craziness—but part of the reason that he got elected was he was one of the few people saying, "Listen, the United States is still the king of the jungle, and while all of these jackals and upstarts and other predators want to come around and nip at the heels of the king of the jungle, we are still the king, and we're going to start acting like it." Now, some people like that, and some people don't, but as analysts, it's not our job to figure out whether this is a good thing or a bad thing. It's not our job to figure out whether this is a moral, uh, prerogative or if this is a negative thing that the US is going to unleash on the world. It's fine to have those opinions, but as analysts, especially analysts for investment portfolios, our job is to figure out what's going to happen, whether or not it should happen in the first place or not. And that's kind of where I think we are at.

And the best analogy for what I think is going to happen that I can give comes from a movie. Now, I know a lot of you know that I like movies, and I love movie quotes. Well, one of the best movie scenes that I have ever seen features Christopher Walken in a, uh, in a movie called *Pool Hall Junkies*. Now, I'm not going to spoil this for you, but will leave the link to it in, um, the description of the video here. I strongly encourage everybody to watch this two-minute video, because to me, it just really sums up where we're at and why we're here and probably what's going to happen going forward.

Now, again, this isn't—I'm I'm not putting any moral judgments on it; that's not my job. My job is to look at the world as it is and figure out what's going to happen, and I think Christopher Walken very clearly lays out what's going to happen. And so I'm, again, I'm not going to spoil it. I'll leave it to you guys. If you've seen it, you already know what I'm talking about, and if you haven't seen it, I think you're in for a treat. Um, but essentially, Trump views the United States as the king of the jungle, and he believes he has a mandate from Heaven to put the king squarely on the throne and keep him there. And so what we've seen, even when he was running before he was inaugurated and certainly since he's been inaugurated, is him not only talking about doing it but doing it, and doing it with speed.

We have already had, uh, escalation of trade wars. We have already had plane loads of, uh, deportees from the United States to foreign countries being returned and then being sent back again. We have already had volatility in the stock market because every time Trump says something about tariffs, the market sells off, and then a few hours or a few days later, somebody comes out and says, "Well, it's really not going to be that bad; no need to get overly excited," and then the market rallies, and then Trump comes back on and says, "I don't know why you guys think I'm kidding; I'm telling you what I'm going to do," and then the market sells off again. But that's kind of what we've seen so far this month. At the beginning of the year, before Trump was, uh, inaugurated, you know, we had about 10 days of downside in the stock markets, but then we had a big rally, um, and things looked great, and then we had some news out of China that they had a technological breakthrough with some AI, uh, programs of theirs, and that sent semiconductor stocks reeling. And because semiconductor stocks and the MAGs make up such a big part of the overall market, that started pulling the overall market down, but then later in the week we started to see a rally again, and at the by Friday, everything was back or very close to its all-time high until about an hour and a half to when Trump came out and said the tariffs that I talked about putting on Canada and Mexico are still in play, the tariffs that I talked about putting in China are still in play. And so now here we are over the weekend, and we're going to come in on Monday morning and see how that, uh, how that affects things.

But I I I am of the belief that this year is going to be, uh, characterized by volatility. If I could think of one word to sum up this year, of what I think it's going to be, volatile is the best word I can come up with. Now, that doesn't necessarily mean it's all to the downside. I do think there's going to be downside, but I think it's going to be volatile in both directions. In other words, I think January is probably a perfect microcosm for the whole year. We're gonna see terrible drawdowns; we're going to see furious rallies; we're going to see Trump being Trump; we're gonna see Trump haters hating Trump; and we're going to see a challenge and a of this rules-based order.

Now, one thing I want to say is we've talked about this a lot over, you know, over a couple different episodes in December, and there's this popular idea out there that tariffs are just an absolutely horrible thing; it's going to lead to all kinds of problems, and the US is going to really get hurt by this, and and I'm not going to go over everything we've talked about before. I would just say that I think people who automatically say that they're bad and they're automatically not going to work, I don't think they've taken the big picture into account. I don't think they've taken into account where other countries are with respect to their own problems, and I don't think they have taken into account Trump's, um, willingness to really push the issue this time. I think in his first term, he was much more careful than people expected him to be, and so some of them are now expecting him to be that same way again. This time, I I I think that is to dramatically misunderstand what's going to happen. And when you think about it, he's already talked about annexing Greenland, and he's talked about taking back the Panama Canal, and he's talked about putting tariffs on our two biggest trading partners and two of our biggest allies. Now, this is not something that he would want to walk back on. All of these things, he doesn't like to be seen as a loser, whether or not you see him as that—again, it's irrelevant—he doesn't want to be seen as that. And so I think the idea that all of this is just bluster and it's all a bluff, I I I think is completely misreading the situation, and I would encourage people to kind of step back and think about what it is he is trying to achieve.

Now, the other thing I want to say here is a lot of times when I talk about this stuff, people will say, "Well, Brench is just an American exceptionalist; thinks that the US can't possibly get hurt; that they are bound to win because they've always been on top, and so therefore they'll always stay on top." And that listen, I feel like I have to say this all the time because I always get accused of it, so perhaps perhaps I I beat this issue a little bit too much, but I think it's important, so I'm going to talk about it again. I want to be absolutely clear: whenever I talk about this stuff, I do not think that the US is going to come out of this scot-free. I do not think that the US is going to come out of this without getting hit. In fact, one of the analogies that I've used, used many times, and some of you may have heard me talk about this before, is the Hagler versus Hearns fight.

Now, I'm a child of the 80s. I think 80s music is the best; I think 80s movies are the best; and I think 80s sports are the best. So one of the highlights of the 80s sports world was the fight between Hagler and Hearns. Now, Hagler is on the right, and Tommy Hearns is on the left. Tommy Hearns on the left; his nickname was the Hitman, and he was, you know, known for throwing incredibly fast and incredibly powerful punches. And the reason I bring this up is in this was a fantastic fight. If you haven't seen this fight, I encourage you to go to YouTube and look it up and find it. But the reason I bring it up is in the first round, Tommy Hearns hurt hit Marvin Hagler so hard that a huge cut opened up above Marvin Hagler's eye, and it was bleeding so much they almost stopped the fight in the first round. But somehow his trainers got it stopped, and then they went another round, and then in the third round, Marvin Hagler knocked Hearns out, and Marvin Hagler won. And I think that is a good analogy for how I think, you know, the next year, few years could play out, as challengers, you know, come up and challenge the United States, whether it's via tariffs, whether it's via other trade deals, whether it's other geopolitical treaties, whether it's military action. I fully expect, you know, challengers to emerge, and I don't think that the US will get out of this without getting hit. I think they will get hit. I think that the US will maybe even bleed. I just happen to think the US still, despite its aging profile and despite perhaps it isn't what it used to be, it's still has the ability to throw a knockout punch better than anybody else in the world, and since this is a relative game, then I think that they still favors the US as we move forward.

But as of now, let's catch up on where markets are at. So this is a chart of the dollar; this is a 30-year chart of the dollar. Now, I think, you know, anybody who who would look at this chart, if if they didn't know it was the dollar, they would look at this chart and they'd say, "Well, that's a pretty good-looking chart," you know, "it obviously had a big drawdown 25 years ago, but since then it's been steadily moving up and to the right." But because it's the dollar, a lot of people think, "Well, it just can't continue higher; the US has way too many problems, and this is just doomed to fail." And we've talked many times: it is doomed to fail; all currencies eventually fail. But it's you have to consider who its competitors are, and you have to understand where you are in the cycle. And so I think this chart, if you look at this chart, it's actually a very big cup and handle formation for me, and at about the 115 level, if the DXY were to break above 115, I think you're going to start to see a lot of chaos in in the world, because as the US dollar gets stronger, gets stronger, it causes all kinds of problems around the world, for many of the reasons we've discussed many times before. So I think we have to keep that in mind as we as we move forward this year.

Now, this is a chart of the—I'm I'm just going to go over kind of the US equity markets here—but this is the this is the ETF; this is the DIA. The reason I bring this up is, you know, at the at one point, uh, I think it was either late November or early December, we talked about how markets had gotten back to where they were in July high, when everything was at its high. We had the RSI at extreme highs; we had the stochastics at extreme highs; and that we were looking for a pullback. Well, we got the pullback; we got the pullback into the first, I don't know, first seven to 10 days of January, and then we've seen a furious rally. Now, the RSI has only gotten back into the 60s, which is not high at all, but the stochastics are back at 98, so that's getting pretty high up there, but we're not at extreme territories as far as sentiment and and and these measurements as we were back in December, and certainly not as high as we were back in July.

Now, if we look at the same thing on the S&P 500, or represented here by the SPY ETF, again, we saw everything was getting into extreme territory in late December. We rolled over into the first week of January. We can see that when that happened, um, the RSI dropped way down to almost 25, um, the stochastics dropped all the way down to like 15, but since then, again, we've had a furious rally. Now, relative strength is, you know, it's kind of in no man's land; it's just above 50; not a big deal, but the stochastics are again, that getting into the 80s. Now, 80s, not super extreme, but it's getting up there again, so but but but we're not as extreme as we were, um, kind of late, uh, late December. As far as the NASDAQ or the QQQs, we had the same thing; we had a hard sell-off into the first week of of January, and then we had a rally, uh, then we had a hard sell-off last week as the semiconductors rolled over, but then towards the end of the week, um, you know, rallied again, and then again in the last couple hours when Trump came out with the tariff news, we rolled over; we started to roll over again. So we'll have to wait and see where we open on Monday, but let's take a look at the semiconductors because this is important. We actually talked about this in, I think it was late December. I said I was I I expected the semiconductors to have a sell-off. Now, what actually happened was it went sideways for a couple weeks, and then I don't know if you can see this or not, but at the the last week it was almost back up at its all-time high, and then over the weekend, uh, or the Friday night, uh, week ago was when the news came out about the deep seek out of China, um, having a new revolutionary breakthrough in the AI technology that would not require as big of capex as many had previously expected and perhaps wouldn't need as many Nvidia chips as previously expected. So Nvidia, but all the chip stocks, but led by an Nvidia, had a huge drawdown, uh, last week, and on Monday they were down, I think Nvidia was down 15 to 20% on Monday alone.

Now, what's interesting is that rallied kind of a little bit into the end of the week, and you can see it's just kind of sitting right at these many different levels of support. So I think the next couple weeks are very important for semiconductors. I do think still between now and the end of March, we're going to going to see more downside in the equity markets, not just semiconductors, but about all equity markets, um, but you know, whether that happens right away, I I don't know, but we're sitting at a pretty interesting place on the semic. And again, the reason that's important is because they make up such an important part of the overall market, especially when you consider the effects of passive management that we have talked about before.

Moving on, if we this is just looking at the sentiment again. Now, sentiment, it's really it's really kind of in no man's land, um, the only thing that's really kind of getting up there—well, coffee is high, but I mean that's not something we talk about a lot here—but you know, gold is in the 70s. Now, gold and silver have had a really good start to the year, um, finished at an all-time high on Friday, but it's in the 70s. You know, again, for something to get extreme, it needs to be in at least the 80s and the potentially the 90s. Now, we'll go over gold here again in a minute, uh, we'll go over some charts and talk about it more, but that's really the only thing that's kind of up super high; everything else is kind of mid-range and you know, not not extreme either to the downside or the upside. So this is not giving us a lot of signal value right now.

Uh, if we look at the put-call ratio, again, at the end of the year, we showed how the put-call ratio was as low as it has been in two years. Now, it it rallied a lot, um, you know, into into the middle of last week, and then it came down again, and now it's it's still pretty low; it's just not as extreme; it's not the extreme lows that we saw in December, and it's and th this would this would indicate that people are positioned bullishly. If this was really high, then we would say, "Hey, we're we're we're we're in we're in danger of a short squeeze," uh, but I I don't see that here on this chart. But this was kind of interesting, um, you know, we saw a substantial surge in the industrial sector, um, over the last couple weeks. You know, again, we had the hard sell-off into like January 10th, 11th, and then we had a two-e rally that was really pretty significant, um, and it's one of the most biggest surges in two years for industrial the industrial sector. So you know, it was real, and so much so that it actually started in some some systems that people use; it was starting to to signal buy signals. And here here we just, you know, it was one of the big a record for for breadth. In other words, um, I think there were six days in a row where more than 68% of stocks went up, and so so that's, you know, so that that shows that the market was, um, surging a little bit, and it was starting to, uh, the breadth was starting to expand, which is what you want to see if you want markets to go higher, um, and like I said, even even in some indicators were saying it was a buy signal, and and I don't know exactly when this was when when it was signaled, but there were certainly, you know, 10 to 14 days of good market action, uh, higher, uh, until we had the the AI news a week ago.

Now, let's here we are talking about gold. Now, I talked about gold earlier; this is a chart that I know many of you like; this shows gold versus the commercial short position. And I've always said that all on its own, it doesn't mean a lot, uh, but when you use it in conjunction with other signals, it starts to tell a story. And for as long as I've been following this market, which is I don't know, close to 20 years now, um, whenever the commercial shorts get as large as they are now, it typically ends up being a pullback for gold. Now, we can see that that happened a little bit at the end of the year, you know, as as as as price as as price came down, then the commercial shorts started to get a little smaller, but then as gold has rallied into January, um, you know, the commercial shorts started building up again. And remember, the commercial short here, this is a week delayed, um, this is only up through Tuesday of last week, so it's actually four days delayed, so the short position is actually probably a little bit bigger than this, which means the commercial short position is probably the biggest it has been since 200, early 2020, um, which was shortly before before COVID, um, so you know, my guess is that over the next week or so, gold probably runs up; I don't know, maybe it even tests $3,000, and I would expect expect this commercial short to get a little bigger if that happens. Then sentiment is going to probably be in the 80s or 90s, and I think, you know, that may be an opportunity if you if you do tactical trades, perhaps an opportunity to do, um, some puts or some kind of a tactical short. Again, I wouldn't do that with your strategic gold position, but if it's something that you look to also have do tactical trades on, that would make sense. That again, that's what you look for. We've talked many times: the easiest to do a trade when everything lines up. So if you have positioning at extremes, you have sentiment at extremes, you have price at extremes, you have relative strength at extremes, then that is something that that that that that typically bodes well for at least a short-term tactical trade. But gold looks fantastic as far as the long-term. You know, we've said for a long time that we think gold will end up going to $5,000, um, with what's happening in the world now. I think that is still very much the case.

Silver, um, kind of a similar picture as as price pulled back in December, you saw the commercial short position decrease, but now as, uh, price has rallied a little bit to start the year, the commercial short position started to get big again. Again, not an extreme territory; it's not as extreme as as the gold position is, but again, this is delayed too, so it's very possible that over the last couple days, the commercial short position increased, uh, dramatically. Uh, part of the by the way, part of the reason that the gold has been rallying is it has to do with Trump's tariffs. He hasn't specified exactly the details of what will be tariffed and what won't be tariffed, and he hasn't talked about exceptions. And one of the worries is that people who are who are who have exposure to gold in the United States, um, and may have to deliver, have been have been, um, you know, asking for the gold from London for delivery, and so gold has been coming into the United States from London as as price has risen. So it'll be interesting to see how that plays out over the next couple weeks.

Now, this is—I I think I mentioned this in late to late last year—this is a chart of the overall markets at the beginning of 2022 through the end of 2024. So it's about a it doesn't have the last last month's price action, but it's pretty similar. But the reason I bring this up is I I think that 2025 can be very similar to 2022 from a price action perspective. If remember at the beginning of 2022, it was kind of a regime change as far as interest rates; the Fed had embarked on a, uh, an interest rate hiking, um, cycle. Nobody was sure how far they would go; how fast they would go; they didn't know what the terminal rate would be. And so it caused a lot of uncertainty, not only uncertainty but just unfamiliarity; people hadn't been used to an interest rate rising cycle for for over a decade. And so for the first six to nine months of the year, we saw significant downside, um, in the equity markets and risk assets that also coincided with Russia invading Ukraine, um, and so we kind of have a similar setup going this year. We don't have an interest rate hiking cycle necessarily on deck, but we have a tariff cycle on deck, and we haven't this this is a wholesale change in the way the United States has done business, you know, for the last 30, 40 years. The US has not, at least not dramatically, used tariffs. You know, Trump wants to dramatically change the way the US does business, and that's going to take a lot of getting used to; it's going to cause a lot of uncertainty. And in some ways, rate hikes are similar to tariffs; rate hikes cause, uh, fewer profits, uh, for the whole world because, um, it makes the dollar stronger, and as the dollar gets stronger, it puts pressure on them; it means they end up with less dollars in their pockets. Tariffs kind of do the same thing; you know, if tariffs tariffs are kind of a tax on imported goods, and so the rest of the world will be getting less dollars or potentially fewer dollars than they typically do, but yet they still need dollars to operate; they still need dollars to service their debts; they still need dollars to buy energy. So in many ways, I think the tariff regime could be similar to the interest rate hiking regime, and I think it might take six to nine months for the world to kind of figure out what the heck's going on; what Trump's going to do; and get clarity on how fast he's going to do it. But I think after that happens, we have have the potential to see some good, uh, gains as a result of it. Um, I just think we have to get through it first. And so I I don't rule out the possibility that the first six to nine months are very volatile, but then after that, maybe we have another year or two of positive action in, um, in in equity prices. And I don't know, maybe that's due to the US has to go back to QE or something; maybe the whole world does; I don't know what will be; I just think that that that that's a possibility that that should not be ruled out.

Um, but this is the VIX, and the reason I bring this up is I said earlier, I think volatility is the is is is the name, uh, for the year or is the theme for the year, and this just shows that since COVID, you know, really, um, the VIX has really stayed, you know, around 20 or lower for most of that time. Now, we had a couple of spikes up in early 20 or late 22 or I'm sorry, around 22 when the rate hikes were going on, uh, we had a big one last fall or last August, uh, you know, when, um, we had some turbulence in in in Japan and in the MAG 7, um, but by and large, for the last couple years, you know, the VIX has remained between 15 and 20. And so I I think we're going to have it—I don't know if we're going to have a year like 2020; that would be pretty extreme—but it wouldn't surprise me at all if we have a couple spikes the way we did, uh, last August. But one thing that, uh, I have done a lot over the last couple years, and you guys have heard me talk about my friend Todd, and my friend Todd and I talk about this all the time, is despite being macro guys, that we're always looking for different ways and places to make money, we keep coming back to the US equity market is probably the best place to do it if money is going to be made, but we don't think you can do it without protection; you should always have some kind of protection.

On the downside, that's why you always hear me talking about either I have some hedges or cash on the sidelines, or T-bills lined up, or whatever it is. But one of the things that we've done is we buy hedges when the VIX is around 15 or 16, and we sell those hedges when the VIX is above 20. You can see over the last year or so, you know, the VIX jumps up into the 20, 23, 20 to 23 range, and then inevitably it comes back down to 15. And then it jumps up into the 20 to 25 range, and it comes back down to 15, and then it spikes, then it comes back down. So we've kind of been doing that off and on for the last couple of years, and it seems to be working. So we'll continue to do that with a portion of the portfolio until it stops working.

So again, I'm not suggesting that everybody should be doing that, but I think if you are looking for some tactical trades to do, um, that would be something to look at. Now, to be clear, I'm not necessarily saying buying call options on the VIX. Uh, you can do that if you're familiar with how those securities work, but we typically will do it on, you know, the equity markets, but it kind of trades the same anyway. It's just an idea, something to think about.

Um, the last thing I wanted to say is we, we, you know, we've over the last year, we've tried to figure out different ways to get the whole community involved and different offerings uh for different parts of the market for people that are looking for different things. And so, you know, Santiago Capital is my wealth management business. You know, we've been doing this show now for a little over two years, two and a half years. Um, we started the Macro Alchemist uh last July or last June, and that is kind of a high-end uh research service. One of the things, and and then we, we, we started, we put that behind a paywall at the beginning of the year, and we've had a number of people sign up for it. Thank you for everybody who signed up as as as Founders.

Um, what you get for being a Macro Alchemist member is you get the two times a year or two times a month we put out fairly, you know, long-form research reports on a theme or an emergent trend that we think is important, or some kind of uh, you know, something that's going on in the markets that we think is is worthy of digging in to on a deeper basis. We also put out two Think, Laugh, Cry uh reports a month. We're going to start having two times a month; we're going to have live Q&As online where subscribers uh we can ask questions, and we're going to go over the reports that we have recently uh put out, or whatever questions the community wants to discuss. We're also going to have special deep-dive reports from time to time, as well as guest reports, and at some point this year we'll do the the the milkshake uh master class. And anybody who has signed up for the Macro Alchemist, the premium subscription, has access to that as well.

Another thing we just started uh is we launched a Substack account. Um, now so far we've only posted things for the premium version, which is also the Macro Alchemist version, but tomorrow will be our first release um on on the basic uh platform of Substack. And what we're going to write and in in in this probably three to four times a month, you know, once a week type thing, I'm going to write an article or a paper on something that I think is either timely or is important to understand. Now, this, these are not going to be as deep dive, they're not going to be as long as the typical Macro Alchemist reports, uh, but for those of you who are interested in this type of stuff, we think that you might uh be interested uh in reading these, but you don't want to subscribe to the full Macro Alchemist, then this is an option for you. Anybody who's already subscribed to the Macro Alchemist gets complimentary access uh to the Substack. But tomorrow we're going to release the report on the rules-based order. This is what I referred to at the beginning of this episode, and I hope you guys check it out. I would encourage you to check it out, is that I think that's going to be a fun way to continue um kind of building the whole milkshakes, markets, madness, Santiago Capital, Macro Alchemist community. And you know, at some point we may have to figure a way to streamline the title of all those, uh, but as of right now, I just want to say thanks to everybody um who's tuned in, thanks to everybody who is a subscriber, thank you to everybody um who interacts uh with me on different social media. I think 2025 is going to be a pretty exciting year, uh, I think the first month was already indicative of that, and look forward to many updates as we go forward. Okay, guys, we'll talk to you again next week. Bye