Transcription
There is a new investment paradigm sweeping the world, and it is going to affect the way governments operate. It's going to affect the way markets function, and it's going to affect the way investors have to allocate their portfolios. And it's something we haven't seen in many decades. And I actually think this new paradigm is going to last many decades into the future. And that's what we're going to talk about today on Milkshakes, Markets, and Madness.
This is a show where we talk about the financial markets, the madness surrounding those financial markets, and we do it all through the lens of the dollar milkshake theory, which sometimes seems to make sense and sometimes it doesn't. But we'll touch on that uh this week as well. But first, I'm going to give a big shout out to my son whose volleyball team won their tournament this this weekend. That's what the St. John's is for anybody's uh wondering what the heck's going on with the hat.
But to talk about this new paradigm, what I thought we would do this week is I'm going to give you a little sneak preview of a report we are sending out to our premium subscribers uh later this week. Now, for those of you who are not already aware, we have a couple different ways that you can subscribe to our research. If you go to research.santiago.com, santiago capitalap.com. There's a couple different levels. There's our main level um which gives you access to a number of different reports, and then there's the premium version which gives you access to even more reports, more in-depth reports. A couple uh times a month we do a live Q&A, and you get access to basically everything we do. Um, but what I thought I would do is I'm still working on this paper. It's not done. Uh, but I'm going to give you a little sneak preview of it because I do I do think that this is a good way to kind of uh just kind of walk through what I wanted to talk about today.
But the other thing is we've sort of talked about this before, and it's very much related to many of the different topics um that that come up from time to time, but I don't know that people actually think of it in this manner. Uh, but anyway, uh hold on, let me just pull it up here and we'll go from there. Essentially, I think this new investment paradigm is deglobalization. You know, for as long as I can remember being interested in the world and in markets, the most important word or the most dominant word was globalization, and how the world is getting smaller, and the world is getting flat, and you know, borders no longer really mattered from an economic perspective because capital was free to flow around the world. And that kind of made all the difference uh in in not only the way that people invested but in the way you know CFO or CEOs ran their companies and the way they thought about hiring different people. Um, but I really think that has changed a little bit. And what I thought I would do here is I'm just going to walk through um, let me just make sure this is working the way it's supposed to work. I'm going to walk through Yeah. Okay. I'm going to walk through uh and I'm I'm going to read a couple little pieces of it uh because I think it will set the stage fairly well.
But essentially um, you know, for nearly half a century, investors operated inside a framework that really appeared unshakable, and and you know, that was globalization. You know, they came to see borders not as obstacles but as opportunities, and capital moved with astonishing ease. Multinational corporations, you know, flourished. Supply chains stretched across different countries and different continents, and the environment uh it really created not only uh an environment that was profitable, but part of the reason it was so profitable is because it was so predictable. Um, everything just kind of worked. It worked efficiently, it worked smoothly, and it worked for the most part, not always, but it worked for the most part peacefully. And as a result, a lot of variables, unknown variables were removed from the equation, and it made everything in many ways easier.
But I think that has now unraveled. Um, you know, the the accelerating conflict with with the United States and China has forced the recognition that economics and politics can no longer be separated. Um, the same supply chains that once were held up as marvels of efficiency are now in many ways seen as liabilities, vulnerable to disruption and manipulation. And I think you know COVID-19 really kind of laid that all bare, and in many ways I would argue COVID is the catalyst that has brought us to where we are today. Uh, you know, in this new environment that we're in, you know, the the things that that get talked about most are no longer necessarily efficiency and integration, but sovereignty, right? Resilience, self-sufficiency, and governments are deliberately trading cost for security, redundancy for optimization, and control for openness. You know, globalization is in retreat for the first time since World War II. And you know, because it's so serious and because um the things that are going on are so important, I don't think this is something that just lasts for a couple months, for a couple years. I I really think this is going to go on for not even just a couple decades, but probably several decades. Um, and and this is going to have uh, you know, a big impact not only on the United States, but it's the whole world.
And I should I should clarify here, I don't think it's just the United States doing this. I think basically all the countries are doing this. The United States is doing it, China's doing it, Russia's doing it, Europe's trying to figure out how to do it. Um, but it's uh, you know, it's it's a big issue, and it's a big issue on a national level and at a governmental level. And because it's at a governmental level, some things that may not even should happen are going to happen because again, efficiency and cost are not necessarily the drivers. Um, and but but but I think the most important thing is why is this happening now? Now I indicated that that COVID was the catalyst, but it's not just it's not just about COVID. I mean, there's several different things that have kind of converged to elevate you know, national interest or government interest above you know, the interest of the globe as a whole. Um, and and it's and it's kind of becoming the defining economic priority of the century.
And the first the first thing that that that that jumps out is just the geopolitical rivalry between the United States and China. There's just really no way to get around that. Um, you know, there was a book that came out, I think it was about five years ago, and I gosh, I I'm I'm blanking on the exact name of it, but it was basically about uh, you know, China and the United States and the Thucydides trap. I think it's called the Thucydides trap, and it's basically talking about whenever there's a global power and there's a rising power, is there a way for those two to peacefully coexist without going to war? Um, and and I think I think that perfectly kind of sums up where the United States and China is now. You know, the United States has been on top for several decades. China is on the rise and um, you know, certainly has global ambitions. And you know, at some point, you know, it was just kind of inevitable that they would come into conflict. And you know, I kind of feel like we're here now.
But you know, it's not just about China and the United States. I think that's the primary driver. And a lot of the stuff kind of flows downstream from that. Um, but some of the other stuff. The second is that you know, the fragility of the global supply chains, and that was really really revealed in uh in COVID. Now this kind of does go back to China and the United States a lot because for for much of the world, China is where the supply chains start, right? They're the manufacturing powerhouse of the world. So a lot of countries around the world are dependent upon China for certain goods, and you know, the United States certainly has um some exposure there um, and I I think that's part of the reason this is happening now. The United States realized during COVID that they were dependent on China, and they didn't like that. They didn't like being dependent on another country which may or may not be an ally. Um, and and and in a worst-case scenario could be seen as an enemy. And so as a result, you know, they're trying to figure out how do we become more self-sufficient, not reliant on a foreign power, and you know, cost be damned, so to speak. And so I that alone is going to have major implications for for the world as a whole and for the markets, and as a result, investor portfolios.
Uh, but a third a third thing that I think is um that that is affecting all of this is energy transition, right? Um, you know, not only has the world been trying to figure out a way to get off of fossil fuels, but they have also now been trying to figure out how for those of us who are not energy self-sufficient, which really nobody is energy self-sufficient. There are certain countries that are more self-sufficient than others. I would argue the United States and Russia are probably the two most self-sufficient, but even they are not self-sufficient. Um, but you know, as uh, you know, as we a a as as countries you know struggle with this, and they start to struggle in a in a bifurcated world that is deglobalizing rather than globalizing, that is going to cause many many problems, and it's going to force many countries to invest in certain projects or do certain things that they might not have had to do uh in a world that was more integrated.
Um, you know, a fourth driver is the pressure of uh domestic politics. You know, the whole outsourcing of supply chains meant jobs went with them, and when jobs went with them, then wages went with them, and and standard of living went with them. And you could in many ways you could argue that the the reason that Trump has gotten elected is this very thing. He wanted to bring that back, or at least he made bringing that back uh kind of a core tenant of his campaign.
And then you know, another one is obviously uh the weaponization of finance. Um, you know, the United States has always had the ability to weaponize the dollar. They've done it several times. You know, other countries weaponize other things. You know, Russia has weaponized commodities. Commodities are playing an increasingly important role. Again, when goods don't flow as freely, and when you live in a bifurcated world rather than a globalized world, if you don't have those commodities in your own domestic economy uh that you are going to struggle. And as a result, the countries that do have those commodities can weaponize them. So the United States knows how to weaponize the dollar very well. You know, Russia knows how to weaponize energy very well. That is going to play a big role in in the world going forward.
And you you put all these things together, and and it just it to me it makes it very clear that that national interest is not just like this passing fad, like it is a it it's a new deviation from the old paradigm where everything was integrated and everything was one big happy family, so to speak. And and and and to me it represents a deep structural realignment of the economy. Um, and you know, but this is any any potential bad things also presents incredible opportunities. And from an investment perspective, we see a handful of of places um that are going to benefit from this. You know, semiconductors and advanced technology is obviously a big part of the future. Now, you've heard me talk be before that I think the valuations have got a little stretched, and we're probably going to have a correction as a result of it. Uh, but it doesn't mean that this isn't still going to be a dominant industry in in the years ahead. You know, defense and aerospace, I I think is is a huge huge area. Again, as countries, you know, need to beef up their own defense because we're living in a world that isn't quite as cooperative as it used to be, um, you know, uh, spending on on national defense is going to increase. You can already see this with what, uh, Trump has, uh, you know, mandated that NATO spend. You know, energy security, we kind of talked about that a little bit. And then obviously critical minerals and commodities, and we've talked about that a little bit.
But you know, this this also plays into uh healthcare and biotechnology as technology continues to ramp up and AI continues to to increase. In many ways, you could see a transition from traditional healthcare and biotechnology into or not traditional healthcare into a more uh technology-focused uh arena, especially with the rise of AI and how that could affect the healthcare industry. And then probably the biggest one that maybe people don't think about too much is how much infrastructure is going to be needed for all of this stuff to happen. Um, you know, you you can't just like flip a switch and all of a sudden start having all these different industries in your own domestic economies without having the infrastructure to do so. And um, I think the scale of the infrastructure buildout could be very, very big.
Now, you might be saying, how the hell are they going to pay for all this? Well, the same way they always do. They're going to print the money to do it. Um, and so that that that itself has has a huge impact as well. And then I think the the final area is, you know, just finance and currency alternatives. Again, with the weaponization of the dollar, the rise of digital assets, um, you know, and people seeking, you know, new ways to do things again in a bifurcated world, we we think that's going to be an area.
But anyway, if this is of interest to you and you think this uh might be something you want to read, you know, go over to again, go to research.santiago capitalap.com and check it out and subscribe, and you can uh you you can read the whole report uh for yourself. Uh, but what I thought I'd do now is hold on, let me I got to switch my screen here so that I can um, let's see how do I do this? I'm going to go over just a few charts and then um Oh god, how do I do this? Oh, I got to stop screens here. Okay, hold on. Um, going to go over just a few charts and then we will uh wrap it up for this week. I think that does it. Let me just make sure. Nope, wrong one. Hold on.
Okay. So, first thing we're going to look at is the dollar. And the reason we're going to look at the dollar is, as I said at the very beginning, we do all of this stuff through the lens of the dollar milkshake theory, right? And the idea that the dollar in the years ahead will rise versus its peer currencies. Now, it obviously had a really big run back in '21 and '22. It kind of consolidated sideways for a couple years, and then it's had a pretty big down move this year. And you know, as a result, I've I've seen a lot of people over the last couple weeks pointing out this chart right here, which basically shows that the dollar is kind of at 15-year support. And they were saying, you know, if this gives away, which it will when the Fed cuts rates, then that will be all she wrote. And you know, there's no support down below here.
The first the first thing I'd say to this is yeah, it is sitting at a fairly important support level. Uh, and I and and I wouldn't deny that. But what I would also say is just because it's sitting there doesn't mean that it will break. And the other thing I would say is if it does break, that doesn't necessarily mean it collapses. And as proof, I'll just say, well, you know, we were in the same place a couple years ago, and we were sitting uh right here, and, you know, four years ago, we were sitting at pretty important support, broke below it, stayed down there for about six or seven months, and then boom, rallied all the way up to a 30-year high u you know, a year later. So, just because you break through a trend line doesn't mean um, you know, it's necessarily the worst.
But again, it's at a pretty important level. But what I would also say again is that it hit that level, and in at least for the last couple days, you know, the Fed cutting rates kind of became a sell-the-news event because it was already all priced in. Um, and if we look if if we uh zoom in a little bit more, you know, this was the Fed meeting. You know, they announced they cut rates, boom, it dropped, and then immediately it just rallied back up. And now it's back to kind of where it has been for the last two or three months. Um, you know, here's the thing is it's really gone sideways for two or three months here, uh, since the middle of June. And it's really not all that far below its lowest point in April. So, it's definitely down, but, you know, it's only what, 20 cents below its lowest point in April. And if uh I if if if it does end up being a sell-the-news event um, which so far it looks like it was um, then it could certainly, and everything is already priced in, if if all the rate cuts don't materialize. You know, this it wouldn't take a whole lot for this to go back higher up here, especially when you consider the whole world is expecting it to go lower. The whole world is uh, you know, uh, the sentiment is really low on the dollar, positioning's way against the dollar. So when everybody's on one side of the boat and everything gets priced in, you you you stand the uh the ability to have a a reversal um that is unexpected.
And this would be a particularly interesting time to have a reversal that was unexpected because volatility is sitting basically at the lowest uh, you know, that it's been in the last five years. It just keeps kind of bouncing along this line down here. Um, you know, and and we're going into the time of the year where seasonally the VIX tends to rise a lot um, or or rise more than other periods of time. And you guys all know that I've been expecting a pullback in the market and a correction, and I said we would get it by the end of September. So far, we haven't gotten it. U but I still think markets are going to start to sell off here. Uh, I uh, I'm I will hold up my hand saying as of right now, I am wrong. And if we get into kind of early to mid-October and we haven't had it, I will hold up my hand again and say, you know what guys, I was completely wrong. But if we start to sell off here in in the next five to ten days, you still just September 20th, uh, then then I think uh my uh my um uh my framework still holds.
And and and let's just look at a couple other charts here. This is the S&P 500. Now, that is a heck of a move coming out of there. The stochastics are couldn't really go any higher there at 99, and relative strength is back to overbought. Um, now that's not a horrible looking chart, and there's nothing that says that you have to have a pullback just because you know these things are running strong, but I feel like a lot of the stuff is already priced in. I think a lot of the good news is already priced in, and I don't think any bad news is priced in. So again, if we start to get a reversal in the dollar, if the VIX starts to pick up, if not everything goes smoothly, you know, over the next couple weeks, I mean, we've got a bunch of new uh we've got a bunch of economic data that comes out this week. It's very possible the government's going to shut down at the end of the month. There there's a lot of, you know, we've still got things with Russia and China, and, you know, there's a lot of things out there um that could cause this perfectly priced market to to stay to stay that way.
And if you look at the, you know, you look at the the NASDAQ, it's even more overbought. Um, you know, again, overbought from a relative strength perspective. Literally can't get any higher from a stochastics perspective. And then the last one all, you know, this is a subset of um um the NASDAQ, but this is this is Google. Okay. Now, you've got it's the most overbought it's been. Let's just go back five years. It's the most overbought by a long way that it's been in five years. The stochastics literally cannot go any higher. They're at 99. Well, they can go a tiny tiny bit higher, but guys, this is a meteoric parabolic rise higher. That is not how moves start. Now, it doesn't necessarily mean that Google is going to crash and that we're going to have, you know, 1929 or the global financial crisis, but anybody that is entering Google right here and gets their face ripped off deserves it. That's what I'll say there.
So, I still holding out that we're due for a correction. I think it's going to come sooner rather than later. But I'm also the first to say that while it's good to have an idea and it's important to have conviction, you also have the abil you also have to have the ability to put your ego in check and hold up your hand and say I was wrong. So if this doesn't happen uh in in the relatively near future, then I'm going to have to hold up my hand and say I was wrong. But right now, I think uh I think things are still on track.
So with that, we're going to wrap it up for this week. Uh, and we'll be back next week with another episode. Okay. Hope you guys are all well. Bye.