Doubting Goldilocks | Julian Brigden on Precious Metals, Fed Independence, and the U.S. Dollar
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode of Monetary Matters, host Jack interviews Julian Brigden, cofounder of MI2 Partners and MacroCapture, for an in-depth analysis of the current economic landscape. Brigden challenges the prevailing "Goldilocks soft landing" narrative that markets have embraced, arguing that historical data suggests only a 20-30% probability of avoiding recession after a tightening cycle. (03:54) The conversation explores the tension between labor market fragility and Federal Reserve policy, with Brigden suggesting that while unemployment is rising, the absence of significant layoffs creates a unique dynamic. (07:27)
- Main themes include the sustainability of the current market rally, concerns about Federal Reserve independence, the structural dollar weakness thesis, and the role of precious metals as portfolio diversifiers in an environment of potential financial repression
Speakers
Jack (Host)
Host of Monetary Matters podcast, interviewing leading financial experts and market analysts. Demonstrates deep understanding of macroeconomic concepts and monetary policy through his questioning technique.
Julian Brigden
Cofounder of MI2 Partners and MacroCapture research service. Former Wall Street veteran who lived and worked in New York from 2002-2008. Brigden is known for his contrarian macroeconomic views and has been consistently bearish on the dollar while bullish on precious metals and commodities.
Key Takeaways
Historical Odds Against Soft Landings Are Overwhelming
Brigden cites research by former Fed governor Alan Blinder showing that historically, the Federal Reserve has only achieved soft landings 40% of the time across the last 10 tightening cycles. (03:52) However, Brigden argues this figure is overly generous, as some of those "successful" soft landings either led to renewed inflation or were followed by recession due to external shocks. When accounting for these factors, he estimates the true odds of avoiding recession at just 20-30%. This historical perspective suggests current market pricing is overly optimistic about the Fed's ability to thread the needle between controlling inflation and avoiding recession.
Labor Market Momentum Is the Critical Recession Indicator
The labor market functions as a momentum indicator, and once unemployment begins rising consistently, historical patterns suggest recession becomes unavoidable. (06:22) Brigden explains the concept behind the Sahm rule - that once employment momentum is lost, economies typically fall into recession rapidly. What makes this cycle unique is the absence of significant layoffs despite rising unemployment, creating an unusual dynamic where traditional recession signals are mixed. This fragility means the economy could tip either direction based on external shocks or policy changes.
Hyper-Financialization Creates Dangerous Market Dependencies
Brigden introduces the concept of "hyper-financialization" - the acute relationship between CEO behavior and stock market performance, where rising stock prices drive hiring and capital expenditure, while falling prices trigger cost-cutting and layoffs. (09:13) This creates a dangerous feedback loop where the economy becomes increasingly dependent on wealth effects. With 10% of the population now accounting for 50% of total consumption, a significant equity market correction could trigger severe economic contraction through reduced discretionary spending by high-net-worth individuals.
Federal Reserve Independence Under Unprecedented Pressure
The current administration is applying unprecedented pressure to gain control of Federal Reserve policy through multiple channels, including attempts to remove board governors and influence the selection of regional Fed presidents. (60:14) Brigden suggests this represents a fundamental shift toward potential financial repression, where the administration might artificially suppress interest rates to manage the debt burden. If successful, this could lead to a "run it hot" economic policy with significant implications for currency stability and inflation expectations.
Dollar Weakness Is Structurally Inevitable Due to Twin Deficits
The combination of a 6-7% budget deficit and 4% current account deficit creates unsustainable external financing requirements of approximately $1.2 trillion annually. (62:52) Brigden argues this twin deficit problem makes dollar weakness structurally inevitable, particularly as the administration explicitly seeks currency depreciation to rebalance the economy. Foreign investors holding an estimated $20 trillion in US assets may begin reducing exposure, creating selling pressure. In a weak dollar environment, historical patterns suggest US growth stocks underperform while commodities, emerging markets, and value stocks outperform.
Statistics & Facts
- According to Alan Blinder's research, the Federal Reserve has achieved soft landings only 40% of the time across the last 10 tightening cycles, though Brigden argues the real success rate is closer to 20-30%. (03:52)
- Foreign liabilities of the US have risen by $20 trillion to approximately 50% increase over the last five years, with about one-third invested in equity markets. (28:04)
- The current twin deficit structure involves a 6-7% budget deficit and 4% current account deficit, requiring approximately $1.2 trillion in annual foreign financing. (62:52)
