thank you I'm Charlotte McLeod with the investing News Network and here today with me is Alfonso pecatello founder at the macro Compass thank you so much for joining me online today it's great to have you here it's a pleasure to be here really nice to be speaking with you and just to give our audience some context I had reached out to you after I read your piece on the detolorization fairy tale and it was really interesting to me because you went over why do we hear about this all the time we never see it


happen so I want to talk about that today and probably begin with a basic question which is why are we hearing so much more about detailerization right now than we might have in the past so the reason why we're hearing it more today is that the U.S sanctioned Russia after the invasion of Ukraine which basically meant that as Russia over time had been selling mostly crude oil and accumulating dollar reserves they found all of a sudden and all this hard-earned assets were basically Frozen they


couldn't use their dollars anymore and so from that moment onwards there has been quite some movements under the surface regarding countries that generally sell services and goods and commodities like China or Brazil for example they accumulate dollars when they sell these Services goods and commodities and they've been thinking do I want really to invest all my hard-earned dollars into treasuries that can be in principle uh made unavailable by the US government itself so there has been a lot of talks and movements under


the surface when it comes to the pedolarization but as I wrote In My article you keep hearing about it but it never happens so we need to talk about it why do we keep hearing it all the time sometimes a bit louder sometimes a bit less but it never happens right and you go into a couple of pretty good reasons why that we hear about it and we don't actually see it happen so I wonder if you can talk a little bit about why this is such a difficult process and I think to be clear for everybody it's not that you don't think


we're going to see this it's that when we do it will be very tough that is correct so the thing I want to fight the most back against is this idea that we can have an orderly dedolarization that's a fairy tale it doesn't it can't happen so let's explain why basically since the 80s 90s we have a globalized world we have expanded global trade so we have countries all over the world that are able to negotiate and trade against each other sell and buy from each other goods and services in


order to facilitate this process we have chosen the dollar to be basically the denominator of most of these transactions about 70 to 80 percent of all Global foreign exchange and Global trades happen to be denominated in dollars now what that means is that the dollar generally gets and the US generally gets tainted with this exorbitant privilege of having the global Reserve currency but as I wrote In My article it's a privilege but it's not easy to be the dollar and why if you are the global


denominator of all trades and transactions it means as we explain that Brazil for instance selling commodities will accumulate dollars when they accumulate dollars as the result of selling their Commodities they will need to park these dollars in a safe and liquid asset to make sure that it doesn't get to waste basically so that the result of their transaction remains fruitful now in order to be the global Reserve currency of the world you need to service this large amount of global dollars with a market where they can be


parked in a safe way that's the U.S treasury market now if you want to be the global Reserve currency in the world you have to have a deep liquid and very transactable bond market that can accommodate all these dollar flows coming from Global trades growth when people tell me we're gonna move away we're gonna de-dollarize then my question is we're going to move to what system and if we stay within currencies and we will talk about gold and the role it can play into into this transition but if we


talk about standard currencies if we move away from the dollar is there another currency to take that can provide with a deep liquid Market where you can recycle your hard-earned money and if I look at the Euro or I look at Japanese Yen they're looking at you know countries that have either the bond market basically completely owned by the central bank that's Japan all we have Europe which is a very fragmented fragile Union with the monetary unit but not the fiscal Union not a banking Union


so basically the dollar doesn't have a competitor when it comes to to having a market that provides with the tip and liquid treasury market was to recycle your currency okay thank you for explaining that I think that makes a lot of sense and one thing that I also wanted to bring up is I think part of the reason we're seeing de-dollarization making headlines right now is we're hearing about the brics countries they want to have a new currency so what are your thoughts on that how does that fit into the picture


here so that's a good question we heard president Lula that actually the brics conference said why do we need to depend on the dollar why can't we just have a brics national bank that basically make sure that we have a common denominator a common currency that underpins all the transactions between the brics currency so we can just walk away from the dollar well that goes to hit the other side of the coin because so far we talked about dollar assets being accumulated as selling goods and


services and it needed to be recycled into a safe Market which is the treasury market what about liabilities because look one of the reasons behind the growth of the role of the dollar over time as the global Reserve currency is also the dollar debt market so there is a 12 trillion dollar big Market which is called which is basically the dollar denominated debt market so those are bonds issued in dollars by entities not residing in the United States in other words Brazilian corporate a Chinese corporate that


issues dollar denominated debt why do they do that because if their business on the asset side is denominating in dollars to generate more business well you need to borrow and to level up in dollars but the moment they do that they basically become entrenched into the dollar system because to service your dollar debt you need the dollar cash flows the moment you walk away from Dollar cash flows and you start selling your Commodities in one or in the brics currency where are you going to get your


dollars to service your dollar debt now the choice at that point is to default to say look we are not going to pay back the dollar debt but by doing that what is the message you will be sending to sending to the rest of the world that you are not paying back your liability so you will be I isolating yourself the world will become even more bipolar than it is today and I'm not sure that China Russia Brazil are looking exactly for that all right so when people hear about these big themes like dedolarization I


think they wonder how does this happen what does the process look like because it's such a massive concept and you had reference the role that gold might play in having this happen so I wondered if you could help us take a look at that tell us what you see coming there so look we talked about the alternatives to the dollar both from an asset perspective and from a liability perspective who's going to want to issue that denominated in Brazilian real or in Chinese remedy who's going to want to


invest their hard-earned asset into a Chinese bond market where you know that your money can just be basically seized through Capital controls so that's why I don't think that an orderly move from a dollar based system to another currency or a basket of currency based system can be an orderly one generally in history such transition between Global Reserve currencies happened with big geopolitical tensions or in other words with worse so nobody wants that but it is historically speaking the


prerequisite to move from one a currency based system the dollar to another currency based system the other transitions we have seen in the past is the move from one currency based system the dollar to a gold based system and that is something different why there are two main reasons the first is in a gold-based system what you are doing is you are pinning the the growth of debt and credit to the existence of a hard asset you can always exchange newly created dollars or newly created fiat currency for gold at a


fixed price what that does is it limits the ability to expand our credit our debt our leverage infinitely because you know that the more Fiat money you create the more the risk it is that people are going to lose confidence in that system because they expect the peg not to hold anymore so there is a hard asset basically that pegs the creation of Credit Now gold has basically always and already in the past serve that role relatively well and why because it already sits on the balance sheet of all


these institutions and it it does so even strongly more strongly today we have seen Global central banks accumulating gold so they're buying more of this asset putting it on the balance sheet because in case we have a transition from a global Reserve currency based system the dollar system to something else they know that rather than a basket of currency the best option they have from a historical perspective is to use gold as the asset that underpins the new system this has been done already


actually 78 years ago last time and this is also why I think Global central banks like Russia or the Chinese Central Bank are accumulating more gold rather than thinking about the brics currency in itself because gold would sort out quite a lot of problems and would also be welcomed I think from many investors that have already seen that system somehow work in the past they haven't seen a system working based on a brics currency they have doubts about the rule of law and capital controls and


Corruption for for instance in Brazil you don't have doubts about gold being a hard asset at underpins a new system so I think gold can and should play quite an important role in the transition from a dollar-based system to another system that's very interesting because I do think it's no secret how much gold the central banks have been buying lately so in your view perhaps they see this coming that's why they're snapping out all of this gold I wonder in the transition to this potential gold-backed


system does the power then shift to the countries that hold the most gold because I believe then when it comes to Central Bank Reserves that is still the U.S at the top of list again yeah and that's a good point so of course also the us but European central banks as well the domestic central banks own quite a decent amount of gold and that's no surprise gold is also a hedge basically in case you would move to another system the more gold you have the more power you have in a system that


obviously is based on gold right and where gold is the hard asses that pin and relates to when it comes to credit growth or debt growth in the new system so what I'm seeing lately is that other central banks that before didn't have a large share of gold into their asset ownership now they're turning more towards gold so this would be central banks like the the pboc the Chinese Central Bank they are trying to move away from the large ownership or of dollar denominated treasuries into gold


in order to make sure that if there is a transition they are better positioned to handle that transition to so I believe that rather than seeing a bipolar world where we are looking at the dollar-centric word against the brick Centric world and a transition towards another basket of currency backed system if we would see a transition it wouldn't be an orderly one either but that transition is more likely to be a transition from a dollar-based system to a code based system once again I am curious what happens to the price


of gold if we potentially do see this happen what do you think about that oh well I think it's pretty simple if you want to transition from a dollar based system a debt based system a credit based system into something else what you have to do is you have to basically deleverage that system first so when you de-leverage that system what happens is everybody who has debts credit denominated into that fiat currency has to or is forced to be leveraged to shrink it down and to try and move their


wealth towards a hard asset the hardest asset of choice is gold so what happens in that case is that you basically have asset prices that take a big hit stock market the real estate market all assets that have been based on that on the increase of Leverage in the system get penalized the assets that do the best are the hard assets so money tends to flow toward this is a hard Assets in that case and look it's hard to put a number on it on gold of course the price would move up pretty materially the way


I think about the role of gold in a portfolio is you don't know when and if this transition is going to happen but when and if it happens you want to have some gold in your portfolio to protect your wealth in that environment you don't need to become rich because of that but you need to have gold in your portfolio as a contingency towards that transition so that's why I think the role of gold in portfolios is not only short term related to what the Federal Reserve will do this week or a week from


now but it is also long-term insurance against a transition to a gold-based system all right and uh one more question on the dollarization before we try to put some of this into broader context for everyone you know when we're hearing about all these things one of the headlines that I've seen is you know the death of the dollar to me that sounds a little bit dramatic and I wonder what your thoughts on there is that is that an overblown concern well the funny thing about the leveraging system based


on the dollar is that when everybody tries to move away from that system they need the dollar in the first place to move away that's a funny story but think about it if you have dollar debts how do you pay back your dollar debt how do you deleverage that system well you need dollars to pay back your dollar debt so when you deleverage a system funnily enough you have situations when the dollar appreciates this is also the reason why when there are periods of stress credit events big deleveraging


episodes we often see the dollar appreciating and that's what people tend to forget the dollar is so much rooted into the system that together away from the dollar we first need to have a period in which the dollar appreciates I know this sounds counterintuitive but this is how the system works this is how the leveraging works the death of the dollar has been proclaimed over the last 50 years I think 20 times already and in that we actually tend to see that the more the system become leveraged the


more vicious this dollar appreciation moves tend to be like it was for instance in 2022 when the Federal Reserve was increasing interest rates rapidly and the over leveraged market like the real estate market or the credit Market OR tech stocks for instance we're taking a large hit and the dollar was appreciating so dollar death are always premature if we're gonna be seeing one true dollar move away from a dollar-based system to something else funnily enough this would probably include the period in which the


dollar appreciates even more but that's going to be the last time it does so all right okay really interesting thanks for going into that as well now I mentioned we should try to put all this into context for investors I think people when they hear about these high level topics they wonder how does that actually relate to what they're doing with their portfolio what does it mean for them as an individual I wonder if we can talk a little bit about that because there is so much uncertainty in the


world today we have the FED meeting this week we may not publish this interview before then but it's happening we've got banking system issues in the US we've got so many things going on what does an investor do look I think we need to get some perspective here we have been talking or been hearing about the fat pivot coming anytime soon right then that adds incentivized investors rate lately of taking risks back into the market buying the stock market buying even unprofitable tech companies back again


so let's take a step back for a second when the FED pivots and if it does you always need to ask yourself why is the Fed pivoting what is the reason behind this so in 2001 for example the Federal Reserve did pivot it cut interest rates by 475 basis point in 15 months it basically brought interest rates from six percent all the way down to one percent in a bit more than a year that is a big pivot right the super dovish pivot if I'd ask you what did the S P 500 do in 2001 you would say well the


FED pivoted it must have rallied 20 and the answer is no it didn't it actually dropped 12 and why that fat pivot came because the U.S economy was going into a recession as the result of the Federal Reserve trying to stop the tech bubble raising interest rates in 2002 levels six percent which prolonged over time damaged the US economy so the Federal Reserve was forced to Pivot but unemployment rate was going up earnings were coming down the leveraging was happening so the stock market didn't


perform well a similar episode could happen this time in 2022 the Federal Reserve is raise interest rates from basically zero percent to five percent that's where we're gonna be most likely as we speak uh next week now with such a rapid tightening of monetary policy with fiscal stimulus basically having exhausted this effect all the way back at the beginning of 2022 you're looking at an economy that needs to withstand tight interest rates tight borrowing conditions for a prolonged period of time and inevitably


this will slow down the economy even further so yes a fat pivot might come but the reason why it comes is to try and repair the damage that has been done to the economy by raising interest rates to slow down inflation that is not an environment where you want to be super positive where you want to cream that there is a new bull market around when the fat pivots because things have gone bad you are supposed to walk defensively with your portfolio if Bones have gold in your portfolio rather than having a


lot of stocks that's not yet the moment to be aggressive it's the moment to be more conservative that's very helpful and just before we wrap up I have a question about your overall strategy so you take a really macro view of what's going on you do a great job of breaking that down I wondered how you filter through there's so much out there that you can look at how do you filter through and find the important points to pull out for people look it's it's a super valid question


and it's true we are inundated with information and that's why one of the things that I tend to do at the macro Compass is try to use a data-driven approach so basically standardize the process and know what data to follow how to analyze it what to focus on and build basically some mental models and Frameworks to gather all that information and put it all together it's not an easy task and I've been a professional investors for eight to nine years you are inundated with information


the problem is how to organize it really and that's one of the main things I try to do at the macro Compass really break it all down in plain English and make sure there is a systematized way to follow all this macro data to model it to understand what's the best tactical and strategic portfolio locations to have not an easy task everybody's its own models but I think it's important to understand also the first principles behind the macro analysis and the last 10 years Charlotte have been I think a


bit numbing investors down to macro why you just would buy some bonds and some stocks and go to sleep and your portfolio would make 10 return a year and I don't think that's the environment we're going to be living in because of this geopolitical tensions because of the volatility around inflation the volatility around GDP growth investors need to understand how to do macro analysis properly I agree I think that's really important and just as we're wrapping up if you could let us know


where we can find you tell us a little bit more about the macro compass thank you so uh all I I do all the macro research the investment strategy the portfolio strategy I do is on the macrocompass.com so every week what I do there is I try to break down what's happening at the macro level in order to make it understandable and actionable for the average investor out there I've been a professional investor myself managing a lot of money for a large bank but honestly I think there is much more


value in trying to sharing a macro framework with investors so that they can understand what's going on in the world and how to make a framework around it so that your portfolio strategy can also be deployed and that's all on the macrocompass.com perfect well thank you so much for joining me today we'll leave a link below so people can check it out I hope that they do because your publication really has helped me understand some pretty complex topics so thank you so much for coming on to talk it was really


great to have you thank you it's been a pleasure great and once again I'm Charlotte McLeod with the investing News Network and this is Alfonso bakit yellow with the macro compass [Music] foreign