Darius Dale, 42 Macro Founder and CEO, sat down with legendary macro investor Hugh Hendry to dissect the Eurodollar system, the Yen carry trade, and the potential for a global liquidity squeeze. If you missed the interview, here are three key takeaways that may have huge implications for your portfolio:
1) The Eurodollar System Fuels the Overvaluation of Everything
Hugh argues that global liquidity isn’t controlled by central banks but rather by the Eurodollar system—an unregulated, highly leveraged financial network that drives global credit expansion. For decades, foreign banks have used U.S. Treasuries, JGBs, and European bonds as collateral to create vast amounts of off-balance-sheet credit, inflating asset prices worldwide. However, as cracks emerge in global markets, liquidity may be tightening faster than investors realize.
Key Takeaway:
The Eurodollar system, not the Fed, dictates market liquidity—watch for signs of stress that could trigger a sharp repricing of risk assets.
2) The Yen Carry Trade Is Unwinding, and It’s Not Over
The Japanese banking system has been a major source of global liquidity, using JGBs to access dollars via Eurodollar swaps. But BOJ tightening amid a U.S. growth scare risks triggering a broader unwind of global risk-taking.
Key Takeaway:
A deepening US growth scare would be a major macro shock, potentially triggering forced deleveraging across global markets.
3) Trump’s Policies Could Engineer a Deep Recession—By Design
Hugh suggests Trump may be embracing a Paul Volcker-style economic shock by deliberately pushing for austerity, tariffs, and aggressive spending cuts. The goal? Trigger short-term pain to force a hard economic reset. Meanwhile, the Fed’s recent rate cuts weren’t about supporting the economy—they were about steepening the yield curve to prevent a flood of mortgage refinancing that could have reignited inflation.
Key Takeaway:
Markets should prepare for policy-driven volatility, as accelerated fiscal tightening collides with delayed monetary easing.
Final Thought: The Death of Money?
We may be witnessing a paradigm shift in global finance. The pillars that have supported market liquidity for decades—the Eurodollar system, Japan’s banking sector, and China’s dollar recycling—are all under pressure. If these liquidity engines unwind, we could see a prolonged bear market and a potential hard reset of the global financial system. The macro landscape is shifting fast—investors must stay ahead of these critical developments.
If you are not confident your portfolio is positioned correctly for the evolving macro landscape, partner with 42 Macro for data-driven insights and proven risk management overlays—KISS and Dr. Mo—to help you stay on the right side of market risk.
No catch—just real insights to help you stay ahead in the #Team42 community.
Best of luck out there,
— Team 42
