Category: global investing

https://www.clivemaund.com/gmu.php?art_id=68&date=2018-08-25

Key points
1.The world remains on US$ standard; there are no alternatives.
2.US$ remains the key driver of most macro variables but it is unforecastable
3.We are concerned that declining liquidity, attempts to raise rates & China’s hesitancy is a recipe for stronger US$. Turkey might tip it over.
‘It is our currency but it is your problem’; It is everyone’s problem

Victor Shvets writes….The Triffin paradox (formulated in ‘60s) states that a country issuing reserve currency must run ever-increasing deficits, or find alternative ways of injecting sufficient liquidity to lubricate global interactions. This is in turn places such a country into a difficult position of constantly trying to balance conflicting domestic and global agenda. It is not only a problem for issuing country but it is also a major headache for the rest of the world. Keynes was right when he suggested creating ‘Bancor’ as an independent global currency. This was unacceptable to the US in 1940s and it is unacceptable today, as it requires ceding domestic sovereignty. Connally was wrong; US$ is a problem for all.
Today, there is no alternative to the US$. Recent small-scale barter deals are a drop in the bucket. US$ continues to dominate trade, finance and reserves. No other country can replace US$, because a reserve currency requires: (a) large and liquid pool of securities; (b) to be freely exchangeable, with minimum restrictions; & (c) an issuing country must run deficits to inject enough liquidity to lubricate the global economy. Today only the US$ satisfies all of these conditions. Alternatives like gold or cryptos are either not yet ready for prime time or cannot expand at a fast enough clip to facilitate global financialization.
But, alas, currencies are largely unforecastable
Hence, US$ remains the most important global driver of key macro variables, from liquidity and inflation to demand. It determines how fast global economy can expand and it distributes gains and losses to various countries and asset classes. In most cases, expanding global economy and trade requires stable-to-weak US$, with direction and intensity being important. However, rapidly rising US$ strangles liquidity, creates disinflation and reduces demand. That’s why more is written on US$ than on almost any other topic, with pages devoted to charts showing LT sweeping trends or variety of fundamental factors, from REER to deficits, growth rates to spreads, alas, to no avail. Currencies are far too complex to forecast. But getting US$ wrong is deadly.
If not well-managed, there is a risk of rapid US$ appreciation
With that proviso, how do we look at US$? We have very simple formulae: abundant liquidity + low volatility + rising reflation = low US$ and in reverse, declining global liquidity + rising volatilities + declining reflation = rising US$. There is of course a question of causation, as US$ is responsible for liquidity or reflation, while also magnifying their impact. However, as public sectors are now aggressively managing cycles, it is state policy choices & settings that determine final outcomes. Today, CBs are reducing liquidity, and China is uncertain as to how robust it should become in reflating demand while monetary policies are more divergent, driving higher volatilities. Plus, we can add social & political factors. How much would US$ appreciate, if Turkey were to introduce capital controls & some repudiation of US$0.5 trillion of its foreign debt? The risks are high, and it is far from clear whether Trump & ECB can stabilize Turkey, leading to a potentially much wider contagion.

Citigroup economic data surprise for US has also fallen into negative territory. Recall that US was enjoying a period of positive economic surprise and that also led to rise in US bond yields. The red line below is now cautioning that we might be getting into bit of soft patch over here. FED raising rates and QT has finally started to weigh on the market.

Bond market seems to be sensing this and have rejected 3% on US 10 year again.

I think we are headed much lower on US bond yields over next few months against the expectation of MAJORITY.

The Economic Confidence Model (ECM) is a global business cycle. This is reflecting a shift in global capital flows from Asia and Europe to North America.

The Fed has raised rates twice this year and is expected to raise rates a couple more times by year end which may attract more foreign capital into the U.S. dollar with monetary policy remaining loose to very insane in Europe and Japan. We have the ECM, which has destroyed the European bond market, frozen like a deal in headlights. It is trapped and it realizes that it has been buying the debt of member states who are now addicted to excessively low-interest rates. If the ECB actually stops buying, interest rates in Europe will explode exponentially.
In Japan, BOJ has wiped out the bond market. The government actually bragged that they bought 97% of the government debt auction. Hellow? That’s a good thing? The Bank of Japan has reduced debt purchases for a third time in June 2018, taking advantage of the recent stability in bond yields and the yen. At least Japan is reducing its purchases whereas the ECB talks a good game, but cannot actually do anything.

So what will happen when some of this capital starts moving to the world largest economy

Read more to understand

https://www.armstrongeconomics.com/future-forecasts/ecm/ecm-the-cycle-inversion/

 

 

 

India is growing ‘too fast’ for its own good, warned Macquarie’s Viktor Shvets. Rising twin deficits, wholesale prices and lack of supply-side reforms may lead India towards ‘stagflation.

when supply side reforms are not undertaken any temporary uptick in demand spills over into Inflation and then Monetary policy is left with no choice but to hike the rates.

 

https://www.bloombergquint.com/markets/2018/08/06/india-is-growing-too-fast-for-its-own-good-macquaries-viktor-shvets-says#gs.037=4fs

 

 

 

Martin Armstrong writes ” The talk behind the curtain remains that the Fed is still under pressure to PLEASE don’t raise rates. The lobbying continues from the IMF, ECB, and Emerging Markets. Meanwhile, the Fed leaves rates unchanged, but it upgraded its view of the US economy to ‘strong’ which remains a signal that the Fed is still prone to raise rates if the stock market continues to rally.

The Federal Open Market Committee voted unanimously to keep the target range for its benchmark rate at 1.75 percent to 2 percent. Still, the committee said that “economic activity has been rising at a strong rate,” which is a more bullish view than the June characterization of “solid” growth. Consequently, this statement also noted that household spending has “grown strongly.”

While many believe that as major central banks continue to push ahead with monetary policy normalization of raising interest rates, they wrongly think that raising rates will hurt the credit market and create a downturn. What they fail to grasp is that rates can rise with no impact provided the economy is expanding, but rates can also rise because there is no demand and government is forced to keep offering higher rates to find buyers of their debt in the real world. It all depends upon what people believe. This is why low rates in Europe have FAILED to stimulate demand when people lack confidence in the future, they will NOT borrow at any rate. Expectations of profit MUST exceed the level of interest rate before people will borrow. They function differently than governments which are addicted to debt and borrows all the time with no cyclical expectation.

The bottom-line remains clear. The US economy is holding up the entire world and lowering taxes has helped to bring capital home and attract foreign capital as the USA remains actually a tax haven outside of the world reporting system agreements.

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One of the finest interview on global Markets,  Capital Flow and surprising explanation why equities will be the last man standing.

Some Points from Martin Armstrong Interview
1.This is really a consolidation (Equities). And what you have to ask yourself is, really, if interest rates are definitely going higher. There’s no question about that. So, effectively, you’ve got the bond market going down. You’ve got people concerned about government on all levels.

2.The safe haven, actually, is equities. And the amount of money in the bond markets versus equities is – everybody knows it’s close to 10 to 1.

3.There are certain times in history when the stock market is the problem. And then on the other side of the coin is when government is the problem.And that’s what we have.

4.It’s amazing how people just don’t look at history. I mean, if you look at the DOW – all this stuff about, oh, higher interest rates, the stock market should go down. Just look at the data and you’ll see that is absolutely false. The Federal Reserve doubled interest rates between 1927 and 1929 and the stock market doubled.The thinking process before socialism was quite different. As long as interest rates were going up, it was viewed as bullish for the stock market because it showed there was still a demand to borrow, which is correct.

5.China is going to eventually be the financial capital of the world. But we haven’t gotten there yet. They still have currency controls and things of this nature, so it’s not a free currency to be able to invest in or trade yet. Yet it is the third largest bond market in the world.

6.Basically, the trade is long dollar, long US assets. You’re seeing a lot of major capital throwing the poor out of Europe and coming over here. You have the US fund managers that keep selling the stock market saying, oh, it’s overvalued, overvalued. Well, the foreigners are buying it.

7.The issue is people will run to gold when they question the validity of government. And that’s where the politics comes back in. It’s a question of your faith in government.

Must Read Full Interview

https://www.macrovoices.com/macro-voices-research/podcast-transcripts/2032-2018-07-26-transcript-of-the-podcast-interview-between-erik-townsend-and-martin-armstrong