By Michael Every of Rabobank
But I Repeat Myself
“Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself.” Mark Twain
One can always find a useful Mark Twain quote. Today’s is not about the US Congress –although who can point to a set of politicians covering themselves in glory at the moment?– but rather about myself. I repeat myself. Yes, I repeat myself. I said I repeat myself. Me? I say the same thing a lot. In doing so, I’m probably also an idiot, but there you go.
Simply put, risks are rising on many fronts and the markets care not a jot about that, or about actual fundamentals. Keep on selling the USD, why not? EUR at over 1.20 beckons. AUD at 0.75. GBP at 1.35. CNY at 6.80. You name the currency, everyone wants to hold it and hold it badly, and at higher and higher prices. Let’s just repeat myself again to recap some of the current backdrop to wanting to hold all other currencies than USD. To do so, here’s the morning summary from Bloomberg – with my comment:
- Fed No. 2 Richard Clarida left open the possibility of employing Treasury yield caps at some point in the future, though he indicated it’s not likely right now. Yes, he did indeed. He also flagged inflation could well over 2% provided it was “consistent”. Perhaps yield caps might be used one day —after just being rejected in a multi-year strategy review!– and I am sure the Fed would love CPI well over 2%. Good luck getting there. Good luck with the US getting there while everywhere else in the world is performing better economically and behaving better monetarily.
- South Korea is gearing up for another year of record bond issuance as the government prepares to boost its budget by 8.5% in 2021, setting the country on track for a record debt burden. Record bond issuance. Record debt burden. Two sets of three magic words that scream “Buy my currency!”
- Global trade is on course to recover more quickly from the coronavirus pandemic than after the 2008 financial crisis, according to Germany’s Kiel Institute for the World Economy. Not all the data show this, and imports are largely dependent on government hand-outs to maintain consumption that are about to run out. Plus, mercantilism is baaaack. Oh, that’s right. This is a German institute: they know from mercantilism. They just think it’s free trade.
- Chinese authorities have detained an Australian television anchor as relations worsen between the two over trade and security. Barley, beef, wine, tourism, universities, the Aussie press talking about iron ore too within five years, and a TV host being arrested. Oh, and CoreLogic house prices -0.5% m/m after -0.8% last month. So buy AUD! That said, when the RBA didn’t address the currency today when leaving rates on hold, even as it is up 28% from its March low, perhaps that is the smarter move…in the short term.
- Looking out to 2050, China’s economy is set for a sustained slowdown, writes Chang Shu. No: way before 2050. Despite the Caixin PMI at 53.1 today, this recovery is again all pump-priming. Debt is soaring. Bank profits are collapsing. The augmented fiscal deficit is goodness knows where. Only mercantilism and a one-off work-from-home export boom is propping up the external accounts, and even then FX reserves are no longer rising. There was also a report yesterday underlining how urbanisation is no longer productive: people drifting to cities for jobs? Good. Building a mega-city and placing people there with no jobs? Not so good – as we have seen over and over all over the world when tried. Still, buy CNY as nothing can go wrong until 2050!
- Consumer prices are sliding in Europe in the wake of the coronavirus lockdowns: Germany, Italy and Spain all reported negative rates. That’s deflation. On one hand, maybe it’s EUR positive, which is also deflationary of course. On the other hand, is the ECB going to sit there and do nothing? There is always more that can be done. The US is not the only one who will be forced to do so. Hey, buy me some EUR now!
- As expected, India posted an eye-watering hit to GDP after shrinking 23.9% last quarter — the biggest contraction among major economies — and it could force a fiscal rethink. We have covered the risks of a fiscal rethink in INR and what it could potentially mean: not good, in short. But go long INR!
- Long-term effects of the pandemic could still affect Germany a decade on from now, says Jamie Rush. But buy EUR, right!
- GMO says it’s time to give up on US Treasuries in a zero-rate world, suggesting investors consider high-yield corporate bonds and EM debt. Because Treasuries are not needed in the global financial system at all, right? And EM in particular are always going to do well in a world forced to keep bond yields low because the economy is so weak! The track record there is crystal clear THE OTHER WAY ROUND. Unless we presume growth is going to be fine everywhere and it’s just the Fed who will the respond with yield caps and zero rates and every EM will diligently raise rates while the Fed doesn’t. Like that is going to happen!
- Japan’s economy is struggling to recover from a record contraction, says Yuki Masujima, citing high-frequency data. Capital spending was -11.3% y/y in Q2, for example, and company profits -46.6% y/y. What’s the new post-Abe Abenomics going to be called? And when do we get it? And far does JPY fall as part of that plan?
- The global recovery could be job-poor due to structural shifts stemming from the Covid crisis, says ANU’s Warwick McKibbin. Which is just *wonderful* for emerging markets, obviously. And everyone around the world, not just the US and the USD.
Moreover, the political consensus still seems to be that President Trump’s re-election odds are improving (or at least the betting market says so). If so, consider the trade-related pledges he has made that would hit CNY and EUR in particular if one joins the dots.
Not entirely unrelated to November, China’s Global Times also states: “If India makes more provocations and launches new border conflicts against China, about 90% of respondents [among Chinese international relations experts surveyed] support China defending itself and striking back at India with force.” That as Indian strategists are also talking about a countdown towards further fighting if China does not back down.
The same paper also noted on Taiwan yesterday: “If the island has made arrangements of take-offs and landings of US military jets, it is crossing the Chinese mainland’s redline to safeguard national unity. This will be very serious. If the mainland has conclusive evidence, it can destroy the relevant airport in the island and the US military aircraft that land there – a war in the Taiwan Straits will thus begin.”
But I repeat myself. In my defense, so does the current market action – and while acting like a member of a Mark Twain Congress.