It's difficult to think of a more politically incorrect idea than recommending investors to allocate money to China's government bond market, ostensibly by selling a portion of their U.S. treasuries. Granted, this would actually be consistent with the rebalancing of the bilateral U.S.-Sino trade relationship that the most ardent critiques of China's economic model desperately want. Or perhaps what they really want is a strong dollar plus capital controls? It is difficult to tell sometimes. That said, it is fair to say that lending money to China's government to fund domestic investment, some of which invariably will go to defence, probably doesn't get you on the White House's Christmas list. Incidentally, and before I flesh out the trade, I should make one thing clear. I think the mismatch between the increasingly tense geopolitical relationship between China and the U.S., and the fact that capital and goods still flow more or less freely—with the exception of direct outflows from China's mainland—between them represent an enormous tail risk for markets.
Read MoreOne of the more enjoyable aspects of being an independent macroeconomic researcher—at least for a geek like me—is the road trips when you get to speak to clients and prospects. Sure, you see more airport lounges and hotel rooms than you need to. But there is no better way to gauge the zeitgeist than to spend a week in meetings with portfolio managers and asset allocators. I have done just that in New York, and I sense a cautious optimism that the positive trend in equities and credit and the economy will continue for a bit longer. In my capacity as a Eurozone economist, my central message to the wardens of our capital was that the European economy is just fine. But I also spent time floating the following proposition: Monetary policy divergence is back with a vengeance, and macro traders will make, or lose, their money on this theme in the next 12 months. The ECB and the BOJ recently have signalled to markets that they will be stuck with negative interest rates for a while. Meanwhile, the the Fed is on the move, a point highlighted by Friday’s robust advance Q3 GDP report, which suggests that growth in the U.S. economy was a punchy 3% annualised, despite a drag from two hurricanes.
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