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 MoreA few weeks ago I provided a bird’s eye view of most of the major asset classes, what they did in Q1, and what they’re likely to do for the rest of the year. I neglected the most important one though; the dollar. I am convinced that other markets eventually will take their cue from what happens to the greenback. The bull case is simple. The U.S. economy is about to get a jolt of fiscal stimulus, propelling growth to above 3%. The labour market has plenty of hidden slack, and productivity is rising, which mean that the Fed won’t have to hike the economy into the stone age to quell inflation and wage growth. Trade wars aren’t a problem, and in the case of U.S. tariffs on imports, the dollar will appreciate offsetting a boost to competitiveness. If the shit hits the fan, the dollar will be the safe haven of choice as capital flees the more open and exposed economies in Europe and China. Mr. Trump might not get a lower trade deficit but he can “win” a trade war with the rest of the world. The contrasting bear case is equally straightforward. The U.S. twin deficit is about to widen significantly, and foreign investors need compensation to finance the party. Higher bond yields and a weaker dollar are a necessary adjustment to reach a new equilibrium.
Read MoreI have trampled around in the same weeds recently, so I will keep it short this week. Equities are doing what they’re supposed to, trying to complete a V-shaped recovery from the swoon earlier this month. Last week was a corker, even for the portfolio, which benefitted from solid earnings reports. Bloomberg’s Joe Weisenthal had me one-on-one on Monday, where I duly warned that the S&P 500 remained overvalued relative to other asset classes. Even Gartman couldn’t have done it better. On this occasion, though, I am happy to double down. A V-shaped rebound to a new bull run looks like wishful thinking to me. Equities are the least of macro investors’ problems, though. The puzzle of the day remains the link between rising U.S. yields, a firming cyclical outlook and a falling dollar. In my last post, I asked the question of whether foreign savings would come to aid of a U.S. economy at full employment—with a record low savings rate—about to be jolted by fiscal stimulus. Open macroeconomics suggest that such an economy should open up a large external deficit, and Japan and Europe have the savings to make it happen. Alternatively I suggested that perhaps the rest of the world doesn’t fancy financing excess spending and investment in the U.S.
Read MoreThis piece was written before Christmas and will appear in the first 2010 edition of the Forex Journal. The data covers the market up until mid December.
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Old Maid is a card game where the simple task is to avoid holding a given card (often the queen of spades) at the end. Even in the company of good friends however, holding Old Maid at the end is not fun. Often, you have to buy the drinks, drop a piece of clothes, or endure other travails. And as it turns out, the global FX market is not unlike this good old game of cards where the Old Maid is proxied by having a strong currency on whose shoulders the correction of global macroeconomic imbalances must invariably fall. In this way, and although one sometimes get the feeling that everyone believes that everybody may actually export their way out of their current misery, buying one country’s currency means selling another and thus, someone (be it an individual economy or a group/basket of economies) must end up holding Old Maid.
The discussion on global imbalances has many faces, but in the context of currency fluctuations and FX markets the focus tends, one way or the other, to gravitate towards the need for the US dollar to fall. This was evident before the crisis and still is. However, if this seems obvious to the most ardent dollar bears as well as to those who still see a structurally important role for the buck going forward, it has been far less evident who should pick up the slack if the dollar is to correct to the new global fundamentals. In this way, key emerging economies are still pegging their currency to the green back and in general; while most claim to see the benefit of a strong currency they just don’t want it to be their currency.