Markets were mulling familiar themes last week. Will a wider U.S. twin deficit change the rules for the dollar and treasuries and is elevated volatility here to stay in equities? Judging by last week, the answer would be: probably and yes. The contemplation over these stories, though, were interrupted by politics. Mr. Trump announced his intention to apply tariffs on steel and aluminium—25% and 10% respectively—and Mrs. May attempted to give clarity on the U.K. government’s Brexit position.* I was unimpressed with both. Before I have a dig at Mr. Trump, I ought to provide an example of someone who supports it. I have great respect for Stephen Jen, but his argument here is like endorsing the idea of a diet by advising someone to eat nothing but kale and carrots for a decade. The analysis of Mr. Trump’s tariffs requires a distinction between the principle and the concrete measures. I concede that China is bending the rules of global trade, but Mr. Trump is stretching the fabrics of macroeconomic policy if he starts imposing tariffs on industrial goods. He is presiding over an economy close to full employment, a low domestic savings rate, and a medium-sized twin deficit. To boot, he is about to let fly with unprecedented fiscal stimulus.Read More
Equities continued to roar higher last week, but they played second fiddle to FX and bond markets in terms signal over noise. In currencies, King Dollar is under attack from all sides. I am no chartist, but it’s looking grim for the dollar. EURUSD is about to complete a break-out from an inverted H&S, GBPUSD is making higher lows, USDJPY is flirting with a break lower from a long and tight range, and USDCNY similarly looks poised to re-test its lows. DXY traded with a 91 handle in a few sessions last week, tagging its Q3 lows. On that occasion, the dollar stepped back from the brink in part due to intervention from the PBoC. With rumours swirling that China is losing its taste for U.S. treasuries—it makes sense given a dwindling CA surplus—we should be watching whether the PBoC is willing to draw a line in the sand, again, at 6.45. I suspect it will because I doubt that it will want to invite further scrutiny about what happens if or when the economy opens up an external deficit.
You would probably think that the dollar’s lousy performance be associated with lower yields, and narrowing rate spreads with the rest of the world. Au contraire, U.S. bond yields have been rising, which has led analysts to argue that yield differentials have ceded to other macroeconomic fundamentals.Read More
On a headline level, 2018 has started exactly as 2017 finished. Stocks are up, U.S. short term rates are up—but the dollar has traded heavy—and economic data continue to tell a story of a synchronised upturn in global growth. The bears are furious, or perhaps just confused. Hussman recently published a prepper’s guide to a hypervalued market. And value investor extraordinaire—and famed bear—Jeremy Grantham from GMO invokes the “highest-priced markets in US history,” but also proclaims that we’re now in the “melt-up phase” of the bull market. I am all for holding opposing views at the same time, but markets demand a view and a position. So which is it Mr. Grantham? Long, short, or flat? I am not holding my breath for an answer. I have long since left the extremes behind. Picture a spectrum with Hussman and GMO at one end, and the wet-behind-the-ears trader, who have never experienced a sizeable drawdown in Spoos, at the other end. Hint: You want to be somewhere in between.
Separating signal from noise is an important skill in this game, and markets currently are throwing a number of curve balls at investors. What better way to kick off 2018 than by highlighting the ones that matter.Read More
Seven years ago I did a thesis on demographics and capital flows, which informs my thinking on economics and finance to this day. That’s a long time ago, though, so I thought that I would provide an update on one of the key pillars of that work. It starts with ageing. The breadth and speed of population ageing currently sweeping the global economy is unprecedented in human history. It is partly driven by rising life expectancy, which we can crudely hold to be a linear function of economic development. But it is also a result of a complex fertility transition. Two stylised facts should be highlighted at the outset. Firstly, the demographic transition does not end with a homeostatic “equilibrium” of replacement level fertility. Secondly, the decline in fertility seems to be driven by two forces; the quantum effect which operates on a quantity/quality trade-off and the tempo effect, which is the phenomenon of “missing births” as women postpone having their first child. The two are connected in complex ways, that we probably don’t quite understand. My goal here is to understand what is happening to global fertility rates. My sample is the World Bank’s data and their estimates of total fertility rates across countries.Read More