Posts tagged Mr. Trump
Sweet Irony

You will find no harsher critique of Mr. Trump’s indiscriminate use of social media than yours truly. If it were up to me, the president’s phone would have been deactivated a long time ago. Last week’s performance on economics, however, struck at the heart of a story economists and strategists have been circling for a long time. How far will monetary policy divergence be stretched in this cycle? Mr. Trump first suggested that other major economies—Europe and Asia—are unfairly manipulating their interest rates and currencies, before following up with a swing at Fed for making things worse by hiking rates. In short; the White House is suddenly spooked by the risk to the economy from a stronger dollar and higher rates. This is probably a reasonable political worry ahead of the mid-terms, but it is also sweet irony. If Mr. Trump wants to complain to anyone about the vigour of the dollar, he should start with a look in the mirror.  Aggressive tax and short-term inflationary tariffs in an economy with a near record-low unemployment and savings rate could only have one outcome in the end. A more assertive Fed and a stronger dollar always were obvious side-effects of such a policy constellation. 

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Agreeing to disagree about the DXY

One of the more interesting stories in markets last week was the disagreement about whether investors are bullish or bearish on the dollar. On the face of it, this is a silly debate. Clearly, sentiment has become significantly more positive on the dollar in the past three months, lifting the DXY index up by nearly 6% to a nine-month high of just under 95.0 at the start of Q3. On occasion, I nail my colours to the mast and try to come up with short-term ideas in equities and bonds, but I am generally loath to do it in FX markets. Currencies have a tendency to the exact opposite of what macroeconomists predict that they will. Usually, the stronger the conviction of economists, the stronger the countermove. With that warning in mind, I think it’s worthwhile looking at the stories which currently are propelling the dollar. The macroeconomic argument for a stronger dollar is simple. The synchronised global recovery has become de-synchronised since the beginning of the year, and the U.S. economy has emerged head-and- shoulders above the rest. Not only that; Europe and China have slowed while the U.S. economy appears to have gathered strength in the second quarter. 

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#Tradewars

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.

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