the strong usd

[dcarrigg]

Re: the strong usd

Midway through your first paragraph above, I started thinking about tulips and burst out laughing.

Hahahaha....it is what got me in the door!

[touchring]

Re: the strong usd

Oh yeah, don't mistake me, I'm not saying China's system is a panacea. I'm just saying I think the worldview and outlook is different, and more congenial to increasing world power than most Westerners want to admit.

This is because the MSM has been painting China positively for decades because of the market opportunity that China presented.

[thriftyandboringinohio]

Re: the strong usd

This is because the MSM has been painting China positively for decades because of the market opportunity that China presented.

I'm just the right age to have been amazed by this.
When I was a schoolboy in the 1960s communism was hated and feared in a very visceral way by most individual people on the street.
Had one of the neighbors been discovered doing business in communist China they would have been chased out of town by a mob bearing torches.
Now we just really don't care about this stuff, expect to throw the old insult at someone in politics once in a while in a half-hearted way

[dcarrigg]

Re: the strong usd

I'm just the right age to have been amazed by this.
When I was a schoolboy in the 1960s communism was hated and feared in a very visceral way by most individual people on the street.
Had one of the neighbors been discovered doing business in communist China they would have been chased out of town by a mob bearing torches.
Now we just really don't care about this stuff, expect to throw the old insult at someone in politics once in a while in a half-hearted way

I think it's all motivated by the (false) idea that it's the End of History and China's run by capitalists now.

[touchring]

Re: the strong usd

I think it's all motivated by the (false) idea that it's the End of History and China's run by capitalists now.

I think you're onto something. Deng is a capitalist (he came from a land owning family) and during his time, China became more capitalist. But after Deng, China is now becoming more communist by the day.

What is interesting is that Rocket boy is more capitalist than communist so his relationship with Xi will be something very interesting to watch.

[dcarrigg]

Re: the strong usd

I think you're onto something. Deng is a capitalist (he came from a land owning family) and during his time, China became more capitalist. But after Deng, China is now becoming more communist by the day.

What is interesting is that Rocket boy is more capitalist than communist so his relationship with Xi will be something very interesting to watch.

Yeah, sometimes I like to just think of things purely in terms of a series of 13, 5-year-plans, just for a different perspective.

1 - Eisenhower years
This one was about the basics of heavy industry. Coal, steel, that sort of thing. Steel output rose by 500%. Coal output doubled.

2 - Kennedy years
This was the great leap forward one. Messed up time. But also some economic success. Agricultural output tripled.

3 - Johnson years
Heavy industry greatly expanded. Massive electrification projects, moving into more complex industry with chemical and plastics manufacturing.

4 - Nixon years
This one was more about infrastructure. Rail. Seaports. Gearing up for exports.

5 - Carter years
This was about reform. The original trajectory was to continue expanding heavy industry. But they realized both the overcapacity issue and that they'd have to cater to western demand if they wanted the export plan to work. This meant taking a lot of steel and coal offline, growing more cotton, shifting focus.

6 - Reagan years
This one focused on efficiency. Reducing wasteful energy usage, installing industrial software systems, improving the quantity and quality of consumer goods, that sort of thing. Once done, heavy industry could compete and grow again, and exports could expand.

7 -Bush years
This one was about establishing tertiary industry. Finance, insurance, telecom, these sorts of things. And about education--bringing everyone up to a Junior High grad level. This was one of the most successful, and least celebrated ones I think, even though it happened during transition w/ Tiananmen, etc.

8 - Clinton years
This was mostly about becoming the best in the world at consumer goods and seriously ramping up the export of them. Americans are quite familiar with this period, I think. It's when everything stamped made in china started showing up on shelves.

9 - Clinton years
This one established long term goals out to 2010, and focused on proliferation of television & radio, defense, population control, and other efforts to sure up the project.

10 - W. Bush years
This one continued the 'grow fast and do everything' approach, but placed emphasis on expanding the information sector, and laying fiber and copper cable everywhere, and on rapid urbanization.

11 - W. Bush years
This was another efficiency one. Urbanization and industrialization was to continue, but electric and water use were to decrease, population was to flatten, forest was to be planted, basic medical coverage was to be expanded, etc. This was when the goal of increasing domestic disposable income and consumption began to be more important.

12 - Obama years
Massive infrastructure investment. Moving to higher-value manufacturing. Increasing investment in universities and R&D. Massive rollout of non-coal power. Massive construction of urban housing.

13 - Trump years
Long term plan to 2025: Align manufacturing, R&D, and defense sector. Reform the military. Establish a soup-to-nuts domestic-sourced defense industry. Short term plan to increase role globally in production chains and international investment.


I mean, when they pick something, they seem to really throw everything at it. So it will be interesting to watch this new one play out. The pivot to world power is obviously planned to begin around 2025.

[touchring]

Re: the strong usd

13 - Trump years
Long term plan to 2025: Align manufacturing, R&D, and defense sector. Reform the military. Establish a soup-to-nuts domestic-sourced defense industry. Short term plan to increase role globally in production chains and international investment.


I mean, when they pick something, they seem to really throw everything at it. So it will be interesting to watch this new one play out. The pivot to world power is obviously planned to begin around 2025.

Propaganda is good. China's biggest problem today is demographics and they haven't found a solution yet.

China's working population has peaked in 2015-2016, the rapid drop in consumption growth data coincides with this change. My sources are telling me that the bulk of discretionary consumption un China are by 20 something "adult kids" in single child familes (virtually every family).

Although working, they are still being supported by their parents in their 50s (they are still working) - yes, many receive lots of extra cash from their parents - not surprising as single childs are much dotted, especially sons. Living with their parents, they don't need to pay rent so this adds to their disposable income - https://www.nytimes.com/2018/08/20/b...harmacist.html

As their parents age, retire and become bogged down by their own medical bills, this source of additional disposable income will dry out. This is when China's consumer spending will fall like a rock. It could come as early as 2025 and there is no solution.

Trade war or not, China's consumer market will stall after 2025 or earlier.

[GRG55]

Re: the strong usd

Time to reprise this nearly year-old thread started by jk.

The Fed has signalled the start of another rate cutting cycle, and all pretense of continuing QT has been dropped.
Talk of incentives to persuade US corporations to repatriate retained earnings held abroad is a distant memory.
In an effort to talk down the USD exchange rate, this Administration seems to have embarked on a program to persuade foreign sovereigns not to increase holdings of US Treasuries (and perhaps even sell down existing US$ denominated reserves) under threat of being targeted a "currency manipulator". This at a time of record US fiscal deficits.

The question is: Are we stuck in an "Endless Ka", or is this current deflationary impulse finally "Prelude to Poom"?

Plausible cases can be made for either of these outcomes.

- Attached is a chart of the USDX, showing "the strong usd" trend in place when this thread was started last year has more or less continued, albeit at a more modest rate. Are we certain that direction is about to change as a result of the Fed's recent policy shift (and other factors)?
- The volume of global sovereign debt, corporates and now sub-prime debt issues subject to negative nominal interest rates continues to increase. The Fed is the only CB of consequence that isn't already at, or below, the zero bound.
- The ubiquitous (magical?) 2% inflation target has been persistently out of reach, especially for the BoJ and ECB. With global economies slowing, as the US remains the strongest of them (evidence of an impending recession in the USA remains muted), can the Fed succeed in achieving the inflation Dr. Bernanke said could always be created, if necessary?
- As global economies slow are capital flows (yield seeking and safe haven motivations) going to continue to favour the US$ and keep its exchange rate comparatively strong, no matter what the Fed does?
- Will it take a complete loss of confidence in, say the ECB and the Euro (as an example), to finally achieve the higher inflation rates needed to help deal with the stifling accumulated debt loads since the global financial crisis? Will a loss of confidence abroad drive even more capital flows to the safety of the US$?

[dcarrigg]

Re: the strong usd

I don't think there can be a Poom in the US without a radical shift in politics and law. Everything is geared to holding wages down and preventing it.

I'm more convinced that there were three sides to the stagflation reaction. The Volker one with the high rates that everyone remembers and that went away and are now gone. The ramp up in deficit spending which thanks to never ending tax cuts still hasn't ended. And the third one is harder to put your finger on, but it's institutional/legal. The tax code was set up in the 80s in reaction to it. But so were the state laws about unionization and employee pay. Labor rules. Everything institutional is geared to ensure wages will never inflate. There's an outside chance you get a massive wave election with a one-party super-majority led by an administration willing to take a sledgehammer to that stuff and end the tax cuts, in which case we'll be in new territory where it's possible. There's also the other chance that commodities will really run up hard and fast, but even then, wages will be held down. And how on Earth could there be a real Poom so long as every law and corporate policy at every level is geared towards keeping wages low? As a nation, most of us can't even discuss our wages openly, because then the boss might lose an edge. America has developed a ton of weird behavioral tics like that, and I don't see how poom can overcome those headwinds.

Anyways these are big questions. I ain't the best at figuring the commodities or lots of other stuff. But I thought poom was coming last time and I was wrong. And I've thought a lot about why between then and now. And that's the best answer I have: That low inflation and low wages are linked, and both are policy-driven.

I mean, think about this: In Vermont right now, the unemployment rate is 2.1%. Lowest in the nation. 10 years ago the rate peaked in Michigan at 14.9%. Wages are functionally the same in both times, places, and environments. That's how little supply and demand have to do with wages at the macro level. And when you subtract state & local increases in minimum wage, all wage gains vanish, and the equation zeroes out.

Everything about employment and wages has become "sticky." We've had just about 2 million federal employees for 60 years now. There's 150 million more people in the US. But the number of jobs stays remarkably static all the while. To put it in perspective, the high over the last 100 years was 3.4 million in 1945 and the low was 1.8 million in 2000. But over the last 50 years, the high was 2.3 million in 1969, low again 1.8 million in 2000. There's no flex there. Neither Nam nor Desert Storm, neither Great Recession nor Nixon Shock, neither 9/11 nor the fall of the USSR made a dent at all. That's how powerful the glue is.

I mean, it seems unlikely, doesn't it? Imagine kicking the DeLorean up to 88mph and going to 1953 and telling them there were about 2.1 million federal employees and asking them how many they think there'd be in 2019. Probably most would guess more. Some might guess way less because robots or automation, etc. But how many would guess "more or less exactly the same number?"

Same thing with wage-levels all around at a macro level. The narrative is usually that wages haven't grown faster than inflation. It's rarely that wages and inflation are intrinsically linked. And yet...

[GRG55]

Re: the strong usd

My thesis at the moment is we are stuck globally in a "nearly endless Ka".

I don't think we have much chance of an inflationary Poom anywhere unless and until there is a complete loss of confidence in a national currency. There are a few examples of that now. And we are seeing signs the usual trouble spot nations are now being joined by a few others.

The most recent IMF data I could find (April 2019) shows the usual suspects Argentina at 43.7% and Zimbabwe at 73.4%. Venezuela is officially shown as "No data available", but the IMF chart is showing >10 million% (Yikes! ). Sudan is 49.6%, Iran now 37.2% with neighbouring countries in the teens: Turkmenistan (13%), Uzbekistan (16.5%) and Turkey (17.5%). A smattering of African nations are also all in the teens; Nigeria, Libya, Egypt, Zambia and Angola. At the other end of the spectrum the only nation showing negative inflation in the IMF data is Saudi Arabia at -0.7% (but its currency is still a US$ proxy).

I expect this inflationary bias will slowly spread to other fiscally marginal small economies as capital flows continue to become more discriminating on the approach of the next global recession. Central Banks will, of course, continue to fight this by desperately pumping as much cheap money into the global economy as they collectively can, using ZIRP and NIRP to try to increase the velocity of that money. We should all be listening for the sound of rotor blades revving up.

North America, Europe (including the eastern block and Nordic nations), ANZ, the west coast of South America and China are all officially printing <3% in the IMF dataset.

Mainland China still appears to be grappling with capital outflows. My long standing scepticism about the strength, durability and resilience of the Chinese miracle economy may yet prove correct. If I am right this will continue to contribute to the global deflationary bias currently in place.

But if I had to pick a developed economy region where I think confidence cracks appear first it is the Euro zone. The ECB is rapidly approaching "zero degrees of freedom" for its policy choices (there is talk of a two-tier interest policy, so the banking system can be relieved of the cost of having to pay the ECB for reserves on deposit in this crazy NIRP world). The EU does not have the social cohesiveness of Japan to see it through as its accelerating NIRP policy combined with Germany's austerity demands continue to tear at the fabric of European society. Brexit is just the beginning. It seems inevitable at some point Germany is going to be asked to exit so the Euro currency can be devalued more aggressively. When that finally happens it will be a marker milestone on the way to a European Poom. But as we have seen so many times before, things can go on much longer than anyone expects, so who knows how long before we see something like this.

In the meantime, despite its problems and its politics, betting against the US economy still seems seriously bad odds. It is, by far, the least dependent on exports of all the major economies. And although agriculture has been hard hit in the tariff wars now underway, ag exports will be redirected to alternate markets that are left short if China tries to source elsewhere. Frankly, I don't see how the Trump Administration is going to be able to prevent continued yield seeking and safe haven capital flows into US Dollars and US Dollar denominated assets as the building credit problems in the rest of the world start to play out first.

[dcarrigg]

Re: the strong usd

I think we're in agreement about a lot of this stuff, especially the relative strength of the US economy and dollar vis-a-vis EMs. More on that was in this thread.

As far as the Eurozone goes, I think you're correct too. The Euro's design is fundamentally problematic. And they're out of bullets for the next downturn like you say. German politics are broken. Social Democrats are all but dead thanks to Schroeder and his acolytes. Far right AfD ate the Christian Democrats, they get maybe a quarter of the vote now as the biggest surviving party. Weirdly the Greens are polling at about a quarter now too. Nobody will work with the Left. There's no clear majority coalition to be found anywhere. And I don't see one forming in the foreseeable future. France is basically on the same path. Italy's a basket case. UK seems like maybe it's heading down that road too.

I'm less sure about China. I think their system is largely different and new in many ways and differently susceptible to problems than just about any other nation on earth. There's still a lot of question marks, and time may prove you correct. But I suspect they have the tools and will to control most macroeconomic problems and the real question is whether they have the tools and will to control things political.

I think India is probably in trouble though. The credit quality of India's corporate debt is really bad. Something like 12 to 13% of assets are non-performing now. Only Portugal and Italy come close. If we're talking about a ~1.6T dollar sized pot, that's a pretty good chunk owing in arrears. Seems likely defaults are on the horizon, and soon. As it is, credit quality's at a six year low, mostly led by small and medium firms. Fitch just cut their outlook, but I think they could cut it more. They're starting from a higher growth rate, so it may not be recessionary, but it will slow down, as China has, and I suspect probably a lot more in the short term.

[jk]

Re: the strong usd

re strong usd- i think it's likely to get still stronger for a while.

i think the world has already entered a [for the moment] slowly [but inexorably] growing recession, as has the u.s.. various countries are in somewhat different positions along their trajectories from recent highs to whatever will be their lows.

the u.s. is "the cleanest dirty shirt," still, and as other countries and regions proceed us down the slope to our coming bottom, currency flows will seek safety in the usd and u.s. treasury paper. usd denominated debt is already weighing heavily on em's, and that will get worse. money will continue to flee em's. too much global capacity is most obvious in the auto sector but is virtually everywhere. there are record profits in many u.s. listed companies as the share to labor continues to be suppressed, but suppressing wages suppresses demand. meanwhile ultra-low interest rates allow zombie companies to lurch forward, contributing to over-production and suppressed pricing power. [recent surveys lately show it is far more likely for prices to be reduced at the margin, than to be increased.] global trade is down. pmi surveys point down. so. korea is down. singapore is down.

the fed can't get rates negative enough, nor will they implement qe fast enough, or vast enough, to prevent the trend from proceeding. i think this makes it likely we will elect a democrat as president in 2020. it is a close run thing whether republicans will retain control of the senate, though i think that is still the likelihood. i assume things will get worse since monetary policy will be played out and fiscal policy will be at an impasse. to spin this fantasy further, then, a democratic senate in 2022 and fiscal policy unleashed. deficits will have already skyrocketed, but now they will turn on the afterburners, to mix metaphors a bit. the fed will buy all the paper.

wage growth will finally have its day.

in other words, ka-poom.

getting back to the usd, it will for quite a while continue to strengthen vis a vis other currencies. but in the poom it will lose significant buying power in terms of real goods. stocks, having gone down in the ka, will soar, at least nominally. equity will be your best bet [among standard investment instruments] for retaining purchasing power.

here i finish my turn as nostradamus.


edit: just came on this:
https://www.alhambrapartners.com/201...r-number-four/


and this

[touchring]

Re: the strong usd

Great write up jk!

You left out the most important thing - which is gold. If the dollar remains strong, gold won't break out?

re strong usd- i think it's likely to get still stronger for a while.

i think the world has already entered a [for the moment] slowly [but inexorably] growing recession, as has the u.s.. various countries are in somewhat different positions along their trajectories from recent highs to whatever will be their lows.

the u.s. is "the cleanest dirty shirt," still, and as other countries and regions proceed us down the slope to our coming bottom, currency flows will seek safety in the usd and u.s. treasury paper. usd denominated debt is already weighing heavily on em's, and that will get worse. money will continue to flee em's. too much global capacity is most obvious in the auto sector but is virtually everywhere. there are record profits in many u.s. listed companies as the share to labor continues to be suppressed, but suppressing wages suppresses demand. meanwhile ultra-low interest rates allow zombie companies to lurch forward, contributing to over-production and suppressed pricing power. [recent surveys lately show it is far more likely for prices to be reduced at the margin, than to be increased.] global trade is down. pmi surveys point down. so. korea is down. singapore is down.

the fed can't get rates negative enough, nor will they implement qe fast enough, or vast enough, to prevent the trend from proceeding. i think this makes it likely we will elect a democrat as president in 2020. it is a close run thing whether republicans will retain control of the senate, though i think that is still the likelihood. i assume things will get worse since monetary policy will be played out and fiscal policy will be at an impasse. to spin this fantasy further, then, a democratic senate in 2022 and fiscal policy unleashed. deficits will have already skyrocketed, but now they will turn on the afterburners, to mix metaphors a bit. the fed will buy all the paper.

wage growth will finally have its day.

in other words, ka-poom.

getting back to the usd, it will for quite a while continue to strengthen vis a vis other currencies. but in the poom it will lose significant buying power in terms of real goods. stocks, having gone down in the ka, will soar, at least nominally. equity will be your best bet [among standard investment instruments] for retaining purchasing power.

here i finish my turn as nostradamus.


edit: just came on this:
https://www.alhambrapartners.com/201...r-number-four/


and this

[GRG55]

Re: the strong usd

Great write up jk!

You left out the most important thing - which is gold. If the dollar remains strong, gold won't break out?

Gold might not break out as much in US$ terms, but I have no difficulty seeing gold AND the US$ both rising simultaneously in a world where real interest rates are negative in the other major currencies.

[GRG55]

Re: the strong usd

re strong usd- i think it's likely to get still stronger for a while.

i think the world has already entered a [for the moment] slowly [but inexorably] growing recession, as has the u.s.. various countries are in somewhat different positions along their trajectories from recent highs to whatever will be their lows.

the u.s. is "the cleanest dirty shirt," still, and as other countries and regions proceed us down the slope to our coming bottom, currency flows will seek safety in the usd and u.s. treasury paper...

...getting back to the usd, it will for quite a while continue to strengthen vis a vis other currencies...

The challenge would seem to correctly anticipate what is "a while".

As with the run up to what became known as the global financial crisis, it was possible to correctly anticipate the coming effects of the growing credit stress. Years in advance. What was difficult was judging the timing as to when things would finally break.

i believe this will be the difficulty this time also. Are we one election cycle away from the turning point in the US$? A few years? A decade?

Will we see the same same sort of euphoric blow off top in the US$ as we saw with tech equities in 1999 and low quality credit in early 2017; a clear early warning signal of the anticipated change?

Heretofore I have taken the ravings of the US$ doomer crowd (James Rickards et al) as an excellent contrary indicator. But as the end game approaches, I'm finally thinking we need to figure out how to distinguish between the head-fakes, like the current Administration/Fed led effort to push the US$ exchange rate down, from the arrival of the long anticipated secular shift.