Key News

• German factory orders, adjusted for seasonal swings and inflation, rose 2.8 percent from March, when they surged 5.1 percent, the Economy Ministry in Berlin said today. Economists had forecast a 0.4 percent drop (Bloomberg)
• China will apply its tighter second- home mortgage policies to loan applicants. (Bloomberg)
• The 10-year German Bund yield hit a record low on Monday. (Reuters)

Quotable

“It shouldn't surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

“Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it's also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.”

                           Arthur Laffer

FX Trading – Key Long-term Themes Still in Play but there are Questions

We put together the chart below for a presentation we made back in January this year; it is a visual representation of the four primary underlying themes we think will drive the long-term dollar bull market.

To phrase it another way, global healing and a strong US dollar are mutually reinforcing and the process itself could lead to a virtuous circle of strength for the US dollar.

Global healing requires global rebalancing. Global rebalancing will be much easier if the US consumer gets back in the game (a strong dollar increases Mr. US Consumer’s purchasing power). A rebounding real economy and money flowing to the US economy are critical factors that will allow Mr. US Consumer to rebuild wealth.

Let’s briefly examine where we may be since we first presented this framework:
1) A rising dollar (falling euro) has relieved a modicum of pressure in Europe; note the
increase in German exports reported today. This is not to say German exports are all
that is needed, there is a very long way to go, but it is part and parcel to the story.
2) US real economy rebound driven by the force of money making it into the real
economy is key to global healing. I think the jury is still out here, as small businesses
still are not seeing the credit they need, or the opportunities, to drive US
employment. But, because this is a relative game, I have to think the US is leading
Europe and Japan on this measure (lagging Australia and Canada). But longer term
we need to see improvement.
3) We expected a rising dollar, and by definition a falling euro, and improving US real
economy as a way of relieving some pressure on China. To a small degree it has.
But, again precisely because the US consumer spending has not rebounded, the jury
is still out here. A double-dip recession i.e. falling global demand, likely means trade
pressures between China and its “partners” hikes up considerably and add to
systemic risk. Again, beneficial to the dollar, but only by default.
4) Lastly, US capital investment hasn’t quite yet rebounded in a way one would expect
given the amount of cash and relatively strong US corporate balance sheets.
However, international investors continue to find US assets a relative bargain. If risk
finally normalizes globally (which still may be a ways off), international money flow
to the US could surprise a lot of people. A return of long-term foreign direct investment to US shores is critical to the long-term move in the dollar and rebound in the world’s demand driver—Mr. Consumer.