- The Bank of England said the U.K. economy faces a “slow” recovery and inflation will probably stay below its target for the next three years as the country struggles to escape the worst recession since the 1980s. (Bloomberg)
Key Reports (WSJ):
8:30 a.m. Apr Import Prices: Expected: +0.7%. Previous: +0.5%.
8:30 a.m. Apr Retail Sales: Expected: 0%. Previous: -1.1%.
8:30 a.m. Apr Retail Sales, ex-autos: Expected: +0.2%. Previous: -0.9%.
10:00 a.m. Mar Business Inventories: Expected: -1.2%. Previous: -1.3%.
“If you put a ten dollar bill under the rug instead of spending it, that is capital formation. It represents ten dollars’ worth of something that might have been immediately consumed, but wasn’t.”
FX Trading – Dollar as global elixir
One of our main premises which our long-term dollar bull market called is based was on the core belief US dollar-based credit would not again flood the global to any degree we saw during the last dollar bear cycle (2001-2008), which incidentally marks the third time in a row the dollar bear market (if we are right) was around 7-years, maybe something biblical there eh? [No apologies to the Christopher Hitchens’ crowd]
We based this belief on two conjectures we believed quite probable:
- Healing of the credit system is a long-term event and sentiment regarding the issue and acceptance of leverage has changed dramatically;
- A period of sustained low or no economic growth in the industrialized world (commonly referred to as the “Japanese disease”) will not be the stuff corporate earnings thrive upon; therefore it is highly unlikely as sustained bull market will engender the wealthy affect and lift the animal spirits of consumers.
And yet, it seems precisely a bet both of our major conjectures are completely wrong (and they may be though we still believe this is an ebb of risk appetite in an ongoing risk averse environment) that is being made by a host of economist and strategist who have called a stock market bottom and an end to the global recession.
Now, there is never any doubt we can be completely wrong at any momentum about a whole host of things. But, to coin a phrase from my youngest daughter, it’s “like way early” to suggest we are all out of the woods and back into Bretton Woods II:
“Bretton Woods II also helps. A third important way that easy monetary policy in the main reserve currency countries is supporting the global economy is via money flowing abroad. Take the case of China, which currently operates a quasi-peg of its currency against the US dollar. Easy money and near-zero interest rates in the US will induce outflows from the US to China, where interest rates are higher. To prevent its currency from appreciating against the dollar, the Chinese authorities will have to buy the dollar, thus inflating domestic money supply. This, together with the domestic measures taken to lift credit growth, should stimulate Chinese domestic demand. So, easy money in the US supports the real economy of the entire dollar zone, especially as the non-US members of the dollar zone such as China do not have an impaired banking system,” writes Joachim Fels & Manoj Pradhan of Morgan Stanley.
This Bretton Woods II scenario is the dollar-based credit game that drove the asset bubbles of the last cycle (as you can see in the chart below).
US Dollar Funding Risk Asset Classes 2001-2008 -stocks and commodities–as you can see in the chart below:
In effect, it represented an explicit weak dollar policy on the part of the US government in order to liquefy the globe and keep the symbiotic relationship between the US and China alive and well. That relationship was a simple one based on the following formula:
Stuff for increasingly devalued Federal Reserve Notes
China ships cartons of final goods to US consumers who can’t spend fast enough; the US fills those empty cartons with greenbacks for the return trip to China; China crams more stuff into said cartons, and off again. Everyone is happy. Walmart rules!
They say the path of a life often comes down to a few key moments, for me it was no doubt getting the courage to ask my wife our for a date 32 years ago this month (a crucial and wonderful key moment in retrospect), maybe the same can be said for economies. If so, the key moments to suggest our view is completely wrong long term rests upon:
- Chinese stimulus is more than a one-off measuring event, and
- US consumer juices flowing again
As traders we MUST remain open. But, for now, our longer term premise hasn’t changed. The moment of truth is inching ever closer so stay tuned.