Permabears Seek Validation in the Cycle
Markets are sending very strong signals of late. The yield curve inversion in the US and elsewhere, falling stock and commodity prices are all pointing to a weaker global growth outlook. The curve flattening in particular reflects a ‘stagflation trade’ which anticipates central banks overdoing monetary policy tightening to contain inflation pressures.
The permabears have been busy recasting their long-running structural bear call into a cyclical one, hoping the cycle will finally validate them. It is increasingly likely that the cycle will finally oblige them on at least some counts. If nothing else, they have the law of averages on their side. Yet markets have not yet delivered much joy to the purveyors of macroeconomic anti-Americanism. Just ask anyone who followed their advice and bought non-USD denominated asset markets, particularly Asian equities, as a hedge against USD weakness. So far, the USD has been a beneficiary of recent market developments and Asian equities have been crunched. Some hedge!
posted on 14 June 2006 by skirchner
in Economics, Financial Markets
(7) Comments | Permalink | Main
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Comments
“The permabears have been busy recasting their long-running structural bear call into a cyclical one, hoping the cycle will finally validate them.”
Well put. The funny thing will be when the US economy slows (from above average real GDP growth), but doesn’t go into a recession, they will claim success with their prognostications. Wow, tough call. Only took 3 years (by my count, maybe more) to predict below average growth.
Posted by cb on 06/15 at 01:21 AM
I take that back, most of it got loud after they lost the US election.
Posted by cb on 06/15 at 01:43 AM
Huh?! The only thing propping up the USD is the Fed hiking rates every month. If Bernanke were to even hint that the Fed might pause the USD would come under huge pressure. Do you disagree?
Posted by .(JavaScript must be enabled to view this email address) on 06/15 at 12:41 PM
Yes, although markets are now also starting to price future easings in the expectation the Fed will overdo it and reverse course. Eg, the eurodollar futures strip starts rising in price from as early as November 2006.
Posted by skirchner on 06/15 at 12:53 PM
Steve, I agree with your previous posts that the large US CAD does not necessarily mean the US economy will experience a recession. But I thought you had observed that the USD may eventually fall significantly (and I assume you use the expression ‘anti-American’ in a non-pejorative sense!)
Posted by .(JavaScript must be enabled to view this email address) on 06/19 at 02:23 PM
Rajat
My main point of difference with those who have been bearish USD-denominated assets has been to argue that any decline in the USD would be orderly and have no implications for US interest rates. If you have a benign view of the adjustment process like I do, the actual direction of the USD becomes a second order issue.
By “macroeconomic anti-Americanism,” I mean the tendency of many to be structural bears on the US economy and asset markets, ignoring the institutional strengths of the US (and other Anglo-American economies). This perverse tendency strikes me as being a derivative form of anti-Americanism (not to mention Bush Derangement Syndrome!), hence the phrase. Whether it is pejorative I guess depends on your point of view.
Posted by skirchner on 06/19 at 04:11 PM
Steve, thanks for your response.
I would agree with your view on benign adjustment - after all, the USD weakened significantly in both the mid-80s and 90s with no ill effect on growth. The direction of the USD movement may be a second-order issue from a macro stability/policy perspective, but it is of great interest to me as an investor in international (non-US) equities!
Posted by .(JavaScript must be enabled to view this email address) on 06/19 at 04:28 PM