European markets could gain what America loses

Outlook:

Much of what is on the schedule today should not affect currencies. Brazil’s president tested positive for Covid-19 and will be watched. He’s the second big country leader to catch the disease, following Boris in the UK.

AMLO is meeting with Trump today to “celebrate” Nafta 2.0 but probably with some hidden agendas in there, too.

We get the consumer credit report, expected to be less-bad at about -$15 billion than in April (-$68 billion). Less-bad translates into “good.” Offsetting is likely another gloomy prognosis from Fed Bostic, that economic activity is levelling off and failing to recover at the sizzling V-shaped pace expected by so many. But Fed Vice-Chair Clarida, perhaps in rebuttal, said “We have a lot of accommodation in place; there’s more that we can do, there’s more that we will do, if we need to.”

About to reach the forefront of the news cycle is the sharp pullback in state and local budget capability due to the drop in revenue from income and sales taxes, combined with the rise in spending on public health. The WSJ reports the “National Governors Association says states need another $500 billion in federal aid to make up for lost revenue. The U.S. Conference of Mayors says cities need $250 billion. The Democratic-led House in May passed a bill that included $1 trillion to help state and local governments. But Republican senators have paused discussion on another fiscal package until later this month.” Note that NPR estimates only $350 billion of the $3 trillion recovery money went to public health, leaving most of the burden on the states. The phrase “federal mismanagement” comes to mind. Presidential candidate Biden says he has a plan.

Then to add insult to injury, the hurricane/tropical storm forecast for this year is 20 storms, the highest prediction since 2005. As we saw with the federal response in Texas vs. Puerto Rico last time, local governments that cozy up to Trump will get the FEMA rescue money and anyone considered Dem or “liberal” can go without.

If the US has a surge in Covid-19 cases while the rest of the developed world is posting sharp declines, why do their stock markets not thrive while the US markets follow the cases? For the FTSE or DAX to follow US leadership in the equity world like a bunch of ducklings waddling along after their mother is silly. The corollary question is at what point do the non-US markets follow the Shanghai, if they are going to follow anything? 

An FT opinion piece by Michael Howell, who is CEO of something named CrossBorder Capital and author of a new book, Capital Wars: The Rise of Global Liquidity, argues that it has been China propping up the dollar all these years and that can end. He has some frightening data, too.

“In barely two decades, China’s share of the $140tn pool of global liquidity — defined as total savings plus credit — leapt from about 6 per cent to well over 25 per cent. China invoices goods in US dollars, invests in US dollars and provides timely countercyclical boosts of fiscal and monetary policy for its dollar-hungry economy.

“Flows from China were most obvious in 2015-16, when an anti-corruption drive from President Xi — forcing capital out of the country — resulted in a spike in the dollar and a collapse in Treasury yields.

But it goes well beyond this. We estimate that the bulk of the near-30 per cent rise in the US currency since the mid-2000s and about three-quarters of the drop in US bond yields can be attributed to China effects.”

If China retreats from the dollar hook, the dollar could lose a quarter of its value, longer-dated T-yields could return to 2%, and “European markets could gain what America loses.”

Hmm. When you go through credit training and bank treasury training, you come away with one Top Rule—liquidity, liquidity, liquidity. It’s the parallel to location, location, location in real estate. Howell’s focus on liquidity is therefore appropriate, if not the only ruling principle in every case, every time. Underling solvency counts, too (ask Argentina), not to mention the character of the principals, aka honesty and transparency. The lack of these could be fatal to China.

In any case, a switch from US dominance or leadership to someone else, even Europe, is a long-term development. We are a little surprised Howell doesn’t name the UK as a winner over the US, at least not in this article.

Meanwhile, we alternate between risk-on and risk-off, and continue to get uneven application of sentiment to different currencies. It looks like the CAD is finally getting a moment, while former darling AUD is struggling. Go figure.

US Politics: The new book by Trump’s niece is out early to the press. Mary Trump, a clinical psychologist, discloses how Donald and the other siblings cheated her and her brother out of their inheritance, a 20% stake in grandpa Fred’s estate. Mary Trump concurs with other psychologists that Donald is a narcissist but adds he learned to swim in the toxic waste of his father’s sociopathy. Among the new things—Trump paid someone to take his college entrance examination to Wharton. Otherwise he would be stuck at the less prestigious Fordham with the rest of the bridge-and-tunnel crowd. Trump cheats at everything he can as a way of life, and learned he could get away with outrageous misbehavior by bullying his own mother. The book is a stink-bomb, if not a surprise to anyone who has been paying attention. 

On another front, the story is not going away that Russia paid the Taliban for every US soldier killed in Afghanistan. A majority of Americans believe the story, according to a new Reuters/Ipsos poll out today, and over half want more sanctions on Russia. The consensus of high-level expert opinion is that if Trump was briefed on the story but failed to take punitive action, it’s dereliction of duty; if he was not briefed, it’s a failure of the intelligence community, full stop. The Barbie-Doll press secretary got scorn for saying they tell Trump only when the intelligence is 100%, which happens as often as the cow jumps over the moon in real life. 

 

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