Is risk aversion the only reason to buy dollars?

Outlook: US GDP came in yesterday at 33.1% annualized for Q3, more than forecast, but remember it would take about 46% growth in Q3 to get even. The dysfunction of the annualization process has hit home and many news outlets, even TV, are pointing out the economy did not recover everything as it may seem. The better way to express the data is not annualized, in which case you get a rise of 7.4% in Q3 over Q2, which is still a record high number, after -9.0% y/y in Q2. WolfStreet.com has a wonderfully snarky article on the GDP components.

Notice that in the eurozone, Q3 GDP is up 12.7% after the 11.8% contraction in Q2, or -4.3% y/y.  The four big European countries got not-annualized quarter-over-quarter growth rates at 8-18% (see above), or far better than the US. This may be an offset to the wildly dovish ECB statements yesterday.

So, third quarter GDP in the US at 7.4% y/y and the eurozone, 12.7% y/y. Of course, a second pandemic wave in Europe and the third in the US are going to tank everybody’s Q4 data. Still, hold in the back of your mind that over long periods of time, currency levels trend to follow GDP growth. Nobody is saying the euro should rise against the dollar because growth is higher than in the US, but it’s not an utterly useless comparison. Europe did better to contain the pandemic in Q2 and got a Q3 reward for its troubles. The US consistently does less well and that should get reflected in Q4.

Today we get the personal income and spending embedded in the GDP data but reported separately. Again, rear-view mirror. More interesting is inflation expectations—see the chart.   The deflator is expected to rise by 1.5% in the headline and 1.7% in the core, but overall, inflation expectations are flat.

We get another barrage of data today, including U Mich consumer confidence, and the Chicago PMI. We also get GDP in Canada (August) and Mexico (Q3).

We think the thing to watch is the dog that didn’t bark. That’s US 10-year yields, which “should” be tanking as global investors flood into the safe-haven. But the opposite is happening. The FT notices, too. “Money managers have been left grappling with that issue once more after the 10-year Treasury was hit with its biggest bout of selling in three weeks on Thursday and the yield on the benchmark sovereign bond hurtled back towards a four-month high. The decline put a months-long sell-off in US government bond prices back in motion, interrupting a mini-rally in Treasuries this week that had been sparked by the worsening pandemic.

“At 0.82 per cent on Friday morning, the yield on the 10-year note is once again near the top-end of the range in which it has traded since late March, having risen 0.14 percentage points this month. The move on Thursday was enough to kick Treasury volatility to its highest level since June, according to Ice Data Services.

“The shift out of Treasuries in recent weeks has been fuelled by the rising prospect of a so-called “blue wave” at next week’s US election, a scenario where the Democratic party wins the presidency and both houses of Congress. Some investors have placed bets that the bigger fiscal stimulus expected under a Biden administration would mean a stronger recovery, pushing up inflation expectations …”

An Oxford Economics study shows Biden stimulus as leading to a 5% expansion in 2021, whereas continuation of the status quo would deliver only 3.7%. “…a Republican sweep would deliver growth of about 2 per cent.”

Golly, do you supposed the “wisdom of crowds” somehow grasps these metrics? All those Trumpies who think he delivers better economic outcomes than the Dems are simply wrong; the majority see fiscal stimulus as the way out, not to mention a more intelligent pandemic response.

The election is next Tuesday but it could be weeks before we get a certified count. One happy idea—if Florida really is a decider, we could have those results on the night. Florida knows how to count, after its debacle in 2000.  Various pollsters and forecasters keep coming up with reasons why the Biden lead, 6-12%, is wrong. One of the reasons is that voters being polled know Trump is universally viewed as a crook, buffoon and just a jackass, so don’t want to admit they voted for him. For some reason, the Trump campaign is not ashamed to use this reasoning, out loud. 

We seem to be alone in having some trust in the polls. Besides, the Dems are raking in money, far more than the Republicans. And the Dems are thought to be the ones doing all that early voting and in a size surpassing the 2016 election, implying motivated voters, including those who never voted before. That is less a motivation to vote for Joe than a motivation to boot the bums out. In other words, a tipping point at which Trump’s violation of US norms and values went too far.

The resumption of the rising dollar on risk aversion is in serious question. If we really have risk aversion, we should have higher bond prices as safe-haveners bid it up and falling yields. If risk aversion is the only reason to buy dollars, the move is ending. This is going to cause great angst by end of day. How to position for Monday morning?

Tidbit: About those stock market forecasts: one cycle guy (John Taylor) sees the S&P up to about mid-Nov and then a crash by month-end. For the dollar index, the charts tell this forecaster the dollar will rise into mid-Nov and perhaps mid-Dec, but then faces major crash risk. In other words, the dollar is not linked one-for-one to the stock market.

You can find many other forecasts, and what is interesting about them is that while mentioning risk-on/risk-off and the election, the real driver is supposed to be cycles in sentiment that follow a pre-ordained path. A different forecaster (Avi Gilburt at seekingalpha.com) sees a 10-15% decline in the Nasdaq in November. But then a recovery will follow, regardless of who wins the election or any other factor we think we can name today, and lead to a rally over the next 2-3 years.

No wonder forecasters are sought after and also despised in equal measure.

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