Calmmarkets,USyieldsandJamesRickards

Dow Jones and S&P 500 are trading around all-time highs notwithstanding the daily minor ups and downs. Dollar index is trading quietly around the 90 mark. The US yields have climbed down, the most watched 10-year yield is trading below 1.50 in its lowest level for 3 months. The Euro and Sterling are also unable to break the 1.22 and 1.42 levels on a sustained basis. All in all, it points towards a climate which is calm and salubrious. Rates are expected to be low; no immediate action is in the offing and one can afford to relax. It might be possible that the market is looking for the next narrative to latch on; inflation, infrastructure spend, tax increase, global tax alliance, geo-political issues. It is just taking time to decide on the definitive narrative to go with.

This week we will have the US CPI data coming in, some surprise there will result in inflation bogey getting upped. There will be the initial jobless claims data coming today. The pattern of this weekly data also has been well anticipated for some time now as the economy is gradually opening hence it is not going to be any market mover. But inflation remains high on priority. Next week obviously the eyes will be on the FOMC meeting. One key issue there will be the large placement of cash in the overnight repo facility of Fed. This might prompt some technical adjustment in the bond buying program. It will be interesting to see the market reaction there. Let’s understand it bit further. The whole justification of bond buying is to provide extra liquidity to the banking system which is then expected to loan it further and ease credit pain for small business in the real economy. If all the new cash is going to get returned to Fed every night, then something is broken somewhere. Fed might term it as a transitory phenomenon too.

Anyways such calm days are ripe for more longer-term discussion. One topic which we keep coming back is the debt or how much debt any government can take up. Clearly as George Orwell said in his famous book Animal Farm, all animals are equal, but few are more equal than others. The answer essentially is that this debt number or debt to GDP number is different for different economies. Few countries are more equal than others. Readers would do well to note the muted market reaction by the markets on Biden’s spending plan with no corresponding tax hike. The yield on the US government debt has gone down as we noted above. The situation is not the same for EM economies surely.

We keep harping that rather than taking a dogmatic approach this needs to be seen more realistically. James Rickards in his book The Currency Wars writes about the US privilege not as the result of some lucky accident but as the consequence of half a century of deliberate well-crafted strategy. He pins the exact moment of the birth of Dollar supremacy when the Brettonwoods agreement was signed in 1945 (post WWII victory). Then the second one came in 1971 when finally, after printing excess Dollars (in contravention of agreement) for two decades US President Nixon rescinded the BW in toto. The third and final moment came in 1989 when the USSR system imploded and the world order shifted from bipolar to unipolar. That’s the story of the privilege.

Rickards however doubts the permanence of this arrangement. The world is becoming bipolar again. There is a push back against the fiat currencies. As per Rickards the question is not if but when. His remedy is the era back to commodity currencies primarily gold. But the gold has its own set of problems (disinflation, constricted money supply etc). We will continue this discussion in a later note. Till then enjoy the calm markets and falling US yields.