Optimism,ExtrastimulusandIshapedrecovery

The Dow Jones was up last night. The Hang Seng and Nikkei are on a tear in the morning trade today. As for the reasons, this can attributed to the renewed optimism from the US. The US Fed outlined the corporate bond buying program which it had announced in March. On the other hand, there was an expectation going around that there would be another 1 trillion USD stimulus program by the US government to fund infrastructure. As none of this money is going to be availed through increasing taxes or sale of government assets, the only likelihood is that more UST’s will be issued which will be promptly subscribed by the Fed and the market alike.

We have previously written umpteen times about who can and who can’t borrow their way out of crisis, and the debate about the special privilege of the US, presenting arguments on both sides as to why the US Dollar status as a reserve currency is secured or threatened. The problem with such views is that many times the whole reserve currency debate is viewed from a narrow and constricted prism of monetarism. Points like deficit to GDP, debt to GDP, unsustainability of debt etc. are bandied about to make the narrative more compelling. But sadly this represents only one part of the picture. In his book The Disunited Nations, geopolitical strategist Peter Zeihan compares each important country/bloc on the basis of its strategic presence across the globe and its ability to secure the trade routes across seas which that country’s economy uses. His final assessment presents a sober picture for many reserve currency contenders. Zeihan summarises that the current situation may continue until the geo-political realities change even in the face of convoluted economic rationale.

Optimism trade follows a predictable pattern. Stocks up, dollar index down, US yields up, EM currencies appreciate. Today is no different. To keep the views balanced we would like to point out the renewed emergence of cases in Beijing and New Zealand, the announcement of stringent lockdown in the Indian city of Chennai etc. This is just to be cognizant of other set of arguments.

Domestically, the stock markets are up 1.7% in the opening trade swimming with the global tide. The Indian rupee is trading around the positive zone compared to yesterday. In other interesting news yesterday, the Director of the US National Economic Council, Larry Kudlow, spoke to news reporters and defined the current economic recovery in the US as an I shaped recovery, which defines something which just keeps going up. This is in contrast to the Fed Chief Powell’s statement last week saying he expected a long and protracted recovery path. The addition of “I” to an already congested array of V, U, W is confusing to say the least.