One Hedge Fund's Warning: "What’s Good For The US In This Case, Is Not Good For Emerging Markets"

Tyler Durden's picture

Last Sunday, when a Trump victory still seemed improbable, One River Asset Management CIO, Eric Peters issued a note that in retrospect, was surprisingly prophetic: in it he predicted that after years of failure to kindle economic animal spirits, the "magic formula" to boost inflation involved a victory by none other than Donald Trump. To wit:

With central bankers desperate to boost inflation both in their country, and around the globe, yet failing to do so for years (especially as measured by the long end of the yield curve) leading to serious economists and pundits going so far as proposing the pinnacle of monetary lunacy, such as helicopter money, one person may have stumbled upon the "magic formula" for how to create inflation in the new normal: 'A populist uprising, compromised free trade, immigration restrictions, a 15% currency devaluation, 0.50% interest rates combined with aggressive QE is today’s magic formula for modestly exceeding a 2% inflation target 2yrs hence."

In other words, all that is needed for inflation expectations to spike, is a victory by the Donald Trump "populist uprising." Sure enough, hours after the presidential election result, inflation expectations soared, bond sold off, and stocks surged on expectations that Trump would... unleash inflation.

Judging by the market's reaction, Peters was 100% spot on.

Which is why we paid especially close attention to his latest note released earlier this morning, in which in his trademark "anecdotal" way, the CIO warned that while the US economy may appear to be benefiting from Trump's policies - if only for the time being - the rest of the world is set to suffer. Below are the key excerpts from his latest weekly note to clients:

“What’s good for the US in this case, is not good for emerging markets,” said the CIO.


“Emerging markets benefit from a weaker dollar, and you’re not going to get that,” he continued.


“Emerging markets benefit from global capital flows moving in their direction and that’s not happening either.” Back in February, emerging markets were in sharp decline, driven by (1) a strong dollar, (2) rising US interest rates, and (3) slowing Chinese growth. Then China spurred a massive credit stimulus, the Fed became wildly dovish, and the dollar declined sharply.


Interest rates collapsed throughout the year. As the growing pool of dollar, euro and yen liquidity searched for a decent return, it headed to emerging markets. “Trump has reignited the dollar rally, and his fiscal stimulus will force interest rates higher. This reversed everything. So emerging market investor’s last hope is that Chinese growth remains strong.”


And to be sure, the Beijing boys don’t want to see material weakness ahead of next autumn’s Party Congress.


But we’re currently near peak impulse from China’s Q1 stimulus. “To be bullish on emerging markets at this stage is to disregard the adverse dollar and interest rate environment, and build your investment thesis on the expectation that China will sustain the largest credit expansion in modern economic history.”


Most investors viscerally understand this, particularly within China, where capital outflows just hit new highs for the year - weakening the renminbi. “Historically, emerging markets have done well when global growth has been robust. But the world is changing.”


From 1945-2000 the US was the largest trading partner for emerging markets. Now China dominates their trade flows.


They’ve leveraged their economies to Chinese growth.


“Investors now have the choice of whether to chase dollar assets higher or buy emerging markets - it’s really not a choice.”

Peters' thesis in a nutshell: for Trump's policies to succeed, the biggest hurdle may be not the US Congress (earlier today in an FT op-ed, Trump economic advisor Anthony Scaramucci took aim at conservative budgetary restraints in a push to unleash much more US debt) but rather China, which will not only need to agree to "let Trump make America great again" by sending the dollar soaring, but to be willing to continue its unprecedented debt issuance flood.

It remains very much unclear if China - and thus the entire emerging market world - will agree to either of these two necessary (if not sufficient) conditions.

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knukles's picture

Wait!  You can't do this, hurt emerging markets.  Everybody gets participation certificates.
Talk about participation certificates, where's Madonna when one wants to collect the bet?

thesonandheir's picture

But he says 15? currency devaluation so how does that tie in with strong dollar?

pitz's picture

Trump will have to figure a way to devalue as there's huge amounts of deflation building in China which will push the Yuan to the moon.  Emerging markets are crazily undervalued.

Crisismode's picture


ChinaMan say:

"He who cuts off my real Estate profits in Vancouver and San Francisco,

will have short dong to put into

even shorter Trojan."


Read it and weep.


pitz's picture

There's minimal Chinese involvement in Vancouver and SF RE. 

mary mary's picture

What?  Wasn't Vancouver the place that passed those laws against flipping houses?  I thought they did that because Chinese businessmen were using that home-flipping to launder money.

Richard Head's picture

Now you're a SF real estate expert too? F off and die, shill!

jamesmmu's picture

Why future is up? what a nightmare!

navy62802's picture

If something is good for a third world shithole, I don't care. I care whether or not it's good for my nation, not yours. GFY

mofreedom's picture

Amen, especially when manufacturing is a national security concern.

I would rather my son work ina coal mine than be replaced by a MUSKy robot while being afforded a "liveable" wage on which to only buy synthetic drugs.


pitz's picture

In this case, the third shithole definitely isn't China these days.  You may very well be living in it if you are an American.

pitz's picture

China's capital outflows aren't a negative thing.  It just means that Chinese aren't finding a lot of good investment opportunities at home so they're acquiring overseas assets.  The Chinese economy is generating insane amounts of capital because they actually have people working.

mofreedom's picture

Yeah, mostly working with spoons, buckets and two acre farm fields.

Too much coal, not enough coal, nat gas too high, not high enough, build more elec gen, shoot we built to much, kill all the second born, shoot we killed to many second born, biuld lots of cities for the ghosts of the babies that we killed, force the rural folks into haunted cities......

Stupidest communists since the Soviets.

I'm not scared.

pitz's picture

Whatever they work with, they manage to create exportable products that are on the shelves worldwide.  Generating a trade surplus in the process.

The EM's have a lot to gain with productivity and financialization going forward.  The US faces a hard road ahead with those trends having mostly run their course. 

mary mary's picture

Who said Chinese kill the second-born?

Lost in translation's picture

Good for the US = fine by me.

Good or bad for EM = don't care.

Privyet_Jet's picture

America First.


EM's are way more dependent on commodities, which are pegged against US dollar.

pitz's picture

Quoted in USD$, but that's only because its a convenient reference currency.  And EMs can grow out of their commodity dependance with internal consumption and growth. 

jamesmmu's picture

Nobody wants VIX, thats the reason I cant stop buying. What could go wrong?

The Fonz...before shark jump's picture

China right now is pegged to usd... If the usd strengthens then China will just decouple and let their currency go into the shitter if need be......devalue the hell out of it....good for US consumer at home but shit for US companies selling I not correct in this assumption......the trade wars will interesting

Kagemusho's picture

For a very (literally) graphic illustration of that Chinese captial flight, go to and watch all those big, fat BitCoins rising from the 'CNY' counter making a  bee-line to Mainland China.

And you can't help but wonder how much of that is by Communist Party members doing what they are berating the ordinary citizen for doing.

Snaffew's picture

None of it makes any sense, US debt will explode, the dollar should weaken wildly...yet the opposite is happening.  I understand the markets are speculative, but this is speculation with zero basis or rational thought.  I'd like to see the US try to crank up rates...they will default on their debt payments so fast it will make your head spin.  I can't believe the markets are giving Trump this much credit when he hasn't done a thing other than to further divide the country.  I've never seen so much open racism in my life.  I think the slavery years were less racist.  It's crazy out there.

pitz's picture

Too many are caught in the delusion that higher rates are good for the USD.  This is what happens when stupid people control the money. 

mary mary's picture

I think higher rates are good for the USD.

realWhiteNight123129's picture

THe USD is rising on capital flows and chase after nominal yield. The USD is the world reserve currency so its value is completly artificial vis a vis its trade position. 

Now given that the Yuan is the largest country in terms of world trade, if the Yuan were to be floated, it would push down the USD enormously, steepen the curve like mad, result is devaluation, large inflation.

So financial assets would massively damaged. At teh same time, the trade gap would probably plunge massively too, meaning the unemployment would go down massively, but not with great salaries...

If teh Yuan were to be convertible, Chinese exporters would be fucked over, Chinese consumers would ahve a field day, Wall Street would fucked over, and the US worker would find a lot of jobs, but not paying so well. inflation would be high, nominal rates high, inflation high.

That is the blueprint... 




Wild Theories's picture

I don't know which is gonna give, but I'm not sure if the US itself would want rising rates and a strong US dollar at the same time, at least going by the action of past few yrs

we'll be in a new chapter indeed if we do get both

realWhiteNight123129's picture

This analysis is bad.

1. Dollar is driven by capital flows and trade.

2. China will take on more US assets only if they continue to run a trade surplus against the US.

3. If the US imposes tariff on China and emerging markets, you can expect capital controls to prevent flows of capital.

4. With more share of trade to the world than the US, China and its Yuan can effectively make the Yuan a good alternative to teh USD.

5. This would bring down the USD against Yuan, it should make, all else equal more difficult for China to run a trade surplus. 

6. This move would prompt a devaluation of the dollar, higher inflation / stagflation / high nominal rates and eventually high real rates.

This is the blueprint for the next 10 years.


pitz's picture

Not to mention because of China's productivity, there is a giant amount of deflation embedded into the Chinese economy, especially if they can't push their goods overseas as much as they formerly did.  This should push the Yuan up significantly.  Add to it the collapsing Chinese RE bubble, and you have a recipe for a very strong Yuan and rising Chinese stock market. 

If America wants its strong dollar and low interest rates to be sustainable, it will need to ruthlessly implement structural and economic reform.  But there will be an extended period of pain. 

mary mary's picture

You can already see that from what happened in the market Wednesday, Thursday, and Friday.

ExpertiseAsia's picture

What's good for the Eurasian trading block may not be good for the US...

Please read up on TPP and other trade thoughts here.

cowdogg's picture

What is this guy talking about? The strong dollar and low interest rates have destroyed the US. Why do you think that US industry has found a home offshore and why are third world immigrants flocking to the US if not for Dollars that they can send back home and retire there wealthy. If Trump truly intends to make America great again he will have to both raise rates and revalue the Dollar by at least 30%. Doing anything otherwise and we will soon see riots in the streets and the rioters won't be snowflakes and homos.