By Michael Every of Rabobank
Back to the Roach Motel.
President Trump indeed returned to the White House yesterday, where people seem to be going down with Covid like flies. Luckily he is probably already immune, as he noted. Trump arrived by helicopter in a Leni Riefenstahl video clip and urged Americans --for the second time, the first by Tweet-- not to be afraid of Covid, and not to let it dominate their lives. He had, he said, fought the virus as a leader. He had to do what he done, knowing the risks, involved.
Critics will point out that the man who just fought the virus is not yet out of the woods medically, and was caught puffing after climbing the stairs: true, but have they ever seen what Trump looks like after climbing any set of stairs at any time? The same critics point out Trump just benefitted from experimental, world class healthcare at public expense even as he has nominated a justice to the Supreme Court who may vote to repeal existing conditions protections offered by Obamacare.
However, one has to also consider that 2020 is likely a base election, and Leni Riefenstahl and Trump know how to fire up a base. It is very easy to call for continued lockdowns when one has a safe job paying full salary to work comfortably from home – which includes most Trump critics (and, full disclosure, this writer too). It’s far less attractive an option for a small business owner facing ruin, or for the self-employed, facing ruin, and even for the ‘always one rule for them and another for us’ blue collar voters who have had to keep working through Covid regardless, for example, delivering food to those working from home. Those are all Trump voters.
In short, objective analysis in partisan times would suggest there is going to be a flood of justified criticism of Trump’s actions (again), but likely also a lot of base support. Unless Trump has a health lapse, as his critics warn – but that is where we have been since Friday anyway.
Stocks certainly perked up on the Trump news, and 10-year Treasury yields rose too in a Lazarus effect….although earlier in the day we were told this was because Biden was far ahead in the polls. Or perhaps this was due to hopes for more US stimulus, which Trump has tweeted he very much wants done, and which appears to be edging closer?
On which, we must enter another Roach Motel. Yesterday, the Financial Times published an article from Stephen Roach --formerly of Morgan Stanley, and now a senior lecturer at Yale-- in which he calls for the imminent collapse of the US dollar (which will decline by a third by the end of 2021, apparently) and its loss of global reserve currency status. Such pieces from Roach, always with the same theme, seem to appear once or twice a year now, and always get coverage in the financial press, regardless of the fact that they are nonsense. Two colleagues contacted me last night about the piece, which shows how much consternation it caused: one to double check that Roach’s arguments were indeed as silly as they looked and he wasn’t going mad.
Anyway, Roach is roaching that the USD will collapse because the US is running a vast fiscal deficit, and that will cause a vast current account deficit, and then foreigners won’t want to fund it, and then the USD will plunge, and then something else will emerge to replace it globally. This is what they teach at Yale today, apparently.
Naturally, this overlooks that the vast fiscal deficit --which looming stimulus would indeed make vaster-- represents a transfer from the public sector to the private sector, so the huge deficit on one hand is matched by a huge surplus on the other. Think of those cheques for USD1,200 going to households, and all the households who just bank it while working from home. In other words, if the US runs a 20% fiscal deficit, for example, it won’t run a 20% current account deficit too: private savings will spike at the same time, and it will only run perhaps a 4% deficit overall.
So, yes, the USD can go down. But it’s already gone down a long way vs. EUR and JPY of late. Does anyone think the ECB and BOJ --who have the same fiscal deficit problems as the US!!!-- are going to sit there and do nothing if EUR should try to go up to 1.40 and JPY to 80, bringing both crushing deflation? Likewise, Roach ignores that the USD is up a lot against many EM FX despite what has happened so far fiscally and politically. Is he really saying everyone will now want to hold EM and not US assets? This is also what they apparently teach at Yale.
That is a parallel to the equally tragicomic ‘But nobody will buy US Treasuries!’ argument, which plays out ad nauseum even as yields trend ever lower: on which, this latest UST yield spike is another false dawn unless Trump or Biden push for serious *structural* change in the economy - and that will take a lot more than a Build Back Better sign falling off of a lectern, Theresa May style, or a Leni Riefenstahl video of a helicopter and a balcony.
Roach also can’t make an argument for how any other currency or asset can realistically replace the USD, which is literally armed to the teeth to stop that happening, and where liabilities in the Eurodollar market exceed available USD by 9 to 1. It will just happen, he says. Such ideas are of course much appreciated in China: here is Roach being praised for his bold commentary in the official China Daily, for example.
Indeed, recall that on 8 October the arms embargo on Iran ends. Russia has suggested it will then sell Tehran its S-400 defence system. The US has said anyone doing so will feel the full effect of the USD ‘weapon’. Likewise, 12 October is the 90-day mark following the passage of the Hong Kong Autonomy Act, by which date China hawk Mike Pompeo must compile a list of each foreign person who is “materially contributing to, has materially contributed to, or attempts to materially contribute to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law”. That then starts a short countdown to financial institutions being listed; which starts the countdown to the imposition of US sanctions. The USD weapon again.
Against this backdrop, people will be avoiding USD and looking at EUR or CNY or others? Only in the way people are always deliberately looking for Roach Motels, rather than ending up in one. For one example, the Aussie trade balance today was just AUD2,643m vs. an expectation of AUD5,050m: exports were down 4% m/m and imports up 2%. The RBA left rates on hold while making clear getting unemployment down is an “important national priority”, and that it is ready to ease again: it is waiting to see the budget, out later today (and a fiscal deficit expected to be around 12% of GDP) before acting, however. Yet expect rates at 0.1% and more QE as soon as November: which according to Mr Roach means AUD is going up to 0.90 by end-2021.