Quickly, among the reasons we anticipate a multi-year US dollar bull market in the making is interest rate differentials. While the difference between interest rates in the US may not close significant ground versus all major central banks, we believe the current US yield disadvantage to the UK and Eurozone will narrow; and the advantage of US rates over Japanese rates will widen.
Who leads, who follows? Do rising stock prices make Mr. Consumer feel good i.e. wealth effect? Or does the ebb and flow of Mr. Consumer’s confidence blaze the trail for stocks?
This from the International Monetary Fund—morphing views on the “free flow” of capital (our emphasis):
With the global economy beginning to emerge from the financial crisis, capital is flowing back to emerging market economies (EMEs). These flows, and capital mobility more generally, allow countries with limited savings to attract financing for productive investment projects, foster the diversification of investment risk, promote intertemporal trade, and contribute to the development of financial markets. In this sense, the benefits from a free flow of capital across borders are similar to the benefits from free trade, and imposing restrictions on capital mobility means foregoing, at least in part, these benefits, owing to the distortions and resource misallocation that controls give rise to.
Winston Churchill once said: “Nowhere is more nonsense talked than by currency experts about foreign exchange.” We are in total agreement, and unfortunately guilty as charged, even though we do our best to spew a minimum of nonsense.
We believe, once all the non-sense is said and done, there really are only two key things to worry about (assuming of course you have a natural market cycle time-frame; we are not talking about short-term technical stuff that seems so popular); these two things encapsulate all the other stuff:
Can you say Chutzpah?
Let’s just say for example you study very hard an earned a PhD. in economics at a “top” institution. And let’s say, given that you had tenure and time to consider pie in the sky stuff, as opposed to being worried about paying your mortgage next month, you develop a very nice theory about how to create a common currency. The problem is, the particular zone you have in mind for this economic experiment is not fertile ground for a common currency, given diverse political and business cycle/productivity levels among the different members your theory cobbles together. Add to that, likely poundfor- pound the smartest economist who has ever lived—Milton Friedman—tells you this is a bad idea precisely because it is not fertile ground for a common currency. No matter.
