Interview: Guest Lecture with Nik Bhatia on "The Bitcoin Layer" -- Currency Wars.
First time on Nik's show to talk about how Competitive Currency Devaluations can lead to (EUR)Asian Contagion 2.0. Comprehensive walk through of my "Battle of the BADS" post. Full Thread Show Notes!
It was a pleasure to be on Nik's show to talk about how Competitive Currency Devaluations can lead to (EUR)Asian Contagion 2.0. Nik was kind enough to give me the time for a comprehensive walk-through of my "Battle of the BADS" post.
Once again, I tried to include relevant content in the Show Notes, so please read along as you listen.
(Side note: I’ve been experimenting with a new webcam in an effort to get better audio/video than my iPad, but the problem is that I can’t look directly at the camera given my setup, which is a bit awkward. Please let me know if this bugs you, and maybe I’ll return to the iPad view.)
YouTube:
Show Notes:
First off, here is the referenced post, “Battle of the BADS”:
Japan is the FIRST DOMINO, because the BOJ faces the most acute crisis right now in its Scylla/Charybdis Dilemma.
JPY Devaluation is the LESS BAD CHOICE, because it provides Export Competitiveness.
Similar Dilemmas are faced by the PBOC & ECB.
China and the PBOC is contending with “China NO Reopening 3.0” and needs all the help it can get:
Given that Chinese households have ~70% of their net worths in RE, how does China create a Consumer Economy without reflating this sector?
CNY Devaluation might not even help China given its myriad problems, but a Competitive Devaluation around them does not help its cause.
The Dilemma of Europe and the ECB is slightly different but results in the SAME decision of EUR Devaluation.
The crux of the ECB’s Dilemma is the divergence between US and Europe economies. Germany Deindustrialization + uneven transmission of Monetary Policy are taking disproportionate tolls on the Eurozone.
My “Four Horsemen of US Economic Resilience” explains the sources of Economic Divergence:
KEY POINTS:
Each separate decision is not a big deal, but when taken together there is a “Beggar Thy Neighbor” effect.
Each CB acting in its own self-interest in selecting the LESS BAD CHOICE for itself results in a decision that weakens its currency which then results in a COMPETITIVE DEVALUATION dynamic.
PBOC’S desperation to forestall a Disorderly Devaluation is evident in its manipulation of Overnight CNH HIBOR to squeeze CNH shorts:
Last March, I wrote “Ball In A China Shop” and warned that if China is forced into CNY Devaluation, it will export a Deflationary Pulse to RoW.
Uncontrolled, it can lead to Asian Contagion 2.0. This is the USD Wrecking Ball in action.
More benign pathway from a Strong USD is the NEGATIVE FEEDBACK LOOP effects of US Exporting Inflation and China Exporting Deflation:
Strong USD is an EQUILIBRATING MECHANISM
Bottom-line: China needs all the help it can get, especially with the ongoing Reshoring Boom away from China, US Election Politics where there is rare bipartisan support for who can be tougher on China, etc.
Wildcard is evaluating China from a pure “Western Economic Rationality” lens, because of Xi’s Maoist policies, but even he has an Achilles Heel when there is Social Unrest.
Evisceration of Chinese Consumers + Capricious CCP Policies are freaking entrepreneurs out and causing CAPITAL FLIGHT. This is from the “China Boss” Substack by
:
Why I remain Short USTs:
What if the USD weakens as a result of the Fed cutting before Inflation is tamed? I believe we will see a severe BEAR + BULL STEEPENER a la the ‘79-’82 cycle:
Fed’s Best Friend might actually be Competitive Devaluations importing Deflationary Pressures.
Short-term, the December Rhetorical Pivot seriously damaged the Fed’s credibility without accruing any gains for the Government and really perplexed me, which is why I postulated my Machiavelli Powell Conspiracy Theory:
The Activation Energy required to
Initiate a Package of Cuts AND
Cut by June given the Elections around the corner…
…is extremely high.
Dueling Mixologists in Powell vs. Yellen:
Inflation Expectations are now embedded, and the BOND MARKET will do the Fed’s job if the Fed is not up to the task:
To be honest I think it’s a pretty incoherent thesis and see de minimus probability of that. That’s what makes a market.
Michael, thank you.
What do you think of the CNY going to 5 rather than deval? How do you see that as a risk?