George Wannabe's  Instablog

Charles Gave of GaveKal which is one of the world s most prominent fund manager and research firm debunks a few interesting myths about the US in his blog. Unfortunately it is all in French but you will find a translation below:

"The US is the most indebted country in the World"

The US obviously has a large current account deficit but it by no means makes it the larger debtor in the world. Actually quite the opposite, the quarterly published balance of payments is positive by 270 BN and in constant progression. This means the cash flow that US economic agents get from overseas holdings is higher than what they pay to foreigners with investments in the US. This should mean that the values of US overseas holdings is higher than that of foreign owned US holdings.

Moreover, 60% of US imports comes from US corporations producing abroad and exporting from China, Brazil or Europe towards the US. US companies export jobs and import profits which is healthy at this stage of economic development.

This, according to Charles is made possible by the US treasury market. For legal, economic, historic and sovereign reasons, most BRICs businessmen invest their savings in US treasuries. They do not do so for a return but for safety in case they have to pack a suitcase and rush on plane. Sovereign entities also do so but more for the depth of the US treasury market. The US in turns consumes part of it and invests the rest in risky productive assets abroad.

So yes, the US is like a large hedge fund which borrows at 2% and invests abroad at 15% thus generating a positive cash flow vis-a-vis the rest of the world.

"The US role in the global economy will keep diminishing"

The US GDP represented 23% of global GDP in 1981 vs. 21% today. This is relatively stable but more important that the US positioned itself as the unchallenged leader of the next gen economy, the knowledge based economy.

All major recent Schumpeter style (creative destruction) economic breakthrough have come from the US and they keep doing so: Apple, Youtube, Google, Microsoft. IBM, Amazon, Facebook etc....

Never has a country dominated invention in such a way throughout history.

"The US is going through a rapid process of deindustrialization"

In reality, US manufacturing is still the largest in the world and its weight in the US economy has not decreased. It is by far the one where productivity is the strongest. Half of all industrial patents are from the US where 40% of global manufacturing R&D spending is made. Moreover, considering all the progress in logistic and robotic, signs of an industrial boom are appearing.

"The Dollar is about to collapse and los its reserve currency status"

This is the funniest of them all. To be a reserve currency, one has to be dominant in military, finance, agriculture, science, culture while offering a complete legal safety to all investing in the currency.

If anyone can tick all those boxes it is certainly not any of those (every other central banks in the world) who at every crisis have to ask the fed for dollar swap lines.

So yes Mr Tyler Durden and others, it is easy amd makes good headlines to declare the end of the US economy and while its leaders and its central bank have put the country in a difficult situation, to judge a whole country by its leaders only while ignoring all its breakthrough and dominance can be an expensive mistake! Long Apple anyone?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Nobel Prize winner Paul Krugman has recently argued in his blog that the high yen could be explained by the interaction between deflation and the zero lower bound. To summarize, short rates cannot go below 0 and if inflation is negative, Real interest rates (nominal interest rate-inflation rate) are de facto positive. Looking above, you can see that the highest real rates are in Switzerland, Japan, New Zealand and Australia.

All those countries had their currencies appreciate strongly against the US dollar. Obviously, New Zealand and Australia have high nominal interest rates but nominal yields in Japan and Switzerland are at 0. However, inflation being negative in both countries, the real return on cash denominated in both those countries is positive.

In his article Krugman highlights the dangers of deflation once interest rates are already at 0 as focusing on exports through currency devaluation which often is the best fighting tool against deflation is compromised.

I will add that notwithstanding currency devaluation, even QE style stimulus become largely ineffective as "inflation trade" post monetary easing cannot drive asset prices higher.

With nominal yields differentials in US, Japan and Germany now effectively closed, investors should pay even more attention to real yields going forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Shorting the Euro is a very compelling case and everyone loves doing so. Whether it is the Italian or Spanish spreads, the ongoing failure of the Greek bailout, the ECB's stealth QE via its LTRO facility, the Central Bank's questionable collateral rules or the looming recession, the arguments abound.

So first, for the Zerohedge readers questioning the ECB's solvency, please be aware that the ECB's main asset is not recorded on its balance sheet.
The ECB/Eurosystem has a monopoly on printing money and the concept of "seigniorage" whereby notes can be printed for a fraction of their face value insures it is very solvent.
It is all well explained in FTAlphaville where Citigroup's Buiter (a euro Sceptic) even argues that despite the fact that future gains from "seigniorage" are off balance sheet as opposed to the ECB's potential losses, the worst case scenario would be for it to live with negative equity for a short while. And yes we all know that the LTRO programme is a form of printing money but Broad Money Supply "M3" has for now expanded at a much less rapid pace in Europe than in the US as you can see below.

Secondly, when it comes to CDS and bond spreads, their correlations with the EURO have only existed for a short while at the beginning of 2010. The EURO is not correlated to EU spreads nor CDS. In fact the EURUSD exchange rate's main correlation has been to the spread between the German 2y yield and the US 2y yield. This spread now being close to 0 and the German 2y trading 80 bps below the ECB main refinancing rate, I see little downside on that front.

Finally, not only is the main refinancing rate 75bps higher in Europe than in the US, the Real Yield (Nominal yield-Inflation Rate) is also 95bps higher. (-1.7% vs. -2.65%). As mentioned above, FX flows are often yield related. Real yields explain the strength of currencies where nominal rates are at 0 such as the yen or the Swiss Franc. In Europe, both nominal and real yields are higher than in the US.

In Fact, should Europe's austerity measures create a deflationary shock and bring EU real yields in positive territory, EURUSD could go much higher! You can read more about real yields here....

And look at this chart, does it look like a currency in its extinction?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.