He promises to extend our Garden of Eden to us, the new generation - of course we trust Him it will be even better! For He will denude it of forbidden and foreign fruit.
We are sick of the old order, those treacherous politicians who have denied us our wants, and succumbed to foreigners’ desperate pleas. Globalisation is good? Please explain how it’s ‘good’ when some foreigner is willing to work twice as hard for half my pay! I know that regime served the US well, and we prospered greatly from it! But it doesn’t anymore does it? Yes I DO care about living standards in China, BUT I have my rights to fulfil my wants first, just as my parents did. I can live with negative equity (actually I still live with my parents), but hell, it’s been 12 months without a decent paycheck! And no! I won’t flip hamburgers - I have a diploma in Film Studies!
We write the rule book remember! We are America, and our Messiah will make America First. Again. But you old-school politicians have ignored our pleas - there were strident voices screaming their anguish at the lack of decent jobs. Your soothing political rhetoric (expressed from under large Texan hats, so lip movements were concealed) that used to allay us long fell on deaf ears. We are jaded by unfulfilled promises, un-rejuvenated wardrobes and smaller hamburgers, we the disenfranchised youth have united in protest and kicked you out! We know you tried - hard - to reconcile America’s role as the global leader of free market capitalism, and the fact we’ve been beaten at our own game. What you forgot (and Trump knows) is we, the US, make the rules of the game! And if we can no longer win, isn’t it obvious you just change the rules! You fret unduly about their retaliation.
You think I’m naïve? Are you going to claim we live in a complex symbiotic world where one can’t just ‘change the rules of the game’….that there will be dire financial consequences if we reverse an era of global freer trade to protect our jobs for our people…
OK let’s talk numbers and assess how perilously symbiotic the current world economic order is...
How vulnerable is the US to a dislocation via retaliatory measures
First the financial markets miracle.
The VIX volatility gauge, commonly known as the ‘Fear Index’, our Messiah has banished from our Kingdom. His wig commands the respect of all his subjects, however independent the monetary/fiscal authority they represent claims to be! When our Messiah tilts his blond bang towards any official who dares to challenge his wisdom, the official immediately heels to attention, no matter how misguided his/her preconceptions of responsibility. And if a tilt of His wig is not wrath enough, our Messiah simply banishes the itinerant from his sacred circle. The journey back to Eden is fraught with obstacles, but our Messiah has mastered the language of our modern media – no president has been remotely as efficient, capable of changing government policy in a single tweet! How grateful we are to our Messiah! Note US stock markets are surfing merrily on the high tide on unprecedented valuations. I want AND DESERVE a bite of that cherry with a job that permits savings, Dammit!
Is this Nirvana portrayed above an illusion? No it’s real, and it has prevailed through the most protracted political wrangle a US President has faced (with alternative spurned Hillary) over the past year.
Long Bond Yield
Now let’s talk about the greatest risk to a country with substantial twin (current and budget accounts) deficits. Long bond yields are hovering around the bottom decile of a half-century of data, reflecting the Goldilocks’ narrative of economic growth and sedate inflationary fears, a stable dollar and confidence in our Monetary and Fiscal Policies. (And yes, I know my stuff, my dad was an Economist). You see flashing danger signs in the graph below ? Go see an optician.
However I’ll be the first to admit, it’s not all rosy, despite Trump’s wig/halo.
Now I have to let you into a faculty that my generation possesses, a dimension that our parents didn’t have access to, something that has evolved as the human DNA gets ‘smarter’ with better resources and knowledge.
It’s a portal to a quasi-articulated unconscious (we call him Swami, which means spiritual mentor in Hindi - just showing neither Trump nor I have racial prejudices, despite Trump’s fake portrayal on fake news).
Swami (who occasionally 'visits or manifests' in a rotund Buddha-esque form) says this could end very badly. And that Swami's voice lurking deep within has never erred (well... hardly ever).
I insist to Swami: "The US is the largest, most coveted market on the planet. No country or bloc could replace the consumer demand the US offers. As for payment, the world is very happy to accept an IOU in US Dollars.
"Honestly Swami", I ask, "Who is going to replace the dollar's hegemony, its status as the world's reserve currency in the next decade? They need us as a market for their goods just as much as we need to pay them in Dollars."
I tell him the privilege is called seigniorage, in case he missed it in one of his reincarnations in a parallel universe.
"OK, Let’s start with US Treasuries." Swami insists foreign investors must surely be assuming higher sovereign US risk, with ever escalating public debt and significantly higher dollar vulnerability. Granted trade surplus countries are less worried about a profitable trade than recycling those surpluses to maintain their competitiveness, but Swami keeps asking me how much of this move is the U.S. buying its own dirty laundry (i.e. quantitative easing)?
“And what would the 10-year yield be if the Fed hadn’t purchased $4 Trillion worth of various government debt instruments over the last decade?” he ponders.
Sometimes Swami is very graphic.
“So the dress party continues, carnival guises de riguer. Asia smiles sweetly in her kimono and pumps more money at Treasuries. The Fed bows graciously (and perhaps more reverently each time!), accepts the loot, and dances a flamboyant rap-groove-twirl, to remind the upstarts who is actually le beau de la balle! Namaste!”
Swami reminds me during his numerous reincarnations, he has never met a trustworthy man bearing a blonde wig to cover a very conspicuous bald patch. He says it looks like the eye of a storm. (I remind him that probably wasn’t common in medieval India, but he ignores me.)
Swami lays out one permutation of the infinite that could unfold in this insidiously dangerous game of escalation the grand politicians have embarked upon:
“US protectionist barriers could rise faster than Trump’s litany of sexual trysts or his revolving door policy for his dwindling cabinet…Within weeks Trump could seal Fortress U.S. via a dozen tweets. And China could say we now boycott your Treasury Auctions. That would make Central Banks more similar to a chaotic Indian Bazaar!” he chuckles.
Swami pauses for a moment, taking a metaphorical sip of his masala chai that I can actually smell, as his third eye envisages the imminent mayhem.
“There was no other choice, you see. You Americans have been beaten at your own game, the game where you made the rules. You either accept that, and you can't cos it’s innate in your nature not to be second, or you have to change the rules. That's when the global symbiotic relationship that has prevailed of recent begins to unravel. And fast.”
And where that takes us, the Swami hasn’t told me yet. I don't think even he knows, given the number of permutations that intertwine measures and counter measures.
But he did say, "Watch the dollar. In this world of complex symbiosis, things are not always what they seem."
He then fell fast asleep.
Disclosure: I am/we are short SPY.