Hegel and financial history - Don't Look for some linear process

We are facing another banking crisis. The same financial and banking mistakes are being repeated as institutions assume that the past will continue well into the future. Hence, banks bought long-dated assets with short-dated deposits and took the asset liability mismatch. Regulators fight the last battle and again miss the crisis that is facing them, blind to the obvious because coping is painful. Policymakers have the hubris to think they can forecast the future and have the tools to solve any problem. Again, they are being proved to be mistaken.  

Technology may be progressive, but the decisions of market participants do not follow a process that learns from the past. For Hegel the great 19th century philosopher, history is an intelligible process that moves toward a specific condition, design with purpose. The purpose is to have the freedom to pursue principles and moral law that look beyond personal desires. Nevertheless, he was pessimistic about whether anyone can learn from history. 

Hegel was not a financial historian. When we contrast his view with current financial behavior, there is little progress from learning and little linearity. Lessons are either forgotten or never learned, so there is constant cyclicality and repetition with financial markets.

This cyclicality may not be exploitable in the sense of being forecastable; however, it can be useful for seeing the financial world.  Assume that the behavior mistakes of the past will be repeated on both a micro and grand scale. 

On the micro level, assets prices are driven by behaviors biases. On a broader levels financial crises are driven by market excesses. Economies will go through business and credit cycles. World orders will change with dominance lost through a well-defined cyclical process. Accept cycles and end linear thinking and your investment decisions will be better.

Dedollarization - Rising talk but is it an issue?

 

Dedollarization is the current buzz with many investors given recent developments with the BRICS and their potential use of the Chinese renminbi as the currency for trade payments. Russia is adopting RMB invoicing for oil since the dollar is off limits. Brazil has used the RMB for some trade invoices given the large trade relations between the two countries. Saudi Arabia has started to invoice some oil exports in RMB.  Clearly, there has been some movement away from the dollar, but the reasons are mainly political and not based on the declining value of the dollar; nevertheless, regardless for the reason, some countries are choosing an alternative to the dollar. While a trickle, there is a growing view by non-US aligned countries that it may be in their interests to have new choices for invoicing, payments, and pricing.

We have heard about the dollar demise before. It is a recurring theme that has not played out in actual behavior.  Yet, if the US government and the Fed ignores the problem, the trickle can become  a deluge. 

Dollar debt still dominates the world's financial markets. Dollar reserves with central banks also are still dominate, and the desires for dollar swap lines are still strong when liquidity is needed. Figures are from Dedollarization is Not a Thing

Still, changes in trade invoicing and settlement are a canary in a coal mine signal that the trade and finance world may become multi-polar.  Trade invoicing and payment flows serve as a foundation for a switch in financial flows. 

Currency regimes through history - 100 years of dominance is about right

With all the talk about dedollarization, it is important to look at the history of past dominance of global reserves currencies. Generally, the dominance has lasted about 100 years and coincide with the dominance of an empire or country hegemony.  The end of a currency as a global reserve matches closely the loss of a war that bankrupts the reserve currency country. It certainly is not surprising to hear the talk about a dollar decline given the decline in US dominance as a world leader. The US is still dominant but there is a growing degree of polarization and country grouping. Of course, there has always been polarization. The Cold War formed a bipolar world between East and West with the Third World somewhere in the middle, but there was no competition to US and Western economic dominance. 

Of course, a country decline is not always abrupt. There is a period of transition, and it is during the transition period that long-term trends will emerge; nevertheless, these long-term trends are unlikely to lead to short-term profits. A long dollar decline will still see periods of dollar gains. 

The biggest impediment to a dollar decline is not from anything the US can or will do. The dollar is dominant by default. China runs large trade surpluses and is net saver, and it is unwilling to be convertible will all other countries. The RMB may be used for trade financing and payments, but that is not the same as serving as a store of value.

 

From Uncommon Cents

The inflation - growth cycle - The problem is knowing where you are and where you are going

It is important to keep the core investment process simple with respect to growth and inflation. A simple case is the inflation growth circle cycle. If you are seeing growth weakness and inflation is starting to fall, we are in a stagflation environment. You want to hold cash, defensive stocks, and value. The industries include utilities, pharmaceuticals, and consumer staples. Investors may want to reduce oil and gas exposures. As you move through growth and inflation changes, the sector exposures should change to take advantage of changing risk and opportunities.

At the top of the circle is when inflation peaks and the bottom represent the inflation low. The right side of the circle is when output gap peaks while the lefthand side is when the output gap is at a low.

The problem is that the inflation growth circle is never clear. What is growth now? What will it be in six months? Will inflation fall quickly? These are expectational markets, so the inflation and growth of today does not matter as much as the expected growth and inflation. As usual, you must know where you are before you can say where you are going. Unfortunately, the consensus on each of these questions is constantly changing.