Win Thin: Bernanke is giving a green light to the risk-on trade
Win Thin of Brown Brothers Harriman was on Bloomberg talking to Tom Keene and Michael Cloherty, head of U.S. rates strategy for fixed income and currencies at RBC Capital Markets, about the global markets for a good fifteen minutes today. Just as I recently posited, Win sees the Bernanke press conference giving a green light to speculators running risk-on dollar-short trades as well. You may think these markets are overvalued. But Bernanke is telling us that zero rates will prevail. That means risk-on. And while they may not be trying to debase the dollar, a byproduct of low rates in an environment where rates are increasing elsewhere is a low dollar.
On the other hand, Win does not believe that the European sovereign debt crisis is over by a long shot. Policy makers are kicking the can down the road. It is clear that significant haircuts are coming because the political process will break down and dictate the economic reality.
Listen to Win’s comments on heavily managed currencies in emerging markets Asia. He sees this as a dirty float. Given the rise of inflation, this creates a problem for Emerging Asia because of how quickly commodity price inflation can pass through to the core. I say Asian CB dovishness is probably driven by China and its peg to the dollar. Unless China revalues more aggressively, I expect the currency wars to be aimed at China going forward.
Note, post-Keynesians like Warren Mosler argue that:
Unfortunately, hiking rates via direct rate hikes, reserve requirement hikes, and the like, which they all are doing, add to aggregate demand through the interest income channels, making their inflations that much worse. (That’s the price of being out of paradigm, as reinforced by analysts who are also out of paradigm)
Some are using credit controls, which do slow demand, as does fiscal tightening which generally happens through automatic stabilizers that work through higher nominal growth, including reduced transfer payments and higher tax receipts.
In general, this type of thing tends to end with a very hard landing, which their equity markets may be starting to discount.
So it is not clear that increasing rates will actually cool down overheating economies like China. I expect a hard landing.
A lot more in the video below.