The Worst Monetary Instability in Ninety Years?
Andrew Hunt Economics
The Lansdowne Club, 9 Fitzmaurice PL, London, W1J 5JD
Thu 15 Jun 2023 - 12:00
Summary
There is a short end buying opportunity arriving, particularly in US and Asia Pacific while there is a buying opportunity at long end in Q4 once issuance subsides and deflation scare apparent. Inflation Accounting has inflated earnings and a recession without unemployment will undermine earnings and relegate shareholders. Central Banks may over tighten in near term if they expect a shortage of USD into year-end while Asia FX and EM in general look vulnerable. Frontier Markets will be tragic casualties of China’s dollar shortage. The theme of China consumption is taking a “time out” to repair balance sheets. Secular Stagnation remains a real factor and unless AI is truly a game changer, average real growth will remain soft until productivity improves. The USD is no longer deserving of Reserve Currency Status (or willing) and we could move away from reserve based currency systems with floating FX rates and currencies used proactively as “buffers” for real economies; the search begins for the new Hard Currencies. The US has already moved towards a CBDC with the MMF set up just so that their owners could have a deposit at the Federal Reserve. The recent bank failures have accelerated the trend towards a CBDC. This presents an existential threat to Offshore Financial Centres.
Topics
The Federal Reserve has been hijacked by “academic” economists and is allowing money and credit conditions to over tighten
The last FOMC meeting yielded a hawkish statement along with a commitment to continue with QT and the RRP scheme, although quietly behind the scenes it does appear that the MMF’s access to the RRP is coming under closer scrutiny
We expect a deep recession to begin during the second half of this year
The ECB and BoJ also look to have become awkwardly procyclical
A needlessly severe global recession awaits
Having lurched from too accommodative and inflationary in 2020-21, central banks now risk becoming deflationary
Presumably, next year they will swing back to inflationary – we are back in the 1970s’ narrative but perhaps with even more amplitude!
We would favour the 3 – 12 month part of the yield curve
The Major Currencies look to be driven at present by a Hicksian Model – issuing large amounts of sovereign debt into a tightening monetary environment will yield a stronger exchange rate in the near term. This is supporting the EUR at present (to Germany’s discomfort) but once the Debt Ceiling is raised (?) the USD should take over the running.
