Tonight I am posting the latest episode from the Financial Repression Authority (click on the blue link to listen). I do these for no remuneration as I think the information flowing out of this group creates great conversation and can generate some very profitable investment opportunities. Yes, it’s 34 minutes long but it is more LEARNATIVE than the network news. So pour a stiff whisky and listen while doing other reading. I share this with, you readers because I am honored to be a part of this great dialectical process. One of the key points in tonight’s post is the development of a narrative in which to analyze the world of Trump. It is not a partisan narrative but one I am developing as I attempt to discern the unfolding global dialogue being put forward by Team Trump.
The major idea I forward is that President Trump is going to try to ROLL BACK Pax Americana. In international relations terms, Pax Americana was the theoretical basis to define American behavior in a post-World War II global configuration. America would bear any burden and any cost to promote a world order in which democracy and trade were promoted, and totalitarianism was to be confronted wherever it thought to expand. Yes, the Soviet sphere of influence was vast in territory but very few countries willingly signed up to be in the Soviet orbit. The U.S. had its empire and so did the Soviets. But the cost of maintaining an empire is expensive. The Soviets learned that when the price of oil rose and the cost of subsidizing the deficient socialist economies of eastern Europe became too exorbitant. Pax Americana, based on capitalism and its expanding growth, was much more capable of sustaining a global empire. But maybe we have reached the limits of what America can afford. I THINK THIS IS THE NARRATIVE ON WHICH PRESIDENT TRUMP IS OPERATING.
Now, this is just a conjecture but I think it is important to utilize a construct to help understand the nuances of the new administration. The VIX may say the financial world is comfortable, but we have seen money flows and experts be wrong in their assessments for their models fail to acknowledge the turbulence beneath the waves. The end of Pax Americana, or at least a move away from U.S. dominance, always promotes great anxiety and potential for upheavals. Trump is proclaiming that Pax Americana is over and if the present world structure is to be sustained more nations will have to bear the cost. This is why Trump continues to denigrate the established world order.
The problem is that the world is far more DYNAMIC than President Trump assumes so the global response will be far more uncertain than the Trump foreign policy team imagines. Going forward our task will be to recognize the financial opportunities in a radically changing global system. Also, what Trump may underestimate will be the bureaucratic battle that will take place in Washington D.C. as the foreign policy establishment ensconced in Pax Americana thinking will be fighting rearguard actions to undermine the attempts to displace the existing order (think, a great deal of leaking). This narrative is an effort to understand and navigate the markets in an age of heightened uncertainty.
Remember, President Trump’s mantra during his campaign was that the NATO nations and other alliance partners were not paying their share of the cost of defense. Empires are expensive and when the cost is deemed a positive it is worth maintaining. But one the benefits accrue away from the CENTER of the EMPIRE questions arise about the sustaining of status quo.
*** This week will be busy as late Monday night the Bank of Japan announces its monetary policy decision. The Japanese are expected to keep the current policy in place but I will be interested to hear if there’s any mention of President Trump-related uncertainties leak into the conversation. The Japanese are always reticent to cause controversy but there is concern in Tokyo about the capriciousness of President Trump’s tweets. Mexico is the front page but other nations will be cognizant of being targeted for being the beneficiaries of the U.S. consumers. The only change I could see the BOJ making would be in the duration of its QE purchases. The BOJ OUGHT to stop buying long-term bonds and stick to purchasing debt TWO YEARS OR SHORTER. But again, I think the Japanese will remain calm and carry on.
***A developing theme, on which I will continue to build, is that the Mexican peso is fundamentally the most undervalued asset in the world. It doesn’t mean it can’t become more undervalued but the Trump team OUGHT to lower the rhetoric for the continual criticism is cheapening the PESO and making it a more formidable export machine. Think about this: Since the inception of NAFTA, the PESO has depreciated by 700% going from 3.2 pesos to the DOLLAR on January 1, 1994. After an initial thrust in inflation following the December 1994 crisis, inflation has settled down since 2000 and has averaged about 3.5% over the last 16 years. Its debt/GDP ratio has climbed but is still at a very manageable 43.2%, mostly because of the drop in oil prices as PEMEX‘s drop in earning has forced the government into higher deficits.
The day that NAFTA began the Chines YUAN was devalued from 5.8 yuan/dollar to 8.7, a 50% devaluation. Today the YUAN is at 6.88 to the dollar. So Mexico is becoming a tempting place for foreign investment as the depreciated peso plus a cheap labor force provides an added incentive to multinational corporations. Now, if the Trump administration pursues a regime of tariffs the landscape will change dramatically as an all-out trade war will ensue. If that’s the case, THEN THE U.S.EQUITY MARKETS ARE AS FAR OVERVALUED AS THE PESO IS UNDERVALUED. Just putting the issues out there for discussion and potential investment potential.