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.
Tags: BOJ, Chinese Yuan, Mexican peso, NAFTA, Pax Americana, President Trump, QE, S&P
January 29, 2017 at 8:13 pm |
“The major idea I forward is that President Trump is going to try to ROLL BACK Pax Americana. ”
Did I miss something in the last eight years? I thought Obama did that. Pulling American troops out of Iraq after that nation was stabilized, allowing ISIS to form to fill the vacuum. Pulling most of our forces out of Afghanistan and allowing the Taliban to regain its strength. Allowing Russia to reoccupy the Crimea and eastern Ukraine with weak sanctions as the reaction. Drawing a red line in Syria in disappearing ink. Not reacting to the outrage of the murder of our ambassador to Libya and allowing nihilism to overtake that nation. There are other examples but leading from behind became our battle cry.
How Trump will act in the next four years remains to be seen. But with a $20 trillion national debt it is good to hear that all members of NATO have to be pulling their own oars. And they will.
January 29, 2017 at 10:33 pm |
Asherz—the Obama administration had tried to roll back the their interpretation of Pax Americana as a colonial enterprise but they sure didn’t mind sustaining the use of American funds to promote a more balanced world with America the main provider of funds.The Obama administration admonished the Cameron U.K. government for having the temerity of supporting the Chinese efforts with the establishment of the Asian Investment and Infrastructure Bank.And via Victoria Nuland with the Ukraine they certainly were promoting Nato expansion at every turn—so in the end Obama talked softly but the State Department continued its pursuit of an American order.My friend Mark weisbrot has written extensively about some of the more nefarious involvement of the U.S. foreign policy in Latin America—so not quite so simple.
January 29, 2017 at 9:15 pm |
Take Yra’s advice to pour a drink and listen. Don’t try reading at the same time though. Podcasts are best absorbed during activities such as working out, gardening, driving,etc.
January 29, 2017 at 11:09 pm |
Yra wrote: “..President Trump is going to try to ROLL BACK Pax Americana…..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.”
As “asherz” points out above, Obama had a significant hand in drawing down Pax Americana, not limited to his policy decisions on health care and omni-regulatory mandates, and his 2009 world apology tour, but in allowing US defense capabilities to diminish. In the case of the US Navy, to levels not seen since pre-WW2. One of the priorities will have to be the rebuilding our armed services to the point we can at least reassert the Monroe Doctrine and look out for our interests in our own backyard. I think limits are close at hand and we’ll be “forced” to prioritize for the first time since WW2. One lesson of the past 16 years might be how fickle an electorate can be absent the kind of national sacrifice that was required during WW2.
But the Progressive Obama, a self-proclaimed citizen of the World, had help. The Bush 43 administration also pursued policies of full speed ahead with guns and butter, insisting on expanding our own socialist domestic obligations, like Medicare Part D to name one, while allowing his neo-con foreign policy team to portray the delayed invasion of Iraq in 2003 as an act of humanity to establish a democracy in Baghdad. I also recall some supportive predictions from a like minded diplomatic corps that we would soon see corporate Disney follow suit, building an Iraqi Theme Park where present generation Americans could vacation with their children. Bush and a GOP congress grew the federal government at a faster annual rate than LBJ & a Democratic congress did in establishing a Great Society while trying to stop communism in southeast Asia. I suppose it was easier for Bush. He didn’t have to contend with Wm. McChesney Martin chairing the Fed.
What still amazes me today, is that the McCain/Graham wing of the GOP believes there are no limits on our ability to finance Pax Americana after 15 years (actually 50 years) of expanding domestic entitlement obligations, (which Pres. Trump does not want to address) and squandering blood and treasure trying to establish western style democracy in a nation state that never should have existed in the first place. Maybe the Def Hawks are no different than our Bernie-leaning Progressives in that they have complete faith that all the central banks in the free world can create enough credit to finance whatever conflicts to come. If that were the case, why is there still conflict and hunger? Is it possible that we just haven’t given modern central banking enough time to work its benevolence?
In 2003 I thought we were already on a path to reaching our limits as a global police force. Of course, the reasoning for staying on the world beat was to fight “over there” and not here. (Even as Russia and China established a stronger presence in central and South America.) I suppose that would be a price to be paid to sustain oil trade and open borders. But as this blog knows, and knows better than your average voter, the state of finance and the future claims on capital and production are looming larger than ever at a time fiat money has never been cheaper. Not really sure if things are presently working out for the better of mankind.
They way the President lays out his goal of Making America Great Again, calls for huge increases in expenditures on defense and domestic infrastructure while keeping up with entitlement obligations and cutting taxes across the board, presumably to keep middle America flush enough to pay higher prices for tariffed goods and Silicon Valley VR Apps. The only thing I know for sure is that this isn’t 1980, and I have a gut sense that Art Laffer’s supply-side policies won’t work the same magic they did in the 80s. Besides, supply side may prime the pump like nothing else, but it also grows the government along with government revenues.
Yra asked the right questions. For me, there are too many paths to run down at once to find pat answers. It’s getting more complex by the day, and nothing is static. I think everybody who reads this blog has more than a clue as to what the pitfalls and possible outcomes are likely to be. I suppose my contribution of an idea, at this point, is don’t sell your Gold and Silver just yet.
January 30, 2017 at 9:18 am |
Wonderful sentence: “The major idea I forward is that President Trump is going to try to ROLL BACK Pax Americana.” I’m reading the FT right now and they don’t get the point.
January 30, 2017 at 11:09 am |
To Yra and all…. Over the two couple of years, which is the better investment? Gold (long), Higher long term interest rates, or Mexico?
RLD
January 30, 2017 at 11:45 am |
richard—a big question which desires much thought and discussion
January 31, 2017 at 12:02 pm |
Richard–saw the first response to the Trump’s effort to rollback the strength of the dollar –the Gold rallied as expected and as we discussed and is closing out the month at a nice gani.The only thing that can contain gold would be a rise of global short yields to real positive returns.The attack on Germany by Peter navarro is a direct assault on Mario Draghi’s QE policy which is meant to weaken the Euro but if the ECB were to succumb to a Navarro attack by curbing QE many parts of the EU would implode unless Germany offered to bail out the debt burdened economy’s.The next attack for the Trumperters will be Japan as we saw last week with CEO of Ford Mark Fields—more will follow
January 30, 2017 at 3:29 pm |
Two of those are already crowded trades by small specs, so that pretty much eliminates them as contenders and actually suggests such positions could be losers. Technically, gold is almost begging to revisit the previous bull high of $850 in 1981 before its current bear episode ends. Also, there are still compelling fundamental reasons to be bearish gold, a “currency of criminals” according to authorities so beware. See the recent rocket shot & crash in BTC.
January 31, 2017 at 3:35 pm |
The Shape of US Tax Reform by Martin Feldstein
https://www.project-syndicate.org/commentary/congress-republican-tax-reform-by-martin-feldstein-2017-01
January 31, 2017 at 7:29 pm |
thanks Arthur
April 2, 2017 at 6:05 pm |
[…] always, we like to revisit some investment outcomes that we discussed. In a January 29 post I called the Mexican peso and the Mexican equity markets the most undervalued asset in our world of […]
June 4, 2017 at 2:35 pm |
[…] Motors CEO Mark Fields: “Currency manipulation is the mother of all trade barriers.” The other point I made highlighted the difficult Trump would face in dealing with Washington and Pax Americana’s […]