dollar Markets

Dollars, Defiance And Democracy

"I can’t think of any market crash brought on by civil unrest".

Risk assets were buoyant in Europe and Asia on Tuesday, as global stocks rose despite concerns over worsening Sino-US relations and worries that the worst social unrest in decades will forestall a recovery in the world’s largest economy.

Donald Trump’s threat to institute martial law served as fodder for critics who warn this is yet another authoritarian turn for an administration with a penchant for blurring the line between democracy and autocracy.

If you’re looking to “explain” the resiliency of risk assets (which for most of you, just means “stocks”), you can point to central bank largesse (“it’s the liquidity, stupid“), but also to the dollar, which is on the back foot for a fourth day (on Bloomberg’s gauge) and a sixth on DXY. In either case, it’s sitting at the lowest in ~three months.

Quite a bit of that is attributable to the euro, which is enjoying a nice run on hopes of fiscal cohesion and ongoing reopenings across the bloc’s largest economies. The ECB is widely seen upping its pandemic emergency purchases this week in another bid to help the economy along.

A softer dollar generally means looser financial conditions. As SocGen’s Kit Juckes put it back in December, the world is a friendlier place when the greenback is on the back foot, and on Tuesday, he says “magic money is hurting the dollar”.

“The BOJ, ECB and Fed have increased the size of their balance sheets by 10%, 20% and 70% respectively since the start of this year, more than enough to absorb the increase in public sector debt issued to finance the fiscal response to the pandemic, leaving plenty to crowd baby-Boomers’ pension funds out of markets”, Juckes writes. “Promises to buy peripheral debt or high-yield send spread/yields down even before the central banks buy anything, and the only part of yield curves that can move, is the long end”.

To be sure, there are plenty of reasons for the dollar to retain its appeal, though. “The threat of mass unemployment, deep recession and geopolitical tension should keep nerves frayed and the safe haven dollar supported against a broad basket of currencies”, Rabobank’s Jane Foley says.

That’s true, but even if the protests and civil unrest stateside don’t manage to derail equities, the tumult could slow the recovery, undermine confidence in the administration, force more spending from Congress and even looser policy from the Fed, all of which “should” be dollar negative, at least in the medium- to long-term.

As for America’s social fabric, it’s being torn apart at the seams.

“How things change. We have moved on from an era in which an army was seen of little practical use, and defense budgets slashed; entered one where an army is accepted as needed at some point for looking national security threats, and defense budgets raised; just left one where any army was relied on to deliver logistical support during a country-wide virus lockdown; and are stumbling into one where an army is required to keep control of a liberal democracy”, Rabobank’s Michael Every wrote Tuesday.

Assuming you can avert your eyes (no easy task) and keep them squarely focused on the “up-and- to-the-right” charts for equity benchmarks, you can retain some semblance of sanity, if making money is where you find solace.

“I can’t think of any market crash brought on by civil unrest”,  Kevin Muir, formerly head of equity derivatives at RBC Dominion, and better known for his exploits as “The Macro Tourist” wrote, weighing in on the market side of things a note. “There are lots precipitated by excessive speculation which is then squelched with tighter monetary policy triggering a crash, but I can’t recall a single significant market correction that resulted from civil unrest”, he added.

And yet, it’s becoming more and more difficult to understand how the US election in November will go off smoothy under the circumstances and considering who’s involved and what’s at stake.

“There’s an army of commentators discussing this one way or the other”, Rabobank’s Every goes on to say, in his daily note. “It’s Law and Order; it’s fascism; it’s about time; it’s the end of US global leadership (which has long-term implications for markets if true)”.

Every says US voters “will get their say in November”.

That’s the plan, anyway.


26 comments on “Dollars, Defiance And Democracy

  1. The right to vote may be a quaint afterthought after November.

  2. Emptynester says:

    This civil unrest will put further pressure on savings rate, even after employment recoveries, because people are and will remain more, not less, worried about keeping their job or saving for retirement.

  3. Scott Frew says:

    Agree with Kevin. A question, though. When was there last martial law in the United States?

    • Anonymous says:

      More importantly, when was the last time that the military was deployed to US cities to quell civil unrest in the midst of an ongoing global pandemic and immediately following a two month lockdown which has plunged the real economy into a sudden and historic downturn?

      It hard to see how this helps to support the “v-shaped recovery” narrative if this continues to drag on. It seems to me, that a military occupation of major US cities is about the last thing you’d want to have happen if you were hoping for economic activity to rebound in earnest. You really think customers/consumers are going to be coaxed out of their homes by a military occupation and ongoing civil unrest?

      This very well could be the death knell for small business owners in large cities who were already under immense financial stress from the lockdown and are now facing a second hit from ongoing social strife, rioting, curfews, and a possible military occupation.

    • Mr. Lucky says:

      I can’t say for sure. There may have been an instance or two arising from some of the big instances of unrest like the Haymarket Riots,etc. Lincoln declared martial law and suspended the right of habeas corpus during his presidency, for obvious reasons.

  4. RStantz says:

    Front running CB’s down a steepening hill may not turn out to be such a hot idea.

  5. Scott Frew says:

    1968, whether rightly or wrongly, is on a lot of people’s minds as a perhaps rhyming bit of historical precedent. I was being radicalized, having moved on from Barry Goldwater’s The Conscience of a Conservative to reading Eldridge Cleaver in Ramparts Magazine in my prep school library. My recollection is that the market took the assassinations and riots that marked the year pretty much in stride. However, it certainly was not a great moment to embark upon a buy and hold strategy for the US equity indexes. Would have been a long time before you were whole, and longer still in real terms.

  6. RStantz says:

    The markets anticipate CB’s heading down the risk ladder in its bond buying, Mr. Market could not care less about the violence in the streets. There seems to be this dream that Austria and the Netherlands are going to sign off on direct transfer payments to PIGS because a lame duck German Chancellor and a French President whose only friend is his teacher told they had to.

    • I think as hinted at here in this portal, this step rather than to be derided as a conflict of personalities, is something that some are chearing as the final step towards fiscal and monetary union.

      • RStantz says:

        Or the realization that Euro was a really bad idea economically speaking and the politics are adapting to that reality. There is will need to be direct transfer payments from North to South (Europe that is) since PIGS cannot devalue in order to stabilize the situation. Domestic politics may make that rather difficult -file under “Viktor Orban”

  7. derek says:

    Demonstrations and civil unrest in Hong Kong sure did not help their stock market. Nor did the protests and rioting in Indonesia in the late 90s.

  8. George says:

    A choice between Trump and Biden is not very encouraging if it a new Political environment one is looking for…Usually by the time the Political environment deteriorates to current levels we have had the third party choice (Perot …Anderson etc..)….I have a hard time believing there is not a surprise coming our way.this year on Candidate choice (not necessarily a Third Party )

  9. joesailboat says:

    As to POTUS notion of military boots on city streets. That is not the sort of thing to banter about lightly. The Roosevelt situation in Guam had many makings of a mutinous situation. Mind you that Naval ships are a world to themselves. Young soldiers who have never fired at live targets being confronted for the first time to aim at fellow citizens is not the kind of thing they signed on for. Just as cops or any profession, a few bad eggs can become inexcusable and deadly. Assuming absolute discipline and accepting friendly fire casualties is not the same as on foreign soil. Blaming the instigators for Police fatalities is one thing, this would be different altogether. We as Americans have not fully grasped what drones have changed as to capabilities. Accidentally hitting weddings and funerals over there will not have the same shrug of the shoulder reaction if it comes to be here.
    Our Nation has blissfully computerized killing elsewhere. Unleashing these capabilities at home on fellow citizens would be cataclysmic. This should remain a police activity. If our Military suffers defeats in a guerrilla warfare situation at home is the next step bombing. The police started this, let them finish.

    • derek says:

      Some great points there, Cap’n Joe. Thanks.

      • northwest says:

        I cannot believe that a majority of Americans view this as a law and order situation. This is getting intolerably uncomfortable.
        As to employing the military or even the police to enforce the law (which law?), well perhaps if you would like to try that we will see how much support you really have. Support in those agencies and support in the public.
        As to the abilities of the military, there are a lot of guns in this country. There is also some outrageous capability in that universe. It is available to ALL the people.
        If you drive down this road you may find enemies who present being strange bedfellows.
        Americans will try everything, and then they will do the right thing.
        See George Will’s commentary of today.

        • joesailboat says:

          The only thing Will did not quote was Twains,
          “Beware the man with a bible in one hand and a flag in the other.”
          I have been reading the National Review since a child. Last fall it started getting weird. Conservatism is at a crossroad. NeverTrumpers are a vocal, intellectual voice of reason. The Republicans have survived with conservatism in tow. We had a 4 party America years ago.
          I am not a political person. I vote, I pay taxes. I do assume that being the reserve currency was based on the rule of law and not the rulers law. The Republican Senates steadfast refusal to look at the Ukraine situation openly was a paramount moment in political history. I am still hoping for epiphanies from some Senators. Wills’ article has us wait for the ballot box. He has given up hope for the whole lot of them.

  10. John Taylor says:

    I think the MLK assassination was not the catalyst but it was LBJ’s decision not to run on March 31, only a week before MLKs death. NO VIETNAM – HOORAY we all thought. I was getting my PhD in Poli Sci at UNC living across the street from Raymond the owner of Farm Fresh, a place with shot guns very apparent after MLK. I was also working for ABC’s political polling team in NC with Wallace getting around 20%. As a pollster, everyone was relieved by Johnson’s move as it lessened Wallace. RFK was a shock and the stock market was hit – see it on the chart – but again it drove politics to the middle. Back then, I was a big-time sailor and raced in the Tempest world championship in Grosse Point in August, against a boat called Black Power – all black boat, all white crew. They were good. Chicago seemed a million miles away. This year is much more on edge, MUCH MUCH FINANCIALLY WORSE OFF for the 90%. It is the financial desperation now. Chicago was ugly, but Chapel Hill was lovely and San Francisco – WOW – no worries man. Nixon just slid in – I now see that as a monumentally big change for the US – the end of US naivete and the last gasp of financial opportunity. The rich started getting richer – now 2020 is the opposite end of the pendulum.

  11. So many things wrong. So many involved in the inequity and injustice. So many lies to hide the truth. Which way to turn to find the way out of this miasma. An almost impossible state of affairs. Where is the charismatic leader with the moral right to lead us and how do we differentiate him (or her) from the charlatans?

  12. bryanb says:

    You guys will still have to wait and suffer a few years before your great leader comes out of nowhere. Too many Americans still think Trump is your gift from the almighty. The need for change must pervade society. A little similar to the time before Obama. Good luck!

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