‘Plaza Moment’ Pondered As Dollar Makes ‘Everything An Emerging Market’

‘Plaza Moment’ Pondered As Dollar Makes ‘Everything An Emerging Market’

Market chatter around the prospect of a global accord aimed at halting the dollar's inexorable run higher grew louder Monday, as the pound collapsed and China slapped a 20% reserve requirement on FX forwards in an effort to slow the pace of yuan depreciation. The greenback has become the "only game in town," as more than a couple of commentators put it. The dollar index is on track for a fourth monthly gain. It's had just one down month in 2022 (figure below). The surge may be overdone, but th
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18 thoughts on “‘Plaza Moment’ Pondered As Dollar Makes ‘Everything An Emerging Market’

  1. I don’t really have the capital to make much of all this volatility, I read you more to understand the world than to leverage it, but i did find a way to take advantage over the weekend — I really enjoy early Greek and Assyrian/Ionian history, and was able to pick up a really cool coin from ancient Miletus this weekend for a song. It cost me less than $100 shipped from europe, and it normally runs for more than 300 euros at auctions. Euro weakness really knocked a lot of bidders out of the action lately.

    I thought it was a particularly poignant purchase as its from around 550 BC and depicts the flashing eyes of a panther peering out of the darkness — a symbol intended to warn the holder of this small lump of metal that they would now attract the evil eye, the malicious gaze of someone who had ill intentions towards them, of someone who coveted what they had (to the panther, their flesh; to other humans, the small lump of electrum).

    As everyone rushes to hold more dollars, it makes me wonder if our modern currency could use a little symbolic inspiration from the earliest days of western civilizations first money.

  2. I feel like a simple country stock farmer who has been thrown into the roiling waters of the big city macro trading pit.

    At the risk of sounding very stupid, let me ask: if the Fed is forced to pivot or pause because it breaks something, and that “something” is GBP or JPY or Italian govt bonds or German Mittlestand, what will the implications be for US markets?

    I’m thinking about the recent episodes of global capital crisis flight to USD (2008, 2020) and it’s not clear to me if the immediate consequences for domestic US consumers, companies, investors, or assets were, or were not, terribly negative?

    Obviously in the bigger picture, the US benefits from an economically healthy and politically stable ROW, or at least G8. But in the short run, if you’re invested in SP500 and UST, would the positives of the Fed pivot/pause outweigh the negatives of whatever is broken if the breakage is overseas?

    Seeking elucidation, welcome correction, even acerbic.

    1. H. Mentioned in a previous article that the US was exporting its stagflation.
      According to statistica
      “Published by D. Clark, Jul 4, 2022
      In March 2022, the global inflation rate for the consumer price index reached 9.22 percent, compared with 7.47 percent in February 2022. After reaching a low of 2.27 percent in August 2020, the inflation rate has steadily increased, with the most rapid growth occuring in late 2021 and early 2022”

      The reserve currency exporting inflation is not the same as controlling inflation at a certain point. A very simplistic view from a fellow bumpkin. Price of oil and products derived from oil play a large part in all of this.

  3. Also, just to toss in my half-cent, having updated my SP500 valuation model, assuming rF rises another 50 bp (10Y UST at 4.3%) and haircutting medium term FCF CAGRs by a full 10 percentage points, points to around 3300-3400 on a DCF valuation. Similar to what it’s been pointing to all year.

    Alternatively, cutting SP500 revenue growth by half in 2022E and 2023E, cutting EBIT margin to prepandemic levels, and applying typical PE from periods when 10Y UST was in the 3.5-4.5% range, points to around 3250-3350 midrange.

    I’d say both scenarios would imply and require a mild to modest recession in the real US economy of goods and services – a 1990 or 2001, rather than a 2008.

    If we indeed have “only” another -10% or so to go on SP500, then depending on one’s tenperament, cautiously/opportunistically buying may make more sense than aggressively/indiscriminately selling.

    Not investment advice, evidently, just my speculative musing.

    By the way, if I remove market cap weighting from my DCF model, and look at the SP500 “equal weighted”, the DCF valuation looks fair here. Which implies that half the SP500 – the smaller half, generally speaking – may already be undervalued.

    1. So, a basis. Bases is the plural. For our purposes here, just think of it conceptually as a spread between two things that “shouldn’t” be there or is larger than it “should” be or wider than desirable. Markets will usually look to arb those situations, but in a crisis they might linger or get worse, sometimes with deleterious consequences.

  4. What you have seen today is a sell everything, go into US $ cash in a flight to quality- in this case the quality is really narrow, longer (like more than 90 day) US Treasury bonds not in this category. A few more days and there will have to be a response from the US Treasury/Fed. It is one thing for stocks and risky bonds/other assets to sell off, it is quite another for the US Treasury market to basically shut down and we are on the verge of that. If the UST bond market shuts down, it will be nearly impossible to value other securities as US Treasury rates provide the benchmark. No matter how determined the Fed is to quell inflation, a disorderly unwinding of the financial markets is not in the Fed’s playbook. That would connote a “run on the bank”, something central banks were designed to avoid, the next shoe to drop is deflation/depression.

    1. I’m not qualified to comment on today’s action in the Treasury market, but looking out a few weeks or perhaps months, I do think there will be a rush into U.S. bonds at the first sign the economy has fallen into a real (as opposed to statistical) recession. Don’t know when that will be, but I feel like we’re getting closer….

  5. The U.S., with all its problems, seems to be in an oddly enviable position, maybe the best since GWB and Dick Cheney torched U.S. foreign policy credibility with their war of choice in Iraq. If I were at the policy table in Washington (or in a position to influence people who might be), I’d be pressing pretty hard for quid-pro-quos in the event of a Plaza 2.0-style agreement. I’m thinking not only of continued support for Ukraine in its existential struggle against Russian aggression, but also buy-in on a coordinated response to Chinese aggression against Taiwan. The UK and other Commonwealth countries (Canada, Australia, New Zealand), and Japan, Poland, and Romania seem like rock-solid allies at this juncture, but I wonder about the long-term commitment of countries like Germany, France, Italy, Turkey, and Sweden. A bit too real politik? Perhaps. But if others have decided to play that game, we would be foolish not to.

  6. H-Man, it seems we are in a quagmire. If the Fed runs to save the world on the currency front, it will mean they have given up the inflation fight which simply is not an option. So it appears we are stuck with a rising currency until inflation takes a bow. Meanwhile, every currency in the world will be pounded (no pun intended).

    On another front, what about all those profits American companies are booking in foreign currencies? It would seem those profits may prove to be illusory when those foreign currency transactions roll into dollars. Which then leads us to the question about repricing company earnings dependent upon foreign currency transactions.

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