Is the federal reserve thinking what we are thinking?
A consistent theme in Linchpin thinking over the past year or so has been that the US economy is heading for a fall and, since the start of 2017, that the US$ is overpriced. We are driven by the data provided by our friends at CrossBorder Capital. It strongly suggests that the two most important prices in World financial markets are wrong. The US 10-year Treasury yield and - to a lesser extent - the US dollar, each representing the price of the dominant economy’s debt, are too high and distorted by capital flows. Whatever the future risk outlook, the World’s two primary ‘safe’ assets are mispriced. In large part, they have been distorted by the extraordinary liquidity injections made by World Central Banks since the financial crisis: in short, policy-makers gave us ‘cheap’ money but we chose to buy ‘safety’ with it. The unwinding of these distortions will cause some jitters over the coming two years, but they will essentially mean a 5-10% weaker US dollar and higher, near-4% US Treasury yields.
We appreciate that this view is counter-consensus at a time when the Trump administration has grand plans to raise middle America's standard of living but, to repeat, we are driven by the money and credit flow data. We note that the Federal Reserve has turned on the money taps in the last few months again and we wonder whether it is thinking what we are thinking.
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