VIDEO TRANSCRIPTION - UnderTheLens - 04-25-25 - MAY – Up Next – Currency Wars!
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TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 – COVER
Trump's presidency will undoubtedly result in sweeping changes in the international economic system. With it will come elevated market volatility and risk for all but also rewards for some?
It is important for us as investors to understand the strategies and tools that might be employed for such purposes, as well as the means by which government may attempt to avoid unwelcome consequences.
A guiding message from history is:
- Tariffs lead to Trade Wars
- Trade Wars lead to Currency Wars
We should fully expect currency devaluations to be coming.
In fact it is my belief as I will explain is part of the unfolding Trump Tariff Strategy.
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To explore this further and better prepare ourselves I want to cover the subjects as outlined here.
SLIDE 5 - MIRAN’S ROADMAP - CURRENCY DEVALUATION
The desire to reform the global trading system and put American industry back on fairer ground with the rest of the world has been a consistent personal theme for President Trump for decades. We may be on the cusp of generational change in the international trade and financial systems because President Trump and the Administration he has carefully selected, understands the key points of a pivot for such a transformation.
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To deliver his goals Trump is following a number of parallel agendas. The one I want to talk about in this session is the one shown here.
Trump obviously isn’t going to announce it because it is part of a strategy. However, we have enough clues and the writings of his Chairman of Economic Advisors to suggest it is planned to unfold something like what is shown here.
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We are currently here.
Despite what the press is reporting there is a lot more going on in these Tariff negotiations than just Tariffs?
A key part of the negotiations we believe involves isolating China and effectively beginning the process of creating the framework for a US Trading Block.
We will come back to that in a moment but first we need to discuss what we at MATASII believe are the Trump Administrations key Points of Pivot during this process.
SLIDE 8 - POINTS OF PIVOT
The first Point of Pivot is setting up the pins for a US Dollar Devaluation.
We have long held that the US dollar is overvalued by 40%. A devaluation of 20% is the minimum we should expect.
- The root of US economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets.
- As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of:
- Being the Global Reserve Assetand
- Being the Global Defense Umbrella
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That is because the manufacturing and tradable sectors bear the brunt of such costs and the US is no longer a manufacturing driven nation.
The loss of nearly 90,000 manufacturing facilities since China entered the WTO in 2002 is simply too great to now afford being the Global Reserve Asset as the Triffin Paradox warned (and as we have written extensively about) and additionally being effectively the unpaid Global “Cop on the “Beat”.
SLIDE 10 - TARIFFS
Tariffs provide national revenue (which the US desperately needs) but more importantly:
- If offset by currency adjustments, it presents minimal inflationary or otherwise adverse side effects, consistent with the experience in 2018-2019.
- While currency offset can inhibit adjustments to trade flows, it suggests that:
- Tariffs are ultimately financed by the tariffed nation,whose real purchasing power and wealth decline, and
- The Revenue raised improves burden sharing for reserve asset provisio
SLIDE 11 – NATIONAL SECURITY
Tariffs must be implemented in a manner deeply intertwined with national security concerns and in the context of the U.S. taxation system.
Currency policy aimed at correcting the undervaluation of other nations’ currencies brings an entirely different set of tradeoffs and potential implications.
- Historically, the United States has pursued multilateral approaches to currency adjustments.
- While many analysts believe there are no tools available to unilaterally address currency misevaluation that is not true.
- There are some potential avenues for both multilateral and unilateral currency adjustment strategies, as well as means of mitigating unwanted side effects
SLIDE 12 - EXPECTATIONS
- The US will adopt a much stronger demarcation between friend, foe and neutral trading partner.
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- Friends are inside the security and economic umbrella, but there is more burden sharing.
- Based on the scope of that burden sharing, friends may experience more favorable trade or currency terms.
- Those outside the security umbrella will also find themselves outside friendly arrangements for international trade and easy access to the U.S. consumer.
- They will have more aggressive costs imposed on them via tariffs and other policies. There are obvious implications for asset prices.
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- The threat of withdrawal of the security umbrella without burden sharing will have its own, potentially volatile, consequences.
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- Will it spur nations around the world to invest more in defense?
- Will it encourage more aggressive action by bad actors against those now outside the defense umbrella?
- These are significant degrees of uncertainty which will permeate markets.
- Risk premia may rise for assets in countries that now experience greater security risks.
- Expect a structural increase in implied volatility in currency markets. The scope for monumental, once-every-few decades level of shifts in policy ought to significantly heighten expectations for volatility
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- These policies may supercharge efforts of those looking to minimize exposure to the United States.
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- Efforts to find alternatives to the dollar and dollar assets will intensify.
- There remain significant structural challenges with internationalizing the renminbi or inventing any sort of “BRICS currency,” so any such efforts will likely continue to fail, but alternative reserve assets like gold or crypto-currencies will likely benefit.
- Wall Street consensus that an Administration has no means by which to affect the foreign exchange value of the dollar, should it desire to do so, is wrong.
Government has many means of doing so, both multilaterally and unilaterally.
No matter what approach it takes, however, attention must be paid to steps to minimize volatility. Assistance from trading partners or the Federal Reserve can be helpful in doing so.
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President Trump is already signaling that tariffs are a means by which he can successfully extract negotiating leverage—and revenue—from trading partners, it is therefore why tariffs are being used prior to any currency tools.
Because tariffs are USD-positive, it will be important for investors to understand the sequencing of reforms to the international trading system.
The dollar is likely to strengthen before it reverses, if it does so.
There is a path by which the Trump Administration can reconfigure the global trading and financial systems to America’s benefit, but it is narrow, and will require careful planning, precise execution, and attention to steps to minimize adverse consequences.
SLIDE 16 - FIRST TO DEVALUE WINS! - LESSONS FROM HISTORY
Modern economists know nothing of the nineteenth century and therefore do not understand that domestic credit bubbles create trade deficits. Their model is the 1930s, which was anomalous because Europe's capital had been largely consumed by and destroyed in the Great War, enabling the US to sustain a large trade surplus despite the enormous 1920s credit bubble that should have created a large trade deficit. When the bubble popped, the America found itself with enormous overcapacity and a terrifying depression.
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Roosevelt devalued the dollar both to make US. Exports more competitive and facilitate debt servicing domestically.
The problem was that other countries were also devaluing their currencies.
Policy makers came to believe, as Ben Bernanke told Milton Friedman on his ninetieth birthday:
"The countries that remained on gold suffered much more severe contractions in output and prices than the countries leaving gold... countries that left gold earlier also recovered earlier."
In other words, those that devalued first won.
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The current situation is, in fact, somewhat parallel to the anomalous 1920s, only this time China is the country with an enormous domestic credit bubble yet is also running a huge trade surplus, a feat achieved through capital controls and currency manipulation.
Trump's Treasury Secretary Scott Bessent understands the implications:
"[China is] the surplus country. Their exports to the US are five times our exports to China. So, they can raise their tariffs .... but, so what?"
If China cannot find markets to absorb its overcapacity, it will face its own great depression, made worse from its demographic disaster, and perhaps be forced into war to distract the populace.
There are risks for the US as well and not just war with China.
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RISKS
- Foreigners buy Treasury bonds with dollars they accumulate from trade surpluses.
- if Trump balances trade, or even reduces the trade deficit, there will be correspondingly less external demand for Treasuries.
- The tariffs, therefore, are called upon to serve a dual purpose of balancing trade and raising revenue.
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PROBLEMS
- Cutting spending through DOGE or any other means becomes a necessity.
- A falling stock market also serves Trump's strategy by reducing the wealth effect and, therefore, inflation, which might prompt the Fed to act.
- Falling stock market also pushes scared money into the bond market, lowering interest rates. Note, however, that in a gold standard, rates rise to attract capital and allocate it to more productive enterprises.
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To achieve his goals, Trump will need to recreate that effect through political direction of capital.
Trump is knocking down the post-World War II geopolitical structures because they no longer serve America's interests. Even assuming his economic plan succeeds, the value of all currencies will be substantially lower. China is already devaluing the yuan.
One misplaced step could turn a controlled demolition into a panic unwind of the entire global credit bubble.
A central bank bailout would have to be on a scale larger even than COVID. And central bank balance sheets are so weak, there is no guarantee that the next intervention will be successful, in which case bonds, stocks, and currencies all collapse in tandem, as has occurred over the years in many an emerging market.
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Productivity exploded off of a foundation when truth and individual sovereignty created free markets and innovation by design, first within then among nations.
Progress is not steady, however, and many eras have seen decades or even centuries of retrogression. The abandonment of the international gold standard and adoption of politically managed currencies subtly reintroduced mercantilism, a predatory regime under which trade creates winners and losers.
Trump understands that America as a whole has been the loser. Trump is determined to make America the winner. The best outcome, however, assuming the world can avoid the horrors of a global war, would be a collapse of currencies and a natural return to the gold standard and market-enforced balanced trade.
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- At $3,200/ oz, gold represents 12.4% of the Fed's assets, which is below the 12.9% reading recorded at the end of 1971, when gold traded at $37.40/oz.
- It is still cheap in U.S. terms. Non-U.S. institutions in particular are figuring out that gold, with a total market value of $22.4 trillion, is one of few asset classes able to absorb safe-haven /lows and provide diversification away from Treasury bonds.
- As gold reenters the global financial system as the preeminent international reserve asset, the only entities able to do QE will be the gold miners.
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So how does this re-evaluation happen and who goes first?
SLIDE 25 - TRADE WARS BECOME CURRENCY WAR
WHO IS FIRST: CHINA OR THE US?
When will Beijing devalue the Yuan — and by how much — it is a matter of great concern.
Its actions could ignite a global currency war and exacerbate fears of capital outflow from emerging markets.
The People’s Bank of China is signaling a willingness to weaken the RMB, but on its own terms. Currently the central bank sets its daily reference rate at above 7.20 per dollar, a psychologically important level that had not been breached since September 2023, even as the greenback fell against other major currencies.
Meanwhile, the PBOC has asked state banks to reduce dollar purchases to avoid steep declines in the Yuan.
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One way to think about China’s currency policy is its fiscal stance. Unless Beijing brings out the stimulus bazooka, devaluing the Yuan might be the most expedient option to avert further economic downturn.
Trump’s punitive tariffs will hurt. In the December quarter, net exports contributed to 46% of China’s total economic expansion. As a result of this trade shock, the economy might grow by only 2% this year, the lowest since late 1970s, according to Barclays PLC.
For now, Yuan traders can likely expect some calm.
That no major stimulus has been announced doesn’t mean it won’t come.
After all, it takes time to put together a big package.
To hit the 5% growth target, Beijing will need to roll out another 12 trillion Chinese yuan ($1.6 trillion), or 8.6% of gross domestic product, the bank reckons. At the National People’s Congress in March, China already raised its broad budget deficit to 8% of GDP, versus 6.6% last year. In recent weeks, top officials have said the government has ample room for more fiscal easing.
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This tranquility may be broken, however, if China can’t come up with a concrete fiscal figure by the Politburo meeting in July, when top politicians set out economic priorities for the rest of the year. Monetary tools may have to be deployed instead. In this case, the Yuan might trend toward 9 per dollar from the current 7.3 to offset Trump’s tariffs, estimates Barclays.
While Barclays’s 20% downside sounds alarming, intuitively, it makes sense. The RMB weakened as much as 10% in 2018, when the U.S. raised its average tariff rate by less than 20%. Now, Chinese exporters on average face 135% levies. The Yuan is roughly flat against the greenback this year.
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To be sure, economists are making various assumptions to reach their price targets.
Barclays, for instance, assumes a fiscal multiplier of 0.3, so every percentage point increase in budget deficit gives only 0.3% boost to growth. Morgan Stanley, on the other hand, is more generous, seeing a 0.5% lift. What they do agree on, however, is that Beijing will stick to its growth target, one way or another.
Having called Trump’s tariff escalations a "joke”, China has vowed to "fight to the end”.
That means every tool is on the table, including the currency.
Be prepared.
SLIDE 29 - USDCNH
We have added this chart to both weekly Market Lab and Technical Analysis Lab to able to carefully watch for the initial movements in by the PBOC in controlling the 7.2 Peg.
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Implied volatilities are climbing, but haven’t yet reached the levels seen just before the US elections in November, which suggests traders have room to build USD/CNH exposure. Indeed, the volatility curve looks set to go inverted which is a signal that extreme currency moves are expected.
Of course, China hinting at devaluation is a huge risk. China has $60 trillion in deposits, 3x more than the US. If this capital starts to flee, it will have catastrophic consequences. In 2015/16 we saw this, and it started the great move in Bitcoin from $200 to $20,000
SLIDE 31 - DXY
The dollar has broken below the October 2024 lows and down a stunning 8.5% from February highs.
With just over a week left in the month, The Dollar Index looks set for its worst monthly performance since 2009 when The Fed started printing money through QE1.
This monthly chart …
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… And this weekly chart are part of our weekly newsletters and continue to be annotated accordingly.
We technically see two potential targets as shown here.
The green arrows are on the charts to remind us of what it will take to make them occur. Strong relative US Real Rates
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We also need to be watching commodities and non-fiat currencies specifically.
- Precious Metals like Gold needs to be viewed as a currency
- Silver has some of those attributes but often controlled by its industrial metal attributes. However, when the Gold/Silver ratio can changes significantly and violently. That has happened yet – but – with gold going up at $100/day it is something to watch closely
- Oil is called “Black Gold” for a reason
- Bitcoin is now a very important borderless currency especially as a potential flight of capital from China and other countries occurs.
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Commodities are currently getting hard as part of a large degree consolidation. But as we have pointed out many times, sectors within the commodity complex are red hot.
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Gold it telling us that global markets are sensing that the instability being caused by trump is leading to a falling dollar and therefore Gold is your protection.
Gold has been surging over the last few years from central bank buying but is now increasingly happening though increased ETF buying of GLD.
Again, all these elements are covered on a weekly basis in the Market Lab and Technical analysis newsletters.
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We suspect oil as represented by WTIC is headed lower as a consequence of global slowing and increased production coming on line from Trump policies.
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Bitcoin is currently in the process of consolidating its prior gains a break of the Proprietary MATASII Momentum indicator in the lower panel and we are likely off to seriously higher prices.
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So what can we conclude?
There are a lot of moving pieces impacted by unprecedented policy changes and announcements. We are in the 4th Turning – expect the unexpected.
We have completely changed our three weekly newsletters to best identify signals early - to separate the noise from the signal
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The Global Trading System is under potential historic change.
But it is only part of what lies ahead.
Stay tuned – it is going to be an exciting and hopefully rewarding ride.
THE UNFOLDING ROADMAP
1- TARIFFs - A Destabilizing Shock
2- TARIFF NEGOTIATIONS - On a Unilateral Basis
3- A US TRADE BLOCK - A US Trade version of OPEC+
4- US DOLLAR DEVALUATION - Surging Gold is now "Front Running" This Stage
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
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Do your reading and make sure you have a knowledgeable and well informed professional financial advisor.
So until we talk again, may 2025 turn out to be an outstanding investment year for you and your family?
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I sincerely thank you for listening!
