The Currency of Last Resort and Free Trade

Lately I have been following The Peterson Institute for International Economics.

See:  https://piie.com/

It can be characterized as pro free trade, and market oriented [right, Brent?].  It was founded by a guy named Fred Bergsten, a man with a long career in and close to government, as opposed to either business, finance, or academe.  The Institute got the Peterson brand because Pete Peterson gave it a bunch of money.  The place is considered one of the big time think tanks.

As it happens, Bergsten is a leading proponent of the strong dollar as the main cause of any trade imbalances.

His thinking goes like this: a strong dollar is the reserve currency, and thus the “price” of the dollar is relatively the highest price for any currency.

The high priced dollar means that America can buy overseas at a relatively low price for goods, while foreigners have to pay a relative premium for American goods.

Bergsten thinks this is a mixed blessing but balances on the gold/shit scale in favor of gold.  As an aside, I think most economists would say that.

But it has me wondering how much of the trade imbalance is related to the strength of the dollar, and whether there are empirical studies from either the IMF or the central banks or the leading graduate schools of finance?

Assuming there is a relationship, of course, how could a double blind study be managed?  I suspect any study would be entirely computer modeled and be dependent on inputs.

Brent, do you have any insights?

Morning Report: Turkey situation deteriorates 8/13/18

Vital Statistics:

Last Change
S&P futures 2836 -0.55
Eurostoxx index 384.89 -0.96
Oil (WTI) 67.37 -0.26
10 Year Government Bond Yield 2.88%
30 Year fixed rate mortgage 4.58%

Stocks are lower as the Turkey situation snowballs to other emerging markets. Bonds and MBS are up on the flight to quality trade.

Financial markets are being driven by the situation in Turkey, with the Turkish Lira continuing to depreciate. This has spread to other emerging markets currencies like the South African Rand. The Chinese currency has hit the lowest level in a year, which is bound to increase trade tensions with the US. There is the potential for this to affect the balance sheets of some European banks, however the US will be pretty much insulated from it. The most likely effect is that it will cause a flight to quality to the US dollar which will keep a lid on interest rates.

The Turkish crisis hasn’t affected the Sep Fed Funds futures, which are handicapping a 94% of a hike, but they have tempered the probability of a follow-on hike in December. It isn’t a dramatic move, but we have slipped from 66% to 61%.

We won’t have much in the way of market-moving data this week – retail sales on Wednesday will be the only one that matters. We will also get housing starts on Thursday. Other than that, it should be a dull week.

Ben Carson is changing the way HUD encourages multifamily real estate development. The Obama HUD used the stick approach – suing local governments to force them to change their zoning rules, based on demographic analysis. The Carson HUD will use the carrot approach – tying grants to changes in zoning restrictions.

Conventional financing accounted for 69% of all financing last year. Of the non-conventional types of financing, FHA loans led with 12%, followed by cash with 10% and VA with 4%.

Elon Musk clarified his tweet regarding taking Tesla private. He decided to use Twitter in order to notify the public of his intention to take the company private. Most companies file an 8-K with the SEC and do a press release, but Elon decided to use Twitter. Second, his “funding secured” comment was based on a conversation with the Saudi Sovereign Wealth Fund who asked if Tesla was interested in selling to the fund. Musk then looked at the assets of the fund, concluded they had the money, and then tweeted that funding was secured. One thing is for sure, if this deal ever happens, the background section of the proxy statement is going to make for some entertaining reading.

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