We’ll get to our title subject anon, but first I must weigh in on the frenzied global debate respecting one of its forbears: Gresham’s Law, which as every schoolboy knows, posits that in an environment with which multiple forms of legal tender of varying soundness, the “bad” money eventually push the “good” stuff out of circulation.
Does it apply at present? We may soon find out. On the other hand, we may not.
But first, a little context. The Law was named after Sir Thomas (no relation to John) Gresham, 16th Century British Financier, hired to look after the economic affairs of King Edward VI (the long sought after male heir to Henry VIII, who was crowned at the tender age of 10, but shed this veil of tears at the tenderer age of 15, to be replaced by the indestructible Elizabeth I, who also availed herself of Sir Thomas’s services -up till the point of his death), and founder of the still-extant Royal Exchange.
Notably, Sir Thomas, modest fellow that he was, never took placing his personal imprimatur on his now eponymous law. Nay, the task was deferred for 3 full centuries, and undertaken by a rather anonymous chap, in remembrance of Gresham’s pushback on the debasement of Pound Sterling during Henry VIII’s time. Perhaps Gresham demurred because he knew that the idea did not originate with him; its origins tracing back at least (and somewhat improbably) to 15th Century stargazer Nicholas Copernicus. However, I suspect our forebears were openly availed themselves of this expedient-but-unfortunate habit, dating back to points when they were still living in caves and sporting tails.
But back to Sir Thomas for a minute; in addition to his sobriety, modesty and unmistakable clairvoyance, wherever else we might differ, perhaps we can all agree that in his day, he cut a rather dashing figure.
Sir Thomas w an Unidentified Skull:
Moreover, in my judgment, he was doing the lord’s work in his tireless efforts to ensure a sound currency. And history shows he was successful. But across the ages, it was perhaps inevitable that there would be periods of backsliding. Consider, for instance, the post-WWI replacement of Germany’s Papiermark with the misanthropic Reichsmark – at an introductory rate of 1 PM = 1 Trillion RM. Of course, this was a one-finger salute from the Germans to the French for imposing-impossible-to-meet reparations at the end of the “War to End All Wars”. But as Sir Thomas foretold, the Papiermark soon disappeared from German commerce, and the Reichsmark quickly fell victim to a 21% per day inflation rate.
What followed: the 1929 Market Crash, the Great Depression and WWII, is well-documented.
Fast forward to the present day, where, while “bad” money is arguably available in galactic over-abundance, “good” money is an elusive designation. If the current flow in FX land is to be believed, then our own greenback is certainly falling out of favor.
The exchange rate deteriorated all week long, closing at a > 2-year low:
Gresham’s Bad Boy: The USD
And notwithstanding Chairman Draghi’s difficult to assess comments (apparently, he’s prepared to increase or decrease Euro QE, as conditions demand), EURUSD breached 120 for the first time since late 2014. Perhaps our Dead Presidents are seeking to be the bad money beneficiaries of Gresham’s Law. If this is indeed their intent, they’re doing a pretty good job of achieving their objective.
But they have company. This month, the amount of fiat currency printed by Central Banks in 2017 will cross over $2 Trillion, and the total amount created out of thin air since the crash is knocking on the door of $20T. One could argue that for the time being, Gresham’s Law applied in spades, because all of the “good” money appears to have been chased out of the economy over the last few years.
Making a gallant bid for the opposite side of The Law are a number of blockchain/virtual currencies, as led of course by Bitcoin. It was a tough, volatile week for these wannabes, and the trend is likely to continue. Ultimately, as stated previously, I think there’s about as much chance of developed countries ceding any measure of control over their currencies and interest rates to entrepreneurial ventures as there is the U.S. Defense Department sanctioning the development of private sector armies and allowing citizens to choose which military enterprise they wish to defend their rights and property. But in the meantime, the virtual circus rolls along, showing no signs of folding its collective tents. I don’t know whether virtual currencies are bad money or good, but it bears remembering that the more we see of them, the lesser the set of qualities they are likely to possess – at least according to Gresham.
Meanwhile, it was a modestly negative week for equities, a strong one for bonds and a mixed one for commodities. Our justifiable and overwhelming focus has been on the sequence of natural disasters plaguing our southern reaches, and, at the point of this correspondence, the toll, in terms of blood and treasure, cannot even be estimated. Less noticed, as a result, was the détente between Trump and the Dems, who have come together, forsaking those on the opposite side of the aisle, to effect a 3-month extension of the budget – debt ceiling positioning notwithstanding. For the markets, this is probably a good thing. While the rebuild in Texas, Florida and their neighbors will generate some incremental demand, left unfettered, the overall impact of the storms is highly deflationary. As a modest example, consider the current dynamics in Natural Gas. One might assume that the worst flood ever recorded, with its epicenter right smack dab in the geographical core of the energy industry, would take out more supply than demand, and that prices would increase.
One would be wrong on that score:
Natural Gas: Knocking on the Door of Quarterly Lows:
My friends in the biz tell me that the storm has completely removed significant pools of demand emanating from Mexico, and that demand disruptions from Irma will make matters worse. Overall, one can safely assume that this double wallop from the fist of God will cost at least 1 GDP point to repair, and this is reflected, among other factors, in our favorite GDPNow estimates:
So one at any rate can understand the economics of Trump’s deal with his sworn political enemies. Nobody can afford the bite that will be taken out by these storms, and I am therefore OK with this bilaterally cynical deal. But I offer the following but of advice for our Commander in Chief. If you think that you can form new political alliances here, think again. Schumer and Pelosi wish you no more good fortune than Hitler and Stalin did each other when they split Finland between them. If you politically compromise House members of your party, and they lose their majority in the next election, then the first official act of the reinstated Pelosi Congress will be to issue articles of impeachment. As usual, Trump is being too clever by half here, and the act is getting very tiresome.
For what it’s worth, I also remain no less concerned about Korea this stormy weekend than I was last stormy weekend. My belief is that by escalating their nuclear activity amid global demands for reduction, the NK bunch has declared de facto war on the United States and its allies. There is simply no way that the current status quo holds. L’il Kim will continue to build his arsenal until his enemies act to reduce it. This could happen at any time, and we probably won’t hear about it until after the fact. The equity markets don’t care about this, of course, but it explains a good deal about the selloff of the dollar, the rally in bonds and the strength of certain commodities.
So these, mes amis, are my immediate loci of concern: Florida, Texas, Korea and Washington. It is a small list, but in my judgment a content-rich one. There are a few macro data releases next week, but it is an otherwise quiet one in that corner of the universe.
So let’s turn to the corporate side, where everyone will hold their breath till Tuesday, 1 pm Eastern Time, when Tim Cook steps up to the podium for the first time in Apple’s newly opened corporate HQ, to introduce the iPhone 8. It ought to be a mind-blowing affair, but the real drama will unfold over the next few months, as the world evaluates whether or not company can meet expectations.
The bar here is high. The A Team are contemporaneously releasing 3 phones. Do they cannibalize each other? Can they overcome widely reported components shortages? Will consumers really pay 1,000 US for the fully loaded 8? Particularly in China: a) which now generates half of all IPhone sale revenues; and b) where suitable substitutes can be purchased for less than 10% of this price?
We won’t know for several weeks, but on Friday I was speaking to my friend Goodie, who unlike me, actually knows something about this subject. We both agreed that this single set of imponderables alone may go a long way towards determining the path of equity valuations in what remains of 2017. If Apple nails it, investors will swoon and perhaps buy everything in sight. If not, the markets may well ignore any technical rationalizations and issue that the cartel of west coast companies bent on taking over the world – the so-called FANGS (and by extension, the overall market) — a much-needed claw trimming.
I will close by designating the importance of the I-Phone 8 to the overall equity market valuations to be Goodie’s Law. It is intended to work in conjunction, rather than supplant, Gresham’s Law. So my risk advice is as follows: if you wish to monitor the potential impact of psychodramas around the world, keep an eye on the USD; if you want to focus on U.S. equities, watch Apple.
If you follow this course, I see no reason why the two edicts cannot achieve harmonious co-existence.
TIMSHEL