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Brainstorms: The persistence of absurdity
People aren't trained to think in tails
Bloomberg recently published an article providing a "Macro View" on major G-10 FX. Many FX strategists hold a bearish dollar view into the end of the year. The logic behind this perspective is that dollar positioning is directly connected to duration positioning.
Here is the article:
Several thoughts in connection with this article:
First, let's frame this with the big picture. We have been in an inflationary regime for the past year and a half. This type of environment creates biases about how people believe the system works. Just think about the narratives during 2020. It was all about deflation and below-trend growth. In 2022, it was all about accelerating inflation, supply chains, and the invasion. In 2023, it has been about the LEVEL of inflation and the "higher for longer" narrative. Every single time we go through one of these regimes, people reinvent how they think about the economic system based on whatever the current driver of price action is. The problem is, different variables drive price action through different cycles. Simply put, the drivers of the dollar in 2020, 2021, 2022, and 2023 were all different.
Second, if the inflation problem persists without a negative growth and credit problem, then yes, the dollar is likely to fall. However, think about how expectations function through regimes. People take views on assets based on the current regime, not how the current regime will change. If the current regime changes from a regime where inflation is the dominant impulse to where negative growth is the dominant impulse, the drivers of the dollar are likely to change. The bearish dollar view is based on the persistence of the inflationary regime as opposed to a regime shift.
Third, if negative growth and credit risk begin to increase across G7 countries, it is very likely that the dollar will begin to strengthen significantly because of the amount of dollar-denominated debt that exists. There will always be some media personality talking about the dollar losing its reserve currency status but in reality, if dollar liquidity begins to fall due to credit risk rising, the dollar will strengthen.
A final note on how to think about FX:
Currency movements are normal parts of every cycle. There is always a charismatic leader pushing a narrative about how a specific currency is going to the moon or going to zero. In practice, extreme narratives like that don’t ever make money.
If you want to learn more about FX, I would start with "The Alchemy of Finance" by Soros. It is still the classic text on FX. I would also recommend you take a look at the FX books I have shared on the book thread:
What I would say is that really old-school people like Soros, Druckenmiller, and Nick Roditi (you probably don't even know who that is, doesn't it make you wonder ;) ) put on massive FX trades back in the day. The reason for this is because they simply knew how macro worked. They didn’t have all the fancy gadgets that we have today. This is why when people say they don’t have an informational edge in markets, I always push back. Sure, you might not have the HFT data or some nice modeling software, but I will assure you of this: all the corporate suits at Bloomberg and major media outlets don’t know macro the way that the old-school guys did.
The majority of market success today is about interpreting things correctly, not access to information. People will still make excuses, but that is okay. The individuals who take responsibility and challenge themselves will achieve greatness. Now you know why I am here.
In the information age, you simply need to be at the right place, at the right time, with the right information to succeed
Thanks for reading