Michael I took a university course in micro and macroeconomics so am a neophyte
Me and my buddy are interested in capital flows and how it would be impacting asset values in USA. In my affluent neighborhood half of the house sales are cash only. Something going on. And the bank of Japan keeps these insanely low interest rates. So could people be borrowing in Japan and buying assets in USA?
Also are there any good books on capital flows. Am aware you wrote one so will start there lol
May be what I wrote was not so clear. The argument is that real exchange rate has two moving parts - nominal and asset prices. Both can move. If the nominal take all the adjustment then assets prices are unchanged. If not then asset prices move. Now the USD and asset prices are sharing the adjustment, which suggests a near-neutral Fed policy. If the Fed eases, asset prices will adjust by more.
Consider the cases of Japan 1980s Asia 1990s and China 2019s. Here capital came in, real exchange rate moved up and adjustment largely in asset prices as Central Banks eased.
So the adjustment is not either/or but can be both depending on policy response.
I'm looking through some historical data about dollar strength and equities, and I'm not seeing that correlation you talk about. Is it well-established that a strong dollar is bullish equities or supportive of capital inflows to equities?
In the 1980s the bull run in equities didn't really start in earnest until after the dollar had completed it's moonshot and round-tripped.
In 2000 the tech crash coincided with a strong move higher in the dollar.
With more than 50% of big tech's earnings come from overseas these days might we reasonably assume that a 3-5% move lower in DXY would be stimulative there?
Hi Michael, so with this dollar milkshake theory playing out, will US be forced to cut despite a hot economy?
Europe is about to cut but if they do, more capital will flow into US. Japan has weak economy although booming stock market. So, maybe they need to cut to avoid other economies blowing up?
But if so, it will inflate currently overvalued asset prices further. May this be what triggers the down liquidity cycle in circa-2025?
A Yen carry trade is possible but after such a large fall it would be nuts. These positions are usually very sensitive to volatility.
Michael I took a university course in micro and macroeconomics so am a neophyte
Me and my buddy are interested in capital flows and how it would be impacting asset values in USA. In my affluent neighborhood half of the house sales are cash only. Something going on. And the bank of Japan keeps these insanely low interest rates. So could people be borrowing in Japan and buying assets in USA?
Also are there any good books on capital flows. Am aware you wrote one so will start there lol
Some good articles on website of academic Helene Rey Prof at London Business School
Thank you for this lucid analysis Michael
Hi Alex
May be what I wrote was not so clear. The argument is that real exchange rate has two moving parts - nominal and asset prices. Both can move. If the nominal take all the adjustment then assets prices are unchanged. If not then asset prices move. Now the USD and asset prices are sharing the adjustment, which suggests a near-neutral Fed policy. If the Fed eases, asset prices will adjust by more.
Consider the cases of Japan 1980s Asia 1990s and China 2019s. Here capital came in, real exchange rate moved up and adjustment largely in asset prices as Central Banks eased.
So the adjustment is not either/or but can be both depending on policy response.
I'm looking through some historical data about dollar strength and equities, and I'm not seeing that correlation you talk about. Is it well-established that a strong dollar is bullish equities or supportive of capital inflows to equities?
In the 1980s the bull run in equities didn't really start in earnest until after the dollar had completed it's moonshot and round-tripped.
In 2000 the tech crash coincided with a strong move higher in the dollar.
With more than 50% of big tech's earnings come from overseas these days might we reasonably assume that a 3-5% move lower in DXY would be stimulative there?
Every time you publish an article, I would need to spend hours to read it over and over again, so I could get a better grasp and understand more.
Thank you.
Hi Michael, so with this dollar milkshake theory playing out, will US be forced to cut despite a hot economy?
Europe is about to cut but if they do, more capital will flow into US. Japan has weak economy although booming stock market. So, maybe they need to cut to avoid other economies blowing up?
But if so, it will inflate currently overvalued asset prices further. May this be what triggers the down liquidity cycle in circa-2025?
I think you are correct. Any stability in USD will allow others to ease and all signs are they want to