Thoughts from the Road

* European clients were negative, very focused on the US and obsessed with tight $ funding
* The lack of dollar strength led some clients to ask if we'd already seen the high
* Everyone was focused on when markets or data would cause the Fed to stop hiking
* Outside the US we got some interesting feedback on Japan, Brexit, trade and Sweden
* Doesn't the Fed see how tight dollars are? Interest on Excess Reserves (IOER) is right on top of Fed Funds, which shows you there's no liquidity!
* The cost of dollar funding over the turn is already at the highs we saw last year, and the bulk of funding doesn't happen until the end of this month!
* QT is caustic. Markets are too focused on rates and forget the destructive power of lower liquidity.
* Surely the Fed see the damage QT is doing? Why don't they stop? If they keep going, another wave lower in global assets is inevitable, especially in EM.
* QT is incredibly dangerous and in January we have a series of new capital requirements that will hit US banks. This will further restrict balance sheets and exacerbate the current dollar funding crisis.
* Thanks to years of deficit neglect and abuse of their exorbitant privilege, structurally the dollar looks dreadful
* How does the US fund the deficit? Where does the money come from? They need foreigners and that means the dollar must fall once again to generate positive overseas reserve growth, money that can flow into Treasuries. If the US has to fund the deficit themselves, the cash will have to come out of equities and indexes will halve!
* Societally and for the debt, the US must get inflation up. The best way to do that would a long-extended decline in the dollar.
* Long-term inflation says 10yr/10yr forward is completely under-priced, especially vs long-term real yields
* We have a lot of sympathy with your 1960's analogy, where the Fed is too quick to back off from tightening policy and inflation becomes ingrained. As we saw back then, in that scenario bonds will be a lousy hedge for stocks.
* We believe that the Fed will be quick to back away from hikes, even if that means higher inflation. The memory of the GFC is too recent and painful.
* If the Fed tries to achieve a soft landing the odds are that inflation will reaccelerate in early 2020
* In terms of trade and the death of Chimerica, no-one pushed back against the broad thesis that the US/China relationship had hit a major structural tipping point. Although, everyone acknowledged that the upcoming G20 meetings in Buenos Aires offered the opportunity for some tactical rapprochement that might suit both China and the US. That, in turn, was an input to the Santa Claus thesis (which seems to be on shakier ground post-APEC/Pence/Xi). The medium to long-term implications for everything from EM to inflation of the Chimerica theme are recognised as being structurally profound.
* A couple of clients were keen to discuss our latest piece on Japan ("Could a Banking Problem Undercut Global Liquidity" 12th Nov). They concurred that a steeper yield curve was absolutely necessary to save the domestic banks and were looking for further trial balloons in regard to tweaking Yield Curve Control. They also agreed this created the possibility of a sharp JPY rally, as weak regional and trust banks repatriated cash. However, their sense was that Japanese regulators, having learned the funding lesson of the FX basis swap, leaned on the banks to term out their basis through yearend, which mitigated some immediate risks. One client pointed out that if you constructed a simple, unhedged basket portfolio typical of that held by most Japanese insurance companies, its return is now negative since the start of their financial year in April. As a result, they expected this to keep the Yen bid as positions were either cut or hedged.
* On Brexit, everyone was confused and exhausted by the day to day political volatility. Taking unnecessary or discretionary UK risk creates asymmetric career risk. However, in terms of forward planning, we heard it suggested that in the event of a poor outcome, US firms were lining up like vultures to scoop up UK firms in cheap M&A deals.
* Finally, we had several discussions about our fear that Sweden could become the poster child for the rest of Europe, i.e. what could happen if a Central Bank went through a whole economic cycle without ever hiking ("Sweden: Ruh Roh" 2nd October). In general, no one was particularly complimentary about the Riksbank's policy timing and believed that, if they went ahead with their planned tightening, it would be a mistake. The "good news" is that, with a debt/GDP ratio of only 40%, they have room stimulate fiscally (patently not the case for the rest of Europe) and they could always let the SEK take the strain!