I think we're talking about two interrelated things here
1) The Nixon shock of 1971 - this effectively established free capital flows and floating exchange rates as the norm, with US Treasuries supplanting Gold as the main reserve asset
2) The Kissinger shock 1972 - with Nixon in China, shifting recognition from the ROC to PRC and favoring China over the Soviet Union
With 1) this allowed fund managers like Quantum (Soros) to profit immensely, and also imposed discipline on governments that didn't want to play along with market-oriented principles. It also eventually led to the problem in US politics we have today: the US dollar has to be structurally overvalued, hurting the Industrial Midwest while benefiting Wall St and the Tech Moguls of both Coasts.
With 2) it was a geopolitical masterpiece, coupled with the oil price crash in 1985 it led to the disintegration of the Soviet Union.
I don't think Trump in Moscow will be like Nixon in China, modern Russia is a lot less powerful than the former Soviet Union, and Putin (or his successor) knows that Trump can turn on a dime, he can't commit past 2028 anyway.
The bigger fear that all fund managers should have, is if the current series of trade wars and politics turns into an anti-Nixon shock moment. If we return to a world of capital controls and tariffs, this would be very bad for asset prices globally, especially in the US. And so much of the modern financial industry: not just in the US, but even in Australia, Hong Kong, Singapore etc... depends on having elevated asset prices. Even the HK government budget is struggling because land sale revenue is weak.
I have got into this argument with some people many times: there are many new 'Global South' commentators like Kishore Mahbubani who seem to relish the idea of US decline and neo-isolationism. I can understand where they are coming from politically, but I urge them and other Chinese or Russian sympathizers to think more rationally: where would the Singapore, Hong Kong, Dubai or London economy be if the S&P 500 crashed by 70%? Sure Gold would trade well in such a scenario, but the revenues from being a gold trading hub pale in comparison to the land sale revenue, equity derivatives and other assorted industries that are a mainstay of global finance.
If 2025 indeed becomes and anti-1971, the post-Industrial Midwest like Ohio, Pennsylvania and Illinois would be the place to be, not Singapore, Hong Kong or London.
Theoretically I do think rust best areas look more interesting. I am pretty sure house prices in Newcastle have done better than London in recent years.
The more interesting question is if the US dollar does decline - this would open the door for China to open up its capital account, and truly take on the free trade mantle that the US has thrown off. For now, I still think we head for a capital scarce future as the world is remade
Thanks for this - much food for thought. In terms of the conclusion on politicians being more 'in the room' now, 'm reminded of the old line attributed to Churchill: "Americans Will Always Do the Right Thing — After Exhausting All the Alternatives". The Bull Market of the 80s onwards was obviously partly due to interest rates peaking due to Volcker, but I like your free market suggestion as another contributor. So I fear that politicians getting involved again will be a Net negative for the markets.
I think we're talking about two interrelated things here
1) The Nixon shock of 1971 - this effectively established free capital flows and floating exchange rates as the norm, with US Treasuries supplanting Gold as the main reserve asset
2) The Kissinger shock 1972 - with Nixon in China, shifting recognition from the ROC to PRC and favoring China over the Soviet Union
With 1) this allowed fund managers like Quantum (Soros) to profit immensely, and also imposed discipline on governments that didn't want to play along with market-oriented principles. It also eventually led to the problem in US politics we have today: the US dollar has to be structurally overvalued, hurting the Industrial Midwest while benefiting Wall St and the Tech Moguls of both Coasts.
With 2) it was a geopolitical masterpiece, coupled with the oil price crash in 1985 it led to the disintegration of the Soviet Union.
I don't think Trump in Moscow will be like Nixon in China, modern Russia is a lot less powerful than the former Soviet Union, and Putin (or his successor) knows that Trump can turn on a dime, he can't commit past 2028 anyway.
The bigger fear that all fund managers should have, is if the current series of trade wars and politics turns into an anti-Nixon shock moment. If we return to a world of capital controls and tariffs, this would be very bad for asset prices globally, especially in the US. And so much of the modern financial industry: not just in the US, but even in Australia, Hong Kong, Singapore etc... depends on having elevated asset prices. Even the HK government budget is struggling because land sale revenue is weak.
I have got into this argument with some people many times: there are many new 'Global South' commentators like Kishore Mahbubani who seem to relish the idea of US decline and neo-isolationism. I can understand where they are coming from politically, but I urge them and other Chinese or Russian sympathizers to think more rationally: where would the Singapore, Hong Kong, Dubai or London economy be if the S&P 500 crashed by 70%? Sure Gold would trade well in such a scenario, but the revenues from being a gold trading hub pale in comparison to the land sale revenue, equity derivatives and other assorted industries that are a mainstay of global finance.
If 2025 indeed becomes and anti-1971, the post-Industrial Midwest like Ohio, Pennsylvania and Illinois would be the place to be, not Singapore, Hong Kong or London.
Theoretically I do think rust best areas look more interesting. I am pretty sure house prices in Newcastle have done better than London in recent years.
The more interesting question is if the US dollar does decline - this would open the door for China to open up its capital account, and truly take on the free trade mantle that the US has thrown off. For now, I still think we head for a capital scarce future as the world is remade
Interesting you mention house prices in the North of England vs London
Contrary to popular perception, London housing prices have actually been pretty flat in real terms since 2015.
Can you really say that London property, is a safe store of value anymore?
Japan's inflation is getting pretty bad - I wouldn't be surprised to see 2% on the 10Y JGB before year's end.
In the "old days" - I would be running long yen, long treasuries and short everything at 10 yr JGBS at 2% - but those days are gone I think...
Thanks for this - much food for thought. In terms of the conclusion on politicians being more 'in the room' now, 'm reminded of the old line attributed to Churchill: "Americans Will Always Do the Right Thing — After Exhausting All the Alternatives". The Bull Market of the 80s onwards was obviously partly due to interest rates peaking due to Volcker, but I like your free market suggestion as another contributor. So I fear that politicians getting involved again will be a Net negative for the markets.
I suspect it will be like the 70s... brutal bear market in real terms, but ok in nominal terms
Thanks for another great note, Russell. What do you think the forcing function is for higher energy prices stemming from a U.S./Russia detente?
Great article, Mr Clark- you got straight to the important issues and provided credible answers as to why markets are behaving this way, too!