One other interesting relationship that I've been thinking about (might be a topic for a separate post) is the way that yen, Treasuries, and gold have stopped moving together. Assets that were all deflation, "risk-off" hedges for past 25 years are starting to go their own ways in last 12 months or so... fits in nicely with some of your broad views on changing structural relationship between inflation, wages, etc. Very hard to get a handle on inflection points that happen every 30-40 years but feels like we are living through one of those times
Specifically as it relates to the China-Japan trade balance, is there much difference if taking the value-added trade balance, and does this economically skew the outcome?
Are you talking about investment income form China to Japan? Yes it should be substantial, and I would naturally suggest that would put upward pressure on the Yen - but we have yet to see that. Not sure that is answering your question - if not could you elaborate? A lot has happened since I posted this - so my focus on Japan is not 100% at the moment!
I understood that your point around the trade balance between China and Japan, implying that given Japan has a trade balance deficit, i.e. net importing more from China overall, although that’s narrowed since 2015, but still, if it sustains, this will help to put weakening pressure on the yen. But in terms of the trade balance, looking one layer deeper, I was curious on the value-added trade balance, i.e. taking into account the value that Japan plays in China’s supply-chain overall – components in an iPhone for example, where the end product might eventually be exported by China, but perhaps a lot of the value-add of the stuff that goes into that iPhone (or whatever product) is Japanese. So looking through so that the trade balance is only reflecting the value-added element for each country. Wondered if you had any sense on if looking at it this way skews the view? I do not know FWIW!
Chinese trade data shows Japan runs a trade surplus with China. CHEXJPN and CHTIJPN if you have Bloomberg. It would suggest Yen should strengthen. On a value add basis, you would expect Japanese exports to have a lot more...
Do you mind expanding on the idea of "liquidity driven assets"?
1) how do you define or consider "liquidity"
2) what transmission do you see from a pullback in this "liquidity", is it only portfolio rebalancing or dcf repricing due to higher sov. rates? or is there some kind of general contraction in supply of general buying power?
Thanks!
Ive tried to capture it "liquidity" in this note, feel free to refer to that if you find any ideas useful
The best definition I cam come up with liquidity is high yield corporate debt. If you are sure that the "next" time the corporate tries to borrow from the market, then you have no problem buying their bonds "this" time. But as soon as you know "next" time might be a problem - then liquidity disappears. Hence, liquidity driven assets are assets that always need new buyers to maintain value. Apple is not liquidity driven, but Zoom is...
Have noticed some of the same things on my end, but you tie it together much more thoughtfully. The yen has been acting very strangely over the past year. I would have expected more of a rally in the yen in Jan 2022 with sharp equity market weakness in U.S. markets but it didn't happen. Compare that to the last major bottom in the yen in August 2015 and it bounced sharply. The yen no longer feels like the same *yen* that's it's been for the last 25 years.
One other interesting relationship that I've been thinking about (might be a topic for a separate post) is the way that yen, Treasuries, and gold have stopped moving together. Assets that were all deflation, "risk-off" hedges for past 25 years are starting to go their own ways in last 12 months or so... fits in nicely with some of your broad views on changing structural relationship between inflation, wages, etc. Very hard to get a handle on inflection points that happen every 30-40 years but feels like we are living through one of those times
Specifically as it relates to the China-Japan trade balance, is there much difference if taking the value-added trade balance, and does this economically skew the outcome?
Are you talking about investment income form China to Japan? Yes it should be substantial, and I would naturally suggest that would put upward pressure on the Yen - but we have yet to see that. Not sure that is answering your question - if not could you elaborate? A lot has happened since I posted this - so my focus on Japan is not 100% at the moment!
I understood that your point around the trade balance between China and Japan, implying that given Japan has a trade balance deficit, i.e. net importing more from China overall, although that’s narrowed since 2015, but still, if it sustains, this will help to put weakening pressure on the yen. But in terms of the trade balance, looking one layer deeper, I was curious on the value-added trade balance, i.e. taking into account the value that Japan plays in China’s supply-chain overall – components in an iPhone for example, where the end product might eventually be exported by China, but perhaps a lot of the value-add of the stuff that goes into that iPhone (or whatever product) is Japanese. So looking through so that the trade balance is only reflecting the value-added element for each country. Wondered if you had any sense on if looking at it this way skews the view? I do not know FWIW!
Chinese trade data shows Japan runs a trade surplus with China. CHEXJPN and CHTIJPN if you have Bloomberg. It would suggest Yen should strengthen. On a value add basis, you would expect Japanese exports to have a lot more...
Do you mind expanding on the idea of "liquidity driven assets"?
1) how do you define or consider "liquidity"
2) what transmission do you see from a pullback in this "liquidity", is it only portfolio rebalancing or dcf repricing due to higher sov. rates? or is there some kind of general contraction in supply of general buying power?
Thanks!
Ive tried to capture it "liquidity" in this note, feel free to refer to that if you find any ideas useful
https://nonlinearexpectations.blogspot.com/2021/10/liquidity.html
The best definition I cam come up with liquidity is high yield corporate debt. If you are sure that the "next" time the corporate tries to borrow from the market, then you have no problem buying their bonds "this" time. But as soon as you know "next" time might be a problem - then liquidity disappears. Hence, liquidity driven assets are assets that always need new buyers to maintain value. Apple is not liquidity driven, but Zoom is...
Have noticed some of the same things on my end, but you tie it together much more thoughtfully. The yen has been acting very strangely over the past year. I would have expected more of a rally in the yen in Jan 2022 with sharp equity market weakness in U.S. markets but it didn't happen. Compare that to the last major bottom in the yen in August 2015 and it bounced sharply. The yen no longer feels like the same *yen* that's it's been for the last 25 years.
My next note offers some ideas... should be out tomorrow