my friends today is October 19th and this is Markets weekly so this past week we had another pretty good week in markets SNP 500 at a new all-time highs now remember not too long ago we were talking about how seasonally this is not a good time for markets but I guess it just Powers through let's see if we can continue now today let's talk about three things first there's some interesting policy divergences emerging among Global central banks and that seems to be driving uh some currency impact let's talk about what's happening there secondly now something
really interesting is happening in the political markets the past week it seems like the political markets are increasingly confident of a trump win and maybe maybe a potential red sweep and that seems to be showing up in certain markets as well let's talk about what happened last week in politics and lastly so I heard this really interesting podcast on macr muss from Professor Emilio Cambo a professor in Argentina talking about uh the case for dollarization in Argentina and how they got to where they are today let's talk about some interesting things from his paper all
right starting with Central Bank divergences so this past week we got some more really good economic data in the US now not too long ago people were worried about a US recession then we had a blockbuster jobs report and people stopped worrying about that now this past week we got consumer spending data and it was really good actually the it blew way past expectations us consumers continue to spend and that's probably going to continue as long the stock market goes higher now with all this good data uh the Atlanta GDP now is now revising upwards
its forecast for US GDP to comfortably above 3% now that is leading the interest rate markets to price in fewer fed cuts now not too long ago the market was thinking that we might get another 50 basis point cut either in November or December and then the Market's began to think we'll just get two 25 basis point cuts for the rest of the year and now there's some slight chance of the FED just maybe skipping November now again slight chance we do have some fed presidents talking about hey you know the economy is doing better
than I thought we got to lower rates deliberately again again but I think the base case continues to be two 25 basis point Cuts although fewer Cuts next year so overall the US economy appears to be doing better than expected and so the market is pricing in fewer Cuts over the next couple years now at the same time though uh there's a different story happening in other regions of the world now looking up north in Canada now recent CPA data in Canada shows that you know inflation is actually below 2% over there and there are
some concerns of economic growth and and so the market is now thinking that maybe the Bank of Canada would cut by know 50 basis points when it meets the next week now looking over in euroland starting with the UK now UK CPI has also been coming in a bit lower than expected now that is also leading the market to increase its expectations of cuts from the bank of England now this past week the ECB met and they cut rates again now what's happening in the Euro zone is similar to what's happening in the other countries
inflation is lower than expected right looking at headline it's already below 2% largely due to Energy prices but at the same time their economy is not doing as well remember we've talked about the PMI data over there it looks like growth is becoming softer and ECB officials have been more and more concerned about um just poor growth and so the market is thinking that they will cut again in December as well so on the one hand as the US is becoming outperforming on the other hand many other countries are underperforming and so that's leading to
a widening Divergence in policy expectations and leading to surprising dollar strength now not too long ago again fed Market was pricing in aggressive fed cuts on top of that massive deficits the dollar was weakening a lot and now the past couple weeks we've seen substantial dollar strengthening with Euro USD below 1.1 and of course the dollar Index just spiked in now I don't know if that's going to continue but it is a notable Divergence that we've seen uh in in recent weeks but part of that dollar strength thing though may not just be due to
monetary policy Divergence but there are also political Dimensions as well so this past week uh we've had a really big surge in the odds of a trump victory in betting markets right now the markets are strongly favoring a trump Victory now to be clear these are Market can be moved by small bets as uh as some people have noted but then again if you look at the history of poly Market you notice that it was around 50/50 for some time it's really the past week that things have changed and of course there are also other
bding markets as well like predicted that also show an increasing Trump Victory and Nate Silver's motto although having both candidates at 5050 has steadily moved up Trump's odds now what's happening seems to be that as as the candidates communicate more with the public people are beginning to feel that uh vice president Harris probably is not the best the chances are not as good so uh remember in the beginning of Harris's candidacy she didn't speak very much and um she had a very good debate performance but as we approach the finish line to the election she's
been giving more and more interviews most recently an interview on on Fox News uh it's only 20 minutes I encourage you to watch it yourself but that seems to be the interview that that seemed to convince many people that you know vice president Harris might not win I don't think this should be surprising to to people now remember in president vice president Harris also wanted to be president in 2020 she ran in the Democratic primary did very poorly totally rejected by Democratic voters and so she had to drop out now this time around again there
was no real competitive primary she was basically installed by party insiders but she's still the same person and it seems like she's still not very popular and as people began to uh listen to her speak more and more I think people become I guess increasingly aware of why she's was uh was not able to make it through the primary the first time now looking beyond the presidency we also have again the Senate and uh the house now in the US we have the legislator is divided into two houses the Senate and the house now the
senate elections is is a staggered term so uh every election cycle only some uh only some Senate seats are up for election now this time around the Senate math makes it very likely that the Republicans will will keep the Senate that that's not really anyone anything people talk about um but the house though it's a lot less certain now I think the odds favor according to people I've read the odds favor the Democrats taking the house but if you have a a president that is winning by a lot you know the odds are that the
president will also the president's party will also take the house as well uh because the way often times people vote is that they don't actually know who their uh Congressman or house representative is they just vote for the president and then go down the ballot and vote for I look say let's say you're voting for Trump then you just go down the ballot and vote for this guy who says he's a Republican and you just vote for him you have no idea who he is you don't really follow these uh Congressional politics but you know
you just vote along party lines and so often times uh the president's party Al also does well in the house and so if you have the Trump increasingly likely to win it and maybe buy a lot again these are preliminary and they can change all the time uh then it increases the odds of a Republican swe which opens up the door to big big policy changes now looking in markets you can also see that you know the market is pricing in it seems like uh some popular Trump trades are being priced in for example I
look at Bitcoin now Trump famously wanted to be a Bitcoin president uh very open to crypto you can donate to Trump in crypto and so Bitcoin is seems to be surging another very obvious Trump trade is uh djt uh Trump's Media company again uh declined a lot far from uh far from its all-time Highs but you know in the past couple weeks H has really surged and I'd say the quintessential Trump trade is equi like everyone knows that Trump measures his performance by how the the stock market is doing and the stock market is surging
now again there are many markets that have different impacts on the Trump trade I would say that it's often thought that Trump would would be bad for the bond market U we've seen the 10e yield rise comfortably above 4% but I think that that's not that much priced in and I think what I'll WR about this week is just what a red sweep means to the interest rate market now beyond that though looking at Economic Policy one of the Trump's signature policies is of course tariffs as he says As He suggests it's his favorite word
in the dictionary now if you if you listen to what Trump talks about uh when he talks about tariffs he had a linky interview with Bloomberg News the past week it's really clear that he views tariffs as a negotiating tool so if you studied economics uh in school like I did people will all tell you that tariffs are not good free trade is good you know everyone's well better off and so forth but if you look at the economic performance over the past few decades you know a lot of people in the midwest will say
well you know because of free trade I have no job right and so my life is certainly not better and if you look at China well you know they don't really have free trade there and if you're American Business you want to sell in China not that easy but if you're a Chinese business and you want to sell into the US really easy and as we as you can see many things are made in China here in the US and during those past few decades China grew tremendously right created uh millions and millions of jobs
raised hundreds of millions of people out of poverty so obviously this free trade thing which they did not do seemed to work for them them and so I think a lot of people are questioning the Dogma that people have been taught in school you know maybe that's that's not the whole story or maybe that's just not true now what Trump is saying in his free trade Pol in his tariff policy is that he wants to use tariffs as a negotiating tool to get businesses to build in America so the US is the largest consumer Market
in the world right we are the client and so the client has power the Chinese the Europeans they want to sell to American consumers in fact for many of them that's their business model now if you're the client you have bargaining power and so what Trump would do is as he's saying is that hey you want to sell to American consumers no problem but you have to build factories in America create jobs and then you can have access to us consumer market and if you don't do that we're just going to put huge tariffs on
you so that you can access us markets and so that's the strategy it's not so much that he just you know wants to wall off the us from the world is that he wants the trade deficit in the US to close for example the US buys much much more stuff uh from yourand than it sells to them much much buys much much more stuff from China than it sells to them so he wants this to be a bit more equal uh either uh well the US can sell more Goods to to say China and or
of course these Chinese companies European companies build factories in the US and I think that's probably going to work because the us obviously it has a a market people wants the access and of course other countries are not doing so well and to be clear people have been doing this for for a few decades remember like the US used to be very angry at Japan for exporting tons of stuff there and now Japan builds lots of factories in the US manufacturing cars and so forth but that also has implications on currencies and Global growth so
part of the dollar strength uh we talked about earlier seems to be that uh the market is becoming increasingly aware of the possibility of higher tariffs against say euroland and China now if the market if uh if that happens then you can expect economic growth to be worse in euroland more rate cuts and uh a weaker Euro currency so again this will be a shock to Global growth in the longer run maybe maybe we do actually rewire the global trade system such that more things are made in America uh but it it will be it
will first be a shock and before we see any medium or longer term results now the last thing that I want to talk about is this really interesting discussion I heard um on macro musings about Argentina now many of you may not know but in the beginning of the 20th century Argentina was actually a very wealthy country things were going really well for them Anda has tremendous amounts of land Rich natural resources and so uh everyone thought that Argent would be uh you know future rich country but that didn't really happen uh in fact uh
if you look at this chart from the professor's from the professor's um paper you'll see that over the past few decades Argentina has had tremendous amounts of Stack inflation so uh GDP growth per capita basis very negative inflation tremendously high in fact uh the culation in Argentina is comparable to places like Zimbabwe now what seemed to have happened over the past Century is that you increasingly have politicians who are shortterm in their thinking so what they'll do is they'll go to Power they'll try to buy votes they'll try to you know spend a whole lot
of money to get elected and then you know continue to do so now in order to get inflation and so forth under control you kind of need to have you know less spending or maybe tighter monetary policy but that was all something that came at an economic cost that people did not want to pay and so uh you have this culture where there's increasingly uh I guess short-termism and then again you also have the erosion of things like rule of law Independence monray policy that just led to uh basically A Century of poor growth and
high inflation so that kind of reminded me of some of the things that I'm seeing in the US but actually before we get to that so the professor actually made some interesting observations in his case about dollarization first he'll notes that you know in Argentina when you have to buy Real Property you know you actually already pay in dollars and in fact because of um the high inflation a lot of people keep their Savings in dollars now dollars not in a bank account but in currency so interesting fact that in the US uh over there's
over $2 trillion worth of currency and the most common build denomination is actually not 20s or tens which is what we see in everyday life but actually hundreds and there's some interesting work from uh the univers uh from the Chicago fed that uh the bulk of currency in terms of value is actually held abroad now in Argentina the professor notes that you know when you're thinking about liquid assets uh the grast majority of liquid access is actually in dollars but it's not in the bank it's locked away in safe deposit box boxes or under the
Matrix or something like that uh this is because in the earli 2000s when people actually did keep money dollars in Banks uh the government basically took it and forcibly forcibly converted it so in order to be able to get inflation under control uh the professor's point is that we have to somehow control the government to make sure that the government behaves in ways that are long-term good and not just short-term opportunism in order to do that we have to be able to bind the government's power to spend and the way that he's thinking is through
dollarization again you country a foreign country can't print dollars and so that's a way to make sure that um the government will behave at least a little bit more responsibly and if you look at other countries who did this let's say Ecuador or um uh El Salvador it seemed to be able to get um inflation at least improve it significantly now to be clear the governments in those countries have at times wanted to be able to deize so that they can have more power maybe to spend more money uh to help in their elections and
so forth but uh it seems like the people were in part able to resist it and so uh from his Viewpoint it seems that the most important way is being able to have these kind of commitment mechanisms so that politicians cannot misbehave now the newly elected president over there president mili has done a good job in getting inflation under control there's this new graph from Bloomberg you can see that in inflation is now uh 3 and a half% but I would say 3 and a half% on a monthly level not annual monthly inflation has gone
down to 3.5% annualize that you still get a very very big number so things are improving over there when it comes to inflation now then that kind of brings me back to our recent election so again looking at the case of many emerging countries the the um their economic situation is largely Downstream from their political situation so when I see say president Trump going to Las Vegas and telling everyone that vote for me and I won't tax tips vote for me I'll cut your taxes or say president vice president Harris saying that vote for me
and I'll give you money to buy houses I'll forgive your student loans and so forth now it seems like that's increasingly like the politics that you would see in many Emerging Markets where politicians behave opportunistically trying to buy votes get elected without regard to the longer term consequences now I think of the economy as Downstream to politics so we are increasingly politically I think moving towards a world where uh we are basically um becoming opening the door to to uh stack flation and I think that's BEC increasingly apparent in markets as well looking at the
price of gold it's just surging upwards um part of it could be geopolitical risk we don't know when Israel reach retaliate against Iran looks like it'll happen anytime but I think that's something to be aware of again I think that economy is Downstream from politics and the politics is becoming increasingly stagflationary all right so that's all I prepared for today thanks so much for tuning in and remember to like And subscribe
