iTrust Daily Insight

12th September
iTrust Daily Insight
Edition 9.12.2019

September 12, 2019 – Trump, Powell and The Great Debate-Oh My!

  • Bitcoin:  $10,199 (up about 1%) (Source: Coinmarketcap.com)
  • Digital currency price movement today: mixed; some up 1%, some down 4% (Coinmarketcap.com)
  • Number of digital currencies with market cap over $1 billion: 14 (Coinmarketcap.com)
  • Market Capitalization of Bitcoin: $182.9 billion (Coinmarketcap.com)
  • Gold “F” futures contract: $1520 (source: Yahoo Finance)
  • Copper “F” futures contract: 2.637 (Yahoo Finance)
  • Oil “F” futures contract: $55.13 (Yahoo Finance) (Iran hawk John Bolton leaving job)
  • DJIA: $27,137  (yesterday’s close) (Yahoo Finance)
  • S&P 500: $3,001 (yesterday’s close) (Yahoo Finance)
  • FTSE (main London stock index): 7,348 (at time of writing) (Yahoo Finance)
  • Shanghai stock index: 3,031 (Yahoo Finance)
  • US 10 year Treasury yield: 1.687% (down 5.5 basis points from yesterday’s close) (WSJ.com)
  • US 2-10 yield difference: +0.035% (i.e., positively sloped — normal — yield curve) (WSJ.com)

Today’s big news:

1) tonight, the top 10 -polling and -fundraising Democratic Party members wanting to be the party’s candidate for President are debating in Houston.  The US political situation will drive markets’ assessment of future relations with China, the UK, Europe and Iran as well as how Wall Street and commercial banks will be regulated.

2) markets are turning their attention more-and-more to the decision expected by the US Federal Reserve next week on Wednesday September 18 whether it will cut overnight interest rates which US banks charge each other.  Current overnight rates are manipulated in the market to remain within a range of 2%-2.25%.  Markets expect at least a 1/4 percentage point reduction in the target for overnight rates.  Because the overnight rate is the rate that can most easily and has historically been the most often manipulated by the US Federal Reserve, the overnight rate is commonly called the “Fed Funds rate”.

3) President Trump has been calling on the chairman of the Federal Reserve System, Jerome Powell, to reduce the overnight rate to 0%.  Ostensibly, the president wants a much stronger economy so that he has a much stronger bargaining position to take on China and what he believes to be China’s history of not only forcing companies to share their intellectual property in exchange for access to China’s markets but also China’s weak enforcement of Intellectual Property protections — effectively allowing regional and local governments and Chinese companies to steal US intellectual property.

4) The European Central Bank announced this morning it plans to buy 20 billion Euro’s of debt on the open market, per month, for as long as it deems necessary, to avert deflation in the Euro-zone.  Deflation is bad because banks would likely stop lending if the collateral on loans is expected to decline going forward.  Thus central banks globally know one of their key functions is to avert deflation lest banks stop lending and the entire economy collapses.

5) There is positive news both from China — proposing how to restart talks on trade — and the US — delaying new tariffs for two more weeks

Today, we want to focus on the long-running debate between a strong currency and a week currency.  

This debate is very old.  In the year 1900, The Wonderful Wizard of Oz was published allegorizing the debate between those who wanted to maintain a strong currency (backed only by gold) and those who wanted a weak currency (backed by a combination of gold and silver).  See the link below for a description of Baum’s famous allegory.

Similarly, in the 1920s, the very young Soviet government wrestled with the “scissors”  of how the much larger population in the rural areas could afford production of the factories.  These debates came to be known among Russians as “The Great Debate”.

Over time, I believe most economists would agree, the prospect of a strong currency and low inflation translates to business owners’ higher willingness to invest into capital.  When workers have more tools and better tools and the education to operate them, they are much more likely to be more efficient; and, therefore, are more likely, over time to earn sustainably higher wages.

However, in the short run, a weaker currency can give a short term boost to an economy as production in that economy goes down versus its international competitors — increasing the likelihood for exports and the short term prospects for job creation.

Of course, what is good in the long run must be decided upon in the short run; but, sometimes political or economic exigencies demand a short term aberration from what might be best in the long run.  When Keynes was devising solutions for the global depression of the 1930s, he was suggesting a cut in interest rates to reduce the cost to borrow and get people back to work.  During the 1930s in the US, for example, the unemployment rate was some 25%.

So, as the ECB plans to buy more and more of government debt in Europe (effectively printing more Euros) to boost the economy there, interest rates, all else equal, will be expected to be lower than they otherwise would have been.  Investors will be less likely to buy Euros.  So the value of the Euro will be lower than it otherwise would have been, all else equal.

President Trump sees the US as being in competition for jobs in the export sector so he wants the US Federal Reserve to reduce interest rates so that European and other non-US workers do not gain a cost advantage over US workers.

This sort of competition is good for corporate profits in the short run, so global stock markets will react positively to such news (again, assuming there is no other news which dominates such changes in interest rates and currencies).

However, lower interest rates and more currency also brings the prospect of higher inflation.  Traditionally, some market participants have bought gold or land as a hedge against inflation because gold and land have traditionally held their real value despite inflation.  In other words, the value of gold and land have traditionally been expected to go up in price alongside the price of other goods as inflation sets in.

In an era of digital currencies, some with a known, fixed amount that will ever be mined / created, it may be true that some digital currencies may also come be seen as a good store of wealth and hedge against inflation.

Of course, time will tell whether digital currencies prove actually to be a good store of wealth during times of inflation.  However, it is likely that some trading in digital currencies is by some people already confident in that prospect and also by others confident that other people will come to have that view.  In countries were economic deprivation has been particularly pronounced more recently in the US it is likely that such trading is an important factor in what drives the intrinsic value we discussed yesterday afternoon for digital currencies.

A simple analysis of the economic allegory of Baum’s original book published in 1900 on which the 1939 Wizard of Oz movie was based:


Tim Shaler is Chief Economist of iTrust Capital.  He is a published Real Estate economist, was a portfolio manager and asset allocation expert at his previous firms and is an adjunct professor at Webster University. His MBA (Finance) and MA in Russian Economic History are both from the University of Chicago.

For all media inquiries, please contact Blake Skadron at b.skadron@itrustcapital.com

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