Will the U.S. Outgrow China This Decade?

ZH: Some Perspective: We Are Talking 2% Of 2021 US GDP In Public Investment For A Decade

Let’s then imagine where the USD would sit with GDP growth of 4% and 10-year yields at 4%, for a hypothetical example (higher!); and where it would sit if the same stimulus and growth sees yields artificially capped at 1.50% (lower!). Can you see the wild ride markets could be about to set out on? It’s really quite the Show!

It’s unclear how the Swedish Chefs at the ECB (“We pooot de PEPP in de poot”) would be prepared for this US recipe. They can “bork, bork, bork!” all they like, but it’s something they can’t control – just hope any US stimulus lifts their booot.

Likewise, the giant Sweetums of the PBOC, overseeing an economy where there don’t appear any post-2021 GDP growth targets, and some view the sustainable level of GDP growth being as low as 2-3%, could face a US economy outgrowing it for a decade, and potentially with higher yields too. Where would that put CNY? Today’s fixing was 6.5713, so the direction is already clear - in which case those who know think: pork, pork, pork!

The U.S. population is growing. China, Japan and Europe are not. Many emerging markets are also aging rapidly. Assume growth is slowing and there isn't organic growth coming except via public spending around the world. While most would say China would spend the money the best, their opportunity for infrastructure investment is limited, plus that risks stoking the housing bubble. Their domestic economy is also less dynamic than the U.S. economy. Their transition to a domestic consumer economy has been stalled for 10 years. They are doing pilot programs today in the hopes of lifting capital controls.

The U.S. domestic economy is still more dynamic than Europe and Japan too. If (big if) the U.S. has turned a corner on glboalism and free trade, it can take GDP growth back from overseas by attaching Buy American provisions to government spending.

A dollar bull market rests on one of two scenarios and one assumption. One scenario is the pessimistic case where the world economy goes into recession/collapse. Everything collapses against the dollar before that too collapses. This is the scenario that ends the dollar as reserve currency most quickly. The optimistic scenario is the above economic scenario (or some similar form of it) accompanies rising rates. The dollar also diverges from history because demographics are everything. The assumption is that the U.S. remains "the cleanest dirty shirt." Debt levels, demogaphics, regulations are all worse in most major markets.

The biggest hole in the dollar bear argument (we're talking FX crosses, not dollar vs gold) is that it assumes the U.S. is more profligate and irresponsible than other nations. Or that the U.S. will sacrifice the dollar to remain the reserve currency. My working thesis for years has been this is a massive negative mood cycle. Increasing weaponization of the U.S. dollar by USG is destructive of the dollar in the long-term, but it also shows USG is abandoning a global coneption of the dollar. What if instead of, or along with weaponizing USD, nationoalist and populist economic policies also push Federal Reserve policy towards more domestic concerns? If you're a foreign investor in a country with worse demographics, higher debt levels, kleptocratic government or less efficient domestic economy, do you want to be outisde of a weaponized dollar system or inside of it?

The best dollar bear argument is the one I subsribe to: it's time. The dollar had a 6-year bull market. It's due for a bear market if the past ~36 years of history holds. I'm agnostic on the future and will let the chart guide me. And I will have to because both of the dollar bull market theses are still intact at this moment. Weakned for sure, but not out.