Category: Markets

• FX: The impacts on US dollar are complicated. On one hand, the US economy is underwent rate cut before the election, aiming to help the economic growth. On the other hand, Trump’s policy (high tariffs and inflationary wages policies) would result in higher inflation, so that Fed might be pressure to rise rate against the greater price increase. The US dollar index would be largely affected by the above mentioned polices.

  Trump states that the US trade deficits have reached to over $1 trillion, implying the imbalance trade condition. The monetary department (Fed) might depreciate US dollar, through which US exports might be accelerated. To make US dollar depreciate, FFR might go downward.

  However, The independence of Fed matters. As Fed’s goal might diverge from Trump’s policy, Jerome Powell’s insight of fighting inflation might not be coincident with the campaign strategy. If wages rise, pushing up inflation, Fed would increase rate again.

  In sum, there is an uncertainty on FX changes. The majority of the market consider Trump’s policy would outperform, so USD appreciates after election.

• Commodity:

  • Gold: As USD appreciates, gold price decrease.
  • Metals: Coppers might experience uncertainty. USD appreciates, commodity price shall decrease. However, the infrastructure plan increase the demand of related commodities as well such as coppers. Thus, the price change of coppers are uncertain.
  • Energies: similar to metals. Two-way effects.
  • Cryptos: Simple logic. Boosting cryptos.

• Stocks: tax cuts definitely benefit firms. Stock price raises.

• Bonds: money flows to stocks, less demand on bonds. Thus, bond price decreases, and yield increases.

1. Seal the border and stop the migrant invasion
2. Carry out the largest deportation operation in American history
3. End inflation, and make America affordable again
4. Make America the dominant energy producer in the world, by far!
5. Stop outsourcing, and turn the United States into a manufacturing superpower
6. Large tax cuts for workers, and no tax on tips!
7. Defend our constitution, our bill of rights, and our fundamental freedoms, including freedom of speech, freedom of religion, and the right to keep and bear arms
8. Prevent world war three, restore peace in Europe and in the middle east, and build a great iron dome missile defense shield over our entire country — all made in America
9. End the weaponization of government against the American people
10. Stop the migrant crime epidemic, demolish the foreign drug cartels, crush gang violence, and lock up violent offenders
11. Rebuild our cities, including Washington DC, making them safe, clean, and beautiful again.
12. Strengthen and modernize our military, making it, without question, the strongest and most powerful in the world
13. Keep the U.S. dollar as the world’s reserve currency
14. Fight for and protect social security and Medicare with no cuts, including no changes to the retirement age
15. Cancel the and cut costly and burdensome regulations
16. Cut federal funding for any school pushing critical race theory, radical gender ideology, and other inappropriate racial, sexual, or political content on our children
17. Keep men out of women’s sports
18. Deport pro-hamas radicals and make our college campuses safe and patriotic again
19. Secure our elections, including same day voting, voter identification, paper ballots, and proof of citizenship
20. Unite our country by bringing it to new and record levels of success

The above 20 statements are listed in Trump’s Republican Party’s Website, https://www.donaldjtrump.com/platform. Combining with the Table of Content, here are some assessments.

Trump’s campaign strategies seem self-containing.

• Fiscal Revenue and Expenditure Balance: In most of case, fiscal expenditure need to be supported by fiscal revenues. Both (1) the reduction of corporate tax, (2) the increase in infrastructure construction, and (3) upgraded social welfare would be financed by increase in Tariffs.

  However, to what degree the revenue could cover the expenditure might need specific clauses of policies to be confirm and need further evaluation of the post-policy impact.

• Labour Market Implication: Stop immigrant would reduce the labour supply. However, Trump’s strategies aim to remain the manufacturing power insider the U.S.. Stop outsourcing and keep the supply chain in America would provide job opportunities, increasing the employment demand. Those policies together would increase the employment level and be helpful for the social stability.

• Inflation: Oil supply increase would decrease commodity price, relieving inflation. Labour market actions (stop immigrant and outsourcing, increase wages) would increase inflation. Hard to say the inflation would go upward or downward.

• International trade: Policies would downgrade the globalisation. Definitely harmful to all exporting countries. Exporters might need to find other large goods importers, or need to consume the excess supply power themselves. However, not just America, but the EU are all implement tariff protection, keep the pricing and competitive advantages to the local companies.

  Theoretically, de-globalisation/trade protection would harm the economic efficiency as relevant parties did not implement the comparative advantage. However, US, as the largest importers, would actually extract productions from others, and take the benefits from the trade protection. In addition, US decides to contain the manufacture power, and exports its production

About Gold ?

There seems some “irrational” movements of gold price since the end of 2023.

How gold should be priced? What factors affect the pricing of gold. Here below are some of my reading and insights.

Typical Determinants

Typically, the gold price is considered to be correlated with a list of factors:

1. Inflation

   In counter with the inflation.

2. Long-term Real Interest Rate

   TIPS, the Treasury Inflation-Protected Securities, is considered to be the real-interest rate, as the inflation rate is counter-deducted. The long-term rate, specifically 10-yr rate, is preferred as we generally assume holding the Gold in a long-term investment horizon. The long-term Real Interest Rate is considered as the opportunity of holding gold. Therefore, the higher rate, the greater the cost of holding golds, and less demand of gold. Price decrease thereafter.

3. US Dollar

   The Brandon Wood System links the gold price with US Dollar, with 35USD = 1 ounce Gold. Since the collapse of Brandon Wood System, there is not a fixed exchange rate between USD and Gold anymore. However, USD is still the most important determinant of gold price in that the unit of Gold price is still USD/ounce. It is also like an exchange rate, the more per ounce value of gold is, the more USD/ounce should be. Or, contrastively, the weak USD is, the more USD/ounce shall be.

• US Dollar Index

  The US Dollar Index might be consider an proxy of the strength and weakness of US dollar. However, as US dollar is the weighted geometric mean of the exchange rates of six major currencies compared to the US dollar:

  • Euro (EUR) – 57.6% weight
  • Japanese yen (JPY) – 13.6% weight
  • British pound (GBP) – 11.9% weight
  • Canadian dollar (CAD) – 9.1% weight
  • Swedish krona (SEK) – 4.2% weight
  • Swiss franc (CHF) – 3.6% weight

    The USD Index is actually a composite of weighted average of above listed currency. The increase of US dollar index means USD is appreciated w.r.t. above currencies. I.E. if USD appreciates w.r.t. EURO, then USDX is likely to increase.

    Therefore, an increase in USDX means appreciation of USD, and then USD/ounce shall decrease, gold price decrease.

4. Risks / Uncertainty

5. Demand and Supply from Central Banks.

   We ignore the impact of demand and supply from individuals and industries, but focus on the demand of Central Banks. Like what those CB did during February and March 2024 would increase the demand of gold price.

Empirical Research

Refer to the research report from CICC, a four-factor model is established. The authors specified the relationship between gold and those four factors, one by one.

• The dependent variable: Gold Price. (Also, attention that they focus on the gold price, not the return as machine learning usually do)

• Explanatory Variables:

  • US Real Interest rate

  ​ Capture the Opportunity Cost of holding gold. Similar as the explanation in the above section.

  • US Dollar Index,

  ​ Similar as the explanation in the above section.

  • Central Bank Net Gold Purchasing,

  ​ The supply side is limited, demand is mainly driven by the Central Banks of US, China, EU, JP, etc.

  • US Gov Debt Level.

  ​ This factor represents the credibility of US dollar or US government. The greater US Debt level, the less credit-worthy the US gov is. Then, the more desire of holding gold as the counter party of US Dollar credibility.

  The Statistic table is shown below.

​ The author argue that people do not need to consider the spurious regression though the R-squared is incredibly high. They state that the reason is that they are only considering the model like a co-integration model. They have tested the integration of the residual term, and find that the residual is stationary. High R-squared means there are less left in the residual.

​ Their explanation is like the Bull Shit. However, we just ignore the bull shit econometric modeling and statistic figure in the above table, as we are not doing academic. Let consider the predictable power and the implication of the model.

​ Here below is their simulated result and the real gold price movement. Let’s investigate is their model perform as good as stated in their report. Also, let’s see how ML way could perform.

Code Example

Gold_Price_Analysis.html

QE

本来美元作为通用货币，而且很稳定，美国慢慢印钱慢慢灌水就行了，可惜来了疫情，为了刺激US内的经济循环，全世界委屈下，然后开始大量印钱，美国牛逼。短期情况下价格水平不变，（1）超额印出的美元可以用来购买import其他国家的资产（2）促进国内消费，带动健康的经济循环。

QT

随着时间段变长，中长期市场会超额印钱速了美元贬值，一般情况下，每次贬值到一定程度的时候都会加息让美元回流。因为加息之后收益利率变高，投资者可以买美元存银行或者换美元买美国其他资产，带来USD需求增加，让在外流动的美元减少，推动美元升值。然后US付利息。财政费用支出增加（财政部，cb配合，以及us gov资产负债表研究 wait to be done）。

QE+QT Circulate

吸收到一定程度后，USD升值，市场中的USD量达到适当（quasi-equilibrium）水平后，可以重复QE QT过程。

综上：QE+QT结合相当于：投资者（其他国家）把钱存入银行（US），银行（US）给投资者利息，然后用投资者的钱，买投资者（其他国家）的资产。In short, US用付利息（money）去买世界的goods and services。 但是，所谓利息，不过是张纸，或者说credit paper罢了。

Some Facts in Reality

• 中国通过出口，挣了很多Current account surplus 贸易顺差，即中国在出口商品的过程中，挣了很多USD。此时。中国世界工厂的职能使得，进口商进口中国商品的时候，对CNY需求增加，使得CNY相对升值。曾经中国对CA surplus的处理是，买gov bond，但是近年逐步增加对实体资产的持有，以及对gold的持有（2020-2021全球QE的背景下，gold储备量保证该国货币的信用水平。USD持有也有为其他国家货币提供credibility的功能，但是该功能在US超量QE的背景下逐渐下降）。持有实体资产的好处在于，不是paper currency，相对更加保值且有能力转换为生产力，受到风险时也更加稳定。
• US QE的时候，中国也处在疫情全国quarantine的阶段，出口减少，导致全球市场上超额印发的USD没有办法购买足够的商品（中国supply少了很多，其他国家同样export少了）。此时US QE的超量不能被市场消化，US通胀大幅上涨。US为了避免hyper- inflation，加息收回USD。
• 各国EU，Canada，UK等（JP不同）为了避免在USD升贬值的过程中被US收割资产，基本上选择和US类似节奏的升降息，以避免本国资产大幅流出。中国外汇管制，资产难以流出。 => 超额USD难以被消耗。

• 俄乌问题+各种sanction使得如俄罗斯，伊朗等国家出现无法转账等问题，这些国家的货币流通出现困难，使得这些国家货币的credit下降。（此时这些国家对于USD的需求增加）。
• 石油美元的勾在新能源大背景下稍微减弱，但是已经稳定。
• etc

总之，在目前短期内，超额USD难以被消耗，US只能继续大幅加息，高利息高收益，为了吸引其他国家钱流入，为了收回超发的货币避免通胀。

硅谷银行

US QE+QT毕竟是宏观行为，但是它改变了收益率的模式。最明显的特征就是收益率曲线倒挂。长期利率低于短期利率。这导致微观层面，消费者存入银行的钱长期不如短期给的利息多，消费者缩减投资期限的情况增加。银行挤兑出现。

USD信用崩塌的情况逐渐出现。