Eurodollar University’s Making Sense; Episode 32; Part 3: Deja ‘V’, CNY Goes Hollow (Is It 2017 Again?)

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———WHO———

Twitter: https://twitter.com/JeffSnider_AIP
Twitter: https://twitter.com/EmilKalinowski
Art: https://davidparkins.com/

Jeff Snider, Head of Global Investment Research for Alhambra Investments with Emil Kalinowski, worth 100 kuài. Artwork by David Parkins, captain of the good ship HMS Lolipop.

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32.3 Is the recent gain in the CNY an engineered feint?

The Chinese currency is gaining against the dollar. That SHOULD be an ‘all-clear’ signal that reflation, global trade, and positive momentum are in place. But we DO NOT see corroborating evidence on the People’s Bank of China balance sheet. Maybe the move is an engineered feint?

[Emil’s Summary] The bread of this podcast hotdog features Jeff Snider putting into context how far behind the times monetary authorities are, and that all may not be as it seems with the appreciating Chinese currency. But the middle, the wiener if you will, is about the unit root. But please! Before you throw your device across the room in disgust rather than listen to yet another podcast about monomial equations and non-stationary processes realize that it’s all about econometricians assuming economies do not suffer permanent shocks. The assumption that an economy must experience a recession AND a recovery.

A 1993 paper by Milton Friedman averred the data showed this is how economies operated, and indeed they did — in the post-WW2 experience. Friedman referenced an earlier work of his, from 1964, with data that stretched over a longer period that ALSO showed this. And indeed, the 1879 to 1961 period does, as long as you exclude the war cycles and 1945 to 1949 because, as Friedman put it “of their special characteristics.” So, if your podcaster understands this correctly, if you exclude permanent shocks and data discontinuity then one is welcome to assume no permanent shocks.

Now, your podcaster is admittedly missing something here. For one, he’s missing econometricians’ razor-sharp intelligence. Second, he hasn’t won a Nobel in economics – not yet at least. The cost of this lacuna is that shoelaces give him trouble – all his trainers and loafers have Velcro. Simultaneous gum chewing and walking results in emergency trips to the dentist. And hot dogs are eaten with the bun in one hand and dog in the other. But the benefit of not having a towering intelligence is not falling prey to hubris. In believing intricate mathematics model out permanent shocks. In believing that it can go back to the way it was. The year 2008 was a permanent break. Like 1914. Like 1929. Like 1945.

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00:05 When the Chinese currency is appreciating against the United States dollar that is good.
01:50 A rising CNY is corroborated by an increase in foreign exchange reserves in Beijing.
05:23 During 2017 the CNY was rising. Great! But weirdly the Hong Kong dollar was falling. What?
06:53 Is there corroborating evidence for a rising CNY? ForEx reserves? The HKD? No. Weird.
09:06 This story might be a repeat of an earlier episode with the CNY but few will know it.

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CNY + TIC = October 2020, or 2017?: https://bit.ly/2FTp2Qk
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7