Safe-havens, the US-Sino Cold War and a tip for traders – Interview with Marc Chandler

Looking for a haven in times of trouble? Gold, the dollar, and the yen all have their particularities that traders should be aware of. Marc Chandler, Global Head of Currency Strategy Marc to Market, discusses recent safe-havens, the impact of stimulus measures, and deteriorating Sino-American relations. In an interview with Yohay Elam, Chandler also provides the one trading tip that is irreplaceable. 

Yohay Elam : How are you coping with the lockdown?

Yohay Elam : More time to analyze markets or are these stressful times problematic for traders?

Marc Chandler : I often work when traveling, remotely. There are just many more things that impact the market and more details to master.

Marc Chandler : My wife has not killed me but she assures me it is not for the lack of trying. There is still time.

Yohay Elam : :)

Yohay Elam : A few more weeks and my wife will kill me as well...

Yohay Elam : After a wild March, markets recovered in April and seem relatively calm now

Yohay Elam : That contrasts the terrible economic data we are receiving almost on a daily basis

Marc Chandler : Yes, markets are an incredible discounting machine. It had priced in the "end of days", extreme left hand tail risk and then incredible fiscal and monetary policy were enacted

Yohay Elam : Does the "Powell Put" have more room to run?

Yohay Elam : You have recently written about growing Sino-American tensions

Marc Chandler : I don't think it is so much the Powell put. Risk appetites returned broadly.

Marc Chandler : Yes, I am concerned about the growing Cold War with China, but yuan is broadly stable.

Marc Chandler : I think US has become more hardline and it is bipartisan.

Marc Chandler : My big point on China is that conventional wisdom is that Xi is pres for life. He is half way through second term and has put to risk China's strategic goals, with three major policy blunders, HK, US, and now Covid. Its BRI is a bit of overreach and has saddled it with bad debt and the awkward position of taking collateral.

Marc Chandler : The US policy response has been huge. Not just Fed, but government. 18% deficit according to CBO and may grow another 5% or so.

Yohay Elam : The China 2025 also seems like an overreach

Marc Chandler : To me overreach is more BRI, but also China is pursuing an import substitution policy. It should make and design its own semiconductors for example. It should not be behold to OiS and Android.

Marc Chandler : The US is also import substitution strategy. Medical products and medicine come to mind. But Trump seeks re-shoring ore broadly. And not just US, Europe will move in same direction and Japan is paying companies to move out of China

Yohay Elam : These are significant realignments, perhaps not priced into the yuan?

Marc Chandler : To me the biggest threat to the dollar is not foreign central bank intervening but US using what was once provided as a public good, namely the dollar and dollar funding has increasingly become a weapon.

Yohay Elam : We have seen considerable dollar-funding issues in mid-March

Marc Chandler : PRC has the ability and desire to maintain broad stability against the dollar.

Marc Chandler : Yes markets broke down for a couple of weeks. I had thought they would close the markets. While there was a push for it, it was rebuffed.

Marc Chandler : All sorts of measures, like VIX, Move, fx volatility, LIBOR, all showing that the markets have re-opened with official help.

Yohay Elam : Immense help

Marc Chandler : This divide between markets and governments seems antiquated to me at best, but I have believed that for a while.

Marc Chandler : Yes, massive help,, broader than in 2008-2009.

Yohay Elam : The immense US fiscal and monetary responses seem to dwarf that of other countries, especially European ones, which are struggling.

Marc Chandler : Yes. And in 2008-2009 this set the stage for stronger US recovery and stronger US dollar.

Marc Chandler : Setting the stage for a new divergence.

Marc Chandler : Then a debate over the twin deficits

Yohay Elam : Yes, I remember that

Yohay Elam : That seems antiquated

Yohay Elam : The world seems to be getting closer to direct debt monetization

Marc Chandler : Today's German court ruling is yet another hurdle...Not for the particular, but because of the institutional power and can a German or national court overrule the ECJ

Marc Chandler : Debt monetization? Yes, but I am not sure we were that far from it before.

Yohay Elam : Even if the German court cannot halt the ECB, its ruling can embolden the hawks at the bank to reject further stimulus

Marc Chandler : I think central bank balance sheets are a legit tool and discovered in earnest a decade ago. I think that negative interest rates might not be. No one with negative rates has cut again in this crisis and no one new has joined...yet

Marc Chandler : I am not sure about hawks. It does not seem to me to be a question of passion but numbers. The hawks are a minority and PEPP was not subject to their ruling.

Yohay Elam : With central banks enlarging their QE programs, some see gold as the place this money will go to. Do you see the precious metal rising?

Marc Chandler : In my work, gold is now and has been during this crisis positively correlated with risk assets (S&P 500 as a proxy). Sure lower rates for longer make a non-interest bearing asset more attractive.

Marc Chandler : I have been bullish since $1400 but I saw only $1700 and now see others talking about $2000

Yohay Elam : So it is not the safe-haven of choice

Marc Chandler : Meh.

Marc Chandler : Some think that buying gold is a hedge for buying risk assets.

Marc Chandler : Sure I imagine some bought paper claims on gold thinking they have the bullion. Few safe haven advocates take into account insurance and storage costs.

Yohay Elam : The yen has also lost some of its shine as a safe-haven

Yohay Elam : In mid-late March, it seemed to be the dollar against the world

Marc Chandler : I don't think it was ever a safe haven really debt to GDP over 200%. I think it was a funding currency and when the asset bought was sold the funding currency had to be replaced. Meanwhile, Japanese institutions used dollar funding to buy dollar assets. When this market froze they became the largest users of the Fed's swap lines.

Marc Chandler : Yes. BIS says there are some $12 trillion obligations outside of the US as of last September. It looks like a short-covering rally than safe-haven buying.

Yohay Elam : Indeed

Yohay Elam : The Non-Farm Payrolls report for April is coming up

Yohay Elam : Everybody knows it will be depressing

Yohay Elam : But can it scare retail investors that have recently begun trading?

Marc Chandler : Yes, but the weekly jobless claims already told us what is happening and some sense of the magnitude.

Yohay Elam : So, not a game-changer for markets?

Marc Chandler : It reminds me of what we call rubbernecking on the highway as people slow to look at an accident.

Yohay Elam : When people know they will see an ugly seen but cannot stop looking

Marc Chandler : It can scare retail investors, but what they need to keep in mind is that just like with other things we buy, there is a wholesale and retail price. The same works for money and the difference is not just bigger piles of capital to deploy but access to information and better ways to process it.

Yohay Elam : Any tip for traders in these turbulent times?

Marc Chandler : My advice would be this. There is no substitute for disciplined risk management. What separates the former traders from experienced traders is not that one is more right than the other, but that the latter is more disciplined and better managers of risk and the downside. When a new person joins the team, s/he says something like I have a trade idea that could make $1 mln. An experienced person will say I have a trade idea and if it is wrong it costs us $100k. One is looking for the upside, the other managing the downside.

Marc Chandler : Should be no substitute

Yohay Elam : Sound advice indeed

Yohay Elam : That some forget when adrenaline is rushing

Yohay Elam : Thank you very much for sharing your insights

Yohay Elam : I recommend checking out Marc to Market, lots more in there

Marc Chandler : I am also @marcmakingsense on Twitter. I enjoy exchanging ideas.

Marc Chandler : No problem. I am a big fan of FXStreet.

Yohay Elam : Thank you very much