By John Forlines III, JAForlines Global
Shakespeare’s Julius Caesar has opened in Central Park, so for Bard lovers and theater fans, summer is truly here. Brutus’ courageous exhortation (paraphrased above) to fight a battle against Caesar’s loyalists out to avenge his death had bad consequences—no one in the kill Caesar camp had a plan for “what’s next.” I’m reminded of the line from the play as we reprise the seemingly endless debate on global trade and its effects. For global investors, misunderstanding or miscalculating currency exposure has had a major impact on returns over the last fifteen years. For US politicians and for many in the financial media, failing to understand the role currencies play in global trade is disaster in the making.
The sub-text for the substitution “currency” for “current” is instructive: both words descend from the Medieval Latin currere “to run.” When currency entered the common vernacular in the 1650s, it was defined as “condition of flowing.” Many American politicians and investors realize that most assets (especially equities and fixed income) and credit indicators (interest rates and liquidity) can be manipulated. But currencies, particularly those dominating global trade today—dollar, renminbi, yen, euro—are different. They reflect the condition of their issuing governments’ underlying economic policies, problems and behaviors.
President Trump’s withdrawal from the Trans-Pacific Partnership trade deal reflects this dangerous misperception. For years, an unlikely alliance of left and right leaning politicians in the US have sought to defend American jobs from what they deemed unfair trade practices; if we could stop currency manipulation, then the trade deficit would narrow and jobs would stay home. This ludicrous argument is a shot at Asia generally and China in particular—China accounts for roughly half of the US merchandise deficit (and has for the past decade), yet despite a recent pullback, the renminbi has risen over 20% against the dollar since 1995.