Beggar Thy Neighbor Correlation

This should be a short post.  There are many reasons proffered for the increase in global equity market correlations — I would like to offer one more: competitive devaluation of currencies, a.k.a., the race to the bottom.  Almost all nations are looking to cheapen their currencies in order to encourage exports.  There is a a global “conspiracy” where consumers are discriminated against by producers and their governments.

The US is involved in this but is more willing to absorb foreign goods than most, making the US is the main reserve currency.  Send us you neomercantilistic goods and services, we will give you promises of future payment.

But when everyone wants to do the same thing, cheapen currencies to promote export-led growth at home, that same thing is impossible, because not all currencies can be cheap at the same time.

But as the process goes on, with so many of the world’s large countries engaged in similar policies at their Treasuries and Central Banks, it is no surprise that with one dominant global policy, there is one global market behavior, oscillating rapidly from panic to euphoria as stimulus measure go from less to more certain.