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The Alchemist explores the mysteries of hedge fund management further. This week's deep dive sees him wearing a suit! Can he cut it? The Acid Capitalist had a rough night but he's taken a magic pill to restore his superpowers and he eventually finds his mojo. This week we review central bank rate hikes. Surely, its the end, not the beginning? Private providers of credit have been raising rates since the summer of 2020. The US economy contracted last quarter. Official economic data is heavily revised in later years. Did the British economy relapse into recession last year? Just why are they insistent on more rate hikes? The Acid Capitalist is afraid, very afraid that equity markets might need to reverse all of their post covid glory.

But rather than accentuate the negative, he wants to offer guidelines and solutions. He believes that they should plead a mea culpa, their primary responsibility rests with preserving asset prices. Only by revealing that they're essentially custodian officers charged with preserving the collateral that underpins the huge debt mountain will we move forward. Better yet, they should move to enfranchise those citizens that have no assets. They should create a sovereign wealth fund. QE has only prolonged the depression. Better to impose a withholding tax on mercantilist nations that choose to park their trade bounty in treasury markets. These countries forsake endogenous domestic growth in favour of chasing exports. They perceive this as a more robust economic plan. But the world of international trade is the business of robbing Peter to pay Paul.

To enact their cunning strategy,  global savings must rise. In China, savings rise because their currency is set too low, preserving a comparative trade advantage that market capitalism would otherwise bid away. Without their state interventions their currency would rise to bring the world  into balance. Chinese households' incomes would reset higher and they might reasonably consume more. This does not happen. Instead savings rise; the share of consumption to gdp is remarkably low for such an advanced state.

The same  applies elsewhere. With their comparative advantage, their lower relative manufacturing costs, secured by their "cheap" currency, they bleed jobs and income security from western households. You might lose your job but you still have non discretionary commitments to make; mostly these are energy and food related, credit cards must be tapped to prevent hunger and freezing. This dictates that western savings ratios decline, and more and more debt is necessary to restore equilibrium. The cycle amplifies itself in favour of the mercantilist.

Whilst the Acid Capitalist's ire is presently directed at the central bankers, he recognises that the primary fault lies with the mercantilists. And so he proposes that western finance ministries  adopt a withholding tax. Think of it as an economic rent imposed on those who choose to game the economic system. Left unchecked, and it has been for way too long, we've created an extraordinary volatility machine that leaves today's risk markets in maximum jeopardy.

That's why the withholding tax ticks all the right boxes; it is vital not to throw grit into the global trading system. Global trade, if conducted properly, enriches all of us; but left in this perilous state it resembles the longest suicide note ever written. Charge them 3%. They wont balk; they'll gladly pay it. Nothing is too expensive in order to preserve the longevity of the Chinese Communist Party. Collectively, other nations own around $10 trillion of US Treasuries. A tax would raise $300 billion a year and it could underwrite a sovereign wealth fund that effectively underwrote the downside risks in equities and other risk assets.  

...continued on twitter @hendry_hugh

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