A New Variation of the ‘Cleanest Dirty Shirt’ Theory
Bill Gross has for some time forwarded the theory that the US was doing better relative to other regions in the post 2008 crisis era because it was the owner of the ‘cleanest dirty shirt’. This was specifically in reference to US treasury bonds, which time and again have proven to attract ‘safe haven flows’ when trouble erupted elsewhere.
Following the sizable decline in stocks late last week, others are now trying to expand this theory to the US stock market in the wake of the rout in emerging market currencies:
“The ongoing concerns about emerging markets could end up boosting U.S. stocks as investors look for greener pastures,” BMO’s Brian Belski told CNBC on Monday.
Belski, chief investment strategist at BMO Capital Markets, said the jitters that caused ripples across global stock markets last week stem from a redeployment of cash between emerging markets and the next investment opportunity. As currencies in emerging markets such as Argentina, Turkey and South Africa continue to falter, the U.S. stock market could be the next best option for investors, he said.
“That’s why people are freaking out,” Belski said on “Squawk Box.” “When you think about asset cycles, the last cycle was driven by credit. The current investment cycle has been driven by cash. … Which companies in the world have the strongest balance sheets in cash? It’s America.”
Michael Purves, chief global strategist at Weeden & Co., agreed that the ongoing worries over emerging market currencies could bode well for U.S. Equities. Multinational companies that do large amounts of business in developing countries, however, could have trouble if those nations continue to appear unstable, he said.â€
(emphasis added)
Allow us to point out here that somehow, the US dollar hasn’t been told about this. Emerging market currencies can be said to have been in a kind of ‘rolling crisis’ since the Indian rupee more or less crashed in the summer of 2013 (note that it has been in a downtrend since late 2011, which morphed into a rout last year). Over the same time period, the US dollar index actually went down. Admittedly, not by much (it got a lot of help from the weakening yen), but it sure hasn’t been reflective of the idea that the US has been the prime destination of international capital flows.
Further below we will briefly discuss a historical occasion when the above suggestion actually ‘worked’ in a way, but at the time the dollar was in a rising trend. This time it has proved spectacularly incapable of profiting from currency turmoil elsewhere. Among the major currencies, the euro has turned out to be the strongest over this time stretch (it was officially declared dead by Newsweek on May 17, 2011, and again on July 2012, which was a rather big hint that the funerary rites had to be postponed). Not only that, European stock markets, long underperforming, have outperformed the SPX as well in the second half of 2013.
