Michael, so good to hear from you after all these years! Thank you for your kind words. AGI, aka the God machine, does have immense implications and unfortunately most of them are not benign. In the meantime, yes, the US and China seem to be galloping ahead of everyone else both in developing AI capabilities and in deploying them. That's why the strategic competition between them is so fierce: creating God is a winner-take-all event.
Marvin, thanks for such a detailed note - No doubt vol of vol is a winner...
My thoughts are somewhat simpler but I was fortunate enough to spend time with some very smart people this week ...one of the founders of bluedot.org. We had an interesting discussion about AI - notably AGI. His view is that AGI will be developed quickly - 5 years. The implications or so profound that it should be nationalised, on an international level. But in the current situation it is hard to see that happening, so likely to be 3 blocks - US, China, and Europe. The issue for the UK - or Europe - is the 'compute' power - US and China far ahead. (As an aside, I had read 'Rich Dad, poor Dad', and spent some time listening to Charlie Munger - so challenged him on which stocks he would buy, given his knowledge, and the idea that our portfolio should be concentrated. He suggested Microsoft, Amazon...it is difficult to get direct exposure to AI, but these firms are investing heavily. Sadly I did not invest - but the impressive results do tell you US tech is still very healthy. One does wonder whether US corporates will use AI more aggressively than anyone else, globally, reduce costs to maintain profitability)
Genuinely curious…I just read Miran’s 40 page report from the fall of 2024. What does he get wrong specifically? Not defending him, I don’t know the answer. I don’t pay any attention to Navarro.
Its very basis is flawed. He bases his views on three ridiculous contentions: (a) there are two different models of FX, trade determination & asset determination; (b) that reserve accumulation is the primary determinant of FX values, particularly of the reserve currency; and (c) are thus the primary causes of US imbalances.
Trade & cross-border investment jointly determine FX and the interact, that’s why it is so complicated. The former typically operates at a longer horizon (people’s tastes/preferences don’t change rapidly even when the price does), and the latter as shown by the last to weeks can operate at lightning speed if investors’ expectations for either risk or return across economies changes. But they also interact, for instance in my piece Solved: Drivers of the dollar cycle” I showed that it is very long innovation cycles that drive the big dollar swings, where some technology in the US makes it more productive, both improving its export generation and attracting foreign investment that drives up the dollar until the technology diffuses to others whose export competitiveness now attracts international capital.
That Miran’s model is silly is just illustrated by the numbers: Foreigners hold $8.5 trillion in US Treasuries and a big chunk of that is held for economic reasons by private investors, not reserve managers. That may sound like a lot, but consider that FX markets turn over $5.8 trillion per day (double China’s total reserves, including those held in other currencies). Again that is every day! Reserve interventions/changes are infrequent and by comparison tiny. To think they drive the dollar beggars belief and reveals deep ignorance.
But let’s take it further: people don’t just by Treauries. That $8.5 trillion in foreign Treasury holdings, again, not all of which are reserves are about 29% of US GDP. But total foreign holdings of US assets are $62.1 trillion or 209% of GDP, and net holdings (foreign holdings of US assets less US holdings of foreign assets) are $26.2 trillion or 88% of GDP. That is. Treasuries aren’t the main assets foreigners buy in the US, just one of many.
Put another way, Whether you look at it in stocks or flows, Miran’s model of the dollar’s value doesn’t hold up to even cursory scrutiny. It is - and I’m not try to be mean - utterly ridiculous on its face.
Michael, so good to hear from you after all these years! Thank you for your kind words. AGI, aka the God machine, does have immense implications and unfortunately most of them are not benign. In the meantime, yes, the US and China seem to be galloping ahead of everyone else both in developing AI capabilities and in deploying them. That's why the strategic competition between them is so fierce: creating God is a winner-take-all event.
Another terrific piece and well explained. Thank you!
Marvin, thanks for such a detailed note - No doubt vol of vol is a winner...
My thoughts are somewhat simpler but I was fortunate enough to spend time with some very smart people this week ...one of the founders of bluedot.org. We had an interesting discussion about AI - notably AGI. His view is that AGI will be developed quickly - 5 years. The implications or so profound that it should be nationalised, on an international level. But in the current situation it is hard to see that happening, so likely to be 3 blocks - US, China, and Europe. The issue for the UK - or Europe - is the 'compute' power - US and China far ahead. (As an aside, I had read 'Rich Dad, poor Dad', and spent some time listening to Charlie Munger - so challenged him on which stocks he would buy, given his knowledge, and the idea that our portfolio should be concentrated. He suggested Microsoft, Amazon...it is difficult to get direct exposure to AI, but these firms are investing heavily. Sadly I did not invest - but the impressive results do tell you US tech is still very healthy. One does wonder whether US corporates will use AI more aggressively than anyone else, globally, reduce costs to maintain profitability)
Genuinely curious…I just read Miran’s 40 page report from the fall of 2024. What does he get wrong specifically? Not defending him, I don’t know the answer. I don’t pay any attention to Navarro.
Its very basis is flawed. He bases his views on three ridiculous contentions: (a) there are two different models of FX, trade determination & asset determination; (b) that reserve accumulation is the primary determinant of FX values, particularly of the reserve currency; and (c) are thus the primary causes of US imbalances.
Trade & cross-border investment jointly determine FX and the interact, that’s why it is so complicated. The former typically operates at a longer horizon (people’s tastes/preferences don’t change rapidly even when the price does), and the latter as shown by the last to weeks can operate at lightning speed if investors’ expectations for either risk or return across economies changes. But they also interact, for instance in my piece Solved: Drivers of the dollar cycle” I showed that it is very long innovation cycles that drive the big dollar swings, where some technology in the US makes it more productive, both improving its export generation and attracting foreign investment that drives up the dollar until the technology diffuses to others whose export competitiveness now attracts international capital.
That Miran’s model is silly is just illustrated by the numbers: Foreigners hold $8.5 trillion in US Treasuries and a big chunk of that is held for economic reasons by private investors, not reserve managers. That may sound like a lot, but consider that FX markets turn over $5.8 trillion per day (double China’s total reserves, including those held in other currencies). Again that is every day! Reserve interventions/changes are infrequent and by comparison tiny. To think they drive the dollar beggars belief and reveals deep ignorance.
But let’s take it further: people don’t just by Treauries. That $8.5 trillion in foreign Treasury holdings, again, not all of which are reserves are about 29% of US GDP. But total foreign holdings of US assets are $62.1 trillion or 209% of GDP, and net holdings (foreign holdings of US assets less US holdings of foreign assets) are $26.2 trillion or 88% of GDP. That is. Treasuries aren’t the main assets foreigners buy in the US, just one of many.
Put another way, Whether you look at it in stocks or flows, Miran’s model of the dollar’s value doesn’t hold up to even cursory scrutiny. It is - and I’m not try to be mean - utterly ridiculous on its face.
Really helpful. Thank you.