“The Terrible Trio”: Why Goldman Thinks “Something’s Gotta Give”

Wednesday, July 11, 2018
By Paul Martin

by Tyler Durden
Wed, 07/11/2018

Call it “Rodrik’s Trilemma” for the Emerging Markets: the combination of higher rates, rising oil prices, and a stronger dollar has historically been a “terrible trio” for EMs according to Goldman’s head of FX, Jeff Curries, who writes that as higher funding costs and capital flight to the US force domestic deleveraging, the pressure on EMs tends to be so great that these periods don’t last long: i.e. a short circuit event takes place, usually in the form of a market crash. And, as the subsequent damage lingers, the trio often ushers in weaker EM economic growth.

We bring this up because a “terrible trio” is precisely the environment under which emerging markets currently find themselves in,
and as Currie points out, “these trio periods signal one of two events: 1) a mid-cycle pause or 2) an end-of-cycle turning point”, i.e. a global recession, usually accompanied by a market crash.

To be sure, conceding that a “terrible trio” environment has brought us to the end of the current cycle would not be prudent for Goldman which still remains resolutely bullish on the global economy and risk assets (just last month Goldman upgraded tech stocks, expecting years of upside for the FANGS).

So what does Goldman expect? Here is Currie with the baseline forecast:

We see several reasons why the current trio likely signifies the former. First, the rates curve is not inverted as it was during previous turning points (and negative term premia now make it somewhat questionable if inversion of the yield curve would even warrant as much concern as in the past). Second, commodities have far more slack (barring a large geopolitically driven supply disruption). And third, the real US dollar trade-weighted index is not nearly as strong as in past trio periods.

Of course, that is the best case outcome in which the “short circuit” emerges without toppling the house of cards.

However, there is also a downside case: should current trends persist, and if higher rates and rising oil and commodity prices are not accompanied by a weaker dollar, the current EM problems will likely intensify warns Currie.

Case in point: The trucker strike in Brazil this year—and the related hit to activity—occurred as oil prices denominated in Brazilian real reached the highest levels on record.

Which brings us to the next topic: The virtuous and vicious cycle of rates, oil, and the dollar.

The Rest…HERE

One Response to ““The Terrible Trio”: Why Goldman Thinks “Something’s Gotta Give””

  1. Strayhorse

    Obscene multi-million dollar payouts to undeserving captains of industry and their millions. Obscene overpricing of goods and services as perks, spiffs, bonuses, commissions and graft otherwise known as theft – that’s what is costing America that lack of its economic recovery.


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