U.S. demand shock ‘puts pressure on all these other central banks,’ strategist says

Thematic Markets' Marvin Barth joins Yahoo Finance Live to discuss news that the Bank of England will purchase bonds, the course of Fed policy in the U.S., and the outlook for global demand and economies.

Video Transcript

AKIKO FUJITA: For a deeper dive on the dynamics impacting the global currency market, we've got Marvin Barth, Thematic Markets founder. Marvin, great to have you on a day like today to try to make sense of all of this.

MARVIN BARTH: Pleasure.

AKIKO FUJITA: Let's go back to what we got from the Bank of England today buying up long-dated UK debt until October 14 in their words to restore orderly market conditions. Is this move going to be enough?

MARVIN BARTH: Well, it depends what you mean by enough. It is certainly providing some stability here. I think one of the things that led to the further sell off on Monday was a sense that policymakers in the UK were not really taking this seriously after a historic sell off on Friday. They've come out. They've addressed this very directly.

Remember, by the way, this doesn't actually necessarily create money, right, because you're taking with one hand, and you're giving back with another since banks can deposit funds and actually have an incentive too because they're being paid interest. And lots of people are actually borrowing those funds and creating new money. You're not actually creating new money, right? So all this is doing is providing what the Bank of England said that it was trying to do, which is to stabilize a market that had started to seem a little bit disorderly.

AKIKO FUJITA: So this, of course, comes at a time when we've seen central banks around the world really starting to tighten their policy. The Bank of England still has remained intact in terms of their target here of shedding 80 billion pounds off their balance sheet annually. Can they keep that target intact given the volatility that we've seen over the last few days and the policy shifts, quite frankly, coming from the government?

MARVIN BARTH: Well, so the-- there's a really interesting thing going on here, which is that central banks all over the world are facing both supply and demand shocks. And the way you want to address a supply shock if you get a negative supply shock that's setting up prices is you don't necessarily want to fight it with higher interest rates. You actually want to accommodate it because that rise in commodity price is actually going to kill demand in the future.

If it's a demand-led shock, then you do need to address it. Now, in the US, it's very clearly much more demand-led shock. It's also a supply shock but mostly a demand shock. And that's why the Fed is leading the way here. But that, of course, puts lots of pressure on all these other central banks.

The Bank of Japan is looking at this and saying, look, we don't have a demand shock. We've got a supply shock. That's, why they didn't raise rates and instead, have had to intervene in the currency market. It is actually this interaction across central banks and the difference in the shocks that each country is facing that's creating a lot of these stresses.

And so how the Bank of England responds to this is how much of this is demand and how much of this is supply? I tend to be a bit more bullish on the demand inside for UK. So I do think that they are going to have to continue to tighten policy to address this. But there's a lot of people who think this is pure supply and that this is folly for them to raise rates.

AKIKO FUJITA: And while there's been so much focus on the Sterling this week, Marvin, as we've been watching the dollar really closely, we've seen significant pullbacks in the euro, in the yen. A lot of that driven by dollar strength. You've done some interesting research here that you say really points to why we have seen the dollar run up so much. Watch your feed this year because I think it's interesting to talk about the innovation investment you've highlighted.

MARVIN BARTH: Yeah, so there's this really interesting feature of the dollar going back historically. If you look at a long-- very long-term chart of it since the dollar was floated in 1973, you see these big, huge, almost sine wave-like cycles. And it lasted about 17 years. And so I did some research to try and identify what's driving this because that actually hasn't been a big mystery in international finance. Nobody's ever actually solved that.

And what I seem to have found is that it's associated with innovation revolutions that take place in the US and propagate out into the rest of the world. And if it starts in the US, it lead to a CapEx boom in the US drawing in capital, driving up the dollar. As that completes itself in the US, it then-- the innovation spreads to the rest of the world. And now, actually the investment opportunities are elsewhere, and the dollar comes down.

What's really interesting about this one is that we're seeing no signs whatsoever that this innovation revolution is seeping out into the rest of the world to the same extent that it has in the past. And as a result, the dollar boom is just far more powerful. And I don't see the end of it anytime soon. It will end at some point, but I can't see it from here.

AKIKO FUJITA: What will it take for that cycle to break?

MARVIN BARTH: So ultimately what has to happen is you have to start to see the return opportunities in other economies on a broad basis come up because they too start participating in this localization process that's taking place in the US. What's really behind this particular innovation wave is the idea that we can actually get rid of all this outsource globalization because now, we can actually use robots to do everything locally.

And so what you've seen is an actual shift in investment back to the United States. Given that the US was sort of the center of globalization for the global economy for the last 30 years, that's a real problem for all those economies out there that were dependent on globalization. And that's why it's difficult for me to see that transition to them-- what they actually need to have the ability to adopt that model. And I don't see any signs that they are.

AKIKO FUJITA: Finally, Marvin, I wonder if you can give us some historical context. You are right in the thick of central bank policymaking during the Asian financial crisis back in S There's a lot of people who are saying, well, what we're seeing right now with currencies kind of reminds me of the '90s. Obviously, that was over in Asia. We saw the collapse of the Thai baht pulled, led to the pullback of other currencies too. Are there parallels to be drawn here?

MARVIN BARTH: Yeah, there's a significant parallel to be drawn. Remember at that time, what was going on is we had the previous innovation revolution taking place in the US, right? The internet 1.0 and the expansion of productivity that occurred with that. And so it was the US was basically sucking capital out of the rest of the world. Well, if you were dependent on foreign capital as happened in a lot of those Asian economies, that created all sorts of balance of payments problems that were exacerbated by fixed exchange rates.

The good news this time is we don't have fixed exchange rates. But what that does mean is that it is exacerbating the supply shock as those currencies fall in terms of increasing inflation or the prices of commodities in these economies. And at the same time, they're also having to compete with higher and higher US interest rates. So it's still creating a lot of pressure. And it's still going to create a lot of the volatility that we've seen in the last week across economies. But at least we're not dealing with broken exchange rate plans.

AKIKO FUJITA: OK, we'll take that, and we'll take the one silver nugget there that we can take. Marvin Barth, Thematic Markets founder. I appreciate your time today.