Déjà Vu or Glitch?

Did they change something in the dollar?

"Trinity: A déjà vu is usually a glitch in the Matrix. It happens when they change something."

Almost no-one associated with markets needs someone else to explain that ‘Liberation Day’ introduced novel risk to capital markets. Well, I’m sorry, I’m here to explain the novel risk, in a novel way. To avoid immediate boredom I’ve worked in a reference to Trinity.

We can think of all capital markets as a large matrix of information which constantly adjusts to news and which over time establishes plastic, but identifiable relationships within that matrix, mediated by the dollar.

Since ‘Liberation Day’ there has been an extremely unusual configuration within the matrix. Such a major disruption in relationships reflects either a ‘glitch’ or something has really changed in the dollar’s central role. Relationships remain wildly off kilter. There follows what I hope you’ll agree is an elegant way to quantify exactly how much of a inelegant shock ‘Liberation Day’ really was.

A glitch in the matrix, cultural reference

There are four major relationships in capital markets worldwide:

1. dollar interest rates,

2. the ‘dollar fungibility’ of risk assets

3. the local value of the dollar

4. the dollar cost of inputs,

Those four relationships - in our opinion - have explained the most important mutual information within capital markets everywhere for decades - in one form or another as far back as 1945. They explain, to varying degrees, the information shared between members of almost any portfolio. This can be shown by picking out the EigenValues for each day over a rolling window of a year. How do you know these four lines represent the four influences above? While there can be no assurance of category, the correlations are highly suggestive over long periods. Here is a picture of how they look for the last year. Bear with us, the truly interesting bit is still to come - for paid subscribers.