The Impossible Trinity Behind the Melt Up

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Today, Jaymes and I broke down the impossible trinity framework that sits underneath the entire credit cycle melt-up. Every country can only control two of three variables: independent monetary policy, capital mobility, and FX stability. The US has open capital, sovereign policy, and a floating dollar, which means the rest of the world’s flows recycle into US assets. (Paid subscriber section is at the bottom of this report)LIVESTREAM RECORDING FROM TODAY:Today’s Livestream: Main Talking Points1. The impossible trinity is the framework that ties every macro move together. Every country can only run two of three: independent monetary policy, capital mobility, and FX stability. China caps capital and FX, which forces its trade balance to absorb everything. The US runs open capital, sovereign policy, and a floating dollar, which only works because the dollar is the global reserve currency. Every other country sits between those two extremes and is functionally cross collateralized with the US.2. The US is the center of every other country’s impossible trinity. That privilege creates dependency on the rest of the world to recycle dollars back into Treasuries or US equities. The Fed’s reaction function is the global cost of capital benchmark. Treasuries are the safe asset that every other country’s capital flight runs toward. When the Fed pauses into inflation and lets real rates fall, every other country has to react, which is why the entire global rate complex is moving in correlation right now.3. Japan capped two pipes with yield curve control and the yen took the full load. T…