So Goes the Nation - Chatham Financial

For nearly a century, American electoral politics was characterized by the oft-repeated aphorism: “As Maine goes, so goes the nation.” These words rang true to Americans for at least two reasons – first, because of Maine’s early harvest and immoderate fall weather, it held gubernatorial and congressional elections in September. Hence, the winning party often hopefully viewed its results as a harbinger of victory in the November presidential election. Secondly, pundits regarded Maine as a statistical bellwether, since its winning gubernatorial party in September took the White House in November near three quarters of the time between 1832 and 1932. This reputation was especially cemented into American consciousness in 1888, when Maine was solidly Republican in September and predicted Benjamin Harrison’s electoral victory in spite of losing the nationwide popular vote.

But Maine’s bellwether reputation was shattered forever in 1936, when Republicans dominated the September statewide slate and looked hopefully towards the November presidential. The election utterly dashed their hopes– Alf Landon carried only Maine and Vermont (8 electoral votes), tied for the worst showing since the current two parties started facing each other in the 1850’s until now. The result led James Farley, F.D.R.’s jubilant campaign manager, to quip famously: “As Maine goes, so goes Vermont.” Ultimately, after failing in four of the next five September elections to predict the president correctly, Maine changed its election law in 1957 to shift its statewide slate to coincide with presidential voting in November.

Lost to history is the identity of whoever first said, “As Maine goes, so goes the nation,” but if he or she were actively commenting today on economics and geopolitics, perhaps the operative phrase would be “As the currency goes, so goes the nation.” After all, there’s:

(1) Argentina: President Mauricio Macri’s administration is one month old, and he’s already scrapped the Argentine peso’s currency controls to attract investment. His lieutenants have also demonstrated good faith efforts to negotiate with the nation’s holdout creditors and move beyond past acrimony. Last week, though, the most surprising announcement was that Argentina’s paper money would swap Evita for an Andean deer, and Gaucho Rivera plus the Falklands/Malvinas for the condor. Images on paper money are symbolic, of course, but in replacing controversial political figures (and islands) with apolitical representative animals, perhaps Macri is sending the strongest possible signal about the monetary and economic policy investors in Argentina can expect.

(2) Saudi Arabia: Last week, the Saudi Arabian Monetary Agency told local banks plus Saudi branches of international banks to stop selling options on riyal forwards, releasing pressure on maintaining its currency peg. Since December 31st, one-year USD-SAR forward points more than doubled, from 463 to 965 at Thursday’s close, implying increased doubts about the peg’s sustainability. And while Saudi Arabia’s foreign currency reserves are third-largest in the world (after China and Japan), it’s burned through $100 billion in the last twelve months. With the price of oil so low, the country has even broached the possibility of floating Aramco, its iconic national oil company. So while Saudi Arabia’s reserves could last it four years – making it far from a perfect analogue to the recently broken Kazakh tenge – investors and speculators alike will be watching this currency closely, especially as Iran opens the taps.

(3) China: The last six months have seen numerous important shifts in the yuan’s management, some of which have seemed inscrutable to the outside world. In August, the country allowed its currency more mobility within a protected trading band, permitting additional market influence. Later, it announced that it would focus on managing the yuan against a (non-public) currency basket, rather than just the dollar. And earlier this month, the central bank surprisingly fixed the currency sharply weaker, causing most of the world’s equities and commodities to plummet along with it. So last week at Davos, managing director of the IMF Christine Lagarde urged “better communication” to facilitate “the massive transition” – because the global capital markets are watching and reacting in real time.

The above examples and countless others illustrate that as the currency goes, so goes the nation (and sometimes the world). But political regimes, economics, market swings, monetary policy, the prices of other assets, and innumerable factors interplay in a complex fashion that renders currency movement unpredictable. However, unpredictable does not imply unmanageable – so if you are interested in specific approaches to managing your risk exposures, plus a survey of current market conditions, sign up for our market update webinar this Thursday!