THE EASIEST ARBITRAGE EVER IS RIGHT IN FRONT OF OUR EYES?
LONG US, SHORT EU
Hello, these two charts seem to show an identical background situation for the two economies (US and German), however, the economy in US and EU is very different (among other explanations, TFP - total factor productivity is, and always has been positive in the US, while it is negative and, most importantly, decreasing since many years in Europe; US has never lowered rates below 0, while Europe did, breaking the Marxist M-G-M model, which means Money-Goods-Money1 cycle, and transforming it into a mere M to M1 model, money to money1, where M1 >M, skipping the "Goods" part of the cycle, basically creating a system where Money that creates other money out of thin air).
The markets (especially the European ones) are discounting the fact that there will be no recession based on last data, and that we will have a soft landing after all in US. I believe this will not be the case but it is not important now. The important thing is that, European investors are believing that the same will happen in EU, where, however, the increase of interest rates is far from being done, and inflation has not peaked yet!
Surprisingly, European investors are continuing to consider the two economies as identical, simply because in the last 40 years they moved together. However, they forget the 10-15 years of QE and the fact that the world after it will not simply continue to be the same as before, as we simply can erase these 15 years of history and put in conjunction the two extremities. They are pricing the two markets as it they were at the beginning of capitalism, while we are probably at the end of it, or better at a new phase of it. A phase in which US adapted to the MDM model by increasing the productive cycle (they have companies like Tesla, Amazon, Google) while in Europe we persevered in the aberration of the M-> M1.
LONG US (Dow jones), SHORT EU (Dax)
IThis is why, n my opinion, what we have in front of us is a win-win situation.
If the markets will continue, in my opinion wrongly, to consider these two markets almost perfectly correlated, while they are going up even if at least one of the two will have a recession ahead, we will be covered in any case.
case 1 - recession in USA, recession in EU
the recession will hit stronger in Europe-> The position will lose on long US less than what it would gain from the short on EU (DAX)
case 2 - no recession in USA, recession in EU
double gain (from the on long US and from the short on EU)
case 3 - no recession in USA, no recession in EU
US economy will perform better then EU : the long position on US will gain more than what it would LOSE from the short on EU
It is worth noting that both indices are surprisingly at 8% from their respective peaks of 2021 but the strength of the trend (red line on the second indicator - DMI) is very low.
Of course, the strategy will need to be adjusted with the sizes so that every side has the same notional value in USD - What do you think?
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