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Dollar 20 year high....what next?


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Dollar reached a 20 year high against other major currencies (as measured by the dollar index). 

 

I can understand the appeal as:

a) Dollar is a safe haven and times are scary

b) Treasury yields in the US are higher than other developed countries so good place to park cash

c) US is the strongest economy in the developed world and its stock market has outperformed this cycle by some distance 

d) A lot of money has been attracted to the US stock market to invest in technology stocks etc. 

 

On the other hands you have some pretty massive twin deficits and the PPP theory of exchange rates suggests considerable overvaluation and the historical precedent after similar occasions of dollar strength e.g. late 60s, mid 80s, early 00s was multi-year declines: 

  • In the 1970s USD fell > 30% in real terms over 9 years
  • In the mid-1980s to mid-1990s USD fell > 35% in real terms over 10 years
  • In the 2000s USD fell > 25% in real terms over 9 years
  •  

 

Any thoughts?

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On the other hand you have some pretty massive twin deficits...

 

1) Federal budget deficit is shrinking fast and is currently in surplus mode.  A shrinking deficit that is too small is deflationary is actually causing the USD to strengthen against gold, commodities & other currencies.

 

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2) The trade deficit is how the rest of the world acquires dollars (they net export to the US in order to get them).   Trade deficit is exploding which is another indication that there may be a shortage of dollars right now.

 

FWIW,

Bill

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7 minutes ago, wabuffo said:

On the other hand you have some pretty massive twin deficits...

 

1) Federal budget deficit is shrinking fast and is currently in surplus mode.  A shrinking deficit that is too small is deflationary is actually causing the USD to strengthen against gold, commodities & other currencies.

 

spacer.png

 

2) The trade deficit is how the rest of the world acquires dollars (they net export to the US in order to get them).   Trade deficit is exploding which is another indication that there may be a shortage of dollars right now.

 

FWIW,

Bill

 

 

Will those surpluses continue, or will Treasury return to deficits now that peak tax season is over?

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Will those surpluses continue, or will Treasury return to deficits now that peak tax season is over?

 

May is typically a "deficit month", but so far it is also running as a surplus (thru first 6 days).  The key story is that tax revenues are still running hot (most receipts for the US Treasury come from Federal payroll taxes) and expenditures are down from the prior couple of years as all the one-timers do not repeat.   I think the deficit will shrink to a very low level as a % of GDP - too low to prevent deflationary pressures from grinding down the economy over the next 12-18 months.     No one is focusing on this story right now but its pretty important, I think.

 

FWIW,

Bill

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12 minutes ago, wabuffo said:

Will those surpluses continue, or will Treasury return to deficits now that peak tax season is over?

 

May is typically a "deficit month", but so far it is also running as a surplus (thru first 6 days).  The key story is that tax revenues are still running hot (most receipts for the US Treasury come from Federal payroll taxes) and expenditures are down from the prior couple of years as all the one-timers do not repeat.   I think the deficit will shrink to a very low level as a % of GDP - too low to prevent deflationary pressures from grinding down the economy over the next 12-18 months.     No one is focusing on this story right now but its pretty important, I think.

 

FWIW,

Bill

 

 

Any idea on why this is happening?

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Posted (edited)

Any idea on why this is happening?
 

Economy is still running hot - wages are increasing.  Labor shortage is real and getting worse.  This is why the Fed is worried.  Economy & stock market are going in opposite directions which is creating a confusing narrative.

 

This is what I call cake-onomics.  Inflation was a cake that went into the oven 12- 18 months ago and just came out early in 2022.  But a new cake went into the oven in April - a deflationary cake.  A growing economy needs more of the govt’s money - but the govt is actually going the other way & removing it right now.  Think of the economy as you exercising in a closed room while the oxygen is very slowly being sucked out.  That’s monetary deflation - the private sector will have to consume savings and/or increase debt to maintain consumption.

 

Bill

Edited by wabuffo
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7 minutes ago, wabuffo said:

Any idea on why this is happening?
 

Economy is still running hot - wages are increasing.  Labor shortage is real and getting worse.  This is why the Fed is worried.  Economy & stock market are going in opposite directions which is creating a confusing narrative.

 

This is what I call cake-onomics.  Inflation was a cake that went into the oven 12- 18 months ago and just came out early in 2022.  But a new cake went into the oven in April - a deflationary cake.  A growing economy needs more of the govt’s money - but the govt is actually going the other way & removing it right now.  Think of the economy as you exercising in a closed room while the oxygen is very slowly being sucked out.  
 

That’s monetary deflation - the private sector will have to consume savings and/or increase debt to maintain consumption.

 

Bill

 

Sounds similar to 2000-2002 type of situation then?

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Posted (edited)

Sounds similar to 2000-2002 type of situation then?

 

That's what I think too.  That was a big equity bust, followed by a grinding down of the economy until recession hit in Q4, 2001 - Q1, 2002.  Equities didn't bottom until October 2002.   History may not repeat here, though.

 

Bill

Edited by wabuffo
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Posted (edited)
49 minutes ago, wabuffo said:

Equities didn't bottom until October 2022.

 

Spoiler

Thanks for spoiling all the fun and letting us know the when the market bottoms in advance.

 

 

Edited by formthirteen
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4 hours ago, wabuffo said:

Sounds similar to 2000-2002 type of situation then?

 

That's what I think too.  That was a big equity bust, followed by a grinding down of the economy until recession hit in Q4, 2001 - Q1, 2002.  Equities didn't bottom until October 2002.   History may not repeat here, though.

 

Bill

 

Alright man...what do you think will happen (in your opinion of course)???

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Alright man...what do you think will happen (in your opinion of course)???

 

I dunno - slow grind downward for the US economy until recession back half of 2023?  Odds of that probably > 50%.  

 

Bill

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The inflation that most people believed last year was transitory obviously wasn’t. The reason this was obvious is because there were still a lot of idiots playing the COVID game. Give out money and restrict activity and this is the byproduct. Now you are starting to see that reverse. It will unwind and correct itself regardless of what the Fed does. The Fed is just helping send the crypto bros and tech savants back to their by the hour w2 jobs. 

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https://www.bloomberg.com/opinion/articles/2022-05-11/sterling-s-drop-to-parity-with-the-dollar-is-a-real-risk?cmpid%3D=socialflow-twitter-bloomberguk&utm_content=bloomberguk&utm_source=twitter&utm_campaign=socialflow-organic&utm_medium=social

 

Article above is pretty good and sheds some light. Markets seem to believe that the US economy is stronger than the others and can therefore withstand more interest rate rises before something breaks. UK economy is headed to recession with little assistance required from the BOE which limits their room to raise rates. 

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