Unhedged: We’re all bearish on the dollar now

Welcome and welcome to the week to stop Unhedged from talking about inflation. Check if the event allows it. Today’s topic is the dollar. It has nothing to do with inflation. No, that’s not a thing.

Have you seen the greenback? Email it to me [email protected]

Where (or did he die?)

It’s hard to find a forex analyst or investor who isn’t bullish on the dollar on Wall Street. This may be a good reason to expect the currency to rise, but let’s first consider the simple case. In most cases, it is based on the US “twin deficits”.

First deficit: the current account. The United States buys far more from other parts of the world than the world buys from the United States. The difference is, you have to fundraise. The problem with mathematical identity is that there has to be an incoming flow that matches the outgoing flow. For example, this could be in the form of foreign direct investment in US real assets, or more often in the form of investment in US securities, most often government bonds (after all, we do a lot) . Manufacture).

Theoretically, this has its limits. At some point, the interest on all of these bonds will consume the entire US budget. And if the United States has a second deficit in its budget, that limit is a little closer. This is because the United States spends a lot of money on other things such as money transfers and aircraft carriers. The places where the twin deficits were in 2020 are as follows. It’s almost certainly getting worse since (via the Fed).

At some point, all of those bond buyers will see charts like this and demand higher interest payments. But suppose the US government also steps in to keep bond rates low (just assume). So what corrects the imbalance?

If the dollar falls, everything in the United States (securities, exports, businesses) will be for sale in other parts of the world. This attracts assets and keeps your account balanced. In countries where the books are out of control, the dollar can be a counterweight.

Don Rissmiller from Strategas gave me a blunt summary. If there is a big imbalance like in the United States, “you have to be poorer, whether locally or globally”. But he cautions that none of this has to happen right away. As a global reserve currency and a safe haven for the crisis, the US currency remains the “cleanest dirty shirt” of global currencies. This was evident at the start of the pandemic when the dollar rose along with the demand for safe assets. The DXY dollar index is:

Lismirer also points out that if the dollar falls, it must fall against something. But what? Although the United States is one of the world leaders in immunization and growth, he says capital should continue to flow into dollar assets. However, that could change as the rest of the world catches up, ending with synchronized 2017-style global growth and potentially sending capital to other parts of the world for better returns. He says yes.

Currency traders often speak of “dollar smiles”. This refers to the fact that the dollar is appreciating at both ends of the US growth spectrum. If the United States grows faster than the rest of the world, the dollar will rise as capital flows into the United States. If US growth is particularly slow, like in March 2020, it likely means the whole world is in dire straits, and US wealth will become an attractive and safe haven, pushing the dollar higher again. Means The dollar’s downtrend lies in the middle of a growth spectrum in which the United States is doing well but not leading the world. Lismiller claims that in essence we can get back to the middle of the smile.

Citigroup FX analyst Calvin Tse is also a long-term Dolberg, but not because of the twin deficits. He believes US Treasuries will continue to be attractive. “What has happened in the last decade since the financial crisis has been a drop in stock prices, which has resulted in a significant increase in global wealth. Investors have a very long risk to compensate for it. Need safe assets in their portfolio. “In this great chart, it shows how global savings and risky assets have exploded, but safe assets haven’t caught up:

Additionally, as the central banks of Japan and Germany increasingly buy their own government bonds, U.S. Treasuries have increasingly become proportionately smaller reserve slices of truly assets. sure.

Tsé can be summarized as follows. “When risk sells, like in March 2020, you can’t make any money other than AAA sovereign assets, but AAA assets aren’t that much.” As a result, it is “permanent” high against the Treasury. I am waiting for demand.

Like Lismiller, he thinks it’s the revival of the global economy that could ultimately weaken the dollar, but he thinks the pattern here is not 2017, but the early to mid-2000s. I am. At that time, global economic activity was booming and, as it is today, the long equity bull market led by US tech companies was retreating into the rearview mirror. Again, we take a look at this low, mid dollar smile.

How should investors position themselves if the dollar falls? The traditional answer is that we report in US dollars, but stocks that generate most of their income overseas should be profitable when the dollar falls. Tech companies are a classic choice. Commodity companies’ products are billed in dollars, so lower dollars increase revenue. But for tech stocks that are currently trading at a rather dizzying valuation, it’s worth considering this chart from Lismiller’s colleague at Jason Trenart’s Strategus.

Price-to-earnings ratios tend to fall as the dollar weakens. Significant. In fact, what happens to tech stock prices, which have been extremely bullish after all, if the next period of global growth draws capital into risk elsewhere?

A good read

Sujeet Indap, FT Bankruptcy Bard, written The astonishing story of Hertz’s bankruptcy. The company’s shares were left behind by Wall Street, but were only revived by “same-stock” retail traders – they ultimately turned out to be correct. As Sujeeth puts it, it’s a “perfect metaphor for a year upside down on Wall Street.”