The U.S. dollar bear market is confirmed. What are the implications?
Investors could face the most dangerous — and opportunistic — investment climate in 45 years.
We have been relentlessly bearish on the dollar and bullish on almost every other currency, especially the euro and the yen and the Aussie and Canadian dollar, for nearly two years. This month’s price action is the beginning of the next down-leg for the dollar and we believe its bear market could last as long as seven years. This week, we had a trifecta break-out of the CAD, AUD and JPY, which followed the break-out of the EUR two weeks ago. In the years ahead, the appreciation in other currencies versus the USD could be far greater than anyone currently imagines. And, given the investor positioning, it would be surprising if the dollar’s decline this year has any meaningful corrections — a huge amount of capital is trapped, and as usually happens, investors won’t be given the opportunity to exit easily. A weak dollar has tremendous implications for almost every asset class, particularly because of the huge amount of capital concentration in U.S. dollar assets and the relentless bullishness that caught so many by surprise.
A weak dollar is bullish for oil prices. Although we turned bullish on oil (and oil equities) last summer, and have seen gains of 35%, much higher oil prices could be the big surprise in 2018. Every major inflation since 1973 has been fueled by a surge in oil prices.
For many months, we have discussed the growing number of breakouts in markets that have historically traded inversely with the USD. This action provided powerful clues for the large selloff in the U.S. currency from the December high.
The sharp breakdown in the USD further confirms and reinforces the signals from every reflation-market and indicator that we have discussed during the last two years. And, the message from the reflation-market charts and indicators appears to be that a long and sustained advance in the reflation-markets is likely now underway.
The dollar’s breakdown further confirms that capital-dispersion into the world’s longest-depressed markets and commodities is likely to continue to accelerate — possibly sharply — as the USD falls steadily in the coming months and years. The markets and sectors that suffered the most during the previous deflationary-trends from 2009 to 2015 are likely to have some of the best relative-performance trends as the dollar’s bear-market unfolds. (Our theme first presented in December 2015: “The last will be first.”)
Crude oil, oilfield services, metals and mining, materials and industrials could all experience faster growth relative to their recent trends. Emerging market economies are likely to benefit from a growing influx of capital as the dollar weakens, which will bolster their propensity to invest and consume, just as the huge pent-up demand that accumulated during the deflation years begins to hit the market. (See section 4.)
This could create a self-fulfilling cycle of growth that attracts more capital away from the dollar and causes commodity prices to rise beyond expectations — a mirror image of the collapse of commodity prices beyond downside expectations when the dollar was strengthening. This could also drive upward surprises in the rate of inflation measured in USD, with or without faster U.S. growth.
For years, we have argued that China is the leader in many ways. Bond market yields began to rise there first. The long bear market in commodities ended in China first. And recently, we have noted that China’s money velocity is starting to rise sharply. Money velocity has declined for so long that no one pays attention to it. But, in an inflationary boom, velocity would certainly increase — adding to the inflationary fires.
UST bonds, which appear to be on the verge of a breakdown from a large topping-pattern, and the excesses in the U.S. stock-market, provide further evidence that investors could face the most dangerous — and opportunistic — investment climate in 45 years.
This article was originally published in “What I Learned This Week” on January 25, 2018. Click here
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