Wednesday, January 24, 2018

Weaker U.S. Dollar - Good for Trade but Toxic for Stocks

In January of 2017 as Trump was inaugurated as President, I published the following article - Will A Weaker Trump U.S. Dollar Be Toxic for Stocks?

Through the first half of 2017, the U.S. dollar (DXY) continued to trade around 100, the level it was when Trump entered office.  But beginning in mid-May 2017 the dollar started to trend progressively lower, and has broken down through a key historical average level of 90.

In an interview in Davos on January 24, 2018, Treasury Secretary Steve Mnuchin reiterated the Trump administration view that a “weaker dollar is good for trade.”   As shown in the real-time capture of the dollar trade at the moment of the remarks, the US dollar dropped, continuing its trend lower.

The relevant investment question is whether a weaker dollar is actually good for stocks (not trade!)?   Against a backdrop of an inversely correlated move in U.S. interest rates, as historical data published in the article shows, chances are very high that the market will collapse as the trend progresses.  There are three points in market history that reviewed in the article – The Nixon Dollar Shock, The Reagan Plaza Accord and the Bush / Snowden Policy. 

I strongly advise that you read the article if you are an investor interested understanding how market risk is fundamentally and rapidly escalating at the present time, and how long it took for the stock market to re-calibrate lower in response to very similar US President direct dollar moves lower in recent history.   Nothing has changed from a market analytical standpoint since the time the article was published.   What has changed is that the US Dollar is now weakening, stocks (SPY) (DIA) (QQQ) are substantially higher, and US interest rates (TLT) (SHY) (TBT) (IEI) are poised to move much higher as the Treasury has to enter the market to finance the Tax Reform Bill not just short-term, but for many years to come. 
Is this a toxic market scenario in the making?  In my opinion, very likely; it is just a question of when for stocks.  And, given that the stock market is starting from an inflated position relative to many market measures, the stock collapses after the post 1971 and 1985 dollar declines are the relative points in history most applicable to the current stock market set-up.

Daniel Moore is the author of the book Theory of Financial Relativity.  All opinions and analyses shared in this article are expressly his own, and intended for information purposes only and not advice to buy or sell.

Wednesday, January 17, 2018

Laws of Financial Physics Temporarily Suspended

The business media was frenetic on Wednesday (1/10) about a story launched by Bloomberg in the early morning hours that China may slow or even cut-off its purchases of U.S. Treasuries. (Reuters, Bloomberg, CNBC).   The stock market had a knee jerk reaction downward, as the pre-market futures were down and the morning broader market stock trade was off up to -0.49% on the S&P500.

But once the Treasury auction was completed, the broader US equity markets resumed the relentless charge higher, as if the Laws of Financial Physics need not apply to stock investors at the present time.  At some point in time, investors are going to figure out that they are parking money in a zone where the Law of Gravity will eventually apply again.  However, for investors who can’t or don’t read the signs, I suspect the day of reckoning will be a brutal one this time around.

Tuesday, January 16, 2018

Fed Put Being Replaced by the Trump Put

The following statement made by President Trump in mid-October of 2017 sent many economic professionals into a tizzy.

“In the last 10 years they borrowed more than it did in the whole history of our country. So they borrowed more than $10 trillion, right? And yet we picked up more than $5.2 trillion just in the stock market, possibly picked up the whole thing, in terms of the first nine months in terms of values. So you could say in one sense we’re really increasing values and maybe in a sense we’re reducing debt.”

This bizarre statement, not unusual for Trump, sent many economic professionals into a tizzy.  It is preposterous, they contended, that movements higher in the stock market have anything to do with the ability of the U.S. government to amortize the National Debt, which has now surpassed $20T and climbing quickly since September 2017.  From an economic perspective, it is GDP that drives a country’s ability to service its IOUs, not the stock market casino.  But in the Trump world, fortified by a bevy of Wall Street advisors, the current view is that as long as stocks are strong, more debt is not bad for the USA.  Why the sudden change of tune?

The reason involves how the U.S. government, led by Trump and minions of structured finance geeks from Goldman Sachs and other investment banks are going to get the financial markets to free up enough capital to finance the Trump Tax Reform bill.   I call it the Trump Put.