Currency moves impact all investors and right now the US dollar is in a bear market.
We need to stop and think about this and see what it means for us.
First of all I define a bear market not by something dropping 20% (when it’s too late), but when the price trend is down with the price below the 150 and 200-day moving averages and those moving averages are trending down on the technical analysis charts.
I call this simple stage analysis.
So now let’s take a look at the US dollar index, which measures the value of the US dollar against the major world currencies.
Ok as you can see it’s obvious the US dollar is falling and it’s been falling for a year, with the drop picking up steam this year.
And this has been happening with the Federal Reserve raising rates and the economy growing.
Well there are now worries that the US budget deficit is going to explode next year with all of the pork stimulus Congress just approved last week and the tax cuts.
I guess some people saw this coming last year.
I’m not going to deep into this now, but Trump’s budget director just last week warned that they could explode.
Bloomberg covered the story here U.S. Budget Director Warns Interest Rates May ‘Spike’ on Deficit.
And this is troubling to foreign investors.
The leading German newspaper De Spiegel argued that Trump is going to cause the US dollar to slide so much that it will spark trade problems: Currency Cold War Donald Trump’s Dangerous Game – De Spiegel
And check this out:
RATTNER: These charts reveal the ‘potentially apocalyptic’ state of the US budget deficit – Business Insider
So how does this impact you?
If you are an American investor you can’t tell any difference right now.
And the dollar hasn’t fallen enough yet to cause meaningful price inflation so you can’t tell any difference in your everyday life.
But if this continues you will in time on both counts.
This chart shows why.
What you are looking at is the TLT ETF of the 20-year Treasury bonds priced in Euros.
It is in collapse.
You see if you are a foreigner outside the US you are actually losing money in the US stock market this year, because you are owning it in a currency losing value against your own!
And if you own Treasury bonds you are getting creamed.
That causes foreigners to sell to get out of this situation and a weaker currency bear market can cause havoc in fiancial markets as it plays out.
At the start no one cares, but at the end it’s a disaster.
To put it to you this way foreigners buying US debt are losing money on it!
That is going to make them demand higher interest rates for US debt if the dollar continues to decline and the deficit explodes next year.
If you are a Canadian and you own US stocks then you are probably wondering if you should keep doing it, because you are very aware of what is happening.
And so are Europeans and Chinese and everyone else, but Americans for the most part have no idea, because they can feel no impact of any of this.
A falling dollar means less money coming into the US not just to finance debts, but to buy stocks too.
Right now though US corporate share buybacks have doubled thanks to the first year one-time impact of the Trump tax plan, but what happens when the buyback buzz returns to normal?
No one wants to talk about that, because if you are on Fox News and ask any questions about anything going on you become a Trump traitor and if you talk negative on a financial channel the audience turns the channel. People want to hear that their stocks will go up and not down!
But such attitudes led to ruin in 2008 and it wasn’t Bush’s fault!
Of course some things benefit when the dollar declines.
One such thing is gold and gold is trading right now on key resistance despite the recent interest rate hikes.
It’s now becoming a good way to make money and is outperforming the DOW this year.
But if this bear dollar trend continues it will one day be a necessity to own as an investor.
We have seen some wild action in the markets this year.
The DOW went down 1,000 points in a day just the other week and now is trying to bounce back.
I saw Jim Cramer on CNBC blame it all on a VIX computer glitch and many are saying the same thing.
But is something more happening?
I talked about that question with David Skarica in a live youtube session yesterday.
You can watch the recording by clicking here: Is the Recent Stock Market Drop Just a Glitch Or a Warning? – Mike Swanson (02/15/2018).
And on Sunday I also announced the release of my new book The Two Fold Formula.