The USD had a heck of a ride, which kept inflation from spiking even further. But it may not last much longer.
By Wolf Richter. This is the transcript of my podcast recorded last Sunday, THE WOLF STREET REPORT.
The US dollar has had one heck of a ride since it became clear that the Federal Reserve would eventually have to start tightening because inflation was beginning to rage.
That inflation was beginning to rage became clear in February 2021. The Federal Reserve, at least in public, brushed it off as transitory, and it came up with all kinds of fake reasons why this was just a blip.
But I was yelling about inflation back then, and I explained why it wasn’t transitory, and why it wasn’t a blip, and lots of people were yelling about it and explaining why it wasn’t transitory, and certain corners of the markets knew that it wasn’t transitory. And we who were screaming about inflation at the time, we all knew that the Fed would eventually crack down on inflation, would have to crack down on inflation, and it would do so by tightening its monetary policy. It would end its asset purchases, it would hike interest rates, and it would start quantitative tightening.
And the currency markets knew it too.
In February 2021 – that infamous February when many of the crappiest stocks peaked and then collapsed by 80% or 90% – in that February 2021, the US dollar made a U-turn against the big currencies that are traded freely, including the euro and the yen.
At the time, so back in February 2021, it took $1.20 to buy €1. Since then, the dollar has surged against the euro. On Friday morning, it took just about exactly $1 to buy €1. The last time this “parity” occurred was in 2002.
The dollar has also surged against the Japanese yen. On Friday, it took over ¥136 to buy one dollar. The exchange rate has been around 136 since late June. You have to go back to the late 1990s to find those exchange rates.
The Federal Reserve maintains a broad dollar index that includes the currencies of the 22 largest trading partners of the US, so not only the euro and the yen, but also the Chinese renminbi, the Mexican peso, the Hong Kong dollar, the Canadian dollar, the Brazilian real, the Thai Baht, etc. 22 of them.
For this broad dollar index, the currencies are weighted by the trade volume with the US. And there is an inflation adjusted version of this broad dollar index, the so-called “Real Broad Dollar Index.” This index goes back to 2006, and by the end of June it had spiked to the highest level since the beginning of the index. Since February 2021, it gained nearly 11%.
The dollar’s sharp rise since February last year has had a significant impact on inflation because we’ve been running a huge trade deficit in goods with the rest of the world. This trade deficit spiked to an all-time high in the first quarter this year.
Import prices shot up too, but the strong dollar has softened the price spike of those imports. In the Eurozone and in Japan, their beaten-down currencies have caused import prices to surge even more than in the US.
So the strong dollar has helped contain the raging inflation in the US. This raging inflation, which has been over 8% for the past few months, based on the Consumer Price Index, would have been higher if the dollar hadn’t gained that much strength since February 2021, when this raging inflation started.
The US produces a lot of commodities, including crude oil, petroleum products, and natural gas, and food commodities, and metals, etc. But it imports a huge amount of high value goods, including gobs of consumer goods, from cellphone to cars, and components, electronic products, industrial products, appliances… you name it.
For example, Boeing’s troubled 787 Dreamliner is assembled in the US, but many of the parts and components are manufactured in countries around the world and are imported. Automakers that assemble vehicles in the US import many components from other countries. This is on top of the large volume of high-dollar finished products that are imported.
This is how the US gets to have this huge gigantic trade deficit – and those goods are paid for in dollars, and when the dollar strengthens, it reduces the bite of price increases that are now cascading around the world.
The exchange rate, such as the dollar versus the euro, is a result of market action in the vast currency market. Currencies are traded against each other, and there is a huge amount of speculation going on, including with currency-based derivatives and hedging, from retail day-traders on up to gigantic trading houses. And so exchange rates fluctuate from one second to the next.
Then there is a separate action that impacts currencies and everything denominated in those currencies, and that is inflation. Inflation reduces the purchasing power of that currency in its own country. The dollar’s purchasing power in the US has been getting whacked by this raging inflation. Everyone knows what this means: you have to pay more dollars for goods and services that you’re buying.
These two dynamics – the exchange rates and the purchasing power of the currencies in their own countries – don’t necessarily move in the same direction short term. Exchange rates are determined by trading in the massive currency market. Inflation has other causes.
So why has the dollar been surging against the euro and the yen when there is so much inflation in the US?
One, there is now about the same raging inflation in the Eurozone as in the US, and in some Eurozone member states, inflation is much worse, in the double digits, and in a couple, it’s over 20%, which is a horrible number. And even in Japan, inflation is now taking off.
And two, the Fed has been on a tightening path since earlier this year – and now on a fairly aggressive path, with rate hikes of 75 basis points and quantitative tightening. But both the European Central Bank and the Bank of Japan are still maintaining negative interest rates.
The ECB will kick off tightening with the first rate hike this month and a bigger rate hike in September, and with QT. There are now some ECB governors talking about an aggressive rate hike in September. One of them just now said that the ECB should hike by one and a quarter percentage points in September to confront this out-of-control raging inflation in the Eurozone. Which would be huge.
The Bank of Japan for now has vowed to not tighten policies, but that too could change if the yen continues to skid lower. Japan is already running a big trade deficit, in part due to the plunge of the yen, that makes imports a lot more expensive, and Japan imports a huge amount in energy commodities, food commodities, other materials, and lots of components, and finished goods, including consumer electronics, and all kinds of stuff.
So central bank tightening is generally supportive of the exchange rate of the currency, and the Fed got there long before the ECB will get there, and the Bank of Japan is still stuck in its old ways.
The Bank of Japan might eventually be compelled to follow. All other major trading partners of the US, except China, have already embarked on rate hikes, and massive rate hikes in some cases, such as Brazil.
And this tightening drama in other countries will eventually start to impact the exchange rates, and the dollar might then reverse and lose ground again.
Hedge fund manager Stanley Druckenmiller said about a month ago, that early tightening by the Fed boosted the dollar but that there’s nothing exceptional about the US economy, and he added, “I will be surprised if sometime in the next six months I’m not short the dollar.”
The dollar is trading at precariously high levels. And historically, when it traded at precariously high levels against other major currencies, it got knocked back down. And sometimes by a lot.
And this is likely to happen again at some point, maybe not tomorrow, or in July or in August, but it’s likely to happen as the ECB starts trying to catch up with the Fed.
There would be nothing special about the dollar reverting to the middle of the 20-year trading range against the major currencies. It has done that before. And in the past, it overshot on the way down.
And if the dollar’s exchange rate reverts back to the middle of the range, or lower, then something else will happen automatically: It will remove the lid that the strong dollar had put on inflation.
A weaker dollar will throw some new fuel on inflation in the US via import prices – particularly high-value finished goods and components. And just when inflation in durable goods might be abating, then there will be this new fuel thrown on top of it – a weaker dollar.
The exchange rate has a delayed impact on pricing of imported goods. Many of these prices are negotiated in dollars months in advance, so a weaker dollar would feed only gradually into consumer price inflation in the US, and it might happen later this year and then more intensively next year. Just when people expect that inflation in durable goods would somehow peter out, there would suddenly be additional fuel for more inflation.
It’s unlikely that this raging inflation will somehow quickly subside below 5%, now that inflation has gotten solidly entrenched in services, where nearly two-thirds of consumer spending ends up. These year-over-year CPI rates fluctuate, they always do, and sometimes by quite a bit, but just when they look like they’re headed back into the acceptable range, they resume surging.
And we’re going to see some of that, we’re going to see CPI rates drop some, and then they will resurge, and there will be lots of reasons for it, but part of the resurgence will be due to the dollar as it loses ground against other major currencies.
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Hi Wolf,
Reposting my question to you… First, excellent piece, as usual. The fact that, as you say, US inflation would go up if the USD drops in value, combined with the big trade deficit of the US, suggests that the US has a strong interest in not letting the USD drop. The main way to achieve that is to ensure that the US Fed rates are at at least as high as those of its major trading partner countries – in particular the 20 countries you refer to regarding the weighted currency index the US has been tracking since 2006. The EU is rife with political unity issues and instability threats (see also todays’ developments in Italy…) and so presumably the US should have no problem keeping well ahead of the EU in its rate hike path – indeed, as rates get higher everywhere, it is plausible that the US will be able to keep surpassing all other countries’s hikes, with the possible exception of China’s. That would only further strengthen the USD. I can see that the USD may reach a point where for other reasons the US considers this unhealthy for its allied trading partners and their trading countries (see Shri Lanka, Gana, etc), but that point has not yet been reached. For example, the USD was much higher versus the CAD at the start of the pandemic. Also, countries such as Canada have even greater housing bubbles than the US, as you have well documented, and so they will be unable (at some point later this year…?) to keep up with US interest rate hikes because the impact on GDP etc will be greater. In short, based on the excellent information you provide, one can just as well make the opposite case that the USD is likely to continue to strengthen, no?
Fan,
Right now, the communicated plan of the Fed is to get a little beyond a “neutral” rate. No one knows what “neutral” is in the US.
In Canada, Tiff said yesterday that neutral is 2-3%. In the US, the range that Fed heads have espoused is also in that range, maybe a little higher.
So right now, I think the goal in the US is to get to 3% by the end of this year, and a little above it next year, so maybe 3.5% and then hold rates and wait and see what inflation does. There is usually a delay of 12-18 month between changes in monetary policy and changes in inflation. QT will continue, and that also acts like rate hikes.
If inflation doesn’t come down to 2%, if it stays high, or goes higher, with rates at 3-4%, then the Fed has a majestic problem on its hands.
They all know, you cannot let this inflation go, or else it’s going to turn into Argentina, where CPI is expected to hit 90% by the end of the year. There is no good way out. They know they have to crack down on inflation, and there is going to be some pain along the way.
In Canada, it means that home prices are coming down and that some homeowners who’re overleveraged will get in trouble. Well, their lenders will get in trouble.
Can someone please explain what the hell is going on with precious metals and precious metal miners? The former aren’t doing shit and the latter have been absolutely crushed! This despite the worst inflation in decades and a Fed that has been completely reckless and clueless now and for 30 years!
The way I understand it, when the world gets in trouble there is selling pressure on everything and only dollars will do.
I saw a scatter plot of gold vs. real interest rates and the chart was still saying gold was expensive.
I don’t really know, but I generally buy stuff when it is out of favor so I am adding to my big gold miner holding because net margins are good, it has a strong balance sheet and pays a good dividend.
Miners are getting squeezed. The price of gold has been flat, to down. The costs to mine have gone up with the price of oil/fuel, labor and general inflation. Until the price of gold starts up, miners won’t go anywhere.
Why the price of gold isn’t going up is a different subject. And I don’t expect it to go up until the Fed starts dropping rates, based on history.
The Chart watchers over at Elliott Wave (prechter) predicted a few years back (when gold was around $2,000+) that it would trend down to $1720 (if memory serves well, not always a sure thing in my case). The EW big thing is that the market moves according to public mood and psychology.
Of course, they never give a time for when something is going to happen. But gold was at $1705 a few minutes ago when I looked.
And this does fit in with what Wolfe has been saying about a strong US$.
@JP,
PMs have the most value during ZIRP and hyperinflation times; otherwise, fiat paying a high interest rate is better, and in stock market declines, w/ margin calls, PMs are a source of funds (SOF). Also, PMs, like all commodities, go way down when deflation is expected, as evidenced by all the inverted yield curves. That is why all the gold bugs can never figure out Au/Ag price action, despite what doomsday Republicans and scam infomercials and PM gurus tell them.
Properties in Argentina are about 20x median income, which points to the suggestion that higher inflation entrenches higher price to income ratios, pricing just about *everyone* out of the market. It makes sense if you think about it, because two years out that house is essentially *guaranteed* to double its value in nominal terms. And due to mass financial illiteracy, nominal terms are what the vast majority of the population can understand, at best. Heck, most can’t even understand that, because they think in terms of payments, not prices!!
Wolf, unless I’m misinformed, Canadian banks are relatively well insulated on the mortgage side because there are no non-recourse loans and CMHC (Canada Mortgage and Housing Corporation) insurance for anyone who hasn’t made a 25% down payment.
Which is not to say that profitability can’t take a hit if that is what you mean by “trouble” rather than outright failure/collapse.
I agree that government guarantees will shift much of the damage from lenders to taxpayers. Same as in the US now.
In terms of Canada’s recourse mortgages, well, in the US, 38 states are recourse states, including Florida. And look what happened during the mortgage crisis. Recourse works only when there are just a few defaults. When 10% of the borrowers default, the banks don’t have the infrastructure to foreclose and get judgements and go after broke borrowers. Just not going to happen.
As Russia sells more of its oil and gas to Asian and Middle Eastern and African ‘markets’, the case for using a different currency base other than the U.S. greenback will strengthen. Nations in Europe will see this and look to going back to and/or further into relations with Russian oil and gas. The outlook for the U.S. Dollar hegemony is beginning to get very weak.
There is no one on the planet looking to hold Rubles rather than Dollars.
Especially the Russians.
Blaming Russia alone is naïve, if one studies foreign policies of USA (+west) for their quest for planetary domination since WWII.
Nata creeping towards the East was done by Slick Billy against the advisors. Then CIA inspired coup replaced the democratic elected President in 2014 and then dominoes fall began.( fyi since WWII CIA has interedered with elections and democratic processes in at least 48 countries including Iran in 1952)
Sanctioning a a country like Russia without fore thought or fore planning is self inflicted injury and misery. The Citizens of the West, especially Europe and the rest of World are paying for that move.
“I have returned from Germany with peace for our time”
–Neville Chamberlain , 1939
Maybe not holding Rubles, but still use them when trading. To buy Russian oil payment in Rubles may be required. Countries will then have to sell other goods in Rubles to get them to be able to buy oil from Russia.
Same for other commodities Russia export. To trade, Rubles are needed, US dollars may not buy what is wanted.
No. The US Dollar has NEVER been stronger or more important in the big picture than it is today in 2022 and that will only increase.
US is forcing China to unwind the dollar peg……they have to or they are in big trouble on export front
But not on the import front. Then, importing commodites and exporting finished goods, China may be equally well of with the dollar peg as is. How production cost and value add up is a rather complicated exersise.
The Russians do not have deep water ports to load enough oil and their Asian and some other fields will close without Western tech. Russia will then face a reduction of sales of oil and of gas and oil production as its ally, the CCP, crashes China’s economy.
The parasitic, US banksters will see inflation reduced due to the reductions of China’s commodities imports, and food issues worldwide will hurt production in many countries. US banksters, for now, will keep failing upward.
Demand will also be crushed because Americans do not have enough retirement savings and social security payments are slowly being made worthless by the banksters’ increasing inflation, so 90% of baby boomers will be in desperate straights— even those with the average, $134000 in retirement savings. Other countries face demographic cliffs that will crush demand also. That can tame non-food inflation.
Also we cut off the insurance ,for oil shipping from Russia almost impossible to transport without insurance
The US imports very little crude oil from Russia — it’s irrelevant for the US market.
https://wolfstreet.com/2022/03/08/how-much-russian-crude-oil-petroleum-product-does-the-us-import-where-does-it-go-how-much-impact-will-the-russian-oil-ban-have/
The US trade of crude oil and petroleum products (such as gasoline, diesel, jet fuel, naphtha, etc.) in 2021 involved, in barrels per day (b/d), according to EIA data:
I forgot to add: the demand for commodities and other goods will plunge when a little thing spreads around the world, and China, even as the supply of goods will also plunge. Demand will crash more. The insecurity will make the world want US dollars more, not less.
DXY looks like a total blow off top.
The US Dollar could easily go as high as 160 on the DXY where it was briefly back in 1985.
I don’t believe so. I believe the world is getting very stressed right now with the quick changes in financial assets. I heard that the IMF is owed $100 billion and everyday the dollar goes up the chances of a massive default increases. I believe the main risk this time around is sovereign debt by a country owing dollars and being in the currency exchange death spiral.
@Djreef Look at a longer term DXY and they consider.
In 2003 Russian economist and statistic Michael Hazin (he’s of Jewish origin if it makes it easier for you to apprehend) wrote a book named “Конец империи доллара или закат Pax Americana» – “Shutdown of the dollar empire or end of Pax Americana”. I’m not sure if it’s available on other languages other than Russian. He was fired from the government after he tried to stop some fraud schemes in 1998.
So, in this book he said that due to distortion of US’s economy – import/export rate, tremendous financial sector which sucked off all the money from real sector US is on the edge of great crisis. And that this crisis should last about 5-8 years until all the financial bubbles will be burnt to zero.
It was in 2003! 12 years only after collapsing of USSR. Everybody laughed at him back then. then came 2008.
And now he says that crisis already is going on. And it’s independent (or can be only worsened) from any ongoing conflicts etc. etc. etc. and even independent from US policy towards own oil fields etc. etc. He says that sever stage of the crisis started in November or October (I don’t remember) of 2021. Every month US economy decreases about 1% or so, the process will take about 5-8 years and at the end US economy will be reduced to half of it’s today’s size.
The only reason it’s not obvious now because the US government “plays” with figures (his words)
He predicts the China’s economy will aslo be reduced to about 50% of its today’s state. Russia’s economy will be reduced to 10-20% because we collapsed already in 90-s.
what your thoughts about such prognosis? is it sufficiently founded?
p.s. Wolf – if you think that my comment is not appropriate for you blog – at least write a couple words of explanation back – I posted my email.
At least I wouldn’t waste my time next time. I will accept it – no matter what reasons are – you personally dislike Russians or FBI/ CIA/ other government officials told you to do not spread panic or etc. etc. etc. Thank you!
p.p.s I’m not a Kremlin agent – I’m an IT analyst. I don’t even live in Moscow!
Konstantin_Bukharov,
What Hazin now says (starting with your paragraph #4) sounds like great financial fiction to me.
My entire life, I’ve heard these kinds of catastrophe stories where in the end everything collapses, and we go back to subsistence farming or whatever. But that’s not happening. A financial crisis causes pain to investors, but it doesn’t kill half of the economy, it causes a recession, and then the economy grows again.
If central banks let the debt blow up properly, rather than bail out the investors and lenders, the economy will be less burdened with debt, and can grow faster afterwards. The Fed screwed that up last time. As did other central banks, such as the ECB.
It would be long-term good for the US economy if all the financial bubbles imploded, and people involved in them would have to try to find something productive to do. That would be a good thing. It would be a bloodbath for investors, bu they got paid for years to take those risks, and it would reduce the huge wealth inequality in the US, and it might trip up some billionaires and turn them into multimillionaires, and that’s fine, but it would be a long-term good thing for the economy.
Wolf, thanks. I’ve heard you – your version – it’s nothing but another fairy (or horror) tale from noname economist. Quite possible.
I’m not an economist – i’m former automation engineer but this guy says that it’s not the US problem – it’s a system problem. globalisation stopped because of the limits of the globe. there is no more space to expand. financial activities can no longer bring the profit to lender – there is no more business (real) where you can invest and get real profit. only scam-schemes left – bying back stocks, Ponzi of any sort etc. etc. etc.
that’s his kee point – he states that since there is no longer new markets – no ways to get profit with old fashion ways. and that the old way was based on the expanding. he also stated that he get it from Marx (I only read first (of three) volume of Das Kapital so I can’t confirm or deny this statement).
Maybe it’s a horror story and looks more like fairy tail or fiction. I don’t know. I don’t have the proper knowledge of economy mechanisms. No real info either.
Anybody else has thoughts on the subject? Or it’s so ridiculios that doesn’t worth the attention? Thanks.
p.s. I totally agree that blowing away the bubbles will make economy more healthy after all. the question is how bad the process of healing can be and for how long. we have a proverb – while fat guy will get thinner the slim one will die.
Hi Konstantin,
The “systemic” problem you had mentioned from Mr. Hazin’s book is the subject matter of a lot of studies (and a lot of blogs and websites, some bordering on doomer hysteria). In case you are not aware, the most famous study came out in 1972, “Limits to Growth”. You can get the thirty year update edition from amazon.
And if you have free time to read blogs, you can try ourfiniteworld.com
Your country man, Mr. Dmitry Orlov (who migrated to the US after experiencing the USSR collapse), also has a blog that you might find relevant.
If you know what you are doing there are still places to invest to incrementally make the world a better place each year. Warren Buffet has done it for 65 years.
The world always needs to improve its standard of living and you do that by carefully investing money for long term returns in something that is beneficial to humanity.
The big question is natural resources:
Are they available, extractable, with a quality that make them useable within the purchasing power of the economy founded on them?
If so there is no problem with a economic crisis. On the other hand if the economic crises is caused by the price of natural resources beeing higher than the purchasing power of the economy founded on them there is a serious problem.
Then, monetary systems, empires and even cultures come and go with time. Cities have been built, expanded and desserted.
Some day the US dollar will be gone together with its empire. Another entity may rise to take place or maybe society go a different direction.
As I write this I sit in Rome. The Roman empire is long time ago gone, still there have never before been more people in Rome.
@Aravind,
The “Limits of growth” estimates are actually still on track, despite the initial study date of 1972. Those people at M.I.T. are no dummies. I once looked at the initial assumptions in the report, expecting to find holes. I was shocked to learn that their model, from a macro level, seemed to be based on incredibly solid choices for input variables, something I had not expected. I can usually spot many holes right off the bat, and what really took me aback about this report is that I walked away impressed.
I agree with some of this. Argentina used to be one of the wealthiest countries in South America. Venezuela, for many years, was actually it. The list goes on with these countries.
Sure, the investors get wiped out, but that comes at a steep price as well to society. I just read an article about how the Sri Lanka middle class has been decimated. Is it because all the wealth gets decimated? The elites take whatever money is left and run? Whatever the reason, the result seems consistent.
Is it a coincidence that these countries, whether it be Lebanon, Venezuela, Zimbabwe, Turkey, Argentina, Sri Lanka, etc…all have some things in common…the governments running funny money schemes, while at the same time, the economies getting crushed and people are getting poorer and hungrier?
I mean, at the end of the day, if the richer countries do the same things, they would likely end up with a similar fate. The only difference is that because we have a larger economy, we have a larger “credit card limit” and can run this kind of scheme for longer…but at the end, there is no something for nothing, no free lunch, and no unlimited stimulus. That said, I don’t think it’s a stretch to look at other countries who’ve been there and done that to get an idea of what the outcome could look like.
Good to see Wolf push back on the apocalyptic fan fiction. We’ve all heard stories about Argentina. I traveled there around 6 years after their big crisis. Pretty nice country, all things considering, even though still a bit cheap if you were carrying dollars. Excellent steaks. Great Malbecs. The rich good ol’ boys in the South loved flying down for epic dove hunting. Cities were pretty clean, streets felt safe.
Point is, Great Depression or Total Societal Collapse are pretty rare, historically. Maybe that’s our sad lot, but it needs a bigger entrance than a 9% CPI number and an extremely strong dollar. -50% GDP hit. Mmmm, okay, comrad.
As Richard Nixon’s Treasury Secretary John Connally put it in 1971: “The dollar is our currency, but it’s your problem.”
For some countries it has been their solution.
Spoken just as the gold standard was dropped. But who could have imagined the ride that the greenback would take over the next 50 years? A chosen FEW have taken the printed dollar to mega-rich heaven.
There have ever only been two monetary standards in world history. Currencies backed by gold (including the dollar) with precious metal circulating coins, and starting in 1971, the
U.S. Dollar, the world reserve currency backed by more printed dollars.
“U.S. Dollar, the world reserve currency backed by more printed dollars.”
Brant,
No. The US dollar, the world reserve currency is backed by the US Marine Corps.
Don’t ever forget it.
Excellent insight and article as usual Wolf. To add a bit more color and risk to the rising USD issue, here are some more thoughts:
– When US companies convert earnings from foreign subs/operations back into their financial statements, the rising dollar will result in weaker results (as the foreign currency is technically not worth as much). Should be interesting to see how many companies reference a strong USD as an issue in Q2 earnings.
– Of course while a strong USD helps keep a short-term price lid on foreign product imports (as noted by Wolf), it also makes US products more expensive in foreign markets (driving inflation in those foreign markets). Hopefully, we’ll get some transparency from companies during the Q2 earnings season related to the potential impact on sales/demand from this issue.
– Also, “I pity the fools” (taken from Mr. T.) who have issued USD denominated debt that a.) must repay the debt in USDs and b.) even worse, have variable rate loans. I understand that these parties may have (and should have) hedged their risks but lets face it, I doubt many were prepared for the violent increase in the USD exchange rate. Further amplifying this issue is QT as in theory this will reduce the number of USDs in circulation making them even more expensive and in higher demand from parties with USD denominated debt.
It would be interesting to analyze/compare the total amount of USD denominated debt against the USD money supply as I suspect this ratio will come under even more pressure in the months ahead as the FED moves down its current path without thinking about the unintended consequences. But then again, when has the FED ever been able to think long-term as they are now hopelessly stuck in a negative reaction loop that is making matters worse.
BTW, I suspect that the FED will be forced to terminate QT sooner than later based on the challenges in the FX markets. Their efforts may not be clearly visible as QT could continue but they have other tools available to provide USD liquidity if needed (e.g., FX currency swaps). Same policy or goal (i.e., increase availability of USD) just different story or “pitch” to the market that all is well and under control, Not!
The Federal Reserve will be substantially INCREASING QT over the rest of this year and will be significantly raising the insignificant Federal Funds Rate rapidly towards 5.25% from which it should never have been decreased at all starting back in 2007.
Unless inflation goes below 3%, they are hamstrung by their ill thought out money policies.
Besides there is a known lag period between raising rate and the response of inflation. It is usually between 6 to 12 months. it took nearly 18 months for Mr. Volcker to contain the inflation. Debt to GDP was around 25-30%, unlike now, over 130%!
The Debt(s) of ALL or ANY kind are at record levels, unlike any time in human history. QT is awfully slow to absorb excess M2, out there since March ’20.
We are in uncharted waters to compare to ANY previous period of mkt history. recession won’t be shallow. Tough days are ahead.
Hi Tage Tracy: Thank you for sharing your comments. Excellent analysis. Life is complicated, eh? As a statistian, my investment strategy is to look for situations of a cyclical nature where an investment is far out of its historical trading range in the negative direction. Then, I buy and patiently wait for a reversion to the mean. I am not foolish enough to predict when that will happen. I simply wait. I just bought a lot of FXY, BASFY, and TKAMY. If they go down further, I will buy even more.
you might want to start scaling into SOXL, lowest Trix reading on record, including 3-20 and 10-09
Hi Wolf
At times history can guide. Ours was the sixth great financial bubble since the first in 1720 and these were typically followed by a lengthy post-bubble contraction. All, including ours lately, featured the senior currency turning up. One reason could be that careful money goes, in a storm, to the most liquid items–Treasury bills in the senior currency and gold. The dollar is the senior currency, because it is acting like one. This could be early stages of a “chronically” firm DX, and weak commodities.
I was just going to mention the historian from Vancouver haha.
Isn’t 1720 about time when Rothschild empire started
No, not until later in the 18th century.
No one is buying gold nowadays, unless you bought gold before the pandemic, your gold lost value to inflation as much as cash till a week ago but since than it has been loosing even more against the dollar.
Ghassan
As long as the US$ is strong and rates keep increasing ,Gold go nowhere to go down but down. Hence option trading ( both ways) is preferred way instead of wedded to gold.
Google how much gold is mined every year and sold. About 3000 metric tons. That’s a lot of ounces that someone is taking off their hands.
China is the largest gold producer according to the World Gold Council. The CCP has had a special unit of the PLA in existence since at least 1979, called the Gold Armed Police i believe, that is a military mining force. China exports almost no gold whatsoever, and the amount of gold they hold may be grossly underestimated by Western observers. The CCP has also encouraged the ownership of physical gold by it’s citizens for over a decade. Australia is next in mined-and-refined gold(even though the Perth Mint was reportedly experiencing a shortage of planchets a year ago), and then Russia, a transport plane with a defective freight door latch dumped gold bars all over a Siberian runway several years ago on takeoff. My coin guy sold me the coins and minibars he had at spot once to get my silver Eagles for another customer when silver spiked, otherwise I haven’t bought gold bullion since before the wubug. I’ve never been able to figure out whether gold is expensive or cheap, myself. But I have never lost a dime on trading it. I have a long history of dealing with my coin guy though, and without that the premiums and faux-numismatic mark-up will make it buy-and-hold–and-hope. Watched a guy walk up and buy three hundred BU Morgan’s for $9k cash last Saturday, I’d not do that. Anybody who wants to get into it should do the due diligence research with regard to all-in-sustaining-costs, or AISC, of the various mining operations. High quality numismatic coins are doing much better right now. Collecting is a lot more fun than stacking, at least to me. No interest in ETFs or any custody plan except physical gold and silver at home.
First, this mania is a continuation of the dot.com bubble and pre-GFC. Yes, it’s lasted over 25 years.
Second, this is the first global mania. It’s not in every major asset class or every market but it’s global, in credit and debt which is the enabler for all other inflated markets.
Third, this mania dwarfs all others by orders of magnitude. I consider Japan the second largest and the US “Roaring 20’s” third. British South Sea Bubble, French Mississippi River scheme and Dutch tulips next.
Augustus Frost
the credit market is the foundation upon which equity and other assets are built. once credit foundation is shaky, all bets are off!
I am sure there more than a couple of ‘Lehman’ out there. Just matter of time, even though Fed is trying to provide liquidity and swaps for foreign currencies. But the problems which gave us the GFC, got never addressed, just covered with more debt! Now that castle built on debt on debt, is unravelling.
Remember Mr. Made off was uncovered in the Dec of ’08! WE will have financial frauds built on easy-peasy money will be uncovered by the end of the year!
One fine thing, I think, unlike the subprime crash, is that the most speculative folks this time around dumped cash into crypto, that vaporized it. In a way, that would be some relief for the banks, which were not caught up in it. The escapist and free-lunch fantasies of the crypto-libertarians blew up in their faces like a cheap cigar. If a fool falls all alone (or with a few exclusive, deluded pals) in a forest, does it make a sound? Yet it wasn’t big enough to upset the whole apple cart.
In all, it was a nice little financial roach motel, fun to watch.
Maybe more like one of those exploding cigars (packed with a minute chemical explosive charge), offered up as a high quality illegally imported Havana cigar by hustling financial tricksters.
CNBC: JPMorgan Chase earnings fell 28% after building reserves for bad loans, bank suspends buybacks
JPMorgan Chase said Thursday that second-quarter profit slumped as the bank built reserves for bad loans by $428 million and suspended share buybacks.
The actions reflect Chairman and CEO Jamie Dimon’s increasingly cautious stance. “The U.S. economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy,” he said in the earnings release.
“But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road,” he warned.
With this outlook, JPMorgan has opted to “temporarily” suspend its share repurchases to help it reach regulatory capital requirements, a prospect feared by analysts earlier this year. Last month, the bank was forced to keep its dividend unchanged while rivals boosted their payouts.
Shares of JPMorgan fell nearly 5% in trading Thursday, hitting a fresh 52-week low.
Good for Dimon! Unfortunately, some folks in JPM were, I believe, caught manipulating precious metals recently. But that is a sideshow. Any organization that big has agency problems once in awhile. Chase bank redid my mortgage to a fixed rate about ten years ago, so professionally and easily. I waited and waited (listening to all the crying wolf about inflation back then, no pun intended, Wolf) and it is finally rewarding me.
it was head of commodity trading, they were spoofing large orders to trap folk…..
just like the libor, forever rigged
Pretty good theory that market bottom will be in when sp500 dividend yield drops to 10 year Treasury yield. You can play with the math. At 2.75% 10 year you get just over 2300 on SP500.
I’ve never seen more bargains at the grocery stores than I am seeing now. Just yesterday I bought 6 16 oz. Wishbone Bleu Cheese dressings for $1.00 each at the 99 cents store, 12 16 oz. bottles of superb Marzetti Cole Slaw dressing for $1.00 each, 4 large cans of air freshener for $1.00 each, and then went to Ralphs and got wonderful Manager’s Special bargains on Cheesecake Factory Oat Bread for $1.49 each and bought 2, plus Farmer John 1 lb. bacon for $1.99, shredded turkey for $1.25, Chicken Tenders for $2.00, and picked up the balance my special order of 10 12 packs of 16 oz. Lipton Peach Iced Tea for $3.99 each plus CRV, and had the whole trunk of my BMW filled to overflowing for nearly free!
Bought a ton of protein bars from Target at deep discount, like 30% off. Same price as sales price of ten years ago.
In my corner of Wisconsin, gas at the pump is now $4.12. Down about 25¢ in less than a week. However, here and there I see stations advertising a $0.000 price for diesel — which I interpret as meaning they are sold out.
At the Aldi store where we shop, even the gal at the checkout commented on the falling prices of groceries.
Rents, however, are still going up here.
Those 3 areas are where we spend most our money.
I bought 2 4 pound packages of chicken thighs with bone-in at Aldi here in Southern California last week for 99 cents per pound and they were of very exceptional quality.
Does the end of non-transitory meme mean that the FEDs are not geniuses or just don’t give a toss about credibility?
Not sure why but it looks like the markets may claw their way back to green for the day on all the good news /s. Wondering when it might be a good time to convert my USD to my favorite vacation $ (Aus or Euros) – can the DXY reach 120?
Cause buy that dip..YOLO and FOMO forces all working at once with the support from PPT since they took a break from their afternoon bar session
PPT might be a fiction, but it doesn’t matter if enough people believe in it, it seemed to acquired a life of its own.
And BFD has worked so great, too.
FED always came to the rescue of the reckless and the brave.
One thing is clear; majority of the retail buyers of stocks and cryptos were wiped out this year. So I assume professionals and institutions are the buyers nowadays because they still have excess free money that they don’t know what to do with.
Maximus Minimus
PPT is REAL and remains active although under the radar. They affect the mkt indexes, through Future mkts trading, any where between 30 minutes or more before mkt closes. It takes a lot LESS money to manipulate indexes.
The President’s Working Group on Financial Markets, known colloquially as the Plunge Protection Team, or “(PPT)” was created by Executive Order 12631, signed on March 18, 1988, by United States President Ronald Reagan.
—
The Trump administration is arranging a phone call on Monday with top regulators to discuss financial markets amid a rout on Wall Street.
Treasury Secretary Steven Mnuchin will host the call with the president’s Working Group on Financial Markets, known colloquially as the “Plunge Protection Team.”
DEc 24, 2018 ABC news
If all the crooks, shysters and rig artists just let the U.S. stock market fall to fair market value it would wipe out a lot of inflation built into it since 2009 when it should have kept on falling for at least the next decade since 2009. The last 13 years have just been the bankers taking the wrong side of every trade and squeezing the other side of the trade out with their vast sums of money. I’ve always said this is the first time in history all the stupid clueless people made money and the astute disciples of economics lost their shirt for this reason above.
count on it
Can it? Of course! Will it? Of course. In fact it may go a lot higher and in doing so will completely destroy the world economy. The USD is like King Kong and the destruction is going to be epic!
BCD round trip to the congestion area : Oct 5/7 2021, 33.98/ 33.07.
Wherever BCD goes, DXY don’t.
BCD is Aberdeen Bloomberg commodity ETF.
While a Thai Bath sounds invigorating, I think you meant to write Baht.
Yes, very invigorating. Thanks!!
The BCD uptrend Lazer coming from May/Sept 2021 might be tested.
Might be tested, or might not be tested. Did I get that right?
Currency rates correlation to inflation makes my head hurt. I think we’re seeing less dirty shirt. Yes, the USD not looking great. But alternatives are Yen with Japan in it’s eternal economic coma and absurdly high debt, Euro with a crazily built EU where the bank goes too aggressive the EU may face a succession crisis while dealing with UKR, Yuan (lol lol), and pound muddling through all the Brexit trade issues.
Not surprising that USD looks a bit more attractive compared to those stinkers. But things change quickly when you’re the less bad option rather than having a great story.
In theory inflation should keep on rising in Europe while it starts to fall in America due to the differences in debt levels between America and most of Europe.
> “things change quickly when you’re the less bad option rather than having a great story.”
No, we’ve been doing it for a LONG time. The rest of the wrold just keeps fumbling the ball (or dirtying up their shirts ludicrously). A good book on it from a few years ago: “The Dollar Trap.”
The US Dollar is looking the best and most wonderful since 1985.
The US has a fair bit of room to raise rates.
Europe has very little.
Japan has almost none.
China almost none.
Emerging markets (with trade deficits – mostly oil) are toast.
So the US will be the preferred destination for cash. Higher rates guaranteed – until the economy burps and the Fed blinks. Even then US rates will be higher than the competition.
The interesting issue is what happens when corporates (esp junk bond issuers) start to default. Ripples will be a sight to watch.
Of course the US is a basket case with an ungodly gap between rich and poor (social stability???), but even so I think social upheaval will be worse elsewhere as inflation tramples wage gains. Sri Lanka is a shot across the bow for world leaders/central bankers.
Pitchforks anyone.
Yep. It’s the theory your interest rates can only be as high as what your real economy can service. If your real economic growth is zero you can’t service a large amount of debt with a real interest rate of any size.
Europe is in an energy crisis. European natural gas costs about $53 compared to less than $7 in the U.S. Global liquid natural gas supplies are tight. A major Russian gas pipeline is down for maintenance. Before this Russia reduced flows to Europe over various disputes.
Europe is also trying to source petroleum, refined products and coal from sources other than Russia.
A few factories have been closed to conserve energy. If Europe does not find adequate energy supplies by winter, there might be more global supply chain disruptions, frozen water pipes, etc.
This resource inflation is weakening the euro compared to the dollar.
So I am long energy and volatility. It might be a nice winter (for me)!
volatility has been a disaster….its a horrible hedge…..
La Nina in the Pacific, and bath water temps in the Gulf…certainly a wild card for refiners this hurricane season.
Europe screwed up their energy policy so badly and they are having to eat crow right now importing large amounts of dirty Appalachian thermal coal. Due to the transportation issues with natural gas they may have to tell people that if you have a choice drive your gas powered car and save the natural gas for heating this winter.
Again, great article Wolf, and it just reminds us how haplessly behind the Fed has been over the last 12 months, and the ECB for that matter. But, things are really starting to come together, which is mainly to say there’s better chance than not that inflation remains much higher than anyone on TV (Cramer, et al) want to admit. No cheerleading here on Wolf Street.
100 basis points is a GO late July! Liftoff!
Nice!
The BoC in their comments yesterday seemed to finally get it.
You need to aggressively front load rate increase to try and shock the economy before inflation really takes root.
Yes the BoC is very late to get to that point, but Fed speakers today seemed oblivious to this truth.
Very worrisome.
Very true. They’ve been oblivious for about 13-14 years, once they decided QE and yield-curve manipulation was the way to go.
Lots of moving parts here, plus others, like shortages, demand destruction, shifts in buying patterns, trade relations, plus other favorites. Lots of variables and nonlinear relationships. Modeling the lot of it is tricky at best.
What we need to smooth it out are regulations, coordinated between elements of the system. What we don’t need are central banks playing games with policies favoring the Financial Industrial Complex, plus policies aimed at profit optimization at the expense of reliability.
Are we going to get what we need and lose what we don’t? Not likely. The economic engines are geared toward enriching the wealthy, regardless of the consequences in terms short and long. We aren’t likely to get policies prejudiced in favor of sustainability either.
So what does it all mean, Mister Natural?
It means economies are going to continue to lurch from one crisis to the next until something major comes along to crap out one or two things that cascades through the whole pile and brings it down. And there are numerous candidates for that major something. These systems have been run unsustainably for years and in several ways, and ‘unsustainable’ means that sooner or later it’s going to fall down and have a very hard time getting back up again.
It gets worse the more you look at it. If you don’t like how things are going now, you’re going to like them even less next year. And the year after. And there’s no sign they’re likely to ever improve. The happy talk about stabilization in the near future misses important stuff and smells like wishful thinking. The smart money is looking at ways to profit from the chaos, and there’s plenty of that around. The smarter money is planning for survival and salvage operations, and that is in very short supply.
I could use a nap. Somebody wake me up when you guys figure it out.
My prediction is richer rich people, poorer everyone else.
If Powell’s plan is hyperinflation eventually everyone will end up poor. No one really knows if he even has a plan.
That too.
The gyrations feed the rich. But they just mess with the rest of us.
That’s why folks get rich. It is risk management.
Round and round we go where it stops no one knows,but emerging markets ,and Italy ,Greece are in dire straights .At which time it will become a financial plague
That’s my rough model: complexity piles up like flammable materials and then whoosh! Things get simplified. Often, it happens in cascades of fire, and erasure of various structures and populations. Sadly, this is my quick summation of the 1920s-1940s.
No need for headaches (at least from excessive anxiety), it is as natural as sunrise. Or supernovas.
I posted here a while back that I was sensing some danger when reverse repos reached like 1T, but couldn’t say anything concrete. Just intuition. I was surprised last week reading a very similar statement in John Hussman’s latest market comment… “…the outrageous size of the Federal Reserve balance sheet poses a vastly greater risk of economic and financial destabilization than the specific level of interest rates…”
I think they did what is normal and fought the last war. Evidently the banks are pretty tightly regulated now.
I hear most of the risk has shifted to hedge funds and private equity firms. A lot of this stuff is not marked to market and when this blows up a lot of people will find out that alternative investment they were sold is worth 80% less now.
“It’s unlikely that this raging inflation will somehow quickly subside below 5%, now that inflation has gotten solidly entrenched in services, where nearly two-thirds of consumer spending ends up.”
We’re in the early stages of a modern day “Grapes of Wrath” situation, with the cities and countrysides littered with broke people living on the streets and all along the highways, biways, and throughout the forests and deserts. Some are in tents, others in busted up RVs and old cars, etc. It’s an absolutely despicable situation.
Jerome Powell, his cabal of crooked bankers, and the entirety of Congress are corrupt filth who rigged the system to suck out every last penny at the expense of the working class and poor. If you didn’t already own assets, you just got crucified. The banksters, like poison pill peddling pied pipers, pitched financial products to make the poor feel like they had a part in things, but they set them up like bowling pins and hung a financial noose on them. Debt is slavery.
While I do not feel sorry for people who borrowed for things they cannot afford, I am thoroughly disgusted that it’s even allowed. This country, specifically the financiers and politicians, have not a shred of moral fiber among them. How these vile sociopaths can look in the mirror every morning is beyond my imagination.
The vast majority of Americans would be unable to identify the Federal Reserve or state what they do. They are completely ignorant about the forces which affect their fate. Consequently they deserve everything that is going to happen to them and yes, it is going to be result in lifelong poverty for most.
“They are completely ignorant about the forces which affect their fate. Consequently they deserve everything that is going to happen to them”
Spare a thought for people of all kinds who are simple people who do a job to earn an honest living. Knowledge of the macro forces beyond the day to day – not having any knowledge of any of those – makes them “deserve everything that’s going to happen to them”? Really?
For that matter, let’s take all those who DO understand the big picture and the forces that are causing what’s going on in the world broadly. What power do we have to stop other than voting party A out and bringing party B in, who don’t do anything differently?
Or about the cabal called federal reserve for that matter?
When we have convinced ourselves as a civilization that there is free lunch, and we shall have it, this is what results. Plain and simple. We need adults in charge, and it is a big ask when all those in power always only look for the easiest way out, the path of least resistance.
Ultimately, everyone does have the power if they gang together. We get the government we deserve.
Escierto, I was wondering what happened to a few of the latter-day members of the Spanish Inquisition. I guess some are here on Wolf St., rendering judgements of others.
“Consequently they deserve everything that is going to happen to them…”
Gonna be a lot of ripped off faces.
dollar has a long way to go to reach 121-2, then blow off top to 132….
europe is going to be cheap travel next year, Euro could see .70
Indeed, the US Dollar could zoom to 165 on the DXY like 1985.
Exactly right. What nearly everyone does not realize is that this dollar strength is going to decimate the world economy. We are heading for a depression the likes of which we have never known. People will envy those who live in cardboard boxes under highway overpasses!
Why would a strong dollar decimate the world economy?
Here’s why. US exports are getting crushed eliminating jobs.A ton of Third World debt is denominated in dollars which will be defaulted on destroying entire countries like Sri Lanka. Imagine fifty Sri Lankas. US dollar strength is really the weakness of currencies like the yen and the Euro – both of which are headed down the toilet. When Japan sinks like the Titanic everyone is going down with it!
What’s next : Next time WTIC test 2018 Lazer it will breach Mar 2022
highs and possibly 2008 high.
JP, CL don’t care what u do next in July and in the Snake River…
Description of crypto: Indeed, a large part of the notional GDP of many western countries consists of some version of magical financial services; generally a form of speculation with money that does not actually exist, but can be collectively hallucinated. If you follow that sort of thing, it’s instructive, and somewhat disturbing, to see how many crypto-currency businesses, allegedly worth hundreds of billions of dollars, simply disappear overnight like light-bulbs being turned off. But that’s what an extractive economy looks like when there’s nothing real left to extract: borrowing hypothetical money to sell hypothetical access to hypothetical profits from more hypothetical money.”
Right now the dollar is paying a higher rate of return which is also giving it a grater value over other currencies. The carry trade rate to exchange let’s say the euro for the dollar and earn a greater return was positive and has now reached parity. The pound is trading around 1.20 to the dollar and the Bank of England is raising rates also, so you could buy more dollars with the pound and earn a greater rate of return as long as the dollar maintains its value. This would be done with forward FX contracts to control the risk. The other countries may be raising rates to neutralize the flight of their currencies? When will the dollar reverse? Will the other currencies catch up or reverse in unison with the dollar?
If the Fed thinks a neutral rate is somewhere around 3% with current inflation at over 9% and continued inflation at over 5% for the foreseeable future then it has already failed.
The dollar strength is directly related to the weakness in the Euro which makes up about 57% of the index. Europe is a basket case in terms of energy policy, debt load, and political problems. The Euro is going to fall even more against the US dollar ensuring a higher dollar index.
The second biggest component, the Yen, only makes up about 14% of the index. It is probably being sold off partly as a result of the BOJ policy and partly because of it being in the index.
Inflation in Japan over the past 20 years or so compared to the USA would tend to support the value of the yen against the US dollar.
The interest rate differentials between Japan and the USA do NOT support the huge weakening in the value of the yen against the dollar especially given that the US dollar has lost so much of its purchasing power and the yen has retained its value.
And no, even the current increase in prices in Japan has very little impact on Japanese rates of inflation over the past 20 years.
And of course people bring up “Japanese trade deficits”. Yes, they have had a few months of deficits, but overall they are still in the lack with their international balance so again, that has only a small impact.
IMO the main reason for the weakness in the yen is a huge gamble on the part of the international financial community which is betting against the yen in the currency markets by going short against it via futures and other financial derivatives. This has increased the speed of the fall and the trend as well.
If betting on which economy is going to do better over the net five or ten years between the USA, the EU, or Japan, I’d pick Japan.
Japanese people will also be better off in terms of other outcomes as well.
“The dollar strength is directly related to the weakness in the Euro which makes up about 57% of the index.”
You’re talking about the DXY.
Interestingly, I never once mentioned the DXY in the article for the reasons you spelled out. I mentioned currency pairs USD/EUR and USD/YEN and the “Real Broad Dollar Index,” which covers the 22 currencies of the biggest trading partners of the US.
Interestingly, the BoJ is trashing its currency just as much as the ECB is, with negative policy rates. And yes, if they keep trashing their currencies that way, their currencies will keep getting trashed. At some point, they will cry uncle.
The price of gold along with many commodities is at an all time high in every currency except the USD. What this should tell you is the fiat currencies are in a race to the bottom where they are all going to be as worthless as the Zimbabwean dollar. Look at the yen – the chickens are coming home to roost. When the yen goes to zero, Japan will sink like the Titanic taking everything down with it. It’s Sri Lanka today but everywhere tomorrow. The USD will be last man standing but it won’t mean anything in a world gone back to the Stone Age!
Don’t know if it’s true, but some say gold will spike against the dollar if the Fed pivots before they slay the inflation monster. If you read between the lines the Fed has signaled they aren’t trying to get back to 2% quickly, they just want to see several months in a row of inflation trending down in the right direction.
Gold has a very strong reverse correlation to the USD.
Strong dollar usually means that Gold is on sale versus USD.
– I also expect the USD/Yen to peak and then to go lower to a level that we saw in say mid 2021. And a rising yen is dynamite for the “Yen Carry Trade”.
– Whe I look at the USD/Yen then I see a currency cross that’s very overbought.
Wolf, great article as usual. BUT (with tongue totally in cheek) there is a huge glaring omission: not a single chart! Your charts are legendary for making reality so clear you cannot deny it.
It’s the transcription of my podcast. I finally get to talk. And that’s what you’re reading here, my spoken words but transcribed. If you listen to the podcast, you get the whole flair :-]
I see a replay of 1980 when interest rate were as high as 20% and unemployment was 10%.
They created a monster with their run hot policies and it will take a very hard landing to snuff out this inflation
Who is heading up the “carry trade” these days?
Abe San will be missed…..