I
will attempt to share my analysis on the US economy, direction of the US dollar
and gold prices.
From
the 1970s to the 1980s, the US experienced high inflation, with Federal funds
rates soaring to 14% during that decade and the price of gold increased 25
times.
Is
gold a good bet now? While high interest rates can lower the price of gold,
high inflation can push it up.
If
interest rates do not exceed the inflation rate by a large margin, the
inflation push on gold prices can exceed the interest rates.
There
are more conflicting signals from the market: The US had a strong employment
market, but GDP declined, and this can be attributed to the transformation of
the US economy and how US changed the computation of unemployment rates. The high interest rates environment saw a decline in high-profit industries such as finance and
technology, leading to significant layoffs, and a rise in low-profit
manufacturing and service industries, leading to increased hiring of lower-pay and part-time jobs.
As
a result, GDP and unemployment rates diverged. The excessive rise in labour
costs caused the cost of returning businesses to the US to skyrocket, making it
difficult to short the US dollar as borrowing costs are too high. The US dollar
needs to increase significantly in value for shorting the currency to be
profitable. If the US Fed funds rate has already reached 5 to 5.25%, and the US
dollar has not appreciated, when will it be possible for the US dollar to
appreciate?
The
global trend towards de-dollarisation is heating up, with BRIC countries
preparing to expand, and it is clear that they are competing with the US
dollar. Once a new trading currency or settlement mechanism appears, the demand
for the US dollar will rapidly decline. The US dollar's smile curve does
increase during economic downturns, but it has never faced the challenges of
the past de-dollarisation trend before a recession. Therefore, being too
optimistic about the US dollar is not a good thing.
Since
there is currently no currency eligible to challenge the US dollar, gold may
continue to rise under the de-dollarisation trend. The US dollar strengthened
throughout the high inflation period in the 1980s but this time it has shown a
different pattern. Michael Hartnett, the Chief Investment Strategist at Bank of
America, predicts that the US dollar has entered a bear market and is expected
to fall 20% in the long term. The US dollar has been weaponised too much,
causing the world to want to abandon it. In the past six months, the US dollar
has fallen, and the price of gold has risen, indicating that these views are
not wrong.
Investors
can continue to go long on the US dollar, but the US debt problem will only
continue to grow as the US dollar's hegemony is challenged. The
creditworthiness of US bonds will continue to weaken, and the US will expand
its debt ceiling before June, meaning that it will continue to print money and
raise debt, diluting the US dollar further.
The
collapse of Silicon Valley Bank can be considered a Lehman Brothers’ moment,
and there are more black swans waiting to happen. However,
the Fed knows very well that the US dollar can only maintain its value by
increasing interest rates and the Fed has to be more hawkish than European
Central Bank's Governing Council in raising the Fed funds rates. However, the current bearish trend on the US
dollar is not just various investment institutions borrowing to short it; it is
a coordinated effort by central banks around the world to short the US dollar,
leading to a significant amount of selling of US bonds and dollars, which must
have resulted in losses for countries that have them. Some could be on the verge of collapsing in the next few months.
It
is increasingly likely that the US inverted yield curves will begin to have a
greater impact, potentially leading to more black swan events for countries and
companies struggling with high levels of debt.
Superphang
http://superphang.blogspot.sg
