Janet Yellen and Dallas Fed’s Fisher became the latest Fed officials to question whether additional QE will do more harm than good. The interesting point is that Janet Yellen is a dove, so this commentary is quite surprising.
Once again, given the reasons I discussed here coupled with these recent Fed speeches, a surprise interest rate hike for China as they grapple with accelerating inflation, and deteriorating conditions in both Europe and the US, I am officially turning bullish on the US Dollar (DXY). I noticed something interesting here. If this is indeed another major dollar bottom, it would be the 3rd higher bottom. Could we be on the cusp of a secular bull market in the dollar as credit is destroyed while the US delevers and the global economy restructures? This thesis is certainly not the consensus.
Hmmm……
Been a long time, hope you’re doing well. It seems as though only yesterday China’s booming economy was being championed. Assuming you’re correct regarding the dollar, could China’s inflation issues be indicative of potential inflation here?
Hey man! I was wondering what you were up to.
Regarding your question, the Fed is actually trying to create inflation here in order to make it easier for consumers to pay off their debts given how much they have amassed in general. A depreciating dollar makes it easier to pay off debt because when inflation occurs, the prices of goods go up consistently. This begins a chain reaction where employers raise wages as workers demand more for their services given that it takes more dollars to buy goods and maintain the same lifestyle. Getting dollars becomes easier. Dollar weakening also helps US exporters as their goods are cheaper for foreign nations as their currencies would be strengthening. The Feds attempts to create inflation is what you see when you see the price of commodities, stocks, and gold rise and the dollar fall.
So why aren’t we seeing inflation on Main Street? In reality, we are experiencing inflation as we speak, in the form of higher gas, food, and raw material prices. Manufacturers who end up producing the end goods that retailers sell to us are also seeing these “input costs” increase. However, because consumers are burdened with debt, they do not have the ability to pay more for finished goods if manufacturers were to “pass the costs” directly to consumers. So in general, we are seeing inflation in raw materials but that inflation remains trapped at the manufacturer level because they cannot pass the costs to consumers. They lack “pricing power”. This is the main reason why I do not see widespread inflation occurring in the US anytime soon. As long as huge levels of debt are being paid off (de-leveraging) and consumers are saving, there shouldn’t be inflation. However with rising input costs and little pricing power, manufacturers’ margins should begin to get squeezed if this continues.
What I think will happen, is that the dollar will begin to increase in value soon. This will have a deflationary effect as dollars become harder to acquire as unemployment remains high, wages are stagnant, consumers continue to save, and housing prices resume their fall. If you have a rising dollar, commodities, food, and raw materials will begin to decrease in value because it will take less dollars to buy any given unit. In general, I see the opposite of inflation occurring if I am indeed right on the dollar rising. However, this doesn’t mean that I am ruling out inflation all together, I just think it is much less likely than deflation. Inflation may spark very quickly if we begin to see a strong recovery. Hope that helps!