I wanted to talk about the US dollar tonight. Take a look at the chart below:
Now don't misunderstand me, I think its very important that the USA has a strong currency. Its good for our country and great when you want to travel abroad!
However, what we need to look at during when we look at this recent surge in the dollar is why is it happening? Normally you see the dollar strengthen when the Fed raises interest rates. Now we all know that that isn't the case today as the Fed has sharply cut rates since the end of last summer.
Notice up above how the value of our dollar started to weaken in Sept. as the Fed started slashing rates. Now we all know the Fed has kept rates low so the question then becomes why have we had this huge surge in the dollar over the past month?
The reason for the surge is traders are now beginning to see that the Eurozone and Japanese economies are starting to fall apart. The belief going forward is you will start seeing rate cuts overseas just like we saw over here last summer.
Certian countries like Spain and the UK have worse housing bubbles than we do! Australia dropped their rates yesterday for the first time in 7 years.
Traders are starting to realize that many countries are in worse shape than we are economically and we will see a global slowdown. I guess now itbecomes a race to the bottom economically for all of us! Some are guessing that we will be the first ones out of the global slowdown because we were the first ones in.
The bulls say this is why you should be buying US equities. Get in now because we will recover first. I say BULL****. I believe we are in just as bad a shape as these other countries, and we will all have to wallow in this together for years before we can start working our way out of it.
So beware people! The strong US dollar is a huge warning sign that the whole world is slowing down. Throughout history, countries always flock to the US whenever things get bad globally. Why do you think countries fall all over each other to buy our treasuries? We are still considered to be the safest haven in the world. If I was a FCB I sure as hell would be buying UStreasuries.
The strengthening of the dollar is an ominous sign that the world is slowing down. If this is the case, the whole global growth story goes out the window. Combine weak global growth with our crippled consumers and banks and you build a strong case to stay the heck away from US equities.
I mean think about it. How can our multinational companies going to grow when imports have become 30-40% of their earnings? There growth in the US is anemic so the only conclusion you can make is its going to be very difficult to grow earnings in this environment.
The strengthening dollar should not be perceived as positive at this point of the economic cycle. The 10-year plummeted today because money was soaring into treasuries not equities. Follow the smart money.
Sadly, treasuries are slowly becoming the only place to be as an investor.